Kansas Medicaid Deal Has Implications for Holdout States

January 16, 2020

Reprinted with AIS Health permission from the January 16, 2020, issue of RADAR on Medicare Advantage

In a move that may turn heads in other historically red states that have held off on expanding Medicaid under the Affordable Care Act (ACA), Kansas Gov. Laura Kelly (D) and Republican Senate Majority Leader Jim Denning on Jan. 9 said they’d reached a compromise proposal to extend Medicaid coverage to an estimated 130,000 more low-income Kansans. While the plan is still subject to votes, it contains elements of a state House plan that was rejected by the Senate last year and key components that address concerns from both parties, representing an example of bipartisan compromise that some advocates hope has a ripple effect.

If approved, Kansas will pursue a full expansion of Medicaid to 138% of the Federal Poverty Level (FPL) with a 90/10 funding match. The state will also seek Section 1332 waiver approval to establish a reinsurance program and Section 1115 waiver approval to transition individuals whose incomes fall between 100% and 138% of the FPL from Medicaid to the exchange no later than Jan. 1, 2022, although expansion is not dependent on those waivers. If CMS denies either waiver, full Medicaid expansion will be implemented on Jan. 1, 2021, according to a summary of the pending legislation.

Kansas would be the 37th state to expand Medicaid. Ballot initiatives are pending in Missouri and Oklahoma, while voters in Nebraska and Utah have already approved expansion. The 10 remaining non-expansion states are largely concentrated in the South, where legislators have argued that the existing safety net provides adequate support for low-income Americans. But a new Health Affairs study based on self-reported health status suggests that Medicaid expansion has led to improved outcomes for vulnerable populations in certain southern states.

According to a summary of the pending Kansas legislation, the compromise proposal would feature a “robust work referral program,” “modest” premiums of up to $25 per month for an individual (or $100 per family) and no lockout provisions. But the expansion deal not does not include work requirements, which Citi analyst Ralph Giacobbe in a Jan. 10 research note said is “somewhat surprising for a conservative state even despite the requirements not faring well in court.”

When filling out their Medicaid application, enrollees would be subject to a brief questionnaire about their employment status, which would be turned over to Kansas Economic & Employment Services and used to determine who should be referred to the KansasWorks program.

Compared with other states that have attempted to require able-bodied expansion enrollees to seek work or other volunteer activities or risk losing their Medicaid coverage, the Kansas tactic is “a kinder, gentler approach to work,” remarks Jerry Vitti, founder and CEO of Healthcare Financial, Inc., a company that connects low-income, elderly and disabled populations with public benefit programs.

KANSAS PLANS ‘GENTLER APPROACH’ TO WORK

“If the goal is to get folks back to work, you could do it with a carrot and you could do it with a stick, but I think this is much more along the lines of giving folks a carrot. It’s supporting people, investing in people to help them work,” says Vitti, who points out that most Medicaid recipients who can work already do. “For the part of the population that either is working or is likely to find work, that’s a terrific approach vs. demanding you work or do community service and those kinds of things. I don’t see the support in the work requirements or the investment in infrastructure to help folks meet the work requirements, and I see this very much as not only a Medicaid issue but as providing more fabric to the social safety net.”

Ten states have received CMS approval for work-related Medicaid provisions, while another 10 have waiver applications pending, according to the Kaiser Family Foundation. Three states that won approval from CMS — Kentucky, Arkansas and New Hampshire — have had their work requirements blocked by courts. Indiana, one of the few states that has implemented work requirements, last fall put that program on pause as it awaited a federal court decision on the program’s legality.

The Kansas proposal also would create an annual hospital “Medicaid expansion support surcharge” of up to $35 million that has been endorsed by the Kansas Hospital Association. In other words, local hospitals would fund the state’s share of expansion costs via an administrative fee. And managed care organizations would be subject to “privilege fees” used to offset the operating costs of Medicaid expansion.

MCOS COULD GAIN $250 MILLION IN REVENUE

In a Jan. 9 research note from Evercore ISI, securities analyst Michael Newshel noted that if the approximately 130,000 additional lives that would be covered by expansion were split evenly among the three MCOs — which are units of publicly traded insurers Centene Corp., CVS Health Corp.-owned Aetna and UnitedHealthcare — they would each gain roughly $250 million in annual revenues.

Despite Medicaid expansion efforts being thwarted by GOP-controlled legislatures in other states, if expansion succeeds in Kansas, “it can presumably also succeed in other GOP strongholds and it is worth noting that Mississippi has explored expansion and voters in Oklahoma are moving to get the issue on this year’s ballot,” he wrote.

“When I heard about Kansas, I thought of ‘Back to the Future’ because it’s almost like we came full circle in terms of state reform from Romneycare,” says Vitti, referring to the 2006 bipartisan health care legislation reached in Massachusetts under then-Gov. Mitt Romney (R). “I think a couple dynamics are in play that could be influences in other red states and that is, the effect of the health care debate in the last election. And I think what’s happening in Kansas underscores what the Democrats are doing and the messages regarding health care everywhere. In that context, I think it provides some cover to other states; I don’t know what [it means] for some deep red states in the South and so forth, but I think it influences people’s thinking” in terms of pathways to reform.

Texas, of course, is the biggest Medicaid expansion holdout state, as it’s leading the charge against the ACA in an ongoing lawsuit that could make its way to the Supreme Court. Filed in February 2018 by 20 Republican attorneys general and governors led by Texas, Texas v. United States challenges the validity of the entire ACA based on Congress’ decision in 2017 to zero out the individual mandate’s tax penalty. U.S. District Court Judge Reed O’Connor in December 2018 ruled that the entire ACA is in fact unconstitutional.

At the behest of the Dept. of Justice and a group of Democratic attorneys general, the Fifth Circuit Court of Appeals took up the case and ruled this past December that while the mandate is unconstitutional, O’Connor needs to explain more clearly why he thinks the rest of the law should also be struck down. The Democratic attorneys general and House Democrats then petitioned the Supreme Court to take up the case on an expedited briefing schedule, though the DOJ and conservative states countered that there’s no need for the Supreme Court to rule on the issue during this term.

But with the question of what’s severable within the law, there is the question raised by some states as to whether “all of Medicaid expansion is an unwarranted tax on their citizens because they’re paying money for a benefit that should have never happened anyway because the individual mandate is zero,” points out Jeff Myers, founder of health care consulting firm OptDis.

Myers predicts that the Fifth Circuit will likely take several months and “use a fine-tooth comb” to consider what is severable. “The courts would do more harm by saying you have to get rid of it all — and that’s a big legal precedent for the courts, that you can’t do harm — but you also can’t make the bill into something it’s not. So where I think they’re likely to end up is that for Medicaid expansion, you’re likely to have the court say Medicaid expansion was never predicated on the individual mandate, even though Congress said it was and even though the Supreme Court ruled that the Medicaid expansion was voluntary.”

ACA CASE CREATES EXPANSION UNKNOWNS

At the same time, if the court rules that all of the insurance mechanisms established by the ACA to create the exchanges are unconstitutional because there’s no individual mandate, that could put states “that have used the expansion as a bridge to the [federal] exchanges in a very tough place, because now you open up a whole bunch of enrollees who are going to fall back into expansion of Medicaid, which would be catastrophic because you’d theoretically have lots of people come back into your 138% below category.”

As a result, Myers wonders whether states with particularly high cost-sharing subsidy levels will start looking at what that means for the federal exchanges and consider backing away from possible (or scaling back existing) Medicaid expansion.

Nevertheless, Newshel says he does not expect the Texas case to impact the managed Medicaid pipeline.

“[The] ACA lawsuit does play into expansion politics in some states, but we have not seen ACA uncertainty (this lawsuit or Republicans’ failed repeal/replace efforts) have much of an effect on the continued shift of state Medicaid spending into managed care, and [the] RFP pipeline remains robust,” he tells AIS Health.

View the summary of the bill at https://bit.ly/2RdHNQh. Contact Giacobbe at ralph.giacobbe@citi.com, Newshel at michael.newshel@evercoreisi.com or Myers and Vitti via Joe Reblando at joe@joereblando.com.

By Lauren Flynn Kelly