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The Arkansas Medicaid 'Private Option': Lots of Hype, but Little Reform

The American Journal of Accountable Care®March 2014
Volume 2
Issue 1

Medicaid is a deeply flawed program in need of reform, but the hope that Arkansas will establish a pathway for such reform may be met with disappointment.

Over the past year, much has been made of the so-called Medicaid “private option” that Arkansas is implementing under the Affordable Care Act (ACA). Supporters of the private option argue that it will offer Medicaid recipients high-quality private-sector coverage at an equal or lesser cost compared with the traditional Medicaid program. Unfortunately, Medicaid’s structural and legal constraints make this outcome highly unlikely. Indeed, it is more probable that Arkansas’ private option waiver is left to expire on December 31, 2016, forcing the state to revert to a more traditional Medicaid program.Background The ACA, as originally enacted into law, required that states expand their Medicaid programs to all adults with incomes below 138% of the federal poverty level. Those that refused to do so would cease to receive federal support for their pre-ACA Medicaid programs.

Official representatives of 26 states joined a lawsuit, National Freedom of Independent Business v Sebelius, challenging the constitutionality of this provision of the health law. The US Supreme Court ruled 7 to 2 that requiring states to expand Medicaid as a condition of receiving pre-ACA Medicaid funds exceeded Congress’ authority under the spending clause of the Constitution.

The high court’s majority struck this provision from the law, opining that “The constitutional violation is fully remedied by precluding the Secretary [of Health and Human Services] from withdrawing existing Medicaid funds for failure to comply with the requirements set out in the expansion.” In other words, the Medicaid expansion was now optional for the states.

Most states with Republican legislatures have taken the Supreme Court up on its grant of leniency, and have thus far forgone the Medicaid expansion. As of January 28, 2014, 25 states had chosen to not expand their Medicaid programs under the ACA.

Arkansas has been a notable exception: its Republican-controlled legislature, in concert with a Democratic governor, passed a nonstandard Medicaid expansion in which Medicaid enrollees would receive privately sponsored health coverage—known as Qualified Health Plans—of comparable design to those offered on the ACA exchanges, or marketplaces, to those with incomes between 138% and 400% of the federal poverty level.

Flaws With Traditional Medicaid

There is much to be gained, in theory, by offering Medicaid enrollees a different type of coverage than that supplied under the traditional Medicaid program.

Because the federal Medicaid statute strictly limits the degree to which beneficiaries are responsible for the costs of their care, patients have a strong incentive to become insensitive to the cost and efficiency of the care they receive. Other legal constraints and fiscal incentives make it difficult for states to focus Medicaid’s resources on the most needed healthcare services.

This inefficiency, in turn, has led to widespread waste, fraud, and abuse in the Medicaid program. Waste, fraud, and abuse have caused Medicaid programs to exceed state budgetary targets, crowding out other fiscal priorities.

States have responded to the fiscal pressures from Medicaid by doing 1 thing in particular: lowering provider reimbursement rates. States have broad authority to lower rates without interference from the Centers for Medicare & Medicaid Services (CMS); in addition, lowering provider rates has proved thus far to be the least politically controversial way to rein in state costs.

Physicians have responded by withdrawing from the Medicaid program. According to a 2008 survey by the Center for Studying Health Care Change, a much greater percentage of general practitioners are more likely to reject all new Medicaid patients than they are to reject either Medicare or privately insured patients (35.4% to 13.6% and 5.2%, respectively).1 Also, a New England Journal of Medicine study found that two-thirds of pediatric specialists would not accept appointments from children with acute medical problems, such as uncontrolled asthma, forearm fracture, or new-onset afebrile seizure, if they were enrolled in Medicaid or the Children’s Health Insurance Program (also known as CHIP).2

These difficulties with physician access are associated with poor health outcomes for Medicaid enrollees. The clinical literature consistently indicates that patients on Medicaid have health outcomes that are significantly worse than those with private insurance. Baicker et al, in the Oregon Health Insurance Experiment, found that “Medicaid coverage generated no significant improvements in measured physical health outcomes” versus being uninsured.3

The Private Option Fails to Address Medicaid’s Flaws

Does the Arkansas private option address the design flaws in the Medicaid program? Over the mid-to-long term, the answer is no.

The privately sponsored, exchange-based health plans offered to participants in the Medicaid expansion must conform to the requirements of the 1965 Medicaid statute, also known as Title XIX of the Social Security Act. This means that copays, deductibles, and other conventional cost-sharing features of commercial plans are largely prohibited under the private option. In addition, plans must have “wrap-around” features to cover the benefits required by Medicaid, but not by other ACA-based exchange plans.

Provider reimbursement under exchange plans is likely to be higher than that in the traditional Medicaid program, which means that Medicaid beneficiaries’ access to physicians may improve in the near term. However, higher reimbursement rates will almost certainly lead to higher program costs.

Higher costs is a significant problem. The federal government’s official Medicaid waiver, licensing the Arkansas private option, requires that state Medicaid spending be fiscally comparable to that under the traditional Medicaid program; otherwise, the federal government will be forced to pay more than it had budgeted for the program. If Arkansas fails to meet this fiscal neutrality end point, CMS is likely to decline to allow the program to continue past December 31, 2016. (CMS has declared that waivers related to the ACA Medicaid expansion must expire before 2017.)

What Would a Reformist Private Option Look Like?

In order to address Medicaid’s design flaws in a fiscally neutral fashion, states would need far greater flexibility in designing the Medicaid benefit. For example, states should have wide latitude to apply substantial copays to nonurgent utilization of the emergency department and to usage of brand name pharmaceuticals in instances where comparable generic medicines are available. Covered benefits under the private option, rather than conforming to the 1965 Medicaid statute, would also enjoy state-based flexibility, perhaps mirroring the requirements of exchange-based Qualified Health Plans.

Ideally, the federal government would give states full flexibility, through block grants or other mechanisms, to administer a low-income health program entirely of states’ own design. This would likely lead to profound efficiencies in the delivery and utilization of healthcare services.

For example, states could offer catastrophic coverage in combination with “concierge” primary care and subsidized health savings accounts, for approximately the same cost as the traditional Medicaid benefit. However, such significant changes to the Medicaid program would require Congressional modifications to the federal Medicaid statute.


For those who believe that the unreformed Medicaid program is worth expanding, despite its grave flaws in efficiency and efficacy, Arkansas’ private option is only of consequence insofar as it expands Medicaid. But for those who are concerned about Medicaid’s problems, and hope that Arkansas is establishing a pathway for reform, there is much reason for skepticism.

The private option is, in essence, a dressed-up version of the Medicaid managed care initiatives that many other states have adopted. Furthermore, the private option has placed state taxpayers at risk for higher Medicaid costs; if the private option costs more than its proponents project, it is unlikely to continue in anything resembling its current form.

Other states that are looking to Arkansas as a route forward for Medicaid expansion would be better served by seeking far greater flexibility from the federal government. Indeed, in an ideal world, we would replace the Medicaid program entirely with either block grants or a fiscally neutral version of the ACA exchanges.

The Medicaid program was enacted in 1965; in the 5 decades since, insurers have developed considerable amounts of innovation in the cost-effective delivery of healthcare services. Without critical tools like flexible cost sharing and health savings accounts, Medicaid will never offer high-quality health coverage at an affordable price. Regretfully, this is a lesson that Arkansas taxpayers will quickly learn.Author Affiliations: Avik Roy is a senior fellow at the Manhattan Institute for Policy Research, and author of How Medicaid Fails the Poor (Encounter Books, 2013).1. Boukus ER, Cassil A, O’Malley AS. A snapshot of US physicians: key findings from the 2008 health tracking physician survey. Center for Studying Health System Change website. http://www.hschange.com/CONTENT/1078/. Published September 2009 (Data Bulletin No. 35).

2. Bisgaier J, Rhodes KV. Auditing access to specialty care for children with public insurance. N Engl J Med. 2011;364(24):2324-2333.

3. Baicker K, Taubman SL, Allen HL, et al. The Oregon experiment—effects of Medicaid on clinical outcomes. N Engl J Med. 2013;368(18)1713-1722.

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