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New Estimate for Medicaid Expansion Doesn’t Reflect Actual Costs

The Centers for Medicare & Medicaid Services (CMS) Actuary has raised its cost estimate for covering the adults that health reform made eligible for Medicaid last year.  The report, however, makes clear that the new estimates reflect the rates that states paid managed care companies to cover these adults, which likely exceeded the actual cost of providing the coverage.  So, the report doesn’t mean states will face higher-than-expected costs once they start picking up a small share (no more than 10 percent when fully phased in) of expansion costs in 2017.

State Medicaid programs cover most newly eligible beneficiaries through managed care programs that the state pays at monthly per-person rates, called “capitation rates.”  Most states had to calculate the 2014 rates for newly eligible beneficiaries without historical data showing how much their health care would actually cost.  The Actuary’s report explains that in formulating capitation rates, states made several assumptions that resulted in higher payments to the plans than CMS had assumed.

Specifically, states assumed that the newly eligible adults would be sicker than adults already enrolled in the program, that uninsured people gaining coverage would have a pent-up demand for services, and that sicker people would enroll first.  Most states require the health plans to return excess funds if the rates prove too high; some also provide for additional payments to the health plans if the rates prove too low.

As the CMS report states, the actual costs are still not known, and some managed care plans will likely have to return excess payments to the states and the federal government:

[D]ata on claims and managed care encounters, along with data on the health status and demographics of these enrollees, are not yet available.  Thus, there is still considerable uncertainty about the health care costs of newly eligible adults in 2014….

[T]here is a greater likelihood that funds would be returned to the States and the Federal government than that the States and Federal government would be required to provide additional funds to the plans.

To the extent that states’ assumptions were correct and costs turn out higher than the Actuary had expected, any added costs will likely be temporary, the report explains.  Once the pent-up demand for health care is satisfied and healthier people enroll, the report projects that covering the newly eligible will cost less per person than covering currently eligible adults starting in 2016.