Two Government Agencies Are Feuding Over How Red States Should Expand Medicaid

When Arkansas asked the government for a waiver to expand Medicaid using the "private option" — taking money for Medicaid and using it to buy private health insurance for the poor — to provide insurance to 200,000 low-income residents, the state had to prove that its plan wouldn't cost more than a regular Medicaid expansion.

A new report from the Government Accountability Office, the nonpartisan government watchdog, argues that the U.S. Department of Health and Human Services didn't get enough proof that Arkansas's private option would cost less than a normal Medicaid expansion when it granted the state a Medicaid waiver in September 2013. In fact, the GAO argues that the spending limit the government gave Arkansas based on the state's estimates should have been 24 percent lower, or about $778 million less.

The problem is that Arkansas used an untested theory to reach the conclusion that the private option is cheaper than normal Medicaid. David Ramsey at The Arkansas Times has a great explanation here, but basically Arkansas's argument went like this: If 200,000 people get Medicaid insurance, the state needs more doctors who take Medicaid. Doctors get reimbursed less by Medicaid, so they don't accept it. To get more Medicaid doctors, you have to raise the Medicaid reimbursement rate to what private insurance pays doctors. If you do that, private insurance and Medicaid cost the same thing.

The GAO is not impressed by theories, and criticized HHS for not getting adequate proof from states that their cost estimates are accurate. "It’s clear that the GAO and HHS have a disagreement over this process that dates back years, and that really has little to do with Arkansas," the Arkansas Department of Health said in a statement. The GAO office openly acknowledges it has "long-standing concerns with HHS’s policy, process, and criteria for reviewing and approving" Medicaid waivers in its report.

The GAO also argues that HHS is letting other states use unsubstantiated numbers. When the GAO provided this report to HHS, the Department of Health "disagreed with GAO’s conclusion that HHS continues to allow states to use questionable methods and assumptions when developing cost projections," according to the report. Pennsylvania, Michigan, Iowa and Indiana are all in the process of launching their own private options.

Technically, the GAO is right — there's no hard data that proves that the private options is cheaper and, as The Incidental Economist notes, most people following news of the private option were skeptical. But even the GAO doesn't really know what information is wants, and doesn't offer any suggestions. At this point there's no way to tell if Arkansas's math was right.

More importantly, this was the only way Medicaid was going to pass in Arkansas and other states exploring the private option. The argument from red state governors is that Medicaid is a broken system that needs to reformed. The private option allows them to take federal money to insure low income people without selling out. Now Arkansas just has to prove that the private option really is cheaper.

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