The Private Option
What did Arkansas Decide?
In April, Arkansas expanded its Medicaid program as described by the President’s health care law. However, instead of a traditional expansion, Arkansas developed a new model of expansion, the “private-option.” Sold by proponents as a “free-market” alternative that would stop “ObamaCare” from coming to Arkansas, the private-option is a costly mistake.
How does the Private Option Work?
Under the private option, individuals in Arkansas below 138% of the federal poverty level—approximately $32,000 for a family of four—will receive a government subsidy to purchase insurance through Arkansas’ health insurance exchange. According to sponsors, this will allow Arkansas families to have a choice when it comes to their health insurance.
How Much Does the Private Option Cost?
Expansion, regardless of type, is a huge expense for state and federal taxpayers. Providing insurance to 250,000 new individuals dramatically grows the size of government. Proponents of the plan discuss how it’s “free” for the state of Arkansas as the federal government will pay 100% of the expenses for the first three years, but this ignores that federal taxpayers also happen to live in Arkansas. After the first three years, the federal government will also decrease its share of the cost and put the state budget on the hook.
But expanding through a private option is even more costly for taxpayers than traditional Medicaid expansion. The Congressional Budget Office estimates that private insurance costs 50% more per recipient than Medicaid.
The state of Arkansas did hire outside advisors to determine the real cost of expansion to better inform their decisions. According to the analysis, traditional Medicaid expansion would cost federal taxpayers $21.5 billion for ten years and state taxpayers an additional $2.1 billion. The private option would cost federal taxpayers $18.9 billion and state taxpayers $1.59 billion for ten years.
But how could that be? Private insurance is more expensive than Medicaid. It should be the more expensive coverage option. Well, the analysis completed for the State of Arkansas relied on dubious, unlikely assumptions that drove down the total costs. It is extremely likely that the private option will actually be more expensive than the actuaries predict.
What is the Good Friday Memo?
During Arkansas’ deliberation regarding the private option, the federal Department of Health and Human Services (HHS) released a memo describing the process for a state’s private option plan to be approved. The memo puts numerous restrictions on a state’s option with expansion.
Importantly, HHS included a new requirement known as “wrap-around” coverage. One of the reasons that private insurance is more successful than Medicaid is that it allows for cost-sharing between the insurer and the insured individual. Individuals pay some sort of out-of-pocket cost, like a co-pay, which encourages them to use their health insurance wisely. However, Medicaid doesn’t allow cost-sharing in most situations, or vastly limits the cost-sharing available. For instance, private insurance commonly applies a $25 co-pay to doctor’s office visits. Medicaid limits it to $4 per visit.
HHS’ memo said that any state that uses the private option model must provide some sort of wrap-around coverage to pick up any cost-sharing in excess of current Medicaid standards. Using the example above, the state of Arkansas would need to pay the $21 co-pay differential. This wrap-around coverage also further drives up the cost for state taxpayers; costs that are not accounted for in the analysis provided by the state of Arkansas.
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