Arkansas is currently trying to pursue a novel path for expanding Medicaid under the Affordable Care Act. They want to take the money and instead use it to get its population to buy private insurance on the new Obamacare exchange. It has been dubbed the “Private option.”

The one big problem with this plan is that private insurance is significantly more expensive than public insurance programs such as Medicare and Medicaid. This private option could be as much as 50 percent more expensive, but the Arkansas Department of Human Services released an analysis claiming the added cost would be much lower. They claim it may only cost 15 percent more or possibly less. One problem is their analysis seems based on some dubious and contradicting logic.

They start by claiming that adding more people to the exchange would increase the market power of the pool and allow it to negotiate lower prices. From the analysis:

It is likely that introducing 250,000 low-income adults into the private market through the insurance exchange will increase competition among carriers and generate some price pressure on providers, since they would then be compensated at competitive rates for all clients. This price pressure is estimated to result in a 5% reduction in private reimbursement rates in the exchange.

There is basically no real world evidence to justify this case. Insurance exchanges  that have been tried in the United States have mostly been cost control failures.

What is more important, though, is that the logic of this section seems to be directly contradicted on the very next page. They claim adding more people to the current Medicaid pool would actually force Medicaid to increase the amount it pays to providers.

Arkansas’ existing Medicaid program appears to provide sufficient access, but adding 250,000 participants would require significant new commitments by providers to meet the increased demand for medical services.

How much might the Federal government need to pay providers to secure access for this new population? The best comparison point might be the rates that would be paid in a competitive market for services to a low-income population, and this is exactly what those providers would get paid under Arkansas’ emerging plan.

So the Arkansas DHS is claiming that larger purchasers are better able to negotiate lower prices, but somehow this don’t apply to Medicaid. Giving Medicaid more market power would make it less effective at negotiating prices.

Photo by TimmyGUNZ under Creative Commons license.