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GAO Bombshell: HHS Cooked The Books To Expand Obamacare In Arkansas

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By Nic Horton, Jonathan Ingram and Josh Archambault Mr. Horton is a Policy Impact Specialist, Mr. Ingram is Research Director, and Mr. Archambault a Senior Fellow at the Foundation for Government Accountability.

As we have written before, Arkansas’ “Private Option” ObamaCare Medicaid expansion has been a disaster for taxpayers, patients and politicians alike. Costs have run over budget every single month since the program’s launch. The Medicaid director who spearheaded the program abruptly resigned to “pursue other opportunities.” The program’s chief legislative architect, a three-term Republican state representative, lost his primary for an open Senate seat to a political newcomer, despite a significant fundraising advantage. And it’s a disaster for patients as well: the ObamaCare expansion plan is already prioritizing coverage for able-bodied adults over care for truly needy patients like Chloe Jones.

News is so bad that Governor Beebe’s office is secretly trying to silence negative press about this ObamaCare experiment. And when that didn’t work, he prematurely leaked incomplete and misleading information. Now, the news for Arkansas – and indeed taxpayers everywhere – is getting even worse.

In August, the Government Accountability Office (GAO) released the findings of an internal audit conducted on Arkansas’ ObamaCare expansion.

Its conclusion?

The Obama administration violated its own budget neutrality protocols, at a cost of $778 million to federal taxpayers.

The Administration ignored the advice of its own actuaries who questioned the program’s costs. In addition, internal e-mails reveal that state officials knew the expansion would prove costly and unpredictable, but pushed forward anyway. Now Private Option costs are exploding and taxpayers everywhere are on the hook.

Trust, But Don’t Verify: HHS Violated Budget Neutrality Protocols

According to federal regulations, the U.S. Department of Health and Human Services (HHS) has certain procedures they must follow when reviewing state requests for Medicaid waivers. One key component of any waiver is budget neutrality: states seeking waivers must demonstrate that they will not spend any more federal dollars under the waiver than they would have without the waiver. But as it turns out, the Obama Administration cut corners and “did not ensure budget neutrality” requirements were actually met before approving Arkansas’ ObamaCare expansion.

To be fair, the Obama Administration is not the first to fail to enforce budget neutrality requirements in Medicaid waivers, which has cost taxpayers tens of billions of dollars, but this instance in Arkansas may be one of the most egregious.

GAO found that the spending limit approved by the Obama administration for Arkansas’s expansion relied on “hypothetical costs.” These costs came from Arkansas officials who argued that, absent the Private Option waiver, the state would have needed to raise Medicaid reimbursement rates in order to get enough doctors willing to participate in the expansion. So the Obama administration let Arkansas include the “hypothetical cost” of those rate hikes – which were entirely hypothetical – in its estimates, including an imaginary 67 percent increase in reimbursement rates for primary care services.

These hypothetical cost projections were reviewed by the Obama administration’s own actuaries before the waiver was approved; they “questioned the reasonableness of the state’s assumptions.” But the actuaries’ concerns were ignored and HHS approved the ObamaCare expansion without even requesting additional data to support it.

The result?

Arkansas’ inflated three-year budget cap is roughly $778 million more than it would have been if HHS had followed its own budget neutrality protocols, according to the GAO. As one Arkansas lawmaker and hospital executive explained, taxpayers everywhere will spend nearly $1 billion on a failed ObamaCare experiment in order to make Republicans “feel better” about expanding ObamaCare.

Arkansas’ Assumptions Had No Basis In Fact

HHS actuaries were right to question Arkansas’ assumptions, even if the Obama administration ultimately ignored their concerns. Would Arkansas really have increased reimbursement rates by up to 67 percent if it had simply expanded its fee-for-service Medicaid program? There are at least two compelling reasons to think the answer is “no.”

First, Gov. Mike Beebe (D) had been lobbying for ObamaCare’s Medicaid expansion long before the Private Option concept was developed. Surely if the state planned to increase reimbursement rates, that plan would be reflected in the cost estimates produced while the Beebe Administration was lobbying for regular ObamaCare expansion, right? Wrong.

Former Medicaid director Andy Allison produced a number of estimates of the Medicaid expansion’s costs – well before the Private Option was ever conceived – but Allison never included any kind of reimbursement rate increase in those projections.

Even a casual observer might expect a projection that the Washington Post called “one of the most detailed [plans] by a state so far” to include the cost of increasing provider reimbursement rates, if that was in fact part of the plan.

But provider reimbursement increases were not included. In fact, the Beebe administration didn’t include it in any of its cost estimates and it certainly did not advertise this fact while lobbying state legislators to expand the traditional fee-for-service Medicaid system. It wasn’t until the state needed a justification for a more expensive ObamaCare expansion that these “hypothetical costs” were invented.

Second, believe it or not, the state of Arkansas was actually planning to cut reimbursement rates, not raise them. During the same legislative session that Arkansas lawmakers passed the Private Option ObamaCare expansion, the Beebe administration proposed freezing reimbursement rates for hospitals and other facilities, while cutting reimbursement rates for other providers in order to fill a $460 million Medicaid shortfall.

Not only were Arkansas officials not planning to do what they promised the federal government they would have done absent the Private Option, they were actually preparing to do the exact opposite.

Did Arkansas Even Try to Estimate Budget Neutrality?

The Obama Administration’s disregard for budget neutrality is alarming enough, but the GAO report raises another important question: did Arkansas even try to demonstrate budget neutrality?

As it turns out, the answer is “no.”

The Beebe administration used some creative (and grossly misleading) accounting to sell the plan to Republicans in the legislature, but when it came time to set the budget neutrality cap, it didn’t bother to estimate what traditional Medicaid expansion would have cost at all.

This “without waiver” baseline is a necessary ingredient for determining budget neutrality, but it appears the state simply said “trust us” on this point. According to a methodology report submitted by the state’s actuaries, the actuaries used actual premium prices on the ObamaCare exchange to estimate what the Private Option waiver would cost – but never constructed the “without waiver” baseline. Instead, it simply assumed the plan would be budget neutral, using the Private Option’s projected costs as the baseline itself.

ObamaCare Cost Estimates Soaring

When the Beebe administration was lobbying for an expansion of Arkansas’ fee-for-service Medicaid system in 2012 and 2013, it estimated that the monthly cost of Medicaid expansion would be $325 per person. Early estimates of the Private Option pegged monthly costs at $437 per person, a 34 percent increase over the state’s fee-for-service Medicaid estimates, even after excluding the sickest 10 percent of patients from the Private Option.

But the state increased its monthly cost projections to $472 per person when it submitted its waiver in August 2013. By the time the federal government approved the waiver, the budget cap had increased to $477 per person. Even though these figures have pretty significant “hypothetical costs” added in, the state has still managed to run over budget with its ObamaCare expansion.

So far this year, monthly costs have averaged between $490 and $495 per person. This means that Arkansas is already significantly over its budget cap and on track to run $20 to $30 million over the cap this year.

Former Medicaid Director Knew Private Option ObamaCare Expansion Would Cost More

Since the GAO audit was released, a number of ObamaCare expansion advocates have tried to discredit the GAO, which has a long history of reviewing budget neutrality agreements under the Medicaid program. But the fact that the Private Option ObamaCare expansion is more expensive than traditional Medicaid expansion shouldn’t be a surprise.

These findings are consistent with estimates from the Congressional Budget Office which found private plans on the ObamaCare exchanges would cost more than traditional Medicaid. GAO’s findings are also consistent with research from the Foundation for Government Accountability, which has been working on this issue for a year and a half.

And perhaps worst of all, the GAO report is consistent with what Arkansas bureaucrats were saying privately when they were lobbying for this “alternative” ObamaCare expansion. Internal e-mails sent by former Medicaid director Andy Allison – before the Private Option ObamaCare expansion ever passed the legislature – indicate that the state knew all along that it would be more expensive.

We do expect the gross costs [of the Private Option] to be higher than expanding traditional Medicaid in the first years of the expansion.

 – Andy Allison, former Medicaid director

John Selig, director of the Arkansas Department of Human Services, also cautioned privately that costs could be unpredictable, as the Private Option’s costs depended on “market factors that are hard to predict.” Even U.S. Senator Mark Pryor, fighting for his political life in a tough re-election campaign, expressed concerns about the plan. His office privately warned that the Private Option could wind up being “much more expensive” than traditional Medicaid expansion.

For Arkansas politicians and bureaucrats to now act surprised at the GAO’s findings is disingenuous, at best.

What Other Rules Will HHS Break?

The approval of the Arkansas ObamaCare expansion confirms our worst fears: the Obama administration is willing and able to do whatever is necessary to prop up its floundering health care law – even if it means breaking its own rules. Because of the administration’s flagrant disregard for taxpayers, Americans are spending nearly a billion dollars more than they would have, simply to score a political victory for the White House and appease the guilty consciences of big-government Republicans in Arkansas.

The Arkansas ObamaCare expansion has been and will continue to be a financial and political disaster for all involved. And if the Obama Administration is willing to break its own rules in order to push through ObamaCare expansion, just imagine what other rules they might be willing to bend or break in order to save it. Arkansas lawmakers would be wise to locate all of the emergency exits; this ObamaCare experiment is taking a nosedive.

TWITTER: @JoshArchambault@nhhorton, and @ingramlaw , and follow The Apothecary on Facebook. Or, sign up to receive a weekly e-mail digest of articles from The Apothecary.

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