GOOD DEAL FOR THE STATE: The Stephen Group's analysis of the Private Option found that it would save the state more than $400 million between 2017 and 2021.

As we reported on Tuesday
, the Stephen Group (TSG) issued its preliminary report to the Arkansas Legislative Task Force and found that the private option would save more than $400 million for the state budget over the period from 2017 to 2021. (TSG is the million-dollar consultant hired by the task force, with the support of the task force’s private option opponents.)

This is really quite big news – unlike previous estimates, TSG was using real premium and claims data from 2014. And their projection looked exclusively at years during which Arkansas must contribute to the gross costs of the policy, precisely the period that private option opponents were worried about.


It’s unclear, based on his comments to the task force on Wednesday, whether Gov. Asa Hutchinson has read the report. Hutchinson fretted about gross costs once the state has to start chipping in and the challenges of finding tens of millions in general revenue to continue the program. But TSG’s analysis found that once revenues and cost offsets are factored in, the state comes out ahead on net even in 2020 and 2021, when it has to pitch in the full 10 percent contribution. Ending the program would end up losing general revenue for the program, on net; continuing the program helps the state’s bottom line. 

So how does the private option end up putting more money in the state coffers? Let’s take a look.



The state’s matching contribution on the costs of covering beneficiaries on the private option. The federal government pays for most of the private option; the big cost for Arkansas is the small portion that the state has to chip in. Right now the state doesn’t have to pay anything in at all, but starting in 2017, the state will have to pay 5 percent of the costs. That slowly rises to 10 percent in 2020 and beyond. By 2021, TSG estimates that the state’s portion will be $215 million. 


Administrative costs. Administering the program for more than 200,000 additional beneficiaries imposes costs on the state (the feds chip in half of admin these costs and 90 percent of IT costs, with the state on the hook for the rest). TSG estimates that administrative costs for the state will be about $3 million per year. This one is unpredictable (witness the current fiasco with the renewal process) but ultimately the state’s administrative costs amount to a very small portion of the overall private option budget picture. 


Transfer populations. Certain Medicaid programs were discontinued because those beneficiaries are now covered by the private option. The state no longer needed to continue special Medicaid programs for Tuberculosis, Breast and Cervical Cancer Treatment Program, Family Planning,  and the ARHealthNetworks program because those beneficiaries are now fully covered by the private option (which has the more generous federal match rates). That saves the state more than $20 million a year. 

Meanwhile, there are certain required Medicaid programs that are continuing but see reduced enrollment because beneficiaries enroll in the private option. For example, there is a special Medicaid program for pregnant women — but if women are already enrolled in the private option when they become pregnant, they’ll be covered by the private option instead. Why does that save the state money? Because the old Medicaid programs require the state to pay a 30 percent match, whereas the state has a much smaller match for the private option Medicaid expansion (again that’s 5 percent in 2017 and 10 percent in 2020 and beyond). That difference — paying 10 percent for these beneficiaries instead of 30 percent — leads to savings for the state, more than $40 million per year. 


Reductions in direct state spending on uncompensated care. The private option has already saved hospitals tens of millions in uncompensated care. But it saves the state money too, which previously was sending more than $30 million annually to community health centers, local health departments, community mental health centers, UAMS, and the Department of Corrections in order to help cover the costs of uncompensated care. With the uninsured rate cut in half by the private option and many of the patients for those providers now covered by the private option, the state has been able to dramatically reduce that spending. TSG estimates that will save the state between $37 and $45 million a year. 

Insurance premium taxes. The state imposes a 2.5 percent tax on insurance companies for all private insurance plans sold on the Arkansas Health Insurance Marketplace. The private option creates hundreds of thousands of additional customers – in this case, plans purchased by the federally funded Medicaid program. That means the insurance companies pay more taxes to the state on all those insurance premiums. You might think of this as an accounting gimmick of sorts – the state is squeezing tax revenues out of Medicaid spending (the overwhelming majority of which comes from the federal government). Nevertheless, it undeniably helps the state’s bottom line, and it’s a unique advantage of the private option approach: unlike a traditional Medicaid expansion, the private option means many more private insurance plans get sold, which means lots more premium tax revenue for the state: more than $200 million over five years, according to TSG’s projection.

State tax revenue on billions in federal spending. The revenues mentioned above are via direct taxes on each plan sold. But that’s not the only way that the private option leads to additional state revenues: The federal government is spending billions of dollars a year in Arkansas because of the private option. That spending ends up being subjected to state taxes – for example, income taxes on providers, property taxes on new hospital facilities, sales taxes on new equipment and supplies, etc. This portion of the savings has occasionally been subject to controversy (one GOP lawmaker once called it “funny money”), but it’s actually straightforward. There is no way that feds can put $20 billion into the Arkansas health care system without it being subject to state taxes which raise revenues for the state coffers (this is one of many ways in which Medicaid expansion amounts to a transfer from the federal government to the states which went forward with expansion).

There tends to be some confusion around this part of the estimate, with some scoffing that it amounts to “dynamic scoring.” In fact, this revenue impact does not include any potential economic stimulus effect. It simply estimates the state taxes that will inevitably and unavoidably end up being collected on the billions of dollars of federal spending. That makes this an inherently conservative estimate, since pumping billions into the state economy will probably lead to some growth not factored into the estimate. Here’s TSG:  

The increase in collections from economically-sensitive taxes is the additional state taxes collected from the addition of new federal funds to the state economy. A typical approach to modeling the economic impact of new programs or investments is to apply a multiplier to the size of the anticipated expenditure, to capture the fact that some proportion of the new funds will be expended through local economic activity, and then the providers of that local activity will expend the received funds on other local goods and services, etc. In the calculations above, no multiplier is applied, which should result in a conservative estimate. Marginal tax revenues due to the additional federal expenditures are calculated as the total private option spending, less the state match, times a percentage factor representing a blended tax rate.

The conservative estimate of the state-tax revenue impact on all that federal spending? $360 million over five years. 


When you add it all up (see figure above) the state comes out ahead, by a lot. If you want to figure out the budget impact of the private option, the analysis can’t be limited to gross costs, as Hutchinson apparently did in his presentation to the task force. If you want to know the full picture, you have to look at the other factors that offset those costs and bring in revenues.

Imagine that Hutchinson was running a business selling widgets and trying to decide whether to buy a new widget machine. It would be awfully strange if he looked at the cost of the new machine, but didn’t factor in the revenues of the additional widgets or the reductions in costs of repairing the old machine.

The reason  that the private option is such a good deal for the state is because of the federal money pouring in. If private option opponents want to take a principled stand against deficit spending (even though the policy amounts to less than a rounding error when it comes to the federal debt) so be it. But if we are talking about the state budget picture, the private option is revenue positive on net. That’s according to a conservative estimate from the state’s own consultant, based on the real, updated claims and premium data. And that’s an estimate of the years in which Arkansas has to start chipping in, precisely the time that Hutchinson claims will be a budget buster. 


Remember, this is an analysis of the current private option policy, as is. If Hutchinson wants to tweak the policy with GOP-friendly bells and whistles, he can make that argument. But don’t pretend that’s a matter of protecting the state budget. Ending the private option would blow a $400-million hole in the budget. Keeping the policy in place remains a good deal for the state.