States Adopt Private Market Model for Public Health Insurance Programs

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An experimental Medicaid program could cut across party lines and provide health care to millions of Americans.

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Three states have received federal approval for experimental programs that use public dollars to buy private insurance plans for low-income residents. Under these programs, referred to as “premium assistance” models, the states pay Medicaid beneficiaries’ premiums so they can enroll in private coverage.

Lawmakers in Arkansas, New Hampshire, and Iowa believe premium assistance could expand much-needed coverage to uninsured Americans and stabilize state insurance markets. These states had not previously expanded coverage under their Medicaid programs, and now hope to expand by placing Medicaid beneficiaries in the private insurance market.

Expanding Medicaid was essential to the Affordable Care Act’s (ACA) mission of providing health coverage to millions of Americans. When the Supreme Court ruled in 2012 that expansion of states’ Medicaid programs was optional, many states refused to participate. This left millions of low-income residents without affordable health care options and it has forced lawmakers in states with high uninsured rates to consider alternatives to traditional Medicaid expansion.

For some states, refusing Medicaid expansion–and the millions of federal dollars that come with it–is part of a bigger resistance effort against the ACA. In states with politically divided governments, though, premium assistance presents a “bipartisan” means of expanding Medicaid by shifting enrollees into the private market while still using federal dollars to pay for their coverage. Some conservative states, such as Georgia, have expressed interest in this private market-based approach, “which is seen as a more politically palatable path to expansion for Republicans.”

Under a premium assistance model, states use Medicaid dollars to purchase qualified health plans–federally regulated private insurance plans sold in the Health Insurance Marketplace created under the ACA. Medicaid beneficiaries enroll in these private Marketplace plans instead of receiving traditional Medicaid. The Department of Health and Human Services (HHS) has stated that it will consider approving a limited number of experimental premium assistance “waiver” programs as a way of testing alternative systems for delivering health coverage under Medicaid. States must apply to the Centers for Medicare & Medicaid Services (CMS) for approval of these waiver programs, and they must reapply every three years to renew the waivers.

A recent report from the Henry J. Kaiser Family Foundation found that premium assistance has worked reasonably well in Arkansas. Arkansas’ program, called the Private Option, has covered 220,000 Medicaid enrollees with private Marketplace plans since January 2014. Premium assistance enrollees account for 80% of the state’s total Marketplace enrollment. Arkansas’ large premium assistance population substantially boosted private plan enrollment; created a healthier risk pool; attracted more insurers to the individual market; and reduced premiums for all Medicaid and non-Medicaid Marketplace enrollees, according to the Kaiser Foundation report. Premium assistance has allowed the state to place these beneficiaries in private health plans with robust provider networks, expanding coverage without overburdening the state’s existing–and very limited–Medicaid program.

However, the fate of Arkansas’ Private Option, which is currently set to expire at the end of 2016, is unclear. The federal government will pay 100% of the costs for Medicaid expansion until then, but that rate will drop to 95% in 2017. Last month, Arkansas Governor Asa Hutchinson addressed the state’s Joint Healthcare Task Force and expressed concern about the state’s ability to support the Private Option in its current form without those federal dollars.

The U.S. Government Accountability Office has raised numerous concerns about the costs of premium assistance programs. All waiver programs must be budget neutral–federal contributions to the program may not exceed the cost of traditional Medicaid expansion–as well as “cost-effective,” meaning its cost must be “comparable” to the cost of providing traditional Medicaid. However, CMS has given states broad flexibility in assessing the cost-effectiveness of premium assistance waivers, which has raised questions about the financial viability of these programs.

The premium assistance model’s appeal is that it gives states flexibility to design a Medicaid program that fits the state’s unique needs. Proponents cite several advantages, such as improved access to providers, increased private market competition leading to more consumer choices and lower overall health care costs, and simpler transitions for individuals who switch between private and public coverage due to fluctuations in income.

Although Arkansas has realized many of these benefits, its success may be the exception rather than the rule. Iowa announced earlier this year that it will discontinue premium assistance because insurers, citing higher-than-expected costs, have withdrawn from the program. New Hampshire’s program does not go into effect until January 2016, but insurance companies have already cited the anticipated premium assistance as a driving force behind significant premium rate hikes for the 2016 plan year.

To critics of premium assistance, the chief concern is that it will deprive Medicaid enrollees of benefits and protections to which they are entitled under law despite being enrolled in private insurance plans. HHS guidance makes clear that the federal government will only consider premium assistance proposals that preserve these rights. States must “wrap around” private coverage by subsidizing copayments, so that beneficiaries are never responsible for costs that exceed the limits prescribed by Medicaid law. States must also supplement coverage, through their traditional Medicaid programs, with any benefits and services required under law that are not covered by the private plans. Consumer advocates are concerned that the administrative complexity of monitoring and providing these benefits could present challenges that impede access to care.

Placing Medicaid enrollees in private plans might have some advantages but, as the vastly different results in Arkansas and Iowa have shown, implementation is complex and the program may not be an ideal fit for every state. Success will depend on factors such as the structure and capacity of each state’s existing Medicaid program, the number of insurance companies operating in the state, the size and overall health of the Medicaid population, and the state’s ability to provide supplemental benefits and copayment reductions as required under Medicaid law.