Why the Obama Administration’s Novel Medicaid Idea Might Not Catch On

Margot Sanger-Katz
National Journal

A few weeks ago, the Obama administration set out to entice Republican governors and state legislators to expand their Medicaid programs under the federal health reform law by floating a novel approach.

The option to use private health plans instead of the government program for low-income residents was very appealing in theory, intriguing politicians in Arkansas, Ohio, Tennessee, Texas, and other states.

But on Friday, the administration dampened that enthusiasm by laying out strict rules for the program that will interest only a few states.

“This does not make it look very appealing to states,” said Dennis Smith, a managing director at McKenna Long & Aldridge LLP, and a former George W. Bush administration Medicaid director and Health and Human Services secretary in Wisconsin. “I’m disappointed that they passed up the opportunity.”

The details will reassure many Medicaid advocates, who were worried that the current administration would weaken long-standing protections of the entitlement program in exchange for Republican buy-in. But the rules also could discourage some on-the-fence states from pursuing a Medicaid expansion at all, leaving more Americans without health insurance after the health law’s biggest provisions kick in next year.

“There’s a multisided dynamic here,” said Matt Salo, the executive director of the Association of Medicaid Directors, who had anticipated that the new initiative could bring 10 or more additional states into the expansion. Now, he says, it will likely appeal to only a few.

Eight Republican governors have already said they will seek to expand their existing Medicaid programs, but many politicians who had ruled out such an option have been expressing interest in the private alternative.

The tension for the administration—between its desire to cover more people and its commitment to ensuring robust coverage for vulnerable populations—has been clear since Arkansas Gov. Mike Beebe, a Democrat, first announced that he had reached an agreement over a private Medicaid option in late February. HHS still has not acknowledged any agreement, but Beebe told reporters that Secretary Kathleen Sebelius had agreed that the federal government would pay for Medicaid beneficiaries to buy the same private insurance plans that will be offered to higher-income residents.

For Republicans in the Arkansas Legislature—and politicians in many other states—the idea of offering private coverage instead of Medicaid was exciting. But there were many uncertainties in the plan. The private plans would have covered fewer benefits than Medicaid, and exposed beneficiaries to more out-of-pocket costs. Estimates from the Congressional Budget Office suggest that, on average, the private plans would cost 50 percent more than Medicaid plans, meaning a 10-year price tag in the tens of billions if enough states signed on.

With the document released Friday, HHS explained that it would only approve such a plan if it also included funding for the extra benefits, kept the usual, low Medicaid copayments, and could be shown to be cost-effective for the federal government, when compared to a traditional program. It also said that if states want to require private plans, instead of just offering them as an option, it will have to apply for a special waiver. That sets a high bar for the states to clear.

But Arkansas thinks it can still move forward. “It is what we expected, and we’re glad to see it,” said Amy Webb, a spokeswoman for the state Department of Human Services.