What Arkansas’s Private Option Means for ACA Waivers

This is a TIE-U post associated with Nick Bagley’s Health Reform and Its Legal Controversies (Michigan Law 866, Fall 2015). For related posts, see the course intro.

After NFIB v. Sebelius, the states gained a lot of leverage in their negotiations with the federal government over whether to expand their Medicaid programs. A handful have used that leverage to negotiate deals with CMS over the rules governing their expansions.

Arkansas cut perhaps the most interesting deal—the so-called “private option.” (Adrianna, Austin, and Aaron have covered it extensively here, here, herehere, here, and here.) Instead of channeling the expansion money into traditional Medicaid plans, Arkansas uses it to allow newly covered individuals to buy health plans on the exchange. Iowa has followed Arkansas’s lead and New Hampshire is following suit in 2016.

But there’s a problem. Because Medicaid doesn’t pay all that well, health plans on the exchanges are more expensive than Medicaid plans. It stands to reason that channeling the expansion population to the exchanges will cost more—much more, in fact—than a conventional expansion. At the same time, CMS has adopted a rule saying that the private option “must be comparable to the cost of providing direct coverage” through Medicaid. Otherwise, CMS won’t approve it.

How did Arkansas clear the cost-neutrality hurdle? When it submitted its plan, Arkansas didn’t compare the cost of the private option to the cost of expanding the Medicaid program that it already had in place. Instead, Arkansas compared the cost of the private option to the cost of expanding a Medicaid program that paid the same amount as private providers. Voilá: both options would cost the same.

Arkansas justified this accounting trick by pointing out that expansion would swell the rolls of Medicaid beneficiaries, which would in turn increase demand for health care. Unless Arkansas boosted its payment rates, it feared that not enough physicians and providers would participate in Medicaid to meet that increased demand. Hence the need to pay at parity with private plans.

Tellingly, though, Arkansas submitted no data to support this assumption. Nor did CMS ask for any. So far as I can make out, no one (including Austin) thinks the assumption is realistic. Even Arkansas, when it toyed with a conventional expansion, anticipated keeping Medicaid payment rates the same.

But CMS bought it. The reason is simple. For Arkansas, the choice wasn’t between the private option and a traditional Medicaid expansion. The choice was between the private option and no expansion at all. The agency’s desire to move another state onto the “yes” column trumped the scrupulous enforcement of its cost-neutrality rule.

All this has been said before; GAO wrote a whole report about it. But the practice raises a concern for the future. Under section 1332 of the ACA, a state can get a waiver from most of the ACA’s new rules so long as the state’s alternative scheme will cover as many people without increasing the federal deficit.

The Arkansas experience supplies a precedent for neglecting these constraints on §1332 waivers. (I’m not the first to make the point; Adrianna made it in a paper she wrote when she was still in graduate school.) Instead of insisting on realistic assumptions and careful economic modeling, HHS could again emphasize the importance of state innovation and approve state plans that fudge the numbers.

In the hands of president who’s hostile to the ACA, waivers could become an instrument for watering down the substantive ACA provisions in states that bridle at their perceived excesses. Complaints about unrealistic assumptions in waiver applications could be brushed aside as political sniping: if President Obama looked the other way for the Medicaid expansion, why can’t President Rubio do the same for the rest of the ACA?

Perhaps tellingly, the state that’s expressed the most concrete interest in §1332 waivers is … Arkansas. “Our hope is that we can get flexibility with the Obama administration,” said one Arkansas official. “But if we can’t get the flexibility that we want, we believe that a Republican administration would be a lot more flexible.” Indeed.


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