The Department of Human Services today released a letter from Optumas, the independent actuarial firm hired by the state to project private option costs, stating that the private option will not exceed the “budget neutrality caps” after adjustments are made to account for slight variations in the demographics of new beneficiaries. The population of private option beneficiaries has been about two years older than projected, according to Optumas, which has added about $24 per month to the average premium over the first four months of the program. 

The per-person-per-month (PMPM for “per member”) costs of the private option thus far have been higher than Optumas originally projected, and have been higher than the PMPM targets that the feds gave as part of the waiver agreement (Arkansas had to get a waiver of federal Medicaid rules, known as an 1115 “demonstration waiver,” in order to pursue the private option, the state’s unique plan to use Medicaid funds to purchase private health insurance for low-income Arkansans). The feds establish these budget neutrality caps in order to try to ensure that experiments like the private option don’t cost more than regular old Medicaid would have. If the state goes over the caps over the course of the waiver’s three years, the terms of the waiver dictate that Arkansas is on the hook for the difference. 


Opponents of the private option like Rep. Joe Farrer have been shouting that “Arkansas taxpayers are going to end up on the hook.” But as I explained at length last week, the waiver actually gives the state incredibly wide latitude to adjust the caps if need be, and there is every reason to expect that the feds will be flexible on this front. There is almost  no chance of Arkansas taxpayers paying out money to the feds for potential cost overruns during the private option waiver.

That’s what Optumas is commenting on: the people who have enrolled in the private option are a tiny bit older than expected, which has made PMPM costs about $24 higher. If the state was able to adjust the caps to account for that (which the waiver specifically allows), the state would be safely below the limits of their budget neutrality agreement.


Now, this is unlikely to do much in the way of persuading opponents of the private option who were skeptical of the Optumas projections to begin with. It’s also not particularly relevant to the question at the heart of any discussion about the cost-effectiveness of the private option: Is this costing more than traditional Medicaid would have? DHS put forward a controversial theory that simply assumed that the costs would be the same either way, an assumption implicitly accepted by the feds. Lots of people are skeptical that this is possible, and none of these skeptics are looking to see whether the state can stay under the caps (adjusted or not) as the means to test the theory. Ultimately, any evaluation will depend on comparing the experience of Arkansas to similar states that went with traditional Medicaid expansion (Kentucky?). 

In that sense, while staying under the budget neutrality caps is very important to the parochial interests of Arkansas and protecting the state budget, it’s kind of a side show when it comes to the big questions at the center of the Arkansas experiment. What we’re seeing from this Optumas letter is that it will be relatively easy for the state to construct a reasonable argument within the wide latitude of the waiver and get the caps adjusted, thereby “acheiving” budget neutrality. (Here’s what the waiver says: “If the State’s experience of the take up rate for the new adult group and other factors that affect the costs of this population indicates that the PMPM limit described above…may underestimate the actual costs of medical assistance for the new adult group, the State may submit an adjustment….”). 


Here’s the 
,  which includes more on the methodology behind their initial projections than has previously been released. It also includes more on why their August PMPM projection included in the state’s waiver application was higher than the original projection in March of 2013 (“The major distinction…is the availability of commercial data and the underlying medical cost assumptions,” the Optumas memo states. By August, “the estimated PMPM premium rates developed by and offered by each issuer were available. Projecting and estimating the cost of commercial carriers providing the covered medical services was not longer necessary, and actual cost amounts could be used.”)

NOTE: Though Optumas is stating that the actual age of private option enrollees is slightly higher than predicted, it’s still dramatically younger than the population in the rest of the Marketplace, good news for the long-term stability of the Marketplace and potentially lower premiums going forward.  

Press release from DHS after the jump. 


For Immediate Release:

April 23, 2014

Independent Analysis Shows Private Option Budget on Target with Allowable Adjustment

Actuaries hired to analyze the cost of the Private Option confirmed Wednesday that spending on health insurance premiums remains in line with the budget approved in the state’s federal waiver and will not exceed budget targets after allowable adjustments are made.
Optumas, which worked with the Department of Human Services on the original budget projections for the waiver, used actual enrollment data from the first four months of the Private Option to complete the new analysis. It showed that participants are approximately 2 years older than the projection used as a baseline for the state’s approved waiver budget cap, said Optumas founder Steve Schramm.
Because the Private Option is a new program with no historic budget data, the federal government established a standard process for adjusting caps if demographic factors used to create budgets, such as age, turn out to be different than expected.
Optumas found that the increase in age for actual enrollees added $24 dollars to the average premium paid in the first four months of the program, Schramm explained.
“We are giving people private coverage at no more cost than serving them through the traditional Medicaid program,” said Arkansas Medicaid Director Andy Allison. “There’s a tangible reason for the higher-than-projected premiums that we can address. Moreover, it’s one that we would have seen even if these enrollees had been in traditional Medicaid.”