In a deal reached last week, the democratic governor of Arkansas, Mike Beebe, and the Obama administration may have succeeded in out Ryan-ing Paul Ryan.  The Ryan budget, which was released yesterday, unsurprisingly included a proposal to transform Medicare into a defined contribution voucher program.  Excuse me, we say premium support now, don’t we? (It polls better).

What was much more surprising was the news from last week that Beebe and Secretary of Health and Human Services, Kathleen Sebelius, took a much bigger step towards introducing vouchers to a major entitlement program – in this case, it was Medicaid. (Florida’s legislature has now signaled that they would like a similar Arkansas-style deal.  You can read about that in a previous post.)

Under the agreement, which has not yet been signed off on by Arkansas’ Republican legislature, federal dollars for the expansion of Medicaid will be given to eligible Arkansans to purchase private insurance in the newly formed health insurance exchange.  This has left many people scratching their head.

Republican opposition to Obamacare’s Medicaid expansion has most often been based on concerns that states would eventually be saddled with much higher Medicaid costs.  Under the Beebe-HHS plan, which is getting more consideration by the Arkansas legislature and more love from conservative commentators than the straightforward Medicaid expansion envisioned by Obamacare, those costs will likely grow – considerably.  According to the CBO, the average cost of Medicaid per enrollee is roughly $6,000.  The average cost of a private insurance plan is roughly $9,000.  Avik Roy at Forbes has questioned this latter figure, arguing that it could, in fact, be as low as $7,500.  But with Arkansas among the states with the lowest Medicaid costs per enrollee in the nation, the move to private insurance, while potentially providing better care, will be considerably more expensive than traditional Medicaid.

Why would higher costs sweeten the deal for Republicans?  Because when it comes to federal dollars going to private entities, and going to them in a way that pushes entitlement programs towards vouchers, cost-containment and budget concerns go out the window.  Look no further than Medicare Advantage – the program through which Medicare beneficiaries can receive health coverage from private insurers.  When it comes to Medicare Advantage, Republicans in Congress have become the greatest defenders of expanded Medicare benefits and spending since, well, since the Democrats.

Over the last eight years, payments to Medicare Advantage plans have cost the government, on average, twelve to seventeen percent more than if beneficiaries were simply enrolled in traditional Medicare.  In extreme cases, Medicare Advantage costs have soared to 137% of traditional Medicare costs – making it hard to achieve the efficiency gains that this market oriented approach has promised.  Let’s be clear, though, this isn’t a direct give-away to insurance companies, the extra payments result in additional benefits and lower cost sharing.  These benefits are, however, only enjoyed by a quarter of beneficiaries, while the higher costs are absorbed by everyone.  In 2009 alone, the year before the passage of Obamacare, those extra costs amounted to $11 billion.

The President’s efforts to bring MA payments in line with traditional Medicare – efforts that would save an estimated $150 billion over ten years – have been met with tough resistance from Republicans.  In hearing after hearing, Republicans in Congress, as well as a few democrats, have decried the cuts to Medicare Advantage and the benefit reductions that will result.  If federal dollars are going to private entities, pushing Medicaid and Medicare towards vouchers dollar by dollar, Republicans have shown their willingness to embrace big government (spending).

The Arkansas Medicaid plan doesn’t just open the door to vouchers; it is vouchers.  This is what makes the Obama administration’s agreement to the deal so stunning.  How strong can the administration’s fight against premium support be if Republicans can simply point to this deal?  And let’s not forget the famous words of political scientist E.E. Schattschneider, politics makes policy, and policy remakes politics.  The introduction of vouchers, no matter how small an opening they are given, makes their subsequent expansion and acceptance more likely.

The introduction of vouchers will fragment the constituency that protects universal entitlements and will lay down an infrastructure for the larger implementation of private plans.  If in response to this proposition you say that the Arkansas plan will only apply to a handful of people, so what’s the big deal?  I would invite you to take a look at the enrollment numbers for Medicare Advantage’s predecessors thirty years ago.  In the early 1980s, enrollment in Medicare managed care plans hovered around one percent.  Now its twenty-seven percent.  Fundamental changes in dominant programs often have small beginnings.  The cost of getting more states to buy into the Obamacare Medicaid expansion might not just be the increased price of private plans.