Now that the U.S. Department of Health and Human Services has agreed to allow Arkansas to use federal funds earmarked for the ACA’s Medicaid expansion to purchase private insurance coverage for its citizens, a number of other states are waiting to see whether or not this approach will prove sustainable. One barrier, as we’ve discussed, is that private insurance coverage is generally understood to be considerably more expensive than Medicaid coverage. The CBO has estimated that while expanding Medicaid coverage will cost the federal government $6000 per enrollee on average, expanding private insurance coverage for the same enrollee via the exchanges will cost the federal government $9000.
Yet the gap between the reimbursement rates provided by private insurers and Medicaid varies across states, and coverage expansion via the exchanges creates opportunities to lower costs by broadening the exchange risk pool and increasing the market power of exchange insurance plans. As Avik Roy reports, the Arkansas Department of Human Services contracted with an actuarial consulting firm to devise an Arkansas-specific estimate of the fiscal costs of coverage expansion via the exchanges:
“These Arkansas estimates,” writes DHS in a memo, “are less than one-third of the Congressional Budget Office cost estimate widely cited in press accounts.”
DHS cites three principal differences between their estimates and CBO’s. First, the CBO only estimated the cost of expanding exchanges to adults between 100 and 138 percent of the federal poverty level, compared to the 0-138 percent expansion envisioned in Arkansas.
Second, expanding the exchanges instead of Medicaid would result in a “market transformation” that would double the risk pool in the exchanges, improving the market power of exchange plans, while increasing competition among the plans to provide a cost-efficient service.
Third, the CBO estimate assumed a wide gap between Medicaid’s payments to doctors and hospitals, relative to those from exchange-based plans. DHS estimates that the actual difference in Arkansas is less than 25 percent, much narrower than the national average.
Avik expresses cautious optimism about the new Arkansas analysis. Assuming it is close to the mark might find the Arkansas approach fiscally attractive.