Earlier this month, the state Department of Human Services sent its request to the feds for a waiver of federal rules so the state can proceed with the so-called “private option” for Medicaid expansion. One requirement of the plan — which will use Medicaid funds to fully cover the premiums of private health insurance plans for low-income Arkansans — is that the state demonstrate “budget neutrality”: The “private option” is not supposed to cost more than traditional Medicaid expansion would. Many have expressed skepticism that this is an achievable goal for the state given the wealth of empirical evidence that Medicaid is cheaper than private insurance.

During the public comment period, in addition to the hubbub over community health centers, a few groups raised questions about budget neutrality. That includes Americans for Prosperity, though it’s been a bit peculiar to see them harp on this particular point — if traditional Medicaid expansion is cheaper, that seems to argue for, well, traditional Medicaid expansion, which is probably not on AFP’s agenda. Voices on the left have brought it up as well. As Anna Strong of Arkansas Advocates wrote, “It is clear the waiver does not go into detail about the evaluation of budget neutrality for the demonstration, a requirement for federal approval.”


And it’s true. The waiver request is vague on this point. Arkansas is asking the feds for a 3-year “Demonstration waiver” — basically, permission to run an experiment. The experiment includes various hypotheses about how the “private option” will work, including the hypothesis that it will be comparable in cost to traditional Medicaid. But unlike the other hypotheses, which articulate clear measurement mechanisms, the “cost comparability” hypothesis lists the “evaluation approach” as TBD; the “data sources” section is blank. (The final waiver request includes a budget neutrality spreadsheet not included in the original draft, but this merely asserts that the costs will be the same.)

I asked DHS about this when they first released the draft of the waiver request. A spokesperson responded:


The hypotheses are designed to support a more formalized academic evaluation whereas the Special Terms and Conditions will include the requirements for achieving budget neutrality. Budget neutrality requirements will be addressed in the Special Terms and Conditions to be drafted by CMS [Centers for Medicaid and Medicare Services] following the waiver submission.

In other words, the question of how to evaluate whether the “private option” costs more than traditional Medicaid will ultimately be up to the feds. The state and CMS are currently discussing  the development of an evaluation approach; if the waiver is approved, it will include instructions from CMS on how to test for budget neutrality.

DHS has a controversial theory (backed by an actuarial study) about why the “private option” will cost the same, or even less. Its hypothesis states that the cost will be comparable to traditional Medicaid “assuming adjustments … to achieve access.” That “assuming adjustments” bit is the key: DHS argues that if traditional Medicaid is expanded, the Medicaid program would have to increase reimbursement rates to providers in order to achieve adequate access. By how much? All the way up to private rates. The Medicaid program wouldn’t be able to “beat the market,” according to Medicaid director Andy Allison; if more than 200,000 low-income Arkansans gain coverage, Allison argues, the reimbursement rates necessary to entice enough providers to cover that huge new pool of people will be the same whether they’re coming from a public program or private carriers. As Allison put it back in March: “If it’s the same number either way then this question of cost comparability — cost effectiveness — for the private option versus some kind of traditional Medicaid is moot.”


I’ll pause here to note that it’s probably a good thing that the feds are the ones with the final say on a budget neutrality test since by the DHS theory, it’s already baked in the cake. If you want to know what traditional Medicaid expansion would have cost, the answer is the cost of the “private option.” Game, set, match!

Presumably CMS will settle on a more rigorous means of testing the DHS theory, which has thus far largely been met with skepticism by healthcare watchers outside of Arkansas. Perhaps CMS will compare Arkansas to another state, one that went with traditional Medicaid expansion.

But here’s the thing: The demonstration is supposed to determine which costs more: a policy that happens — the “private option” — or an alternative policy, traditional Medicaid expansion in Arkansas, that never happens. That’s an inherently abstract question and the feds are likely to grant a good deal of wiggle room in determining the answer. For example, if Arkansas is compared to another state, there are any number of individual differences between states that might be hard to control for. A budget neutrality evaluation won’t necessarily have a clear, black-or-white result.

Given that CMS appears to be politically invested in the success of the Arkansas “private option” policy, the state is probably going to be given some latitude on the budget neutrality question, at least over the course of the three-year demonstration period and perhaps beyond that. Joan Alker, a health policy expert at Georgetown University, does a good job in this post of explaining federal rules for “private option”-style premium assistance schemes and concludes that “CMS left some room for fudginess in how they will approach the issue of cost-effectiveness.” Hmmm. Meanwhile, a recent study from the U.S. Government Accountability Office (GAO) found that CMS isn’t exactly a stickler for proving budget neutrality on Medicaid waiver applications, regardless of what the rules say.


Will the state actually achieve budget neutrality? Hard to say, and harder to measure than you might think. There are critics that believe the DHS theory doesn’t pass the smell test; they point to the experience of Massachusetts — when it moved to universal coverage, Medicaid remained significantly cheaper than private insurance on  that state’s healthcare exchange. Regardless, the chances of Arkansas missing out on federal approval because of concerns about budget neutrality — or even the chances of failing a budget neutrality test imposed by CMS — strike me as low. A little “fudginess” goes a long way.

That’s not to say that the question of budget neutrality is unimportant. After all, it’s federal taxpayers that will be footing the bill! It matters to the state budget too: If Arkansas continues with the “private option” policy, the state will be chipping in eventually (the feds pick up the full tab for the first three years, the length of the proposed demonstration waiver).

Of course the point of a demonstration wavier is to try something new. DHS may be right, and the “private option” may turn out to be just as cost effective as Medicaid, or more so — which would be big news in healthcare reform. It’s an empirical question and we’re about to get three years of data. But it’s also a politicized issue, and I expect that folks will still be arguing about the answer three years from now.