DHS will not ask feds for adjustment to 2014 cost caps for the private option | Arkansas Blog

DHS will not ask feds for adjustment to 2014 cost caps for the private option

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The Arkansas Department of Human Services will not ask the feds for an adjustment to the private option's "budget neutrality" cap, according to DHS spokesperson Amy Webb (for lots more on the budget neutrality caps, see this post). Last month, Webb told the D-G that the agency was not planning to ask for an adjustment "at this point," but officials have been cagey ever since, stating that the agency did not believe it would need the adjustment but would wait to make a final determination closer to the deadline, October 1. 

That decision has now been made, Webb said. DHS is confident that the private option will be able to stay under the caps even without a 2014 adjustment, officials said, a decision with potentially millions of dollars at stake for the state. State officials have previously suggested that they believe that after the real costs of care in the private option are calculated at the end of the year, the insurance companies may owe money back, lowering 2014 costs. Webb also pointed to next year's lower-than-expected premiums as a sign that the private option can stay below the 2015 cap. 

As part of the terms of the federal waiver of Medicaid rules (known as an 1115 waiver) to pursue the private option, the state must keep the 2014 per-person-per-month costs of the private option below the target of $477.63, which is supposed to represent what traditional Medicaid would have cost. Thus far, the private option has been above that line, averaging $490.60 per-person per-month over the course of the year, around $13 above the cap (that price includes the cost of the premium, cost-sharing reduction payments, and "wraparound" benefits not covered by the plans). There is a new target each year ($477.63 this year; $500.08 next year; $523.58 in 2015). Under the terms of the waiver, the state is on the hook for per-person expenditures that come in over the line, on net, over the course of three years (the state is not on the hook for any given year but for the total; a good year could offset a bad year). 

There was always a catch, though. The state could ask the federal government to adjust the cap, and it had a lot of wiggle room to do so. Here's what the waiver states: 

If the State's experience of the take up rate for the new adult group and other factors that affect the costs of this population indicates that the PMPM limit described above...may underestimate the actual costs of medical assistance for the new adult group, the State may submit an adjustment....

Critics of the waiver's budget neutrality process have pointed out, fairly, that this represents so much latitude that we're really not talking about "caps" at all: if the targets "underestimate the actual costs," then the targets can be moved! Of course, these are just the rules of the game in terms of how the waiver is designed. The budget neutrality rules are supposed to compare the private option to what traditional Medicaid expansion would have cost, so it allows adjustments to the per-person cost caps if the population turns out to be different than what was projected (if the population is, say, older, than it would be relatively costlier to cover folks whether the coverage was through Medicaid or through the private option).

Let's be clear: under the terms of the waiver, the state of Arkansas would likely have no trouble getting the 2014 cap adjusted downward. According to actuaries hired by the state, the actual age of private option beneficiaries was slightly higher than the the state projected, adding more than $20 to the per-person cost; once the adjustment was made, the state would be below the caps. 

So why isn't the state going ahead and requesting an adjustment, even if it turns out not to be necessary, just in case? Well, most likely: politics. Opponents of the private option have argued that following the terms of the waiver and adjusting the cap would amount to a "bailout." That's not a bailout in any meaningful sense, but politicians love that pejorative. With another fight over re-authorization of the private option looming, state officials and backers of the private option want to express their confidence in containing private option costs — we could get an adjustment, they're saying, but we don't need to, so we won't. 

“If everything was equal, if the private option wasn’t a hot topic, we might just go ahead and ask for it just because it’s available,” DHS Director John Selig acknowledged. “But the bottom line for us is, do we need an adjustment in order to feel comfortable that we’re going to be budget neutral over the three-year course of the waiver? When we look at this year and the next years out, we’re comfortable that we’re not going to need [the adjustment]. Why raise that issue if it's not necessary?” 

This amounts to a bet. The state is currently somewhere around $13.6 million above the 2014 budget neutrality cap. That's $13.6 million that the state could potentially be on the hook for. DHS is sending a strong signal that based on Medicaid data trends, discussions with carriers, and preliminary information about 2015 rates, the agency has concluded that 1) the 2014 costs will go down after adjustments AND/OR 2) the 2015 and 2016 costs will be below the cap.

I'll have more on this in a subsequent post, but point #1 is key: the prices we're seeing for 2014 private option are only estimates. If the actual cost of medical care turns out to be less than 80 percent of premium prices, the insurance companies will owe money back. Similarly, carriers were paid up front for cost-sharing expenses (private option beneficiaries are protected from most cost sharing, so the private option pays for any expenses that normally consumers would have had to chip in for), but again, these were just estimates. At the end of the year, Medicaid and the carriers will settle up, and if the actual cost was less than predicted, the carriers will refund Medicaid, which would bring 2014 costs down. The fact that 2015 rates are steady or going down (rather than increasing, as is typical in the private insurance market) could suggest that the premiums in 2014 were set too high and that the state will get a rebate. As for cost-sharing expenses, that information from the carriers is proprietary, but the Arkansas Insurance Department looked at trends from earlier this year from partial information provided by the carriers and did not find conclusive evidence either way. 

A reconciliation of 2014 costs in the state's favor could wipe out some or all of the amount ostensibly above the cap this year. That said, DHS officials said they are not necessarily counting on the 2014 costs being revised downward. Because next year's cap is going up by about 4.7 percent while private option premiums are projected to be flat, DHS is confident that the average per-person cost will be below the cap in 2015. (Because enrollment has increased, the impact of 2015 will be magnified compared to 2014, with a greater number of member months covered.) There are other factors that might keep premiums down, such as a new rule next year that private option plans can only offer essential health benefits, with no extra bells and whistles attached; on the other hand, there are uncertainties about cost that go beyond the rates, such as which plans beneficiaries end up enrolling in and the impact of the Health Independence Accounts

"We've said all along that the benefits of this will build over the three years, particularly in the insurance market," Selig said. "We're certainly seeing that with the [2015] rates. It's pretty clear that even by Year 2 — if you just look at Year 1 you can say we're on the hook. By our analysis, by Year 2 we think we're going to be well in the clear.  If we thought it was going to be close, we'd ask for an adjustment." 

The 2015 rates are certainly a promising sign, but I suspect that there's more going in to the DHS decision than that. This is not a move a state agency committed to protecting the private option would make unless it was extremely confident that it won't leave the state liable for millions two years from now. Once the October 1 deadline passes, the state can no longer go back and ask for an adjustment for Year 1. However, DHS officials pointed out that if necessary, they could still ask for an adjustment in Year 2 or 3. That big leeway for the state is still built in for future years.  

One note on the politics. It's true that this does away with the lame "federal bailout" talking point (though did that actually sway anyone not already convinced?). But it seems to me that this opens up a different political problem. If the reconciliations reduce the 2014 private option costs, we won't hear about that until March at the earliest. And of course we won't know the average private option premiums being paid next year until next year. That means we'll go in to the legislative session with the state, on paper, on the hook for more than $10 million. The fact that the state would probably not actually end up paying that out to the feds won't stop someone like Sen. Bryan King from waving a laminated sign at the Capitol


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