The Minnesota Medicaid controversy – a history told through documents

April 7, 2013*

On February 14th, 2012, Minnesota Department of Human Services (DHS) Commissioner Lucinda Jesson testified before a legislative committee that was holding a hearing on the state’s public health care programs. During the course of her appearance, Jesson revealed that the federal government was investigating the use of Medicaid dollars by the state, and searching for possible improprieties.

Jesson’s disclosure resulted in a flurry of pronouncements and hastily arranged press conferences. Within days, both state and federal representatives were calling for independent audits to scrutinize how Minnesota was managing the billions of dollars of federal Medicaid money that it disburses each year. Such calls did not begin on February 14th, however. For the past few legislative sessions, voices on both sides of the aisle have called for greater scrutiny of Minnesota’s public health care programs, and of the non-profit organizations that administer them.

At issue
The “Minnesota Medicaid” controversy has a long and complex history. At the center of the issue lies an extraordinary amount of money. The State of Minnesota spends over $3 billion bi-annually on its public health care programs. In addition, the federal government contributes another $3 billion in Medicaid funds to these programs. This aggregate pool of money is largely disbursed through “PMAP” (pre-paid medical assistance) programs that form the heart of Minnesota’s public health care system.

The beginnings of PMAP
The philosophy behind PMAP is one that seeks cost savings by disseminating state and federal dollars through non-state entities. PMAP programs deliver blocks of funds to non-profit Health Maintenance Organizations (HMOs), which are then responsible for disbursing the funds to health care providers (hospitals, etc.) to cover the needs of various enrolled populations. While HMOs are the largest recipients of PMAP funds, these dollars also flow to several rural, county-based purchasers.

The PMAP approach began to evolve in the 1980s, and was initially conceived of as a pilot project to reduce costs relative to the then-dominant “fee-for-service” model of public health care spending. Under that model, enrollees were served by health care providers who billed the State directly for service rendered.

PMAP placed an intermediary between providers and the State. HMOs and county-based purchasers received blocks of public funds, and were then responsible for providing health care services to set groups of enrollees. Due to their ability to purchase services in bulk, these intermediary entities were viewed as a way to hold down provider costs. HMOs were also seen as being able to implement large-scale, intentional cost controls to ensure that public funds were being spent efficiently. The Minnesota Legislature established PMAP in 1983, and has continued this “demonstration project” ever since.

“The commissioner of human services shall establish a medical assistance demonstration project …”

Document – Minnesota Statutes 256B.69
Source – Minnesota Office of the Revisor of Statutes
Click here to see the full document

Rate-setting for PMAP programs
Central to the idea of PMAP was the practice of “rate-setting.” The Minnesota Department of Human Services (DHS) was given the role of setting the rates for the “capitated payments” that HMOs would receive. These payments were blocks of money spread out over finite populations, based upon annual public health care enrollment numbers.

While DHS set the rates, outside actuarial firms were contracted to review those rates, to ensure that they would cover per-person costs, and thus be “actuarially sound.” The federal Department of Health and Human Services, through its Centers for Medicare and Medicaid (CMS) office, is also responsible for evaluating state rate-setting, and for verifying the actuarial soundness of those rates.

The Minnesota departments of Health and Commerce each were assigned additional regulatory roles – largely to ensure the financial stability of the participating HMOs and organizations. These entities were required to provide certain types of financial data to state agencies on an annual basis. Beyond state agency review of PMAP programs, the Minnesota Legislature did not require independent audits of how HMOs were utilizing public funds. Certain HMOs have performed their own audits, however.

The degree to which the existing auditing and review procedures are seen as sufficient is central to the ongoing debates over PMAP-style programs.

“I have not audited or verified this data and other information …”

Document – Letter detailing benefit and reimbursement rates changes
Source – Milliman, Inc., via Minnesota Department of Human Services
Click here to see the full document

NOTE – In late 2011, Public Record Media (PRM) obtained several hundred pages of DHS documents related to the rate certification process as it existed from 2009-2010. The time period was selected as a sample, near in time to the date of the request, in order to expedite the production of records. Included in the documents were multiple “rate certification letters” from the State’s actuary, Milliman, Inc. Find the documents here.

Early DHS evaluation
As Minnesota’s public health care demonstration project evolved, DHS undertook an evaluation of the state’s HMO-administered programs for cost-effectiveness and efficacy. According to a 1993 article in the Star Tribune newspaper, this study “was shelved” and the employee who worked on it was re-assigned before the study could be completed.

NOTE – PRM attempted to obtain this study from DHS through a Minnesota Data Practices Act request. DHS was unable to locate responsive documents. PRM later received a copy of the report that had been filed with the state’s legislative library.

Questions about administrative expenses
During the tenure of Minnesota Attorney General Mike Hatch, Hatch became interested in obtaining information about the administrative expenses of Minnesota’s HMOs, and the relationship of those expenses to overall health care costs. Hatch’s inquiries were directed at both the private insurance operations of the HMOs, as well as the public programs that they administered.

Hatch conducted audits of Medica, Health Partners, and others, and characterized their administrative spending as “extravagant.” For instance, in an audit of Medica’s 2000 operations, Hatch claimed to have found administrative expense rates as high as 19%, as opposed to the 9% claimed by the HMO. Hatch’s claims were hotly disputed by Minnesota’s HMOs, who asserted that Hatch was re-classifying spending categories in order to drive up administrative expense totals. The Minnesota Attorney General’s Office and various HMOs engaged in protracted legal battles over audits and other matters for the duration of Hatch’s tenure.

HMO administrative expenses – and the way in which they are allowed to be categorized by the state – have played a lasting role in public health plan controversies. Such controversies stem – in part – from the fact that Minnesota allows HMO health plans to operate under accounting principles that differ from U.S. Generally Accepted Accounting Principles (GAAP).

“the statutory financial statements … do not present fairly … the financial position of the plan …”

Document – Letter from KPMG to the Finance and Audit Committee, HealthPartners, Inc.
Source – Minnesota Department of Health
Click here to see the full document

NOTE – In early 2012, PRM obtained Statutory Financial Statements for all of Minnesota’s HMOs for the 2009-2010 calendar years, and inspected the organization’s Annual Statements from the same time frame. We have posed the Statutory Statements in their entirety, and have posted pages from the Annual Statements that detail administrative expenses here. These documents are part of the financial reporting that Minnesota HMOs are required to provide to the state each year.

The Minnesota Department of Health’s (MDH) Health Economics Program (HEP) publishes annual summaries of the administrative expenses for all health care plans (public and private) operating in Minnesota on an annual basis. We have posted HEP’s reports for 2009 and 2010 here.

OLA questions HMO cost containment
In 2008, the Minnesota’s Office of the Legislative Auditor wrote a report that examined the provision of health care services through Minnesota’s public programs. The report recommended greater scrutiny of costs and outcomes in Minnesota’s public programs. The report’s authors noted that while the “managed care” HMO model provided some benefits, it did not automatically contain costs, as long claimed. The OLA recommended that DHS should increase its scrutiny of HMO administrative expenses, since the state has conducted “limited reviews” of such spending in the past.

“DHS should increase its scrutiny of administrative spending.”

Document – Financial Management of Health Care Programs
Source – Minnesota’s Office of the Legislative Auditor
Click here to see the full document

Health Department report calls for consistent reporting
In 2009, the MDH utilized Deloitte Consulting to review the methodology used by HMOs and county-based purchasers to allocate administrative expenses and investment income. Deloitte’s review found that there was no consistent methodology used amongst the various entities, although it felt that the various methods were reasonable. The Deloitte report recommended the adoption of a standard method for reporting administrative expenses, so that it would be possible to compare and contrast the operations of various health plans, and to assess the “reasonableness of the administrative costs of public plans in particular.”

“… no two plans used the exact same methodology.”

Document – Administrative Expenses and Investment Income for Health Plans and County-Based Purchasers: Guidelines and Recommendations
Source – Minnesota Department of Health
Click here to see the full document

GAO raises questions
In 2010, the federal Government Accountability Office (GAO) issued a report that raised questions about whether CMS – the federal office that oversees the disbursement of federal Medicaid funds to the states – was providing sufficient oversight to determine whether states were using reliable data to set payment rates.

The report noted that CMS oversight of rate-setting for state health plans was “generally limited to requiring assurances from states and health plans – efforts that did not provide the agency with enough information to ensure the quality of the data used.” The GAO recommended that CMS take steps to improve consistency in reporting, and to clarify rate-setting practices.

“CMS … does not have sufficient efforts in place …”

Document – CMS’s oversight of State’s Rate Setting Needs Improvement
Source – United States Government Accountability Office
Click here to see the full document

MN Hospital Association lobbies for oversight
During the 2010 legislative session, David Feinwachs, chief legal counsel and lobbyist for the Minnesota Hospital Association (MHA), worked to introduce the “Abler Amendment.” The bill was aimed at switching HMO health plan accounting to the standardized GAAP (Generally Accepted Accounting Principles) model, and to introduce PMAP audits.

The proposed legislation was ultimately withdrawn by its legislative sponsor.

Feinwachs releases video, is fired
In the fall of 2010, David Feinwachs created two video presentations that posed questions about the manner in which Minnesota HMOs handled funds for Minnesota’s public health care programs, including Medicaid funds. The presentations raised questions about the amount of administrative expenses that HMOs charged against public health care programs, and also presented questions about state oversight. The videos were circulated widely within the Minnesota health care community. On November 9, 2010, Feinwachs was fired.

David Feinwachs subsequently filed a lawsuit in Ramsey County court, seeking damages from the Minnesota Council of Health Plans (MCHP) – the trade organization for Minnesota’s HMOs. Feinwachs’ suit alleged that the MCHP applied pressure that led to his firing.

“Minnesota’s $3 billion black box”

Document – (Video) PMAP Presentation 11.17.10
Source – David Feinwachs
Click here to see the video

2011 oversight bills are introduced, then fail
Largely in response to the controversy raised by the Feinwachs video, several proposals were introduced during the 2011 legislative session that sought to increase oversight of Minnesota’s public health care plans and the HMOs that manage them. None of the bills made it out of committee.

UCare contributes $30 million to Minnesota
On March 16, 2011, Nancy Feldman, the CEO of UCare wrote to Minnesota State Senator David Hann. UCare is an HMO that administers public health care programs for the State of Minnesota, and spends both state and federal funds to do so.

Feldman’s letter notified Senator Hann that UCare would make a $30 million, “one-time contribution” to the state, to be used to help reduce the state’s budget deficit. Feldman noted that the contribution was voluntary, and not “required by state contract or law.” In her letter, Feldman also claimed that the $30 million in funds represented “excess operating margin” for the public programs administered by UCare.

“UCare believes it is appropriate to make a one-time contribution of $30 million…”

Document – Letter from Nancy Feldman, CEO of UCare to MN Senator Daivd Hann
Click here to see the full document

Dayton enacts executive order
On March 23, 2011, Governor Mark Dayton enacted executive order 11-06, which sought to improve reporting and documentation related to Minnesota’s “managed care” health plans. The order tasked the Department of Commerce with auditing financial data submitted by managed care plans relating to public programs.

Document – Executive order 11-06, Minnesota Governor Mark Dayton
Source – Website of the Minnesota Governor’s Office
Click here to see the full document

State Sen. John Marty writes to CMS
In May of 2011, Minnesota State Senator John Marty wrote a letter to Cynthia Mann, the director of CMS. In his letter, Senator Marty urged CMS not to extend Minnesota’s 1115 Medicaid waiver, which is necessary in order for the state’s public plans to utilize federal Medicaid dollars. Marty’s correspondence raised concerns about the state’s use of such money.

“The scope of the mismanagement is huge.”

Document – Letter from Minnesota State Senator John Marty to Cynthia Mann of CMS
Source – Office of Senator John Marty
Click here to see the full document

DHS competitive bidding pilot established
In 2011, DHS established a pilot project to test an alternative to the standard rate-setting process for public health care programs. The pilot covered the counties of the Twin Cities metropolitan area, and was described as being competitive in nature. The aim of the pilot was to reduce costs over the standard rate-setting model, which trended existing costs forward each year.

The project was slated to begin in January of 2012.

NOTE – In 2012, PRM requested information about the bidding process for the DHS pilot program. Find documents related to the competitive bidding process here. Find the RFP here.

CMS adds reporting requirement
In response to concerns raised by State Senators John Marty and Sean Nienow, CMS added additional reporting requirements to the “Special Terms and Conditions” section of Minnesota’s 1115 Medicaid waiver, prior to its renewal. In an August 9 letter, Senator Nienow thanked CMS officials for adding the requirements, but also sought information about whether CMS would conduct independent audits of the use of Medicaid dollars by the State of Minnesota.

State Sen. Marty writes to CMS a second time
On September 16, 2011, State Senator John Marty wrote to Richard Jensen of CMS. In his letter, he noted that he was unsure if problems with Minnesota’s PMAP programs could be fixed.

Document – Letter from Minnesota State Senator John Marty to Richard Jenson of CMS
Source – Office of Senator John Marty
Click here to see the full document

CMS and DHS discuss managed care criticism
In an internal CMS e-mail obtained by PRM, Jennifer Sheer of CMS reported on the agency’s efforts to respond to the concerns raised by Senator Marty and other critics of Minnesota’s managed care programs.

In a January 30, 2012 e-mail to Richard Jensen, Ms. Sheer provided a summary of CMS interactions with Senator Marty’s office, and noted that CMS had held two conference calls on July 11 and August 2 of 2011.

She also noted that CMS had attempted to arrange a third conference call between CMS, David Godfey of Minnesota DHS, and Senator Marty’s office. Sheer’s e-mail noted that David Godfrey “did not want to participate in a conference call, and asked that (CMS) stop meeting with this group.

Document – E-mail from Jennifer Sheer of CMS to Richard Jensen of CMS
Source – U.S. Department of Health and Human Services
Click here to see the full document

Feinwachs lawsuit dismissed
In early 2012, David Feinwachs’ lawsuit against the Minnesota Council of Health Plans was dismissed.

Federal probe revealed
On February 14, 2012 – during a legislative committee hearing – DHS Commissioner Lucinda Jesson revealed that the federal government was investigating the use of Medicaid dollars by the State of Minnesota. Legislators raised questions about whether the investigation was aimed at improprieties and/or possible fraud.

State Sen. Nienow introduces HMO audit bill
In February of 2012. Minnesota State Senator Sean Nienow introduced SF 1824, a bill aimed at establishing third-party audits of HMOs in order “to identify and prevent mismanagement of health care programs.” Other related oversight bills were subsequently introduced during the course of the session.

“HMO transparency needed for taxpayer confidence”

Document – Press release, Minnesota State Senator Sean Nienow
Source – Website of Senator Sean Nienow
Click here to see the full document

Sen. Grassley seeks HMO information
In March of 2012, U.S. Senator Charles Grassley sent letters to several Minnesota HMOs seeking information about their use of federal Medicaid dollars. The letters cited concerns raised by UCare’s 2011 “one time contribution” of $30 million. Senator Grassley’s staff made a Minnesota Data Practices Act request to DHS related to the UCare donation, and received a cache of documents for review.

In the e-mail cache, multiple messages were exchanged regarding the nature and characterization of the UCare donation. A “talking points” memo sent by UCare on March 15 noted that none of the organization’s $30 million contribution “involved Medicaid dollars.”

That same day, DHS Commissioner Jesson sent an e-mail in which she stated that the UCare contribution would need to be characterized as a donation – rather than a refund – otherwise the federal government “would clearly get half.

Governor Dayton announces $73 million in health plan savings
Minnesota Governor Mark Dayton announced that a 1% cap on managed care program profits negotiated by DHS resulted in $73 million in savings in 2011. The Governor announced that HMOs would refund the monies directly to the State.

Document – Press release, Governor Mark Dayton
Source – Website of Governor Mark Dayton
Click here to see the full document

CMS writes to UCare seeking more information on give-back
On March 21, 2012, CMS director Cynthia Mann wrote to David Godfrey of Minnesota DHS seeking information about UCare’s $30 million contribution to the state. Mann was particularly interested in whether any part of the $30 million give-back was related to Medicaid funding.

“… it would be helpful to receive additional information from the State …”

Document – Letter from Cynthia Mann of CMS to David Godfrey of the Minnesota Department of Human Services
Click here to see the full document

Minnesota Legislative Auditor questions DHS, UCare
On April 10, 2012, Minnesota State Auditor James Nobles wrote to Minnesota State Senator Sean Nienow regarding questions raised about UCare’s $30 million payment to the state. In his letter, Nobles noted that DHS “has not been as candid as it should have been” about the nature of the UCare payment – particularly whether any of the funds should have been refunded to the federal government.

Document – Letter from OLA to State Sen. Sean Nienow
Click here to see the full document

DHS agrees to give half of UCare donation to feds
After several months of characterizing the 2011 UCare contribution as a donation, the state agreed to provide half of the money to the federal government on April 23, 2012. In correspondence with CMS, Minnesota Medicaid director David Godfrey noted that, due to UCare’s return of 2011 “operating margin” money over a negotiated cap, the state would refund half of UCare’s $30 million donation “because of the interaction with the one percent cap.”

“Minnesota will agree to treat the $30 million as a return of a Medicaid payment …”

Document – Letter of April 23, 2012 from David Godfrey to Cindy Mann of CMS.
Click here to see the full document

House of Representatives holds Medicaid hearing
On April 25, 2012, U.S. Congressman Darrel Issa convened hearings on the use of federal Medicaid dollars by state governments. Minnesotans featured prominently in the proceedings, including members of the state’s congressional delegation, DHS Commissioner Lucinda Jesson, and attorney David Feinwachs.

Jesson defended the changes that DHS had made to Minnesota’s managed care programs, such as the establishment of competitive bidding and the establishment of a 1% profit cap. She also addressed the UCare controversy, stating that the issue was “complicated” and had “no clear precedent” to guide the state’s actions. Jesson noted that once state HMOs (including UCare) returned excess margin to the state, then the state treated the UCare donation as “part of that return,” to which the federal government was owed half.

Feinwachs presented key points featured in his 2010 video presentations and legislative testimony, along with information culled from his lawsuit. Feinwachs held that Minnesota’s managed care programs were effectively engaged in “a massive financial fraud against the government of the United States” stemming from rate manipulation that drew down extra Medicaid dollars.”

Document – Testimony of Lucinda Jesson and David Feinwachs.
Click here to see the full document

Legislature passes bill containing independent audit provision
On April 23rd, a legislative conference committee produced a Health and Human Services omnibus bill that included third-party managed care audit language. Audit provisions that had been introduced in various stand-alone bills were rolled into the final HHS omnibus bill, and subsequently approved by the full legislature.

“A biennial independent third-party financial audit …”

Document – Conference committee report for HF 2294, the 2012 HHS omnibus bill
Click here to see the full document

Governor Dayton signs HHS bill
Governor Mark Dayton signed the HHS omnibus legislation on April 30th, 2012. Audits of managed care programs are slated to begin with contracts that take effect after January 1, 2014.

DHS issues RFP for retroactive review of HMO rate-setting
On July 23rd, 2012, DHS issued an RFP seeking an actuarial firm to conduct a retroactive review of rate-setting for public health care programs. Previously, the lack of a retroactive component to the audit provisions of the 2012 HHS omnibus bill had been commented upon by several managed care critics, including Senator John Marty.

Document – DHS RPF and related correspondence.
Click here to see the full document

DHS issues RFP for review of role of managed care in public health programs
On October 1, 2012, the Department of Health and Human Services issued an RFP for a vendor to review the “value of managed care for state public health care programs.” The DHS RFP also states that the review should evaluate whether the statutory requirement for HMOs to participate in such programs continues to be necessary.

Commerce Department issues reports on managed care programs
In December of 2012, the results of the first audits stemming from Governor Mark Dayton’s Executive Order 11-06 are released. On December 6, 2012, DHS Commissioner Lucinda Jesson issued a statement regarding the findings, stating that “The financial management of publicly-funded heath care programs … was generally sound. Several issues were identified that deserve further action, and demonstrate the wisdom of .. increased oversight of public programs.”

“Managed care organizations allocated marketing and advertising expenses to public programs …”

Document – Managed Care Organization Audits, Key Observations and Findings for Fiscal Year 2011
Source – Minnesota Department of Human Services
Click here to see the full document

DHS releases preliminary rate-setting report
On March 1, 2013, the Minnesota Department of Human Services released a report on managed care rate-setting conducted by the Segal Company of Atlanta, Georgia. The Segal Company had been selected by DHS to conduct a retroactive review of the state’s rate-setting process for its public health care programs.

The Segal report noted that HMO profit margins on public programs reached – in some cases – 3.1%, although rate-setting targets projected average profits of around 1%. The report noted that this deviation continued year-after-year, with the greatest deviations occurring during the years 2008-2011.

The Segal report also noted that a limited amount of data was utilized to evaluate benefit changes that would impact the overall rates, and that the data that was used was provided by the HMOs themselves, rather than from a review of paid claims data.

An accompanying March 1, 2013 letter from DHS Commissioner Lucinda Jesson noted that the Segal report found that “the rate-setting process was generating profit margins higher than targeted levels” and raised “serious questions.”

“This method seems to intuitively have issues …”

Document – Rate Setting review
Source – The Segal Company, via the Minnesota Department of Human Services
Click here to see the full document

DHS releases final Segal report
Minnesota DHS released the final version of the Segal report on March 28, 2013.

*Original article posted on April 9, 2012. Article updated on April 11, April 14, May 12, August 26, December 17, 2012, March 2, 2013 and April 7, 2013.