The Arkansas Approach to Coverage Expansion is Controversial

by Reihan Salam

The editors of Bloomberg View have taken a dismissive stand against the Arkansas approach to the Affordable Care Act Medicaid expansion, but there are a few issues that merit closer attention:

1. The CBO’s estimates concerning the cost to the federal government of covering low-income individuals via an expansion of Medicaid or private insurance provided via the subsidized exchanges don’t reflect the conditions in particular states, as Avik Roy has explained. States in which the gap between reimbursement rates provided by Medicaid and private insurers are relatively small, like Arkansas, are in a different position from states in which the gap is much wider, like New York and California. Increasing the size of the risk pools in the exchanges would also tend to hold down costs.

2. And one of the reasons the private premium assistance model is attractive is that it has the potential to reduce churn, as Medicaid beneficiaries who earn higher incomes over time, and thus lose their Medicaid eligibility, wouldn’t have to exit from their insurance plan. Matthew Buettgens, Austin Nichols, and Stan Dorn noted the following in a report released last year:

To place churning’s magnitude in perspective, the 29.4 million people who will change coverage systems from year to year equal 31 percent of the estimated 95.9 million who will receive either Medicaid or exchange subsidies during any given year.

This churning interrupts continuity of coverage and care, and causes serious problems for low-income Medicaid beneficiaries. The editors chose not to address churn. They might have argued that we could reduce churn not by granting low-income individuals access to private insurance coverage on the exchanges but rather by covering the entire exchange population via Medicaid, with copays to reflect higher incomes. One suspects that this approach wouldn’t be very popular, but it would address a fairly serious problem. 

3. The editors cite a recent Robert Wood Johnson Foundation literature review of the literature on Medicaid managed care to observe that most states haven’t yielded significant savings:

This isn’t to say the federal government should rule out the whole idea of private premium assistance for Medicaid beneficiaries. After all, states’ experience so far with managed-care insurance plans for Medicaid suggests some of them have saved some money, even though most haven’t, according to a recent review of the literature.

The report is illuminating, though its authors are careful to note the limitations of the data. The following is a list of reasons why the report suggests managed-care insurance plans haven’t yielded significant savings:

• Fee-for-service rates are already so low that it is hard to get additional price discounts. More generally, Medicaid already is a low-cost program, with a lower rate of per capita cost growth than either commercial insurance or Medicare.

• States were using prior authorization, utilization review, and other similar tools, even before moving to managed care. 

• It is unlawful to impose significant co-payments on Medicaid beneficiaries, thereby making it more difficult to incentivize beneficiaries to change care-seeking behavior. 

• It is arguably more costly (at least in the short term) for states to develop the administrative infrastructure needed to contract with and regulate health plans than it is to simply pay bills directly to health care providers. 

• Providing beneficiaries with a usual source of care could lead to higher costs as previously unmet needs are treated. 

• Health plans have relatively little ability to themselves change the health delivery systems for the poor, especially if there are multiple plans contracting with multiple providers. 

• The federal government requires that health plan capitation rates be “actuarially sound,” which gives the plans a legal lever with which to seek higher rates.

The editors explicitly warn against private insurers that charge “undue copays,” which is an entirely reasonable concern. Yet there are a number of strategies Medicaid can use to encourage cost-consciousness, e.g., Indiana’s POWER accounts. One problem, however, is that the Obama administration has been skeptical of this approach. 

I definitely don’t think the Arkansas approach is a no-brainer. But it’s not clear that the CBO’s national estimates are the best place to look.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.