The governors of Ohio and Arkansas, seeking a way around conservative state legislators who refuse to expand Medicaid, want to insure some of their poorest residents using a market-based approach.

The federal government appears likely to allow Republican Gov. John Kasich of Ohio and Democratic Gov. Mike Beebe of Arkansas to use federal Medicaid dollars to purchase private health insurance for low-income people from the new health-care “exchanges” that will be created under the Affordable Care Act.  They plan to use the strategy to cover newly eligible adults making up 138 percent of the federal poverty level ($15,870 for an individual or $32,499 for a family of four).

Washington’s only caveat is that the states must prove that private insurance won’t be any more expensive than giving the beneficiaries a Medicaid card. Under traditional Medicaid, the government pays health-care providers directly.

If Kasich and Beebe are successful, officials in other states, including Louisiana, Florida and Texas, may opt for a similar arrangement.

“It’s a potential turning point for states that are on the fence,” said Matt Salo, director of the National Association of Medicaid Directors. “If Arkansas and Ohio can find a path through this thicket, it could give a lot of other states that have either said ‘No’ or are on the fence a reason to think again.”

The Supreme Court last June made the Medicaid expansion in the Affordable Care Act optional. For states that choose to expand, the federal government will foot the entire bill for new enrollees for the first three years. After that, the state’s share will gradually increase to 10 percent of the cost.

After last year’s elections, about a dozen Republican governors announced they would not support the expansion, while others remained silent. Most Democratic governors supported the expansion. Since then, GOP governors in Arizona, Florida, Michigan, Nevada, New Jersey, New Mexico, North Dakota and Ohio have broken ranks, approving the Medicaid expansion. But the final decision rests with their legislatures.

Extending Medicaid coverage to an estimated 17 million new beneficiaries is the health law’s primary means of reaching its goal of providing health coverage to 32 million uninsured Americans. The other method is providing tax credits to people with incomes between 138 percent and 400 percent of poverty.  The so-called “individual mandate,” which requires most people to purchase health insurance or pay a tax penalty, is expected to motivate millions more who can afford insurance to go ahead and purchase it.

In Arkansas, the number of new beneficiaries under a Medicaid expansion is estimated at 250,000 people. In Ohio, the number is 366,000.  Arkansas currently covers about 700,000 people under its Medicaid program, while Ohio covers 2.3 million.

How the plan was hatched

Beebe always has been in favor of expanding Medicaid. But GOP lawmakers in his state–whose numbers increased after the November elections—refused to go along. They told him they would only approve a market-based approach to covering low-income Arkansans.

Kasich announced his support for the expansion in February. But legislators in his state also balked at the idea of adding hundreds of thousands of people to a Medicaid program they see as deeply flawed.

Last month, Washington gave both governors a way forward by granting them tentative approval to pursue a private option.  In Arkansas, GOP lawmakers are expected to approve the strategy, said Beebe spokesman Matt DeCample, because it was their idea in the first place.

Kasich received a call from Washington right before he unveiled his proposed budget, which included a Medicaid expansion, last month. He plans to present the private option to lawmakers once he sees the details in writing from Washington, said spokesman Eric Poklar.

Is it still Medicaid?

To beneficiaries and health care providers, the strategy that Arkansas and Ohio are pursuing would look exactly like private insurance. Instead of a Medicaid card, the newly eligible adults would get a private insurance card. They also would be responsible for certain co-pays, just like private insurance subscribers. The difference is that the state Medicaid program would pay their premiums with federal dollars.

The Medicaid agency would maintain control over enrollment and could determine that certain people in the expansion group, such as those with severe chronic illnesses, should receive traditional Medicaid benefits, including home health services and long-term care.

In fact, the private option already is allowed under the federal Medicaid law, although it is rarely used. Called “premium assistance,” it is considered cumbersome by Medicaid officials because it requires the agency to find a policy with roughly the same set of benefits that Medicaid offers—or provide additional benefits separately—and it must cost enrollees no more in copays than other Medicaid subscribers pay. If it does, Medicaid must reimburse the beneficiary.

But using the premium assistance option should be less of an administrative burden in 2014, when the federal health law takes effect. That’s because insurance companies should be eager to create plans that fit the state’s existing Medicaid benefits, because it will give them the opportunity to sell policies to hundreds of thousands of newly eligible beneficiaries.

The question of cost

After the Affordable Care Act became law, the Congressional Budget Office estimated that providing Medicaid coverage to the uninsured would cost about $6,000 per year per person, while health insurance purchased on the exchange would cost about $9,000 per person. The primary reason for the gap is that private insurers traditionally pay health care providers much more than Medicaid does.

But officials in Arkansas and Ohio said they do not expect their private insurance strategy to cost the federal government significantly more than traditional Medicaid over the long term.

Medicaid experts agree. Alan Weil, director the National Academy for State Health Policy, predicted that over time the prices for private insurance and Medicaid would converge.  He and other experts argue that as insurance companies compete on the exchange and insurance risk pools grow, private insurance premiums will come down.  At the same time, adding millions of people to the Medicaid program likely will force states to increase the rates they pay health care providers in order to convince them to serve the new patients.

Better for beneficiaries

Proponents of the plan say it makes more sense than traditional Medicaid for the new expansion population: able-bodied, non-elderly adults. Unlike those currently covered by Medicaid—low income pregnant women, children, disabled adults and the elderly—almost all of these newly insured adults will be working or seeking work. As a result, their incomes may fluctuate.  If their Medicaid coverage is through a private insurer, they won’t have to find new insurance or change doctors if they begin making too much money to qualify for Medicaid, or bounce back and forth between being eligible and not eligible.

“What we are trying to create is a ladder up and out of poverty to help people make that transition from Medicaid and get into the private insurance market,” said John McCarthy, Ohio’s Medicaid director.

For many of the people in the expansion population, particularly young people with mental illness or substance abuse problems, the new health coverage is expected to rapidly change their earning ability, said Salo. “You’ll see many of them rocket out of poverty.” If their treatments are interrupted because they lose Medicaid coverage, it could send them back into a downward spiral, he said.