Medicaid Expansion’s New Cost Estimate Isn’t Alarming

The Centers for Medicare & Medicaid Services (CMS) Actuary has raised its estimate for how much states spent to cover adults newly eligible for Medicaid under health reform in 2015, but the actual costs are likely lower than the estimates, and risk-sharing arrangements in many states will lead managed care plans to pay back the excess funds they received for covering newly eligible adults.  That would likely bring per-enrollee spending more in line with prior estimates.

When, for 2014, CMS similarly raised the cost estimates of covering newly eligible adults, we explained that the estimates reflected higher-than-expected payments to managed care companies because states had little experience on which to base their rates.  That likely accounts for this year’s higher estimate for 2015, too, according to the CMS report. 

When states set their initial rates, they assumed that previously uninsured enrollees would have a pent-up demand for health care and that sicker enrollees would likely enroll first, leading to higher-than-expected payments.  CMS expected the costs of covering newly eligible adults to fall in 2015 when we would know more about the actual costs.  But that didn’t happen because states still lacked sufficient information about what happened in 2014 — the first year these adults were covered — when they set their 2015 rates.  Not surprisingly, emerging evidence shows that states again likely set their managed care payment rates too high in 2015.  

Due to the uncertainty about per-enrollee costs for newly eligible adults, most states include risk-sharing provisions in their managed care contracts that require health plans to return excess payments if costs turn out lower than assumed (and some states require that the state provide higher payments if costs are higher than expected). 

Only a few states have reported on the net effects of risk sharing on their actual spending, but, assuming these results apply across expansion states, the difference between actual per-enrollee spending and original spending projections for 2014 and 2015 would shrink considerably.  As a result, CMS expects the federal government’s share of what managed care plans will repay state Medicaid programs to equal about 9 percent of spending on expansion adults in each of 2014 and 2015. 

CMS also expects the costs of covering the expansion adults to drop in 2016 when we know more about the actual costs of their health care, and for those costs eventually to be lower than coverage for pre-health reform adults — although CMS also estimates that the difference between the two groups will be smaller than previously assumed. 

Of particular note, most states themselves aren’t reporting that the costs of covering newly eligible adults are higher than they expected.  Nearly two-thirds of expansion states reported that their per-member costs for expansion enrollees were at or below their projections, a Kaiser Family Foundation survey found; only a few reported higher costs.