As we noted earlier today, the feds today approved the state’s application for a waiver of federal rules to pursue the so-called “private option” for Medicaid expansion. It’s worth highlighting the “budget neutrality” requirements explained in the  so I’ve pulled this (and updated/expanded) from previous post. 

In order to secure the waiver, the state must show that the “private option” is no more more costly than traditional Medicaid expansion would have been. The approval of this waiver signals that the feds believe that Arkansas has a plausible argument that they can achieve budget neutrality. But now the state, over the course of three years, has to prove it. The feds are footing the bill for the coverage expansion, but if the state goes over the targets set by the feds, Arkansas will be on the hook for the difference at the end of the three-year life of the waiver


The test that the federal Center for Medicare and Medicaid Services will use isn’t based on how many people enroll, but on the per-person cost of coverage. The cap changes each year. The average cost per month of covering a beneficiary must be at or below: 

2014: $477.63
2015: $500.08
2016: $523.58

Those are pretty generous caps, and officials from the Arkansas Department of Human Services expressed confidence that the per-capita costs of the “private option” would remain below those figures. DHS spokeswoman Amy Webb said that the budget neutrality requirements were expected. “We will need to monitor closely and make prudent choices in collaboration with the Arkansas Insurance Department to ensure the success of the Demonstration, including its costs,” she said. Rep. John Burris, one of the key Republicans behind the “private option” policy, said that the budget neutrality requirements would keep the state honest and ensure that federal costs were kept in check. 


The caps can be modified over the course of the waiver and in practice, it’s exceedingly rare for a state to have to pay money back to the feds after a demonstration waiver. The caps are very close to the per-person, per-month costs that DHS projected in their waiver application: 

2014: $472.19
2015: $495.79
2016: $520.58

The state has three years to meet the budget neutrality requirement, but if they exceed the cap by 3 percent or more after 2014, or 1.5 percent or more after 2015, they’ll have to submit a “corrective action plan” to CMS for approval. Again, there’s not a total limit on spending (there’s no cap on enrollment) just a cap on the cost per beneficiary. After three years, if the state has spent more than the cumulative budget neutrality limit, it will have to pay back the difference to the feds. 


Arkansas will probably not have much trouble staying under the caps and passing the budget neutrality test. That’s unlikely to quiet those who are skeptical of the state’s claim that this won’t cost more than traditional Medicaid expansion would have. That’s what a budget neutrality test is supposed to determine, but the feds are implicitly accepting the controversial theory from DHS that the cost would be the same either way. The actuaries hired by DHS projected the per-person, per-month cost of a beneficiary under a traditional Medicaid expansion, then automatically raised the cost by 24 percent in order to make it the same as the actuarial projection for the per-person, per-month cost of a private plan. That’s an approach, and a theory, that some health care experts find less than convincing. But given how closely the caps from the feds track the projections from DHS, CMS is apparently on board. 

So how do the caps/projections compare to likely costs now that we know the actual 2014 premiums? It’s…complicated. After the jump:

Here’s what we know: “Private option” beneficiaries will choose from Silver plans on the exchange. Across the state, the average cheapest Silver plan is $351 and the average second cheapest Silver plan is $366. But predicting the per capita cost of “private option” beneficiaries is complicated for three reasons: 

1. There is a lot of variance in price between age and region, so a projection of the cost of the “private option” has to take into account the age and residence of the “private option” population.


2. “Private option” beneficiaries can pick any Silver plan in their coverage region, regardless of price.

3. “Private option” beneficiaries will have the same strict cost-sharing protections as other Medicaid beneficiaries, so the Medicaid program will have to reimburse the private carriers for some expenses accrued by beneficiaries, creating an additional cost beyond the premium.

*** I originally included a fourth complication — ten percent of the expansion pool will be designated “medically frail” and will go to the traditional Medicaid program. These beneficiaries will be much more costly, but according to DHS, because they are not going to private plans, they will not be subject to the budget neutrality limits.

All of that’s to say: even now that we know the premiums, projecting the per-person cost of the “private option” is a complicated analysis. In the coming weeks, DHS will likely attempt to update their projections of “private option” costs using the newly released premiums, though DHS officials point out that they’ll have real numbers soon enough once coverage begins in 2014.