By Naomi Freundlich

Arkansas is now the first state to use Medicaid expansion dollars to buy private coverage for many of its 250,000 newly eligible residents rather than enroll them in the existing Medicaid program. This week the Arkansas House of Representatives approved the plan, followed by the  Senate, to confirm that the state will be implementing this “market-based approach” to expanding Medicaid.

The idea of buying private insurance for Medicaid recipients is emerging as a “conservative compromise” for some of the 24 states (home to more than 25 million uninsured residents) leaning toward rejecting federal funding the Affordable Care Act provides for the expansion. In the original legislation, the ACA required states to expand Medicaid to adults earning up to 138 percent of the federal poverty level, $15,870 for an individual or $32,499 for a family of four. The federal government would fully cover the costs of this expansion for two years, with states gradually having to contribute 10% by 2020. Last summer, the Supreme Court struck down the Medicaid expansion requirement, allowing states to refuse federal funding and opt out of the expansion.

But most of these states, including Florida, Texas and Indiana, are leaving a lot of money on the table—from hundreds of millions to $1 billion or more in federal funding.  Under pressure from healthcare providers and other interested parties, some governors view premium assistance programs that move the poor, disabled and frail elderly to the state insurance exchanges to buy private insurance as a way to capture this windfall without appearing to embrace ObamaCare.

In Missouri, for example, Republican state legislator Jay Barnes calls the Obama administration’s plan for Medicaid expansion a “one-size-fits-all, far-left-wing ideological path.”

Instead, Barnes tells Business Week that he supports a plan to “award health care contracts to competing private insurers and provide cash incentives to patients who hold down their health-care costs.” Unfortunately his proposal would keep costs under control by covering fewer children than Medicaid does now in Missouri and adding fewer adults than required by the Affordable Care Act.

Missouri’s plan will never—and should never—gain federal approval. Although the Obama administration has said it is eager to see premium assistance proposals from states, there are important caveats meant to protect Medicaid beneficiaries. The cost of covering an individual in a private plan must be the same or less than “comparable coverage” in a traditional Medicaid or CHIP plan. Private plans also must offer the same benefits available through Medicaid—which are usually more comprehensive. For example, Medicaid covers the cost of home care and transportation to office visits; benefits that are not part of most private medical plans. Private plans also have higher administrative costs—another consideration that could impact the cost-effectiveness and therefore feasibility of the private option.

So far the Department of Health and Human Services has approved premium assistance plans in just Arkansas and Ohio. Meanwhile, the agency rejected a plan from Gov. Bill Haslam of Tennessee to provide Medicaid recipients with premium assistance to purchase private insurance in that state’s health exchange. The problem was that none of the plans sold on the Tennessee exchange would have offered benefits comparable to Medicaid. The governor’s proposal also required out-of-pocket co-pays for some Medicaid recipients who the state deemed able to afford them.  In response to HHS’s rejection of its plan, Tennessee has now chosen to leave some $1 billion on the table in federal funding for the state’s Medicaid expansion and go it alone.

As more states consider privatizing Medicaid it’s important to question the wisdom behind making Medicaid expansion so strongly reliant on the private insurance market. Has this really been so successful in the past?

The experience is very limited. Many states already have Medicaid premium assistance programs in place, yet because of the comparable coverage and cost-effectiveness requirements they are used very infrequently. A Kaiser Family Foundation brief finds: “Total state and federal spending for premium assistance is unknown, but a conservative estimate suggests that it constituted less than 1% of all Medicaid and CHIP spending in state fiscal year 2008-2009.”

Supporters of the premium assistance idea believe that plans competing for the rush of new customers on the state-based insurance exchanges will offer the best coverage at the lowest price—at a cost comparable to Medicaid. According to Pew Charitable Trust’s Stateline, some Medicaid experts predict, “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.”

That sounds promising for patients as well as for providers who are often underpaid when they care for Medicaid patients. Still, there’s just one problem: current market trends in private insurance; including more cost sharing, limited coverage for low-income workers, and higher costs in private versus public coverage, don’t support this rosy view of privatizing Medicaid.

In recent calculations the Congressional Budget Office estimated that providing Medicaid coverage to the uninsured would cost about $6,000 per year per person in the traditional program, while health insurance purchased on the exchange would cost about $9,000 per person. Costs continue to rise in the employer-sponsored health insurance market—another venue where low-income workers could receive premium assistance from Medicaid. According to a Robert Wood Johnson Foundationanalysis of employer-sponsored plans, “costs doubled for individuals during the study period [1999-2011], while family premiums rose 125 percent and employee contributions increased from 17.5% to 20.8% of the total premium.”

The fact is, although frequently maligned, Medicaid is more cost-effective than private insurance. Those who are covered under the program also fare better than their uninsured counterparts. On March 18, Judy Feder of the Urban Institute and Paul Van de Water from the Center on Budget and Policy Priorities testified in a House subcommittee meeting that Medicaid “provides acute health care coverage at a cost of 27 percent less per child, and 20 percent less per non-elderly adult, than private coverage.”

And despite the standard criticisms of Medicaid—difficulty in finding specialists, low reimbursement to providers, fraud and abuse of the system—studies find that people covered under the program are more likely to go the doctor, less likely to use emergency rooms, they take advantage of preventive care and report better health and lower stress. Medicaid recipients also had improved financial health with a 25 percent decline in unpaid medical bills sent to a collection agency and a 35 percent decline in out-of-pocket medical expenditures.

Unless private insurers have been quietly designing new plans that compete with Medicaid on cost-effectiveness—including lower provider payment rates, lean administrative costs and the benefit of being able to bargain with drug companies and other vendors—it will be difficult to compete.

In the end, what worries me most is that this new push to privatize Medicaid is not an innovative plan advanced by governors and state legislators who have carefully studied the options for expanding coverage for the poor. Instead, it offers a face-saving way to capitalize on billions in federal funding without appearing to “cave” on ObamaCare. As the Dayton (Ohio) Daily News reports; “Economically, it’s such a good deal for (Ohio), it’s hard to turn the money down,” said Bryan Marshall, a political science professor at Miami University. “That’s why you’ve seen more and more Republican governors coming on board. But they’re going to try to find any daylight they can find between this federal money and embracing Obamacare because conservatives are very much against Obamacare.”

I understand the Obama administration’s desire to give governors a chance to expand Medicaid in a way that works best for their state. After all, without full buy-in from states, a good portion of the 16 million Americans who would be eligible for Medicaid under the ACA will remain uninsured or dangerously under-insured.  But the truth is that Medicaid, which serves the poor, disabled and frail elderly, is unpopular with conservatives who see the program as synonymous with welfare and dependence.

As conservative columnist John Hood writes in North Carolina’s Daily Advance, “Unlike some state programs, Medicaid cannot be properly thought of as investment. While spending tax dollars on roads or schools might increase the future growth of North Carolina’s economy, by moving goods more efficiently or making future workers more productive, most Medicaid dollars go to fund acute and long-term care services to elderly and disabled North Carolinians.” He continues, “These are necessary and valuable expenditures, obviously, but they represent consumption, not investment.”

Consumption without investment is heresy for free-market boosters. In Florida, the state legislature voted against Gov. Rick Scott’s surprising—but economically sound— embrace of accepting ObamaCare dollars to expand Medicaid. Instead, two leaders of the Florida House are now advancing a plan that would turn Medicaid into a 100% state-funded program—one that would cost just $237 million a year, according to their calculations. The idea is to give eligible beneficiaries a $2,000 annual contribution to a health savings account. Each enrollee would have to make a $25 monthly payment to the account (giving them “skin in the game”), bringing the total up to $2,300. In his Forbes column extolling the virtues of this bare-bones and, yes, heartless, plan, ex-Romney health care adviser Avik Roy writes that “beneficiaries could then take that $2,300 a year and use it to buy catastrophic coverage, or save for a rainy day.”

It’s hard to imagine what kind of health plan one could buy for $2300—but it surely would have a high deductible, high co-pays and extremely limited “catastrophic coverage.” How will this help a diabetic afford the medication, regular monitoring and check-ups that prevent a $100,000-plus hospital stay? How will this catastrophic coverage help a single mother when her daughter breaks her arm or comes down with a high fever? This whole concept seems anathema to a health care system that is reorienting itself toward prevention and management of chronic disease. But of course, helping poor people, the disabled and elderly access health care is consumption, not an investment.

The Supreme Court dealt a serious blow to efforts to expand Medicaid benefits to 16 million uninsured Americans. At this point, the Obama administration is trying to get as many states as possible to accept federal funding to extend benefits to their low-income, primarily working, uninsured residents. In the spirit of compromise, it makes sense to allow states like Arkansas and Ohio that have drawn up good-faith plans to use those funds to purchase private insurance for Medicaid recipients on the state exchanges.

But it is important that Medicaid itself is not compromised. States can enact other reforms that work within the current Medicaid system to improve outcomes and cost-effectiveness; increasing reimbursement for high-quality providers, promoting medical homes and community health care centers, and moving toward accountable care organizations are some key strategies. Let’s not use compromise as an excuse to gut Medicaid.

Naomi Freundlich is a former research associate at the Century Foundation, Medical Editor at Business Week, and an award-winning journalist, policy wonk and health advocate with over 25 years experience. She blogs regularly at Reforming Health, where this post originally appeared.