How far should the Obama administration go to persuade states to expand their Medicaid programs?

Since last June, when the Supreme Court gave states permission to opt out of the Affordable Care Act’s Medicaid expansion, 14 governors have declared that they will do just that. Eleven more are on the fence. The upshot? More than five million Americans could still be without health insurance in 2014.

Naturally, Kathleen Sebelius, the secretary of health and human services, would like to keep that from happening. Her department is working to lure states into covering everyone with incomes as much as 138 percent of the federal poverty level by loosening some rules. For instance, many states have been given permission to put all new beneficiaries on private managed-care insurance plans.

Now, however, Arkansas and a few other states are proposing to go a huge step further and use the federal Medicaid-expansion funds to give new enrollees “premium support” to buy individual policies on state insurance exchanges. Arkansas Gov. Mike Beebe says this would satisfy Republican legislators’ philosophical preference for private insurance over government programs. Presumably, it would give them a rhetorical path to accept billions of dollars in new federal Medicaid spending without seeming to compromise their anti-Obamacare principles.

It’s not clear, though, how the states could manage this in a way that would preserve the program’s efficiency and taxpayer dollars. (Yes, Medicaid is efficient, delivering a high standard of care at rock-bottom cost.) Unless Arkansas and its counterparts include credible measures to ensure that private plans don’t squeeze beneficiaries’ health care, Sebelius should draw a line — the tradeoff won’t be worth it.

States already have a strong incentive to participate in the expansion: the federal government’s commitment to pay the full freight for the first three years and at least 90 percent thereafter. Taxpayers in states that refuse the money, as Florida Gov. Rick Scott pointed out when he recently changed his mind in favor of the expansion, end up supporting other states’ efforts without reaping any benefit for their own poor residents.

In addition to Scott, Republican governors in Arizona, Michigan, Nevada, New Jersey, North Dakota and Ohio have seen the wisdom of cooperating. With pressure building on the holdout governors and legislatures, it’s reasonable to think that most states will eventually come on board, even if not in the first year. (The Obama administration has set no deadline for states to decide.)

It therefore shouldn’t be necessary for federal officials to bend over backward to get states to sign on right away.

To understand the case for patience, consider what it would mean to put beneficiaries on private insurance. According to the Congressional Budget Office, in 2022, it will cost the federal government $6,000 on average to cover a Medicaid beneficiary, but $9,000 to provide the same level of coverage through a private insurance plan. Raising the cost per beneficiary by 50 percent should only exacerbate the reluctant governors’ worries about the federal government being able to meet its future funding obligation.

Of course, states could try to persuade private insurers to do the job for less money. In that case, however, they’d need to make sure those insurers were still able to provide the same standard of care that traditional Medicaid delivers — without charging beneficiaries undue copays. If not, the states would need to provide “wraparound” coverage to make up the difference.

This isn’t to say the federal government should rule out the whole idea of private premium assistance for Medicaid beneficiaries. After all, states’ experience so far with managed-care insurance plans for Medicaid suggests some have saved a little money, even though most haven’t, according to a recent review of the literature.

Beebe says Sebelius has verbally approved his plan, though a formal proposal has yet to be assessed. Sebelius is right to entertain such experiments, provided the plans are carefully constructed and the results closely monitored. If not, Sebelius should stand her ground.

Bloomberg News (March 22)