Arkansas wants to privatize its Medicaid Expansion: Is this the start of a trend?

How do you get recalcitrant Republicans like Pennsylvania Governor Tom Corbett to support expanding Medicaid, which is a key feature of Obamacare? The answer is to do it through privatization.

That's the path Arkansas Governor Mike Beebe, a Democrat, is hoping to take. To convince the state's Republican-dominated legislature to expand Medicaid, he proposed offering coverage through private insurance companies. So far, Republican leaders in the state are going along.

His approach has also attracted the interest of Republican governors in four other states - Florida, Ohio, Louisiana and Maine. Governor Corbett suggested earlier this week that he might follow suit after meeting with Health and Human Services Secretary Kathleen Sebelius.

The Beebe plan would have the state pay for private policies for residents with incomes below 138% of the federal poverty level. They would purchase the policies on the new insurance exchanges that will operate under Obamacare starting next January 1. This would avoid the need to expand the existing Medicaid program directly.

Obamacare originally envisioned two separate means of covering the uninsured – an expanded Medicaid program in each state for the poorest and exchanges for everyone else. When it upheld the law last summer, the Supreme Court said states must be allowed to opt out of the Medicaid part of the arrangement.

To the surprise of some, the Obama administration signed off on the Arkansas proposal in February. It has actually been encouraging states to consider similar ideas since last December and is now actively urging them to look into the Arkansas approach. It has even published an information sheet with advice on how they can proceed. The privatization alternative could tip the balance for some states that remain undecided.

What's in it for a state to go along? Supporters of privatization claim it harnesses market competition to control costs. It could also reduce the need to expand existing Medicaid bureaucracies to administer the expansion. And it might result in better care.

Are these benefits likely to materialize? Unfortunately, the answer is probably not.

The Congressional Budget Office projects that policies sold on the Obamacare exchanges will cost taxpayers 50% more on average than coverage under Medicaid - $9,000 a year vs. $6,000. And many states have used private insurers to run their Medicaid programs for years with no cost savings to report.

Arkansas commissioned its own analysis to counter CBO's, and it predicted the state's cost would only be one-third of CBO's estimate. But the analysis acknowledged that privatization could still cost as much as 15% more than traditional Medicaid.

Could costs come down over time as competitive forces come into play? Again, probably not.

Medicaid programs dictate that physicians and hospitals accept low prices as a way to control costs. Private plans can't do that. They must negotiate with providers, which keeps them from matching Medicaid's rock bottom rates. Paying providers more has a positive side, since it might lead to better care, but it will not make Medicaid any cheaper.

And private plans can't cut benefits to control spending. Medicaid benefits must meet minimum standards, and the Obama administration has made it clear that the standards would apply to Arkansas' plan and others like it. Some of those benefits are more generous than typical private coverage, like transportation to provider facilities and extremely low co-payments and deductibles. Private insurers would have a hard matching them while cutting costs.

Might competitive pressures still push private insurers to innovate in order to find ways to sell more policies at lower cost? That's also unlikely. With full subsidies for the cost of coverage, why would Medicaid beneficiaries care what the price is? Economists call this moral hazard, and it affects all of us when we go shopping at someone else's expense.

And insurers don't necessarily want large market shares. They almost always make more money selling coverage selectively to those least likely to become sick. That's difficult to do with Medicaid populations, which tend to be high risk from the start.

Would privatization help states avoid the cost of expanding their Medicaid bureaucracies to accommodate more beneficiaries? Not necessarily. They would still have to regulate private plans for compliance with Medicaid standards, which could pose a significant administrative burden.

However, there is one huge potential benefit of Medicaid privatization that is less frequently discussed. It could solve one of Obamacare's biggest challenges.

Medicaid suffers from what experts call "churning." Beneficiaries move in and out as their incomes rise and fall. Exchanges will have a difficult time keeping track of consumers as their Medicaid eligibility changes. The Arkansas approach would run all coverage through the exchanges, which could help them to make the transition between coverage programs seamless.

The irony of this should not be lost. Privatization makes the Medicaid expansion more palatable to Republicans by relying on insurance exchanges, which are one of Obamacare's key features. By endorsing it, they are buying into Obamacare's central premise. Health reform is certainly full of surprises.