The private option, the state’s unique plan using Medicaid funds to purchase private health insurance for low-income Arkansans, has had plenty of good news, with more than 200,000 people gaining coverage, the uninsurance rate cut in half, and what appears to be a positive impact on the Arkansas Health Insurance Marketplace. There has been a nagging concern, however, on the cost side. Thus far, the state has been spending $490.60 per-person per-month. That’s about $13 more than the target set by the feds as part of the waiver of Medicaid rules to pursue the private option.
Critics of the private option have complained that the policy has gone over budget. You might remember a press conference in which Sen. Bryan King held up a laminated sign purporting to show cost overruns.
What King’s sign didn’t mention, however, was a needed asterisk. In fact, we don’t yet know the true per-person costs of the private option in 2014. What we have are estimates based on the current premiums and predicted costs of covered cost-sharing, which the private option pays up front. At the end of the year, those costs will be reconciled with the true costs of medical services, which could mean the actual per-person costs of the private option wind up being less than what we’ve seen reported this year.
There are actually two reconciliations that will happen at the end of the year. The first is due to the medical loss ratio (MLR) provision of Obamacare, which demands that 80 percent of premium dollars are spent on medical care (leaving the rest for administration, marketing, and profit). The idea is to keep the insurance companies honest. If premiums are too high, insurance companies have to rebate the difference to the customers. In this case the customer is the government — the private option. If the real medical costs of the 2014 beneficiaries are lower than insurance companies predicted, Medicaid will get a rebate and the 2014 cost of the private option will go down. MLR, which is enforced by the federal Department of Health and Human Services, can only work in one direction – if the premiums are too high, the insurance companies have to pay back Medicaid, but Medicaid won’t owe any money back if the premiums were on the low end.
The second reconciliation regards cost-sharing reductions (CSR), a situation unique to the private option. Remember, these are private plans, and the premium is based on the assumption that the consumer will foot some of the bill via cost-sharing, such as co-pays and deductibles. But private option beneficiaries are protected from most cost-sharing by Medicaid rules, so the private option pays those expenses for them. Under the terms of the waiver, the state paid the insurance companies up front for those expenses that normally would have been paid by the consumer via cost-sharing. These were just estimates: a projected average amount of expenses based on a prediction of how much beneficiaries would utilize their health care coverage. Just like MLR, at the end of the year, the private option and the carriers will settle up. Unlike MLR this can work both ways. If the actual costs are lower the CSR payments predicted, the insurance companies will owe money back (lowering the 2014 cost of the private option); if the actual costs are higher, Medicaid will owe money back, raising the 2014 cost of the policy.
Got all that? If you want to talk about private option costs, you have to keep MLR and CSR in mind, because everything we think we know about 2014 costs could change. We have estimates now. We’ll have the true costs next year. Both reconciliations likely won’t be completed until March at the earliest.
It’s too early to make predictions with any confidence about what will happen with MLR and CSR. The reconciliations could cut this year’s private option costs significantly, but the impact could be negligible or even negative. The insurance companies have been cagey, and their year-to-date data is proprietary. When the Arkansas Insurance Department looked at partial CSR data from earlier this year provided by the insurance companies, they didn’t find conclusive evidence of a significant impact either way.
There are some hopeful signs. It’s become nearly axiomatic in health care that premiums will go up significantly ever year, but the 2015 rates, pending federal approval, are going down by 2 percent (Ambetter is dropping a whopping 12 percent). The fact that premiums came in much lower than expected for next year could signal that they were set too high this year. If so, the private option could get an MLR rebate. If the premiums were set too high, that might signal that beneficiaries were utilizing less medical services than expected, which in turn gives hope of a CSR rebate too — if people were using less health care than expected, they may have accrued less in the way of cost-sharing expenses for the private option to cover. As we noted yesterday, the Department of Human Services signaled some optimism on this front from the agency’s internal analysis, with its decision not to ask for an adjustment to the 2014 budget neutrality cap. The private option is over the cap this year, but that could change if the reconciliations work out in Medicaid’s favor.
In short, we just don’t yet know the true 2014 costs of the private option. Critics of the private option don’t always note this. The Florida-based anti-Medicaid-expansion advocacy group Foundation for Government Accountability has penned a series of articles for Forbes critiquing the Arkansas private option for cost overruns, but has never made mention of the possibility of MLR and CSR adjustments. A recent article in the Forbes series included an update from a D-G report that the state likely wasn’t seeking an adjustment to the cap (or a “bailout” as they put it) but was silent about the reason why, articulated in that same D-G report. Forbes simply said that Arkansas would be on the hook, without mentioning that DHS stated that it believed the adjustment wouldn’t be needed, in part because of reconciliation. This was a curious omission, just as it’s curious to report on 2014 costs without mentioning that those costs may be revised.
Monitoring the costs of the private thus far is vitally important, but it’s also important to acknowledge that those numbers may change.
*Some of this information was included in this previous post but I thought it would be helpful to have all of the MLR and CSR background in one place.