cover story two

Privatized Medicaid and MinnesotaCare

Bills could lead to review of zombie programs

BY Kip Sullivan, JD

How do we explain the insurance industry’s eagerness to participate in Medicare and Medicaid when Congress enacted those programs precisely because the insurance industry didn’t want to insure the elderly and the poor? Answer: The insurance companies are being overpaid.

Congress has been notified dozens of times over the last forty years that Medicare pays more to insure Medicare beneficiaries through insurance companies than it does to insure beneficiaries in the traditional (or original) Medicare program. In its March 2022 Report to Congress, the Medicare Payment Advisory Commission (MedPAC) stated, “The MA [Medicare Advantage] program has been expected to reduce Medicare spending since its inception … but private plans in the aggregate have never produced savings for Medicare…”

Private plans in the aggregate have never produced savings for Medicare.

Measuring Overpayments

MedPAC and other observers are able to measure the overpayments to insurance companies in Medicare because they have a handy yardstick with which to make such measurements—the original fee-for-service (FFS) unprivatized portion of Medicare. Half the enrollees in the Medicare program remain in the original program. Those enrollees are roughly comparable to the half that are insured through Medicare Advantage plans. By comparing the per capita cost of the original program with the per capita cost of the Medicare Advantage program, analysts can get a rough measure of how much the Medicare Advantage plans are overpaid. (The comparison is rough because healthier Medicare beneficiaries enroll in Medicare Advantage plans, and the algorithm that MedPAC and others use to adjust costs to reflect health status is crude.)

Unfortunately, the research on the impact of privatization on Minnesota’s public health insurance programs is not as rigorous. The legislature failed to conduct research prior to 1983, which is when the legislature began the privatization process, to determine whether HMOs could save money. In 1983, it passed a law authorizing the Department of Public Welfare (DPW) to participate in a “demonstration” promoted by the Reagan administration, in which Medicaid recipients would be forced into HMOs in two counties (Hennepin and Dakota). DPW was so unsure of the claims made for HMOs that it wrote into its application to the federal government a requirement that HMOs receive subsidies and be allowed to offer worse coverage than the MA program offered. By 1996, the legislature still had no evidence that HMOs could save MA money. That was the year the legislature authorized DPW’s successor, the Department of Human Services (DHS), to force MA and MinnesotaCare recipients throughout the state into “managed care organizations,” (MCOs), as insurance companies that employed managed care tactics were being called by then.

Zombie Programs

Since 1996 the privatized versions of MA and MinnesotaCare have been on autopilot. They have become zombie programs: they don’t deliver the savings they were supposed to deliver, but they won’t die because the legislature refuses to ask whether they are saving money. And now that the great majority of MA and MinnesotaCare recipients are in HMOs, there is no comparable population in a FFS, unprivatized program against which to compare the costs incurred by the MCOs. And so we must look to other types of evidence to determine whether Minnesota’s grand privatization experiment worked.

For starters, we know privatization raised Medicare’s costs by driving up administrative costs. In the private sector, insurance companies incur overhead costs equal to about twenty percent of their revenues; their overhead is about fifteen percent when they participate in a public program like Medicare. How are they supposed to cut utilization sufficiently to pay for that fifteen percent overhead? They don’t have the ability to do that without harming patients.

Privatization has the same effect on Medicaid. According to research published by the Lewin Group, a subsidiary of UnitedHealth Group, insurance companies that participate in Medicaid generate the same level of overhead  costs—about fifteen percent. As the Lewin Group put it, “MCOs must typically achieve roughly a fifteen percent savings on overall medical costs vis-à-vis  the FFS setting simply to break even.” Other experts agree. In a 2006 article, the Wall Street Journal reported, “[A]ccording to Martha Roherty, director of the National Association of State Medicaid Directors, …. [a]t Medicaid HMOs, only eighty percent to eighty-five percent of premium dollars generally go for medical costs.”

A small body of research indicates Medicaid privatization not only forces taxpayers to pay for insurance industry overhead, but it drives up the administrative costs of the state agencies that run Medicaid (DHS in Minnesota’s case). Several experts who observed the Medicaid privatization fad as it spread across the nation in the late 1980s and early 1990s have commented on the additional burden that supervising MCOs places on state agencies. “Medicaid managed care programs have proven enormously taxing for state Medicaid agencies to put into operation and then manage effectively,” reported Freund and Hurley in a 1987 evaluation of the earliest Medicaid privatization demonstrations. Michael Sparer, a nationally recognized expert on Medicaid, wrote in 1998: “Medicaid managed care actually increases the state’s regulatory role. State Medicaid officials need to select health plans, determine capitation rates (and struggle with risk adjustment), supervise the marketing and enrollment process, ensure quality of care, consider whether to adopt special programs to protect safety-net providers during the transition to managed care, and so on."

Inside the Numbers

The research suggests DHS’s administrative costs doubled during the 1990s, from 4-5 percent of expenditures (the pre-privatization level cited by the 1991 report of the Minnesota Health Care Access Commission) to 10 percent, as DHS pushed MA and MinnesotaCare recipients in all counties into MCOs. The total increase in the cost of Minnesota’s Medicaid program caused by additional administrative costs might be on the order of twenty percent-fifteen percent MCO overhead that the taxpayer didn’t have to pay for prior to privatization, plus another 5 percent added on to DHS’s overhead. And this doesn’t take into account the increase in the administrative costs inflicted on providers. If we assume the MCOs cut utilization (both necessary and unnecessary) by 5 percent, the net increase to the taxpayer would be fifteen percent.

Is fifteen percent the correct number? It’s a reasonable estimate, but we don’t know for sure. It wasn’t supposed to be this way. When DPW applied to the Health Care Financing Administration (HCFA) in 1981 for permission to experiment with HMOs within the MA program in Hennepin and Dakota counties, DPW promised HCFA it would conduct a rigorous study of the effect of HMOs on utilization and costs. DPW promised to “provide HCFA with adequate data to evaluate the demonstration’s effectiveness in increasing enrollment, impacting cost savings, and enhancing health care competition.” DPW said it would collect utilization data from the HMOs in the “experimental counties” (Hennepin and Dakota), collect utilization data in several adjacent control counties, and compare aggregate expenditures in the experimental and control counties. On the basis of these assurances, HCFA granted DPW permission to run its proposed demonstration over a three-year period, December 31, 1985 to December 31, 1988.

The legislature refuses to ask whether they are saving money.

Soon after the demonstration began, the HMOs refused to provide the necessary data to DPW. DPW asked HCFA for an extension of the study period, but in September 1987 HCFA refused. Congress and the Minnesota legislature took DHS and the HMOs off the hook by enacting bills that permitted DPW/DHS not only to continue its privatization “experiment” but to expand it into all Minnesota counties even though the rigorous examination DPW had promised had not been done.

In 1993, a DHS employee, Steven Foldes, made the last known attempt to conduct the study DPW had promised HCFA. He sought to compare the quality and cost of care for MA recipients in Hennepin and Dakota counties with the quality and cost of care provided to MA recipients by doctors paid FFS in five other metropolitan counties that had not yet been privatized. He compared 1991 utilization rates for 121,402 FFS MA recipients with 98,578 MA HMO recipients enrolled in one of four HMOs—Group Health, Medica, Metropolitan Health Plan, and UCare. Again, the HMOs refused to deliver to DHS the necessary data. In his final report, Foldes noted the HMOs’ failure to deliver usable data and called for more research.

Foldes was, however, able to draw firm conclusions about two preventive services—mammography and Pap smears. “[T]he health plans had a comparatively 5 percent higher rate of Pap smear use,” he wrote, “but the fee-for-service setting had a comparatively 35 thirty-five percent higher rate of mammogram use.” Because HMOs claimed they were much better than FFS doctors at delivering preventive services, these findings were embarrassing to the HMOs. They persuaded DHS to conceal the study from the public. But someone leaked the study to the Star Tribune, which published a front-page article about it on March 13, 1994. Under the headline, “Study shelved after HMOs complained,” the article opened with these sentences:

“Minnesota officials suppressed a study raising questions about HMO care for poor people...The study was the first attempt by the Minnesota Department of Human Services to see whether the state was saving money by sending Medical Assistance patients to health maintenance organizations…”

Deaf Ears

Neither the legislature, then in the hands of Democrats, nor then-governor Arne Carlson, a Republican, called for hearings into the HMOs’ conduct, nor did they demand that DHS take appropriate steps to force the HMOs to cooperate. DHS, which had abolished Foldes’ position when it shelved his study, did not initiate a follow-up study.

In the summer of 2004, a half-dozen members of the Minnesota Universal Health Care Coalition and I asked House minority leader Rep. Matt Entenza for help extracting from DHS a statement on whether the insertion of MCOs into MA and MinnesotaCare had saved money. In December 2004, DHS Commissioner Kevin Goodno replied to a letter from Rep. Entenza with this statement:

“There no longer remains a credible comparison group of fee-for-service recipients against whom to compare the groups now enrolled in managed care. We do not have a methodology that could accurately assess whether managed care has cost us more or less than fee-for-service.”

That is where we stand today. Minnesota law still describes MA and MinnesotaCare privatization as a demonstration even though the rigorous study of the “demo” promised by DPW four decades ago never occurred. And it still describes the privatized counties as the “experimental” counties. Some experiments never die.

Legislative Response

Two bills introduced this year in the Minnesota legislature might, just might, trigger a discussion of the impact the grand privatization “experiment” has had on the cost of MinnesotaCare and MA. One is HF 96/SF49, the MinnesotaCare “buy in” or “public option” bill supported by Governor Tim Walz. This bill would eliminate the income eligibility ceiling on MinnesotaCare. That provision in the bill has been widely reported. A section near the end of the bill that has not been widely discussed would require DHS to prepare an estimate of alternative “models” of MinnesotaCare, one of which has to be a deprivatized MinnesotaCare.

Another bill that could trigger a good discussion (if not a review) of the “experiment” is SF404/HF816. This bill, authored by DFL Senator Alice Mann and DFL Representative Tina Liebling, would restore to MA recipients the freedom to choose their doctor. SF404/HF816 is a very simple bill. It amends the statute that authorizes DHS to “develop criteria to determine when limitation of choice may be implemented in the “experimental counties” by adding this clause: “but shall provide all eligible individuals the opportunity to opt out of enrollment in managed care.”

There is obviously a moral and an economic argument for the freedom-to-choose bill. The moral argument is that the legislature should never have forced MA recipients to choose between having health insurance and retaining their freedom to choose their doctor. Can you imagine the uproar if Congress had tried to do that to the elderly?

The benefit of SF404/HF816 to taxpayers should be obvious at this point:. If a substantial number of MA recipients were to leave the MCO MA program and enroll in the FFS MA program, that would create the “credible comparison group” (to use former DHS commissioner Goodno’s phrase) that DHS and other analysts need to derive a more precise estimate of how much privatization has cost the taxpayer.

Deprivatization, however it is achieved, will deliver at least two benefits to doctors. Returning the MA program to its original form—a public agency that reimburses all doctors according to the same FFS schedule—will eliminate differences in physician payment that are due primarily to differences in the negotiating clout physicians have vis a vis the MA plans they contract with. It will also restore autonomy over decision-making to MA patients and their doctors. A third possible benefit is an increase in MA reimbursement rates. That might happen if the legislature were to decide to allocate some of the savings from deprivatization to higher physician pay.

Last month, hearings were held on the public option and freedom-to-choose bills in the House and Senate health policy committees. If one or both of these bills do lead at long last to a debate about the pros and cons of privatization, we can be sure the insurance industry will urge legislators and the public to adopt a double standard, one for the insurance industry and one for all of us who think privatization was a mistake. The industry will promote evidence-based health policy for critics of privatization, but will apply to themselves the bloviation-based, “because we say so” standard that brought us privatization in the first place. For any observers—legislator or non-legislator—who might find themselves confused by the debate about whether privatization saved money, I suggest a simple tie-breaker: support deprivatization on moral grounds. Forcing MA and MinnesotaCare recipients to give up choice of doctor in exchange for health insurance is just plain wrong.

Kip Sullivan, JD, is a member of the advisory board of Health Care for All Minnesota.