The Medicaid Gap in Pennsylvania – Does Corbett’s “Private Option” Add Up?

October 1st – the day the Insurance Marketplaces opened – came and went in Pennsylvania without an answer to whether many uninsured low-income residents will be able to get coverage through Medicaid.  Unlike states that are participating in the Medicaid expansion under Obamacare, roughly 350,000 Pennsylvanians living in the income gap between the current Medicaid program and newly subsidized private insurance will be left out.

Last month, Governor Corbett proposed to the federal government a "private option" plan similar to one recently adopted by Arkansas.  Under the so-called "private option," instead of enrolling low-income individuals in Medicaid, newly eligible Pennsylvanians would be sent to insurance "marketplaces" where they would be offered a heavily subsidized private plan.  Since those plans would require a lot of cost sharing for patients and states are prohibited from requiring new out-of-pocket costs within the Medicaid program, the government would have to supplement the coverage of the private plans.

The key question is, will it cost more money?  Arkansas has said it won't.  The Corbett administration has not provided any details of its own cost analysis.  However, Arkansas' claim that the "private option" will not cost more than traditional Medicaid is hard to believe. Medicaid generally costs less than private insurance because the prices Medicaid pays for things like doctors' visits and drugs is a lot less than those paid by private insurance.

In Arkansas, Medicaid pays about 24% less than private insurance.  In Pennsylvania, the amount is even lower.  So for private plans to beat traditional Medicaid they would have to dramatically decrease the use of services and still build in a profit margin.  Many states already use managed care plans in their Medicaid programs.  The evidence says the cost savings have been small or nonexistent.

So how did Arkansas officials convince the federal government they could do it more cheaply?  They argued that as private plans compete to be among the most affordable plans on the marketplaces (and therefore get more business), insurers will negotiate lower provider payment rates (they estimated about 5%).  They also argued that with so many new enrollees, the state's Medicaid program will have to increase their payment rates anyway (private option or not) to make sure patients have good access to care (so doctors and hospitals will agree to provide care).

In my view, this logic is shaky.  For decades, there have been debates and even lawsuits attempting to raise the reimbursement rates that Medicaid pays providers to be closer to those of private insurance.  Yet that has not compelled nor persuaded states to raise their rates.  If history provides any lessons, it's hard to imagine that Medicaid programs will increase the amount they pay because of "market forces."  And although Obamacare temporarily increases Medicaid payments for primary care, I think it is unlikely to stick or be extended to other providers and services.

A good argument can be made for the federal government to approve the "private option" in several states to test whether it can save money and perhaps at the same time improve access.  I doubt it will work but the idea can be tested.  However, the federal government should rigorously evaluate whether it has worked.  And if it hasn't, it should put an end to the program after a three-year demonstration so that taxpayers are not footing the bill.  If it turns out that it costs a little more but improves access and quality, then maybe it is worth it.

Or maybe states should just pay providers better in their existing Medicaid programs, which in the long run might be the most cost-effective way to provide coverage and improve access.  That "option" is worth testing too.

Editor's Note: Cross-posted on the Voices@LDI blog of the Leonard Davis Institute of the University of Pennsylvania.