The Segal Report and the future of Minnesota managed care

July 17, 2013

In early 2013, the Minnesota Department of Human Services (DHS) released a report on aspects of the state’s publicly funded health care programs. The report – written by the Segal Company at the behest of DHS – brought a long-simmering controversy about those programs into full public view, and renewed a debate over the propriety of Minnesota’s public, “managed care” operations.

Fee-for-service to managed care
At one time, expenses for Minnesota’s public health care programs were paid directly by the state, under a so-called “fee-for-service” model. That model later gave way to the current managed care model, in which program dollars are distributed through non-profit Health Maintenance Organizations (HMOs). This arrangement bundles state funds and federal Medicaid dollars into bulk payments calculated to cover per-person user costs. These bulk payments are then provided to the HMOs, which distribute monies to medical providers for the treatment of public program enrollees. Minnesota HMOs are required by law to participate in all of the state’s public programs in order to transact other health care business.

Over the past three years, several voices have raised concerns over the possible mismanagement of state and federal monies within the managed care system. Critics have contended that managed care has resulted in an institutional arrangement in which HMOs have retained undue amounts of public funds, while simultaneously reducing the amount of money that flows to patient care. For their part, HMOs have defended their performance by noting that they are operating within the double bind of statutory requirements and escalating health care costs, but yet have managed to effectively serve the state’s low-income population. Julie Bruner, executive director of the Minnesota Council of Health Plans (MCHP) noted as much in a March 15, 2013 Star Tribune opinion piece. “Health plans,” Bruner noted, “provide significant value to the State of Minnesota.”

Concerns over public program management were raised before the Minnesota Legislature starting in 2010, and both the Legislature and the Governor’s office responded with program modifications. For its part, the Legislature instituted a requirement for third-party program audits that are slated to begin in 2014. Governor Mark Dayton moved to cap public program fees for HMOs, and established annual program reviews by the Department of Commerce. Late last year, the Minnesota Department of Health and Human Services (DHS) also hired an outside actuarial firm (The Segal Company) to conduct a review of public program “rate-setting” – the methodology by which the State determines the size of the payments that will flow to HMOs for managed care programs.

Released in March of 2013, the Segal report is the first state-authorized, retroactive review of public program rate-setting. Notably, its findings bear out many of the concerns raised by critics in the earliest days of the Minnesota managed care controversy.

Feinwachs claims
From nearly thirty years, David Feinwachs served as the general counsel for the Minnesota Hospital Association (MHA), a trade association of 144 state hospitals and health systems. In 2010, Feinwachs released a much-publicized video that set out concerns about the management of Minnesota’s public health care programs. According to Feinwachs:

1. The operation of the complex managed care system was not properly overseen by the State, and resulted in a “black box” into which tax monies flowed without sufficient accountability;

2. DHS approved rate increases for managed care programs by largely relying on HMO-provided data, without effective, outside verification;

3. The State did not effectively review administrative spending by the HMOs, allowing public program monies to subsidize other HMO business lines.

GMHCC claims
Related concerns were raised by Buddy Robinson of the Greater Minnesota Health Care Coalition (GMHCC), a Duluth-based consumer advocacy organization that tracks health care policy.

Robinson’s group analyzed reams of HMO financial statements, and released a lengthy report in August of 2012 entitled “Who’s Minding the Store?” The report offered a critique of managed care program operation, and presented the following key points:

1. HMOs made contributions to public program “reserves” (monies retained) in excess of the targets established by the State. Rather than retaining 1% for program reserves, HMOs were retaining up to 3% of the public program payments they received, adjusted to include income from investments;

2. HMO financial reporting was confusing and misleading, and made it difficult to gauge the true financial conditions of the programs;

3. Public program monies subsidized other HMO business lines;

4. HMOs made questionable donations that may have come from public program dollars.

The Segal findings
The Segal report was authorized by DHS after managed care critics such as State Senator John Marty called for a retroactive program review, so that policy makers could better understand the past operations and problems of the state’s managed care system.

In the fall of 2012, the Segal Company initiated its review of Minnesota’s managed care rate-setting process. DHS issued preliminary findings in early March of 2013, and released the company’s full report later that month. Segal’s key findings were as follow:

1. In its RFP, Minnesota DHS asked Segal to determine whether managed care program rates set by the State were “actuarially sound” (essentially, whether the rates paid to HMOs covered public program expenses). The Segal Company reported that program rates were, in fact, “actuarially sound.” However, Segal also noted that the construction of those rates raised significant questions about whether they were “reasonable,” and whether they enabled federal Medicaid monies to improperly cross-subsidize non-Medicaid programs. As stated in the company’s report, “there is an apparent lack of reasonableness that should have called into question the data and/or methods being utilized … the State, the plans, and the actuary must have understood that the historic and forecasted losses on non-Medicaid programs would be covered by historic and forecasted profits on the Medicaid programs.”

Furthermore, the Segal report noted that “without the “take one, take all” requirement in Minnesota law, it is doubtful that any plan (HMO) would have entered into any contract with the State to provide services under the non-Medicaid programs.”

2. The Segal report indicated that HMO “profit” margins were higher than State program targets. By including investment income, Segal found that managed care public program activity resulted in a “profit of approximately 3.1% … over the full period reviewed” (2002-2011). In contrast, the overall average State target was 1.2%. “The consistent pattern of actual profits vs. targets,” said Segal, “is concerning.”

3. In setting program rates, the State relied on incomplete and self-reported data provided by the HMOs. According to the Segal Company, the actuary hired by the State (Milliman) that was charged with certifying whether program rates were “actuarially sound” also relied on such data to make assumptions about whether the rates were reasonable. As Segal stated in the report, “having limited detailed data from which to do a trend study was obstructive to the work of the actuary, and provided challenges for which Milliman tried to compensate … Intuitively, we do not believe it is best actuarial practice to use self-reported data supplied by the (HMOs) for analysis that could directly affect their capitation revenue.”

4. Administrative costs for public programs were not effectively defined or contained. According to Segal, “there did not seem to be any critical or diligent review of the administrative components going into the base rates.”

5. Formulas for public program rate-setting appeared “appropriate,” but Segal noted that since rates for all years amounted to adjustments to the rates of prior years, the company attempted to go back to the beginning to analyze the base-line. However, Segal noted that “the starting point was an input we were unable to verify.” Segal recommended re-designing to rate-setting process to show the source of the starting numbers for all inputs.

DHS response
Segal’s conclusions were endorsed by DHS Commissioner Lucinda Jesson in a March 1, 2013 letter that summarized the company’s preliminary findings. “The report,” wrote Jesson, “raises serious questions about the failure of the previous administration to take action to address high health plan profit margins.” Jesson also contended that the report demonstrated the wisdom of the Dayton administration’s move to institute a 1% program cap on public program profits. Because of the cap, DHS has recently claimed that Minnesota HMOs will be required to return $73 million in excess program revenue to the State.

For their part, the HMOs and the MCHP have used the Segal conclusions to highlight the failings of State oversight, and to defend the propriety of HMO operations. In her March Star Tribune opinion piece, Julie Bruner of the MCHP noted that while the Segal report identified excess rates as being paid to state HMOs, those rates were ultimately the result of State actions. “During that period, and still today,” Bruner wrote, “the State sets the rates it will pay for the services the health plans provide to Minnesotans.”

Managed care critics have long maintained that viewing managed care problems as exclusive to either the HMOs of the State misses the larger structural issues that generated the problems to begin with. The Segal report appears to indicate this as well, and casts blame upon the State for lax oversight, and the HMOs for management problems and self-serving reporting.

Will public program managed care survive?
The Segal report noted that in the course of administering Minnesota’s package of public programs, Medicaid-funded programs covered losses in the state-only PGAMC program, improperly subsidizing the state program with federal money. As stated by the Segal Company, “the question is whether the rates for the other programs, matched by the federal government, were deliberately on the high end of the actuarially sound range in order to make up for anticipated loses for PGAMC.” Program critics such as David Feinwachs and Buddy Robinson have long contended that such an arrangement was intentional. Federal investigators are likely looking into this allegation at present, given Robinson’s provision of information to federal authorities, as reported by KSTP news on March 28, 2013.

If, indeed the cross-subsidization of Medicaid and non-Medicaid programs was intentional, did HMOs and the State see the arrangement as necessary in order for the bundle of public programs to operate? Would HMOs offer the state-only programs if they were not legally required to offer all the programs as a package?

HMOs, it seems, have been exploring a possible decoupling from the State’s bundle of public health care programs. During the 2012 Legislative session, MCHP lobbyists testified in favor of a House bill that would release HMOs from the requirement that they participate in all public program business. According to a March 13, 2012 story in the Pioneer Press, MCHP lobbyist Kathryn Kmit was quoted as telling legislators that “In this time of changing health care delivery … I think it behooves the Legislature as well as the State to consider other options.”

The Segal Company’s report also suggested that Minnesota should look to other models beyond managed care, since its history has demonstrated that the managed care model has resulted in “higher than required” payments to HMOs due to a lack of appropriate oversight. As an alternative, Segal suggests the Primary Care Case Management approach, in which the State would contract directly with primary care providers, bypassing HMO-style administrative arrangements.