The private option has led to the enrollment of more than 200,000 in health insurance (cutting the uninsured population nearly in half) and appears to be leading to relatively lower premiums on the state’s Health Insurance Marketplace. This all happened in Arkansas, where traditional Medicaid expansion was likely dead in the water, but the alternative version, the private option, has twice been approved by bipartisan supermajorities.

In that sense, the private option has been a political and policy success story for advocates of coverage expansion — but there has always been a nagging question about the state’s unique approach. Given that private insurance has generally been costlier than Medicaid, would the private option end up costing more than simply expanding Medicaid? A new report from the federal Governmental Accountability Office (GAO) argues that the feds failed to ensure that Arkansas private option would be “budget neutral” and implies that the private option could cost around 24 percent more over the next three years than regular old fee-for-service Medicaid would have.


First, the background: In order to get approval for the Arkansas private option — the state’s unique plan to use Medicaid funds available via the Affordable Care Act to purchase private health insurance for low-income Arkansans — the state was supposed to establish that this alternative approach wouldn’t cost the federal government more than traditional Medicaid would have. The private option was made possible by a waiver of federal Medicaid rules (known as an 1115 waiver), a waiver that was only allowable if the state could show that their alternative was comparable in cost.

The feds bought the state’s argument that budget neutrality was achievable and gave their stamp of approval, establishing a spending limit based on per-person costs. In theory, the per-person limit was a baseline — what Arkansas and the federal Department of Health and Human Services (HHS) projected that traditional Medicaid expansion would have cost. In  order for the private option to be considered budget neutral by the feds, the costs were supposed to stay below that line (and if costs went over, the state could be on the hook for the difference). 


Now GAO — an independent federal watchdog and auditing agency which works for Congress — argues in a report released yesterday that the feds relied on unproven assumptions and that the spending limit over the three-year life of the waiver was about $778 million too high. From the GAO report: “HHS approved a spending limit for the demonstration that was based, in part, on hypothetical costs — significantly higher payment amounts the state assumed it would have to make to providers if it expanded coverage under the traditional Medicaid program — without requesting any data to support the state’s assumptions.”  

*NOTE: Based on some of the reactions I’m seeing, I think it’s worth being crystal clear: GAO isn’t making an argument that the private option is going to be more costly than projected, it’s making an argument that it will potentially be costlier than the traditional Medicaid expansion alternative. The argument isn’t that the PO projection is too high; it’s that the imagined (counerfactual) alternative of Medicaid expansion is estimated too low. 


This report, with the stamp of a federal agency, will be oft-cited by those who believe that the private option will be more costly than traditional Medicaid (note that this includes critics from the left, who support expansion but believe that the private option approach was unnecessarily expensive, as well as critics from the right, who oppose expansion altogether but view the private option approach as even worse because of costs). That said, there’s actually not anything all too new here. 

GAO’s beef is that the feds accepted a controversial theory from the state’s Department of Human Services. Previously, reimbursement rates have been higher on average for private insurance than for Medicaid, so you would think that insuring Arkansans via private insurance would be more expensive. DHS argued that in order to achieve the necessary access to health-care providers if the state added 200,000 more beneficiaries to Medicaid, they would have to raise Medicaid reimbursement rates. They argued that the rates would end up being the same either way, whether the coverage expansion was achieved by fee-for-service Medicaid or via private insurance. You can read about this theory here; I may re-hash some of this in subsequent posts, but for now, suffice to say that lots of health-care wonks from both the right and the left are very skeptical of this claim, but state officials and lawmakers (and, apparently, the feds who approved the plan) defend it as a necessary assumption when looking at the question of cost comparability. 

GAO doesn’t directly take on the state’s argument, but they conclude that the feds did not request sufficient data or proof to substantiate the state’s hypothesis. Instead, GAO argues, the budget neutrality line should have been based on actual historical expenditure data in the Medicaid program. If you approach the question that way, the private option projects to be more expensive. DHS officials themselves reported way back in March of 2013 that the historical difference in average rates between private insurance and Medicaid was around 24 percent, the same figure that GAO suggests is the likely costly difference.  That’s what I mean when I say this isn’t new: from the get-go, this has been the argument at the heart of questions about the private option and cost comparability. What set of assumptions is the best way to approach an ultimately unknowable question: what would have happened if the state had expanded Medicaid instead of going the private option route? 

(We’ve written at length about the inherent fudginess of the budget neutrality process and noted the same issues regarding the way that the state arrived at their estimates; national experts expressed skepticism about the state’s rationale from the beginning.)


GAO also made two other familiar complaints about the waiver: 1) The budget neutrality rules are designed to compare the private option to traditional Medicaid expansion, so it allows adjustments to the per-person cost caps if the population turns out to be different than what was projected (if the population is, say, older, than it would be relatively costlier to cover folks whether the coverage was through Medicaid or through the private option). In practice, though, as we’ve pointed out, this gives so much wiggle room as to render the “caps” moving targets that the state can adjust if costs are higher than expected. 2) The state will be allowed to include factors other than a strict cost-to-cost comparison of traditional Medicaid and the private option in its evaluation of whether the private option was “cost effective.”

HHS disputed GAO’s conclusions, calling the report “misleading.” In their response, HHS officials stated that “consistent with our policy that budget neutrality calculations should be based on the best available data, the state provided an explanation of how the demonstration program will achieve budget neutrality and the data to support its rationale.” GAO’s estimate that the spending limit was $778 million too high was “inaccurate,” HHS officials argued in their response. “GAO used only a subset of the data that CMS uses to assess and determine the appropriate estimates used in developing a budget neutrality model.” HHS also stated that including other factors in the cost-effectiveness test — such as “improvements in sevice delivery and health outcomes” and increased competition on the Arkansas Health Insurance Marketplace — would “yield valuable data applicable not only for this demonstration but also more broadly in terms of Medicaid policy.” 

What we have here is a pissing match between federal agencies — one from the executive branch, one from the legislative branch — that has been going on for some time. GAO has argued for years that HHS (under various administrations) has been insufficiently transparent and rigorous in establishing budget neutrality for Medicaid 1115 waivers. GAO argues that budget neutrality should be determined only using historical claims data. Instead, states are often allowed to make hypothetical assumptions about what would have happened. This boils down to an inherent tension in 1115 waivers, which are intended as experiments but can amount to states initiating policymaking. Both sides have a point: without some flexibility in the waiver process, including testing unproven hypotheses, experimentation is impossible. On the other hand, without a rigorous budget neutrality process, states could use 1115 waivers to initiate policy more expensive to the feds than Congress allowed. 

“I was not surprised by the GAO report because any GAO report I’ve ever read on budget neutrality over the last 20 years has said that HHS has not done budget neutrality well,” said Joan Alker, Executive Director of the Center for Children and Families (CCF) at the Georgetown University Health Policy Institute and one of the nation’s foremost experts on Medicaid waivers and the use of premium assistance in Medicaid. “We know that very important policy gets made in Medicaid waivers. We have more transparency in the process now thanks to the ACA and the new rules, but I’d certainly like to see more.”

Alker noted that the private option represents “a really fundamental change in your health care system. It’s reducing your uninsured rate quite dramatically.” That makes cost-effectiveness a more complicated question, with “bigger-picture considerations,” than the much more limited premium assistance experiments enacted by Medicaid 1115 waivers in the past. 

As to whether the private option will actually be cost-effective, Alker said that she would like to see an independent evaluation of the question once we have real data over the three-year life of the waiver. “I really think that we don’t know the answer,” she said. ““The bottom line is it’s all hypothetical. You can’t predict precisely what a state would be spending, and it’s even more difficult in this new world of the ACA to predict that. Putting people in the exchange like this — premium assistance in the past has not been cost effective on a super-large scale, but it was a very different kind of premium assistance. We really don’t know the answer. The point of section 1115 waivers is to test new approaches. A lot of times that doesn’t happen. I would say in Arkansas’s defense that this really is testing a new approach. We need a rigorous evaluation. We need an independent evaluation down the line, but that’s a good thing and that’s what waivers should be for.” 

Former Arkansas Medicaid director Andy Allison, the principle architect of the private option policy, vigorously defended the approach the state used to arrive at its cost comparison assumptions.  “GAO doesn’t engage in the debate about whether provider rates would have to go up if Medicaid was expanded,” he said. “GAO is making a procedural argument against such hypothetical assumptions. They’re not actually debating whether this particular hypothetical assumption is appropriate or not. They miss, therefore, the whole point — which is to try to project what really would happen if Medicaid were expanded and then allow Arkansas to try something different and see if they can do better. Using GAO’s logic would stymie experimentation because you [wouldn’t be able to] take reasonable assumptions of hypothetical circumstances into account.”

Allison’s argues that an attempt to expand Medicaid at the old fee-for-service rates in Arkansas simply would not have worked. Either rates would have been raised in response to pressure from providers, or the state would potentially face a lawsuit for failure to provide sufficient access to beneficiaries (worth noting that Arkansas is under a consent decree that Medicaid reimbursement rates must be approved by the Arkansas Medical Society): 

Under federal requirements for those who are funded by Medicaid, individuals need to have access at a level which is equivalent to others in their geographic region. That is a critical flaw in the commercial rate critique, which we faced in Arkansas from day one.  … I think it’s a fairly powerful argument—what level of payment does it take to get you that level of access? States have struggled with that in court for years, including in Arkansas, where we’re under consent decrees as a result. It really is an open question, when you’re expanding coverage at the proportion that Arkansas did – now more than 200,000 individuals, a fifteenth of the state, it is a very reasonable question whether or not you can secure access from the state’s providers at the same level of payment. Providers had a certain balance between private and other forms of payment such as Medicaid, but when you increase coverage by that amount – to a different population, by the way, with a different pattern of use by providers – it is not at all reasonable to assume that those new providers or that increased payer mix of Medicaid fits within their business model. That’s actually a pretty aggressive assumption.

(I had a long, interesting chat with Allison; more to come in a subsequent post). 

Whatever one thinks of the administrative disagreement between GAO and HHS (which amounts to a dispute over the process for determining budget neutrality), the fact of the matter is that the experiment in Arkansas has begun. Ultimately, we’re debating guesstimate projections of unknowable counterfactuals. HHS and the state of Arkansas made more aggressive assumptions and we should view them with healthy skepticism, but of course GAO made assumptions too, projecting that historical Medicaid and private rates would continue unchanged regardless of expansion. The GAO report doesn’t tell us any more about whether the private option will cost more than Medicaid expansion than we could predict last week. 

Whichever prediction you find more plausible, the far more interesting question will be an evaluation of the experiment’s results. The theoretical debate will shift to an analysis of what happened. While imperfect, the best tests will be comparisons with other similar states that went with traditional Medicaid expansion or chose not to expand at all. Arkansas will submit an evaluation, including cost comparisons to other states; hopefully there will also be rigorous evaluations conducted by entities independent of the state. These evaluations should both address whether the private option costs more than traditional Medicaid, but also whether the private option might have benefits that are worth the cost (and the impacts on federal costs will extend beyond Medicaid itself, for example impacting federal subsidies on the exchange).

GAO at least heavily implied skepticism about the state’s budget neutrality argument, and plenty of health-care observers don’t buy it. DHS stands by their assumptions. The experiment has begun. They have three years to prove it.

p.s. here’s the DHS response to the GAO report: 

We read the GAO report questioning HHS’s process for ensuring budget-neutrality for demonstration waivers. It’s clear that the GAO and HHS have a disagreement over this process that dates back years, and that really has little to do with Arkansas. We just seem to be the latest vehicle to raise that complaint. Arkansas followed the guidelines outlined by HHS and has been transparent throughout that process.

However, the GAO did question one main thing specific to the Private Option, and that was about our assumption that Arkansas would have had to raise rates had it opted for traditional Medicaid expansion. Historically, clients across the country have had difficulties getting access to physicians willing to take Medicaid because of the low payment rates. It’s unreasonable to assume we could add hundreds of thousands of clients to the traditional program and not have had to raise rates.

Interestingly, with about 200,000 people now enrolled in the private option, which has commercial payment rates, we are not getting complaints about lack of access.

This approach has never been tried before, and with any innovation you will have disagreements over what assumptions to make and how to measure its success. Ultimately, the proof of its value will be in the results. We’re seeing some already in Arkansas: more than 200,000 Arkansans – 85% of the target population — now have coverage, insurance premiums have gone down and hospitals have said the program has helped with their financial stability. We will soon be able to analyze costs, and will share that information as it is available.