The Razorback Alternative: Is Arkansas’ Medicaid Game Plan a Blueprint for Others?

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Richard Evans / Scott Hinds / Ryan Baum


203.901.1631 /.1632 / .1627 richard@ / hinds@ /


March 19, 2013

The Razorback Alternative: Is Arkansas’ Medicaid Game Plan a Blueprint for Others?

  • Until recently, states had three apparent options for the Medicaid expansion:
    1. Do nothing
    2. Expand partially (probably to 100FPL)
    3. Expand fully (to 138FPL)
  • Arkansas Governor Mike Beebe claims to have an agreement with HHS Secretary Sebelius for a fourth option: fully expand coverage to 138FPL by using Medicaid funds to subsidize beneficiaries’ purchase of commercial (not managed Medicaid) coverage on the state’s health insurance exchange
  • Beebe (D) needs the support of a Republican legislature to expand; the exchange-based approach makes that support a very real possibility. Costs to Arkansas eventually would be much higher; after the state becomes responsible for 10 pct of expansion costs, the exchange-based approach would cost the state 6.4 pct more than expanding to 138FPL under traditional Medicaid
  • Interestingly, this exchange-based expansion option is more expensive for Arkansas than for any other state save Alaska. The Razorback option is all about politics, and has little or nothing to do with economics
  • If all states took the Arkansas approach, federal Medicaid spending would be 17 pct higher than if all states expanded to 138FPL traditionally – a near impossibility in the current fiscal setting. HHS can only use the Razorback option selectively; they cannot afford to make it available to all states
  • States’ increased acceptance of the full 138FPL expansion has much to do with Secretary Sebelius’ requirement that states participate in the full expansion in order to get enhanced federal matching – however this policy expires in 2016
  • At that point, states’ best option (still) would be to limit Medicaid eligibility to 100FPL, leaving persons and households between 101 and 138FPL to purchase coverage on the exchanges
  • HHS appears committed to making whatever deals are necessary to get full 138FPL expansion in as many states as possible – thus we need to think in terms of large Medicaid enrollment gains (at least through 2016) as we consider enrollment prospects for Medicaid HMOs, and Hospitals’ aggregate pricing power. After 2016, our money’s on 100FPL as an upper limit on Medicaid eligibility

Prospects for Medicaid expansion under the Affordable Care Act (ACA) have been in flux since the Supreme Court obviated the ACA’s mandate that states must expand eligibility to all persons at or below 138 pct of the federal poverty level (FPL)

Post-SCOTUS, states literally had every possible option – everything from reducing eligibility to the federal minimums to full 138FPL expansion. Because persons at or above 100FPL are eligible for federally subsidized coverage on the health insurance exchanges, because this coverage costs states nothing (as opposed to an eventual ten percent share of costs if these persons are in Medicaid); and because the federal inflows for persons on the exchanges are far (more than $3,000) greater than for persons in Medicaid, every politico-economic framework from Machiavelli to Keynes pointed to an expansion of Medicaid to 100FPL only, with persons (and households) between 101 and 138FPL being left to find coverage on the exchanges[1]

This optimal ‘expand to 100’ strategy assumed states would be able to access enhanced federal matching dollars for new enrollees, something HHS Secretary Sebelius effectively ruled out in a policy stance taken last December. HHS requires states to expand fully to 138FPL to get enhanced (ultimately, 90 pct of costs) federal matching; however as we pointed out in a note published December 17, this requirement effectively expires in 2016

Against this backdrop, states’ collective self-interests would have been best served by sticking together – refusing to expand at all unless the enhanced match were available for partial (100FPL) expansions[2]. This path has been more or less obviated by larger hold-out states’ decisions to participate in the full expansion. Florida and New Jersey (5.9 and 2.0 pct of expansion enrollees, respectively) both announced their participation in the full expansion; this leaves Texas (8.5 pct), Pennsylvania (3.7 pct) and North Carolina (3.2 pct) as the remaining big – and increasingly isolated — hold-outs

Complicating matters greatly, Arkansas (1.2 pct of expansion enrollees) recently announced an agreement with HHS whereby Arkansas will expand coverage by using Medicaid (state and federal match) dollars to allow beneficiaries up to 138FPL to purchase commercial coverage on the state’s health insurance exchange. Arkansas claims the agreement between Governor Beebe and Secretary Sebelius will put beneficiaries in commercial plans, rather than into Medicaid-specific managed care plans. Arkansas news sources are reporting that state’s Department of Human Services has reflected its understanding of the agreement in a memo to the US Department of HHS on March 13th. Talk Business Arkansas claims to have accessed the memo under the state’s freedom of information rules (reproduced as Appendix I) in a recent blog post[3]; however we caution that the memo is not on official letterhead and that we have not obtained a direct copy from an official source

By moving expansion enrollees to the exchange rather than to Medicaid, Arkansas’ Democratic governor may be able to recruit the cooperation of a Republican legislature to the expansion. However, once the state becomes responsible for its share of expansion costs, economics argue the state will more seriously consider cheaper alternatives. Expanding to 138FPL under Medicaid is cheaper than expanding by subsidizing exchange-based premiums, since the exchange-based coverage is substantially more expensive than Medicaid. And, because states may be able to gain enhanced federal matching on partial expansions as soon as 2016, limiting Medicaid eligibility to 100FPL and leaving the remaining potential beneficiaries (101 to 138FPL) to buy (100 pct, now and forever) federally subsidized coverage on the exchanges quickly reemerges as the cheapest path to making coverage available to all persons and households at or below 138FPL

Exhibit 1 summarizes the change in state (net of provider taxes) and federal spending under each of three expansion scenarios: expand to 100FPL only (‘A’); expand to 138FPL under traditional Medicaid (‘B’); or, expand to 138FPL by offering premium support for purchase of exchange-based coverage (‘C’). All scenarios assume a 90 pct federal match for expansion beneficiaries. State-by-state detail is provided as Appendix II

Even after states’ full 10 pct cost sharing obligations are in place, there’s not a great deal of difference in most states’ costs between scenarios ‘B’ (expand to 138FPL under trad’l Medicaid) and ‘C’ (expand to 138FPL with premium subsidies for exchange-based coverage) – on average, the difference in states’ direct (net) Medicaid spending between these scenarios is only 1.5 pct (but there’s a big range – see Exhibit 2). What makes option ‘C’ attractive for stakes seeking Republican support for the expansion is its far greater political palatability (for Republicans) as compared to an expansion of traditional Medicaid. The small average cost difference (for most states) is negligible in the context of 2013 decision making, especially since the states’ cost sharing obligations aren’t in full effect until 2020[4]

The difference in federal spending is more dramatic – if all states took option ‘C’, federal Medicaid spending would be about 17pct higher than if all states expanded to 138FPL under traditional Medicaid (option ‘B’). For this reason, we believe HHS will do its best to limit the availability of option ‘C’ (the ‘Razorback’ option)

The relative costs of the options vary quite a lot by state. Exhibit 2 provides three values for each state: 1) (dotted green line and basis for x-axis descending order) the percent difference in net (of provider taxes) state spending for option ‘C’ (expand to 138FPL on exchanges) v. option ‘B’ (expand to 138FPL under traditional Medicaid); 2) (solid green line) the percent difference between options ‘C’ (expand to 138FPL on exchanges) and ‘A’ (expand only to 100FPL); and 3) (grey columns) each state’s share of potential expansion enrollees

Quite ironically, the eventual state cost of expanding through exchange based coverage is higher for Arkansas than for any other state save Alaska. This argues Arkansas’ motive has far more to do with politics (Democratic governor attempting to expand against the objections of a Republican legislature) than with economics – at least until the cost sharing begins

The current Administration has much at stake in the roll out of major ACA provisions, and the Medicaid expansion is key among these. Put plainly, HHS is making deals. However the Administration’s authority cannot reach beyond 2016, and it has yet to make full 138FPL expansion (via exchanges or traditional Medicaid) an economically superior alternative to option ‘A’ – expand to 100FPL and let the remaining 101-138FPL beneficiaries find coverage on the exchanges. Because this option is both economically (from the states’ perspective) preferable and politically quite palatable (all income ranges have access to affordable coverage), we’re convinced the states ultimately (post 2016) will limit Medicaid eligibility to 100FPL

Appendix 1: Memo from Arkansas DHS to US HHS as obtained here :

Arkansas’ Approach to Low Income Premium Assistance

March 13, 2013

Arkansas has obtained conceptual approval from the Secretary of the Department of Health and Human Services (HHS) to extend premium assistance for private coverage to low-income adult Arkansans with incomes up to 138% of the federal poverty level (FPL). Under the emerging plan, Arkansas would use Medicaid funding to enable low-income adults to enroll in private health insurance plans through the health insurance exchange in 2014.

Draft description (subject to legislative and federal approval)

Through premium assistance, Arkansas Medicaid would fund the purchase of qualified health plan (QHP) coverage in the Exchange on behalf of eligible participants. These low-income adults would apply for benefits in the exchange in the same fashion as higher income adults, and if their income is found to be below 138% FPL and they meet other qualifying criteria (e.g., citizenship), premium assistance would come from the Medicaid program rather than the Federal Treasury. The group of adults expected to participate in the premium assistance QHP buy-in includes both the new eligibility category, as well as the existing category of adult caretaker/parents, with incomes between X% (where X <= 17% FPL) and 138% FPL. This group of adults would select coverage from among the insurance carriers offering a QHP in the “Silver” category of the exchange. “Silver” is the health plan category receiving the greatest level of federal subsidies for premiums and cost-sharing for the non-Medicaid population, i.e., the health plan level designed to best serve those below 150% FPL. Limiting Medicaid-funded participants’ options to the premium assistance program may require a federal waiver. Similar waivers have been granted in the past. The state also intends to develop a proposal for future review that structures benefits in a way that further enhances participants’ ownership in health care purchasing decisions.

The Medicaid program would pay insurance premiums and supplemental cost sharing subsidies directly to the QHP issuers for enrolled low-income participants – just as the Federal treasury would fund insurance costs for other low-income exchange participants. Low income enrollees’ essential health benefits would be covered through the same health insurers serving the State’s individual and small group health insurance markets. It is Arkansas’ intent through this plan to increase participation and competition in its health insurance markets, intensifying price pressures and reducing costs for both publicly- and privately-funded health care. Where necessary for low income individuals with exceptional needs, Arkansas Medicaid would provide some supplemental services. Also, some Federal rules for Medicaid-funded health insurance would apply, such as due process. The cost of the low income premium assistance and supplemental services for newly eligible adults would be funded through 100% federal financing from 2014 through 2016, declining to 90% by 2020 and thereafter, subject to continued legislative support.

The State would implement its market based approach to cover low income adults by taking steps to ensure that QHPs in the “Silver” plan level have appropriate regional or statewide coverage and participate in the Arkansas Health Care Payment Improvement Initiative. e.g., the patient-centered medical home.

Benefits of Arkansas’ approach:

  • Integration and efficiency – Arkansas is taking an integrated and market based approach to covering low income Arkansans, shrinking rather than expanding a Medicaid program that is separate and duplicative. For example, pregnant women and individuals with very high medical costs would be covered by private insurance on a continuous basis rather than receiving short term Medicaid benefits. This integration is a more efficient mechanism for achieving coverage for Arkansans and should lead to better health outcomes. We will seek increased flexibility in serving the existing Medicaid population and new participants. Flexibility for both cost savings and developing solutions tailored to Arkansas populations are critical components of the emerging plan.
  • Market-driven provider reimbursement and improved access – Medicaid has long been acknowledged to provide low reimbursement, raising questions about whether the program could successfully serve an expanded population and causing some providers to “cross subsidize” their Medicaid patients by charging more to private insurance. The Arkansas low income premium assistance plan would help rationalize provider reimbursement, bringing more providers into the program and significantly reducing the need for providers to cross-subsidize. The costs of increased access for low income Arkansans would be determined directly by market-based interactions with providers.
  • Continuity of coverage – For families with members eligible for Medicaid and Exchange coverage as well as those who have income fluctuations that cause their eligibility to change year-to-year leading to churn (e.g., movement between Medicaid and Exchange subsidized coverage), Arkansas’ plan for low income premium assistance would create continuity of health plans and provider networks. Families can stay enrolled in the same plan regardless of their underlying subsidy.
  • “All payor” health care reform – Arkansas is at the forefront of payment innovation and delivery system reform, and low income premium assistance will reinforce and strengthen the multi-payer nature of the Arkansas Health Care Payment Improvement Initiative. Payment initiatives and medical home investments can be implemented across Exchange insurers to the benefit of hundreds of thousands of patients, regardless of their insurance source.
  • Personal Responsibility. Individual cost-sharing requirements for the low income adults under 138% FPL have not been developed, but could be comparable to cost-sharing requirements in the exchange, where individuals are subject to scaled income-related obligations, e.g., approximately 2-5% of income for the lowest-income participants in the exchange. Medicaid’s ability to use cost-sharing tools such as co-pays and co-insurance was recently increased under proposed regulations issued by the federal government in January, which would allow cost-sharing at or above levels for individuals served through the exchange with incomes between 139-150% FPL.
  • Impact on Health Insurance Exchange. The state’s exchange would benefit from the addition of Medicaid-funded participants, potentially doubling the number of covered lives. This would enhance the attractiveness to recruit new carriers and potentially increase the competitive aspects of the Arkansas health insurance market. Importantly, the need to retain local control of consumer engagement and plan management is increased under Arkansas’ approach to low income premium assistance.
  • Reduction in enrollment in current Medicaid programs. The existing patchwork of traditional Medicaid programs could be scaled back. ARHealthNetworks would be eliminated, as would the family planning waiver and potentially other limited benefit Medicaid programs such as the Breast and Cervical Cancer program and the Tuberculosis program.   Other categories such as Pregnant Women and Medically Needy would continue to exist (required by CMS), but would largely dry up because the people who would have entered those categories will already have coverage.  The state also intends to use available flexibility to serve higher income children in the ARKids B program through their parent’s private insurance, keeping family units together in a single insurance plan.

  1. Subsidies in this income range are such that beneficiaries have very limited out of pocket costs for either premiums or actual care, meaning exchange-based coverage is a realistic alternative to Medicaid
  2. Politically, (and now, academically …) this would have had the effect of shifting responsibility for lack of sub 100FPL coverage to the HHS Secretary
  4. The enhanced FMAP is 100 pct in 2014 – 2016, 95pct in 2017, 94pct in 2018, 93pct in 2019, and 90 pct in 2020
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