Trouble in State and Federal Medicaid Relations

The relationship between federal and Minnesota state agencies responsible for Medicaid administration has been tenuous as of late. Minnesota’s Medicaid program is administered at the state-level by the Department of Human Services (DHS), and the Centers for Medicare and Medicaid Services (CMS) is the federal agency that administers Medicaid in partnership with states. States are reimbursed by the federal government for a percentage of the costs of providing Medicaid services. Typically, the federal government covers 50% of Minnesota’s Medicaid spending. The majority of this money is paid to managed care companies (HMOs like UCare, Medica, BCBS, and HealthPartners) to provide health care coverage for certain low-income adults without children, pregnant women and families with children.

Governor Dayton’s 2011 budget established a new competitive bidding process for managed care contracts. Medicaid plan providers were now required to submit a bid for a monthly payment amount per enrollee, and the state assesses the bids based on the quality and cost and chooses two or three plans to contract for each county. As part of the 2011 contracts, plan providers were requested to voluntarily cap their profits at 1 percent of revenue for the state health care program. This action was taken largely in response to a historic state budget deficit and the massive earnings of the major healthcare providers over the preceding years. Providers agreed to the 1% cap, and additional profits would be returned to the state. Excess profits for 2011 were expected to return over $70 million. Furthermore, as seems equitable, 50% of those returns would be reimbursed to the federal government.

Sounds easy enough, right? Think again. In March 2011, UCare (one of the four contracted managed care companies in the State) voluntarily donated $30 million in its reserves to the state, stating that the money was donated in response to the state’s massive budget deficit. Thus began a debate between DHS and CMS over how to classify the funds and how they should be allocated. DHS believed the money qualified as a “bona fide donation” and had no relationship to Medicaid payments, allowing the state to retain the entire balance. CMS argued that the funds qualified as “repayment” from a Medicaid provider, and therefore the federal government was entitled to half. The lengthy negotiations came to an end in April 2012, when the DHS released this press release and reversed course, agreeing to include the funds as part of those claimed under the 1% cap. While DHS Commissioner Lucinda Jesson claimed the decision was based on a matter of fairness, it was made conveniently in time for Jesson’s scheduled testimony in Washington at a House of Representatives hearing on Medicaid fraud. The hearing is part of a hushed investigation that recently made headlines thanks to Michele Bachmann:
Link to KARE11 story.

Medicaid is a complex program requiring coordination between federal, state, and local governments. Minnesota and other states often dispute or appeal unclear or contradictory federal mandates. Even minor issues require an intricate network of coordination and collaboration to resolve. Relationships between state and federal agencies can become tense, and efficiency is surrendered to costly negotiations and litigations. When millions of dollars are on the line, the stakes get a bit higher. As is currently under investigation in Minnesota, players may take advantage of Medicaid’s complexity in order to game the system. In a recent Star Tribune article, U.S. Senator Chuck Grassley, R-Iowa, who initiated the Justice Department’s investigation of the UCare donation, was quoted saying “the state [of Minnesota] clearly has structural problems with its Medicaid payments that need examination. If a state is gaming the federal government to get more out of Medicaid, the state is gaming taxpayers nationwide and ultimately hurting the people who need Medicaid.”