States eye Medicaid private insurance

Some states may use their Medicaid expansion funds to buy private insurance.

NEW YORK (CNNMoney)

That twist is keeping alive the possibility of broadening Medicaid coverage in states where conservative legislators are bucking their governors' acceptance of the optional -- and controversial -- Affordable Care Act provision.

Republican governors in at least eight states have agreed to Medicaid expansion, which would extend coverage to all adults with income below 138% of the poverty line. It's part of the Obama administration's push for universal insurance, and the federal government is dangling a big carrot to make it happen. It will cover each state's expansion costs in full for the first three years. After that, states will be responsible for no more than 10% of the tab.

However, lawmakers in Ohio, Louisiana and Florida -- and in Arkansas, which has a Democratic governor and a Republican legislature -- have an alternative idea: Use the federal cash to cover the premiums on private insurance for their newly eligible Medicaid participants. They believe getting the private market involved could help rein in costs.

The U.S. Department of Health and Human Services is open to the idea, saying it wants to be flexible and work with states to design plans that fit their needs.

There's precedent for using Medicaid cash to pay for private insurance -- but it's rarely used. States have to clear two big hurdles before they can do it.

First, they have to prove that the private insurance costs are the same or less than those of enrolling the person in Medicaid directly. That's not easy, because Medicaid's costs are fairly low, said Joan Alker, co-executive director of the Georgetown Center for Children and Families.

Also, states generally have to make sure that recipients get all the same benefits that they would with Medicaid. If there's any shortfall, the state has to kick in money to buy extra coverage or cover the additional costs imposed by the private plans.

Those obstacles mean that only a tiny fraction of Medicaid funds get used to purchase private insurance -- less than 1% of all Medicaid and Children's Health Insurance Program spending in fiscal year 2009, according to the most recent estimates compiled by Georgetown. The most common path is to purchase insurance for low-income workers through their employer-sponsored plans.

The Affordable Care Act introduces another option. Starting in 2014, residents in all 50 states will be able to shop for coverage through health insurance exchanges.

Some lawmakers want the newly eligible Medicaid participants to sign up for plans through the exchanges, with the state using its expansion money to cover the premiums for these folks.

Taking that route might mollify some Republicans, since it would increase the involvement of the private market, which they believe will help lower Medicaid spending. It could also prove beneficial for some Medicaid recipients, particularly those at the higher end of the income scale. It could give them access to more providers. Also, it could help them maintain consistent coverage if their earnings rise above the Medicaid income threshold, since they would be able to remain in the exchange and qualify for federal subsidies to help cover their premiums.

Reducing that churn -- Medicaid participants exiting and returning to the program -- would save states time and money.

But the proposal leaves open some key questions. Among the biggest is whether providing premium assistance on the individual market will prove cost-effective, said Sara Rosenbaum, a law professor at George Washington School of Public Health and Health Services. Covering each recipient through an exchange would cost the federal government an additional $9,000 per year, rather than $6,000 through Medicaid, according to Congressional Budget Office estimates.

Also, unlike in an employer plan, where companies pick up much of the premium cost, the states would be responsible for covering the entire individual premium in the exchange, she noted.

Precisely what the states are thinking remains to be seen. Lawmakers in Ohio and Arkansas said they are still analyzing their options. They're especially focusing on whether going through the exchanges will save the states money in the long run.

"It seems there's an opportunity with private insurance plans to drive costs down over a number of years," said Davy Carter, Speaker of the Arkansas House of Representatives.

Until states settle on their plans, it's hard to judge how well the program might work, experts said.

"The devil will be in the details," Alker said. "We will have to see how it unfolds. There are clear pluses and minuses."

First Published: March 20, 2013: 6:16 AM ET

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