By Kip Sullivan
May 28, 2005
The Star Tribune reported that Minnesota’s health maintenance organizations make more money from Minnesota’s Medicaid program than from employers (“HMOs profit from aid by state” May 18).
But the damage being done to the taxpayer is far worse than the article suggested. The gradual takeover of the Medicaid program by HMOs, which began in 1985, raised Medicaid’s costs. This would have been true even if the HMOs had made a zero percent profit off Medicaid
The reason is that HMOs have huge administrative costs compared with the Department of Human Services, the state agency that runs Medical Assistance (MA), as Minnesota’s Medicaid program is known.
Prior to privatization (that is, before the Legislature let HMOs run MA), Human Services spent 4 to 5 percent of the tax revenues allocated to MA on administration of the MA program. But HMOs spend 20 percent of their revenues on administration, including marketing, second-guessing doctors, perks for executives, and lobbying.
For example, Mike Hatch’s audit of Medica, the state’s largest HMO, found that Medica spends 18 to 19 percent of its revenues on overhead.
So do the math. Human Services was passing on 95 percent of its revenues to doctors and hospitals before privatization. Now it is passing on 95 percent of its revenues to HMOs (and possibly less because supervising HMOs is costly), and the HMOs scrape off 20 percent before passing on the remaining 75 percent to doctors and hospitals.
Something has to give. Either doctors and hospitals have to accept lower fees, patients have to get fewer services, or taxpayers have to raise the amount allocated to MA to cover the HMOs’ high overhead costs.
The evidence indicates that patients are getting slightly fewer services and taxpayers are paying a lot more money to support Medical Assistance.
Some evidence indicates HMOs have made a slight reduction in emergency room use by Medicaid patients, but because ER expenditures amount to only 2 percent of total health expenditures, the reduction in medical costs was negligible.
The Kaiser Family Foundation and other experts have concluded that HMOs have been unable to deliver more preventive care to Medicaid patients, in part because the turnover rate among Medicaid enrollees is so high. HMOs, in short, have been unable to reduce use of medical services substantially enough to offset their high overhead costs.
A study recently published by a University of Maryland economist named Mark Duggan concludes that the privatization of California’s Medicaid program raised costs by 20 percent without improving quality.
In a letter this past August, Rep. Matt Entenza, DFL-St. Paul, asked Human Services Commissioner Kevin Goodno whether the agency had ever done research to determine whether privatization of MA harmed providers, patients or taxpayers. Goodno replied, without offering any evidence, that the introduction of HMOs into the MA program did not harm doctors or patients. He noted that Human Services had no studies on the subject of whether HMOs saved MA money.
Years ago, the agency did try to study the issue. In 1993, a Human Services employee (who later went to work for Blue Cross and Blue Shield) completed a study which suggested that the agency was overpaying MA HMOs.
According to a March 13, 1994, exposé in the Star Tribune, this report was deep-sixed by Human Services at the urging of several HMOs (“Study shelved after HMOs complained”).
The Star Tribune article referred to “a memo from a [Human Services] staff member [that] said some HMOs ‘have a vested interest in keeping information from [the agency] because a large profit currently is being made [off Medical Assistance]…”
Although the suppressed Human Services report called for further research to answer definitively whether HMOs were raising MA’s costs, the agency eliminated the job of the report’s author and, thereby, Human Services’ ability to settle the issue.
Gov. Tim Pawlenty and the Legislature need to do more than to reduce the excessive profits HMOs are making off MA. They need to kick the HMOs out of MA, as well as General Assistance Medical Care and MinnesotaCare. And they need to do this before they debate cutting one more human being from the rolls of these programs.
Kip Sullivan sits on the steering committee of the Minnesota Universal Health Care Coalition.