qotd: HHS authorizes higher hypothetical cost threshold for privatized Medicaid

GAO
Released September 8, 2014
Medicaid Demonstrations:
HHS's Approval Process for Arkansas's Medicaid Expansion Waiver Raises
Cost Concerns

What GAO Found

In approving Arkansas's Medicaid Section 1115 demonstration, the
Department of Health and Human Services (HHS) gave the state the
authority to test whether providing premium assistance to purchase
private coverage offered on the health insurance exchange will improve
access to care for individuals newly eligible for Medicaid as a result
of the Patient Protection and Affordable Care Act (PPACA).

In approving the demonstration, HHS did not ensure that the
demonstration would be budget- neutral — that is, that the federal
government would spend no more under the state's demonstration than it
would have spent without the demonstration. Specifically, HHS approved a
spending limit for the demonstration that was based, in part, on
hypothetical costs — significantly higher payment amounts the state
assumed it would have to make to providers if it expanded coverage under
the traditional Medicaid program — without requesting any data from the
state to support the state's assumptions. GAO estimated that, by
including these costs, the 3-year, nearly $4.0 billion spending limit
that HHS approved for the state's demonstration was approximately $778
million more than what the spending limit would have been if it was
based on the state's actual payment rates for services under the
traditional Medicaid program. Furthermore, HHS gave Arkansas the
flexibility to adjust the spending limit if actual costs under the
demonstration proved higher than expected, and HHS officials told us
that the Department granted the same flexibility to 11 other states
implementing demonstrations that affect services for newly eligible
beneficiaries. Finally, HHS, in effect, waived its cost-effectiveness
requirement that providing premium assistance to purchase individual
coverage prove comparable to the cost of providing direct coverage under
the state's Medicaid plan, further increasing the risk that the
demonstration would not be budget-neutral.

As of June 2014, HHS has approved one additional state's — Iowa's —
demonstration to use premium assistance to purchase exchange coverage.
Iowa's demonstration is more limited in scope in that it covers a
portion of the expansion population, those with incomes of 101 percent
to 133 percent of the federal poverty level. As with its approval of the
Arkansas demonstration, HHS gave Iowa the flexibility to adjust its
spending limit and waived the cost-effectiveness requirement. According
to HHS officials, three other states as of June 2014 had indicated an
interest in implementing a similar approach.

In commenting on a draft of this report, HHS disagreed with GAO's
findings that HHS's approval process did not ensure that the Arkansas
demonstration will be budget-neutral. GAO maintains the validity of
these findings.

What GAO Recommends

GAO is not making recommendations in this report. GAO has had
long-standing concerns with HHS's policy, process, and criteria for
reviewing and approving section 1115 demonstrations, including the lack
of transparency in the basis for approved spending limits. GAO has
previously reported that HHS's budget neutrality policy and process did
not provide assurances that demonstrations would be budget-neutral to
the federal government. Among other concerns, GAO reported that HHS
allows methods for establishing the spending limit that GAO believes are
inappropriate, such as allowing states to include hypothetical costs —
expenditures that the state could have made under its Medicaid program
but did not — in establishing the baseline for the spending limits. As a
result, GAO has made a number of recommendations in the past to improve
the budget neutrality process for Medicaid demonstrations. In 2008,
because HHS disagreed that changes to the budget neutrality policy and
review process were needed, we suggested that Congress require the
Secretary of HHS to improve the demonstration review process by, for
example, better ensuring that valid methods are used to demonstrate
budget neutrality.

http://www.gao.gov/products/GAO-14-689R


From the full GAO report:

HHS's approval of $778 million dollars of hypothetical costs in the
Arkansas demonstration spending limit and the department's waiver of its
cost-effectiveness requirement is further evidence of our long-standing
concerns that HHS is approving demonstrations that may not be
budget-neutral. HHS's approval of the Arkansas demonstration suggests
that the Secretary may continue to approve section 1115 Medicaid
demonstrations that raise federal costs, inconsistent with the
Department's policy of budget neutrality. Moreover, the additional
flexibility granted to Arkansas and 11 other states to increase the
spending limit if costs prove higher than expected sets another
precedent, further eroding the integrity of HHS's process. If, as it did
with Arkansas, HHS allows states to use an approach to expanding
Medicaid that is expected to cost more than expansion under the existing
Medicaid program with fewer cost controls in place, there could be
significant cost implications for the federal government. Efforts to
ensure cost- effectiveness and budget neutrality in Medicaid expansion
demonstrations have even greater fiscal implications given that states
that choose to do so will receive enhanced federal funding for the newly
eligible population.

http://www.gao.gov/assets/670/665265.pdf

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Comment by Don McCanne

Our two major public programs for health care financing - Medicare and
Medicaid - continue down the path of privatization, with the complicity
of the Department of Health and Human Services (HHS).

We've reported many times that the private Medicare Advantage plans that
are displacing the traditional Medicare program have been deliberately
funded well in excess of that allotted for traditional Medicare, both by
acts of Congress and by administrative chicanery at HHS.

Now the GAO reveals that HHS has also used the section 1115 Medicaid
waiver process to allow states to not only transfer their Medicaid
patients to private health plans, but to also allow them to meet the
higher costs of private plans, through innovative chicanery such as
"allowing states to include hypothetical costs — expenditures that the
state could have made under its Medicaid program but did not — in
establishing the baseline for the spending limits."

Although privatization of Medicare and Medicaid has long been a
Republican goal, since the neo-liberals have dominated the Democratic
leadership, they have aided and abetted this effort. We are supposed to
be a democracy, yet no matter how we vote, we are electing politicians
who spend more of our tax and premium dollars on the administrative
waste and mediocre performance of the private insurers. Any suggestions?