DHS Medicaid audit points to problems

A preliminary audit of the state’s Medicaid rates released on March 1 determined that they were “actuarially sound.” That’s the finding that Minnesota Department of Human Services Commissioner Lucinda Jesson repeatedly stressed during a phone call with reporters the day the report was released.

It was arguably the lone bit of good news in a troubling 10-page summary, and even that came with a caveat: “That doesn’t mean that they were good rates,” Jesson conceded. “They were too high and there should have been harder bargaining.”

The audit, conducted by the Segal Company under a contract with the Department of Human Services (DHS), was commissioned after years of questions from legislators and federal investigators about whether there is sufficient accountability and transparency in the state’s $8 billion-per-year Medicaid program.

More than 700,000 low-income individuals receive health-insurance coverage through the program. DHS contracts primarily with four health plans — Medica, HealthPartners, Blue Cross Blue Shield and UCare — to administer the program. Segal was tasked with looking at the rates for fiscal years 2003 through 2011.

The audit was supposed to be concluded by the end of January, according to the contract. But due to troubles collecting the relevant data, that schedule was pushed back. The 10-page summary issued last week is a preliminary report; the final audit is due by the end of March.

But the Segal report, even in its preliminary form, includes several troubling conclusions. Most notably, it determined that DHS did not have access to paid claims data when assessing the appropriateness of the Medicaid rates. That means, in essence, that the state was in the dark with regard to how much of the money it disbursed to the health plans actually went toward paying for health care. Neither did Milliman, the actuary hired by the state to ensure that the Medicaid rates were sound, have access to such data.

“Segal briefly reviewed the [managed care organization] contract and we believe DHS had the authority and should have collected data over the period being reviewed,” the preliminary audit states. “We were told that DHS did not push for this data, and it was met with significant resistance from the MCOs. This left Milliman no choice but to rely on MCO self-reported information.”

David Feinwachs, former general counsel of the Minnesota Hospital Association and a fervent critic of the state’s Medicaid program, argues that the lack of payment data is alarming. “Do you know what encounter data without payment data is? It’s called garbage,” he said. “You can’t set a Medicaid rate without that information. It’s not possible. It’s not mathematically possible.”

Julie Brunner, executive director of the Minnesota Council of Health Plans, says she doesn’t have direct knowledge about why paid claims data wasn’t collected during the time in question. “I had no knowledge of that,” Brunner said. “We don’t participate in any of the conversations that go on between the health plans and the state when they’re negotiating contracts. We aren’t a part of that.”

DHS points to Pawlenty years

The Dayton administration and its allies are similarly eager to point out that the period covered by the Segal audit fell almost entirely during the tenure of former GOP Gov. Tim Pawlenty. “What’s fundamentally troubling about this was that it wasn’t called into question over those years, according to this report, by either the actuary or the previous DHS leaders before Gov. Dayton took office,” Jesson said.

The administration is likewise eager to point out changes implemented in recent years. In 2011 the Legislature enacted a law requiring the collection of paid claims data. In addition, Dayton administration officials assert that other changes in how the Medicaid program is run have resulted in roughly $1 billion in savings.

“We’ve really begun to do a lot better with our public programs,” said Sen. Tony Lourey, DFL-Kerrick, chair of the Health and Human Services Finance Committee. “It’s work that was seriously overdue.”

The state’s failure to collect adequate financial data apparently led to significant overpayments to the health plans over the course of a decade. Segal concluded that rates were 1.4 percent higher than they should have been. While that may not sound like much, it adds up to $162.5 million over the course of the period covered by the audit. In addition, Segal concluded that the health plans likely earned an additional $150 million from investment income generated off of Medicaid payments.

During the same period, the balance sheets of the nonprofit health plans ballooned. UCare, for instance, which only provides insurance coverage for individuals enrolled in government programs like Medicaid, saw its assets increase from just over $150 million in 2002 to roughly $630 million in 2011, according to tax filings.
The Segal report also looked at whether the state may have improperly used federal Medicaid funds to subsidize the state’s General Assistance Medical Care (GAMC) program for indigent adults. This allegation first arose in relation to UCare’s decision in 2011 to return $30 million in payments to the state. At the time, UCare President Nancy Feldman explained the firm’s rationale for the contribution in a letter to Sen. David Hann, R-Eden Prairie.

“Historically DHS rates set for General Assistance Medical Care resulted in health plan losses which were offset by higher Medical Assistance payments,” Feldman wrote. “When GAMC moved out of managed care in mid-year 2010, Medical Assistance rates were not lowered to reflect this overpayment.” (GAMC was eliminated in 2009 by Pawlenty.)

That statement is problematic on its face, because subsidizing state-only programs with federal funds is not permitted. Congressional investigators have seized on this passage as evidence of financial malfeasance. In August, U.S. Sen. Chuck Grassley, R-Iowa, and U.S. Reps. Darrell Issa, R-Calif., and Trey Gowdy, R-S.C., sent a letter to Jesson suggesting that “upwards of $500 million” in improper federal Medicaid payments may have occurred.

The Segal report appears to indicate a cross-subsidization of GAMC with Medicaid dollars. It refers to an “inherent” subsidy for GAMC and points out that the health plans were able to cushion systemic losses from that program by participating in other profitable public programs, including Medicaid. But the preliminary audit report stops short of explicitly alleging that cross-subsidization occurred.

Because of that, Jesson doesn’t anticipate that there will be any need to return federal dollars. “While [the audit] found no evidence that GAMC influenced the setting of the PMAP rates, the fact that there were very high margins on [Medicaid] provided the opportunity for higher losses on GAMC,” Jesson said.

This stance is echoed by Lourey. “I’m hopeful that the state won’t be facing a federal disallowance for any of this,” Lourey said. “We did submit rate-setting plans. Those were approved by CMS. The fact that they included excessive profit margins is troubling, but I don’t see a federal disallowance.”

But Sen. Sean Nienow, R-Cambridge, who has been among the most persistent critics of the state’s Medicaid program, isn’t ready to applaud the Dayton administration for its conduct. He argues that DHS officials continued to ignore issues with the Medicaid program long after they were informed of the problems.

“They knew what was going on two years ago, and they either chose to ignore it or they really knew what was going on and they didn’t want anyone to find out,” Nienow said. “I don’t know which it is, but they absolutely knew and they did nothing. They are absolutely culpable.”

Feinwachs reaches a similar conclusion. “Jesson hired this firm to do a quick-and-dirty and say it’s all good,” he asserted. “What you’ve got here is as far from ‘all good’ as you can get. This is very, very problematic.”

Separate federal audit proceeding

The issue of Medicaid rates will not go away anytime soon. The complete Segal audit is supposed to be released by the end of March. In addition, the U.S. Department of Health and Human Services’ Office of the Inspector General has been conducting its own probe since January. Officials with the federal agency won’t comment on that process, so there is no public timeline for any release of findings. In addition, legislation passed last year requires the Office of the Legislative Auditor to conduct a probe of the state’s Medicaid rates in fiscal year 2014, which begins on July 1.

Legislative Auditor James Nobles expects to get that process started immediately, but he’s concerned about duplicating work that’s already been done by Segal and others. “I really want to know, have we gotten to the bottom of all we can know from the data that is available?” Nobles said. “There are legitimate questions that need to be answered about what happened.… Accountability compels that. People, especially where public money is involved, they deserve an accounting. But I do think at some point you do have to move on.”

Lourey argues that the findings of the Segal audit will inform other work at the Capitol. For instance, he suggests that the troubling report is emblematic of why the health insurance exchange currently being debated needs to be governed by a board that has the authority to determine which insurance products should be made available to consumers.

“This is the core point that this Segal report really highlights,” Lourey said. “If we don’t have strong public tools to make sure the insurance industry puts out products that are in the best interests of consumers, within the realm of the rates that you expect to pay, you’ll lose that value.”

But Brunner, of the Minnesota Council of Health Plans, doesn’t see a connection between the two areas. She argues that any health plan that meets certain threshold requirements should be able to sell products through the exchange.

“I don’t follow that line of logic,” Brunner said. “We support transparency. We’ve supported all the legislation in the last few years that has brought more transparency into how this program operates. I don’t see the connections to what we would see as limiting consumer choice in an exchange with this audit.”