A growing number of states want to use the coming health insurance exchanges as a means to expand Medicaid coverage, and the approach carries both promise and pitfalls for providers.

Arkansas, the latest state to move in that direction, said last week that it will expand Medicaid eligibility as sought by federal officials under the 2010 federal healthcare overhaul. To do so, the state would buy private insurance plans to provide the coverage. The plan, which still lacks many details, would use Medicaid funds to purchase policies for about 230,000 low-income state residents on an insurance exchange authorized by the Patient Protection and Affordable Care Act.

Arkansas hospitals generally support the plan, which was offered by Gov. Mike Beebe, a Democrat, because it is the most likely approach to succeed in expanding Medicaid, Bo Ryall, president and CEO of the Arkansas Hospital Association, said in an interview. State law requires 75% of both legislative chambers to approve the expansion, which is a “high bar” in a body led by Republicans whose opinions of the underlying federal law range from leery to hostile.

But hospitals also are worried about the strategy, because health plans sold in the exchanges are supposed to have much higher cost-sharing than required by Medicaid programs.

Initial analyses indicate Medicaid beneficiaries may be moved into silver plans on the exchange, and those require the policyholder to cover 30% of the cost of their care. The expansion is expected to open eligibility in the program to residents earning up to $15,500.

“Expecting someone with that kind of income to pay a 30% share is unrealistic,” Ryall said.

Without federal rules to minimize cost- sharing for newly eligible Medicaid enrollees, hospitals could face a surge in their uncompensated care costs, even as they prepared for federal cuts for such care as part of the healthcare reform act, he said.

Other states are advancing similar exchange-based plans, said Judy Solomon, vice president for health policy at the liberal Center on Budget and Policy Priorities. Ohio Gov. John Kasich, a Republican, has proposed a similar approach as a way to rely on private-sector insurance plans, instead of a government-run insurance program. Similar approaches were discussed recently in the Florida Legislature and in Tennessee and Nebraska.

The approach appears to stem from recent HHS rules that allowed some flexibility in Medicaid designs, she said. But it remains unclear whether the exchange-based expansions were exactly what federal officials had in mind when they urged states to tailor their approaches.

The emphasis on flexibility was a departure from previous guidance that HHS provided, which generally rejected variations sought by states. Many states wanted to limit the new coverage to people under 100% of the federal poverty level, while allowing everyone with higher incomes to get coverage through subsidized private exchange plans—an approach HHS flatly rejected.

But the proposed exchange-based expansions are different because HHS is expected to require that the beneficiaries receive the same benefits and cost-sharing as they would under the Medicaid program, Solomon said.

She expects more states to consider the use of exchange plans to provide Medicaid coverage because so many states already use private managed-care plans to cover much of their Medicaid populations.

“A lot of people are saying, 'This is good because we are going to put the people on Medicaid into private health plans,' but many of them already are,” Solomon said.

A new Medicaid expansion proposal by Iowa Gov. Terry Branstad, a Republican, includes a smaller exchange element. The bulk of Branstad's proposal would add about 150,000 people to another state-run safety net program instead of Medicaid. The plan also would replace coverage for some specialized Medicaid populations with subsidies to buy coverage in the state's exchange.

“We're not necessarily opposed to that concept,” Kirk Norris, president and CEO of the Iowa Hospital Association, said in an interview.

However, hospitals in Iowa have pushed back on Branstad's overall proposal in favor of a broad expansion of the Medicaid program's eligibility to all residents earning up to 138% of the federal poverty level. And they are confident a full expansion remains possible because federal approval for the existing state alternative to the Medicaid program is about to expire.

“There's a lot of incentive to come together and find a workable solution,” Norris said.