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Twin Town High (vol. 8) |
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Scam!: Your tax dollars and the HMOs
Wednesday 10 January @ 16:29:19 |
 Special to Pulse of the Twin Cities © 2007
BY KIP SULLIVAN
For two decades, Minnesota taxpayers have been losing hundreds of millions of dollars annually by letting HMOs participate in the state's three major health insurance programs--MinnesotaCare, Medical Assistance (MA, Minnesota's Medicaid program), and General Assistance Medical Care (GAMC). These losses have never been investigated by the Legislature.
 HMOs in Minnesota act as the middleman between the state's Department of Human Services (DHS) and the doctors and hospitals and other providers who treat low-income Minnesotans who qualify for MinnesotaCare, MA and GAMC. When this privatization "experiment" began in the mid-'80s under Reagan, the state of Minnesota promised the feds it would evaluate the experiment. That evaluation never happened, or if it did, has never been released.
The HMOs have gotten what they wanted--privatization with access to the public trough without so much as a single public evaluation of whether privatization saved money.
The HMOs have warded off accountability long enough.
"The Legislature is now under great pressure to expand MinnesotaCare and MA to include more of the uninsured," said Lisa Nilles, MD, vice chair of the Minnesota Universal Health Care Coalition.
"That's wonderful news. But the Legislature must fix the HMO overpayment problem before it expands the coverage of those programs. If they don't, the overpayments will get a lot worse."
The way these HMO overpayments were created resembles the way the Pentagon overpaid Halliburton. Halliburton is a gigantic corporation with considerable influence in Washington, D.C.--it used that political influence to win lucrative contracts with the Pentagon for services to soldiers in Iraq (like meal preparation and transportation of gasoline) that used to be provided by military personnel at lower cost to the taxpayer. Now that evidence of the Halliburton rip-off has emerged, Halliburton is resisting audits of its books, and the Pentagon is doing little to recover the overpayments.
Similarly, HealthPartners, Medica and other Minnesota HMOs used their political power to get DHS to outsource the job of insuring low-income Minnesotans to the HMOs. Once this outsourcing, or privatization, had occurred, the HMOs used their political power to keep DHS and the Legislature from evaluating whether privatization saved money.
Administrative costs: The rhinoceros in the room
 To figure out whether privatization raises or lowers the costs of MinnesotaCare, MA and GAMC, you need to calculate two numbers: the amount of money HMOs spend on overhead costs (non-medical costs like advertisements and salaries for lobbyists) and the amount they spend on medical care for patients. Those two numbers together equal total spending by HMOs.
According to research, including a 2003 report by the federal Centers for Medicare and Medicaid Services, HMO overhead is about 20 percent of the revenues. According to other research, HMOs reduce medical spending on patients by about 5 percent. The net effect is about a 15 percent increase in total spending.
But all the HMOs talk about is the 5 percent cut in spending on patients, allegedly achieved by making patients healthier through greater use of preventive services like mammograms, and by cutting out unnecessary services. Everyone who promoted privatization in the '80s understood that HMOs were going to spend a large portion of the tax dollars funneled to them on administrative costs including sales people, marketing, arguing with doctors about whether their patients needed this or that medical service or drug, lobbying, perks and huge salaries for executives. But no one wanted to talk about it. All the HMO lobbyists talked about was the big savings that would allegedly materialize in the form of reduced medical spending if Minnesota's poor were pushed into HMOs.
When forced to talk about their overhead costs, HMOs minimize them. In recent years, the HMOs have claimed their overhead costs are merely 10 percent of revenues. Even if that's an accurate number, the HMOs still lose the larger argument about whether they should be booted from state health insurance programs. But 10 percent is not accurate. For example, Hatch's audit of Medica, the state's second largest health insurance company in terms of market share, reported that its overhead was at least 19 percent in 2000.
The Nov. 15, 2006, Wall Street Journal put it this way in a front-page story: "At Medicaid HMOs, only 80 to 85 percent of premium dollars generally go for medical care. The rest covers other costs--including executive compensation, entertainment and political contributions …."
The original rationale for inserting HMOs between DHS and providers was to save money. (That rationale was articulated in Minnesota's April 1982 application to the federal government for permission to force MA recipients in two "experimental" counties--Hennepin and Dakota--into HMOs for a three-year "demonstration" period, 1985 to 1988.) If HMO overhead eats up even as little as 10 percent, never mind 20 percent, of the tax dollars the HMOs receive from DHS, how were the HMOs supposed to break even during the 1985-88 "demonstration" period of the programs, much less save the state money?
Minnesota's 1982 application to the feds didn't bother to address this question. There were only three possible answers: the HMOs would reduce spending on medical care by an amount at least equal to their overhead; DHS would pay the HMOs more than it would have if HMOs had never been inserted between DHS and providers; or some combination of the above.
There are two ways HMOs could have cut medical spending: They could have cut the fees they paid to providers below the levels DHS was paying prior to privatization, or they could have cut the volume of medical services provided to patients. Because the fees DHS was paying to providers were already less than half those the private sector plans paid to their providers, it is extremely unlikely the HMOs were able to save money with even lower fees. In any case, there is no evidence that that happened. That leaves medical utilization rates. There is some evidence that HMOs reduced medical services delivered to MA recipients, including many necessary medical services.
But the reduction in medical use rates was nowhere near enough to offset the HMOs' 20 percent overhead.
Research by the Congressional Budget Office (the agency in charge of estimating the cost of bills proposed by members of Congress) indicates the typical HMO cut medical utilization by about 5 percent below the rate seen in patients treated by unmanaged providers. But 5 percent, obviously, is a lot less than the 20 percent overhead generated by the typical HMO. That leaves one explanation: DHS has been overpaying HMOs all these years by roughly 15 percent.
Dancin' the night away: Your tax dollars at work
 The best-known type of HMO overhead or administrative cost is executive salaries and perks. Mike Hatch's 2002 audit of Medica, which at the time was part of a combined HMO-hospital-chain called Allina, painted a lurid picture of this type of overhead. Although Allina operated only in Minnesota and small slices of the Dakotas and Wisconsin, it reimbursed its executives for flights to Aruba, London, Paris, Venice, Grand Cayman, Amsterdam, Athens, Cancun, Los Cabos, Pago Pago, Puerto Vallarta, and San Juan during the period 1998-2000.
During those same three years, Allina paid for over 30 trips to Hawaii, and more than 1,000 trips to California and Florida. The purpose of one of the California trips (eight Allina officials made the trip) was to attend an "ethics" seminar in Monterey designed to teach the executives how to find Allina's "moral center."
Other examples of wasteful expenditures by Allina documented in Hatch's massive, six-volume report included:
•a hot air balloon ride for executives over vineyards in California's Napa Valley ($1,295, champagne brunch included);
•a $70,000 company party, $10,000 of which was for a "laser light show";
•$18,000 worth of season tickets to the Minnesota Timberwolves for just one executive over three years;
•$1 million a year for a "turn around" specialist from California who worked at Allina only four days a week and who in turn hired more California consultants to host parties for executives at which they watched the movie "Twelve Angry Men" in order to learn about "group dynamics."
But the lavish salaries and questionable perks for HMO managers constitute only a small portion of the 20 percent of revenues that HMOs spend on overhead. The bulk of HMO overhead is accounted for by:
•marketing and advertising;
•"managing care," or, in plain English, telling doctors what services and drugs they can offer to their patients;
•claims processing;
•lobbying and otherwise influencing government (such as the $306,000 over three months Allina gave to GCI Tunheim and other public relations firms to carry out a publicity campaign in 2001 to destroy Hatch's credibility); and
•profit (in the case of for-profit plans) or surplus (in the case of nonprofits). Profit or surplus typically averages 3 to 5 percent.
In case it isn't obvious, let me state the obvious: DHS spent no money on trips to Pago Pago, Timberwolves tickets and the other administrative costs HMOs incur before privatization. But after privatization, that is, after DHS started funneling tax dollars through HMOs rather than directly to providers, our tax dollars did finance trips to Pago Pago and expenditures on marketing, lobbying, etc.
HMOs gag the messenger
The first sign that something was very wrong with Minnesota's privatization experiment came in 1987 when the federal government refused to grant DHS' request to extend the Hennepin-Dakota demonstration project for two years beyond 1988. Judging from a vague explanation of this event in a history of the privatization project published by DHS in 1995, the feds refused to extend the demonstration project because DHS had not carried out the evaluation it had promised to conduct. Here is the sum total of DHS's explanation from its 1995 report: "Difficulty in obtaining usable service encounter data from the health plans made it difficult to evaluate the [demonstration]. In addition, delays in enrollment of recipients resulted in considerably less than three years of actual program experience."
Arranging for the HMOs to deliver necessary data to DHS and getting poor people to sign up for HMOs were the two most obvious tasks DHS had to think through before it asked the feds for permission to begin the privatization experiment. Why weren't these obvious problems anticipated by DHS? Why was the privatization "experiment" allowed to continue without some assurance from DHS that these problems, especially the HMO's inability or unwillingness to deliver useful data, had been addressed?
In an ideal world where state agencies do what they say they will do and where large corporations are held accountable, this should have been the end of the road for the privatization experiment. It was not. In 1989, according to the DHS history, Minnesota's legislature rewarded the HMOs by enacting legislation authorizing DHS to privatize all 87 Minnesota counties. In 1990 Congress, apparently at the request of one or several members of the Minnesota congressional delegation, voted to give Minnesota permission to continue its privatization experiment.
DHS made no further attempt to determine whether privatization was working until 1993. In that year, a DHS employee named Steven Foldes sought to compare the quality and cost of care for MA recipients in Dakota and Hennepin counties with the quality and cost of care provided to MA recipients by doctors in five other metro counties that had not yet been privatized. Again the HMOs refused to deliver the necessary data to DHS. (The HMOs refused to provide any data at all on mental health services.) In his final report, Foldes noted the HMOs' failure to deliver usable data and called for more research.
However, Foldes was able to draw firm conclusions about two preventive services--mammography and Pap smears. He found that doctors in the unprivatized counties (referred to as "fee-for-service" counties because doctors there were paid a fee by DHS for each medical service they provided to patients) were doing a better job of providing preventive services than the HMO doctors in Dakota and Hennepin. "[T]he health plans [referring to the HMOs] had a comparatively 5 percent higher rate of Pap smear use, but the fee-for-service setting had a comparatively 35 percent higher rate of mammogram use …," said the report. Because HMOs claimed they were much better than fee-for-service doctors at delivering preventive services, these findings were profoundly embarrassing to the HMOs. It suggested that if HMOs were saving any money at all for DHS, it was not because they were doing a superior job of "health maintenance."
The HMOs persuaded then-DHS assistant commissioner Helen Yates to conceal the study from the public. We know this because someone leaked word of 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 …."
Neither the Legislature, then in the hands of Democrats, nor then-governor Arne Carlson called for hearings into the HMOs' outrageous 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.
"The Star Tribune report was front-page news," said Charlotte Fisher, a retired St. Cloud nurse and president of the Greater Minnesota Health Care Coalition. "But the Legislature didn't lift a finger to find out what happened. No calls for HMO accountability. No hearings. Nothing!"
This would not be the last time the Legislature ignored reports that indicted HMOS: The Legislature ignored then-Attorney General Mike Hatch's 2001 report on the abuse of mental health patients by Blue Cross and Hatch's 2002 audit of Allina.
With the deep-sixing of Foldes' report, the question of whether HMOs were robbing taxpayers sank from sight. As I reported in the Dec. 5 Pulse, former DHS commissioner Kevin Goodno stated in a December 2004 letter to former Rep. Matt Entenza (DFL-St. Paul) that even at that late date DHS still had not performed a study to determine if privatization saved money.
Although the HMOs have suppressed research on whether privatization of the state programs saved money or improved quality of care, we have dozens of studies of HMO performance in the private sector, in Medicare, and in California's Medicaid program indicate that HMOs raise costs and damage quality of care.
HMO-ectomy: Big business shows the way
Perhaps the most compelling of these studies are those showing that when businesses "self-insure" they save money. Self-insuring means a business stops buying insurance from a health insurance company and instead acts as the health insurer of its own employees. It just sets aside money each year in a bank account to cover the estimated cost of its employees' medical bills and, when bills come in, it pays providers directly. In other words, self-insured businesses bypass the HMO middleman. Today, about 40 percent of all Minnesotans with health insurance get it through a self-insured employer. The high number of companies that choose to self-insure is a sure sign that self-insuring is a money-saver.
Self-insuring cuts health insurance costs because the self-insuring company no longer pays for some or all of the administrative costs associated with running an insurance company. Take, for example, a self-insured company--call it Company X--formerly insured by Blue Cross Blue Shield. Company X still has to pay someone to process claims and negotiate contracts with providers (it might do this in house or contract with Blue Cross or another insurance company to do this), but it no longer pays for trips to Pago Pago (or wherever Blue Cross sends its execs for R and R) nor all the other overhead costs private insurers incur. By ceasing to pay for these costs, self-insuring corporations cut their health insurance costs by 10 to 20 percent.
Two dozen Fortune 500 companies headquartered in Minnesota documented the value of self-insuring a decade ago. The group, known as the Business Health Care Action Group (BHCAG; today it is the Buyers Health Care Action Group), included, for example, Carlson Companies, General Mills, Land O' Lakes, Pillsbury, Super Value and 3M. The BHCAG corporations self-insured in 1993. In 1997, the group reported that self-insuring cut its health insurance costs by 11 percent. According to a January 13, 1997, report in Business Week, "a coalition of 25 Minnesota companies appears to be scoring … savings ... by bypassing insurers. The Business Health Care Action Group deals directly with doctors and hospitals. Steve Wetzell, executive director of BHCAG, contends that HMOs ... waste millions on administration. By cutting them out, the coalition has reduced employers' health-coverage expenses 11 percent since 1993." The article ran under the amusing title "Minnesota's HMO-ectomy."
The Minnesota Legislature is often urged to make government act more like a business. This is one case where that advice should be followed. "If bypassing the insurance companies makes sense for big business, why can't our legislature see that it makes sense for MinnesotaCare and Medical Assistance?" asks Charlotte Fisher.
If sticking HMOs between large corporations and providers raises costs, it seems obvious that sticking HMOs between Medicaid and providers will also raise costs. That is what a study of California's partially privatized Medicaid program found. The study reported that counties where HMOs have been inserted between the state and providers have per capita costs 20 percent above those of counties that were never privatized (You can find this study at www.econ.umd.edu/~duggan/mcd_hmo.pdf.) This study was conducted for the National Bureau of Economic Research, a right-of-center think tank that has produced 16 of America's 31 Nobel Prize winners in economics since its founding in 1920.
Just last Nov. 15, the Wall Street Journal reported that "private HMOs" are making billions off of the Medicaid programs of Illinois and other states while spending lavishly on executive salaries, executive jets and inventive forms of advertising such as buying the right to put the HMO's name on art museums and baseball stadiums.
It gets worse
The cost of privatization is a lot higher than just the 15 percent overpayment to HMOs. Privatization also drove up provider administrative costs, and probably drove up DHS' overhead costs.
The Nov. 15 Wall Street Journal article quoted above on HMO overhead also reported that state agencies that run unprivatized Medicaid programs typically have much lower overheads than HMOs. "When states run their own Medicaid programs," the article reported, "they spend an average of 4 to 6 percent on administrative costs …. The rest--94 to 96 percent--goes to paying for medical care."
That 4-to-6 percent overhead is attributable mainly to claims processing and means testing (determining whether people who apply for Medicaid are poor enough to qualify). What the Journal did not say is that there is some evidence indicating that when states privatize their Medicaid programs, state overhead costs double, because overseeing HMOs is so much more expensive than simply processing claims and measuring the incomes of applicants.
In other words, not only does privatization force the taxpayer to pay a 15 percent overhead fee to HMOs, it also requires taxpayers to finance another 5 percent in state agency overhead, or a total of about 20 percent in new non-medical costs.
Finally, the Wall Street Journal did not take note of evidence that the overhead costs of clinics and hospitals rise when Medicaid programs are privatized. Providers who have to deal with HMO middlemen must spend a lot more on getting their bills paid than they did prior to privatization. Doctors and hospitals all over America can attest to this. All the large insurers have been sued by providers for losing claim forms, altering claim forms to lower the reimbursement level, and otherwise delaying payment. Good research on the impact HMOs have had on provider overhead is sparse.
But if the increase is only 5 percent of provider expenditures, that brings the total cost of privatization of state health insurance programs to 25 percent--15 percent overpayments to HMOs, a 5 percent increase in state overhead costs, and another 5 percent increase in provider overhead costs. Of course, that last chunk of waste--the additional overhead costs providers incur--does not show up on the taxpayer's bill.
Be wise, deprivatize
Cutting the cost of MinnesotaCare, MA and GAMC by 20 percent is not the only benefit that would flow from "deprivatizatizing" those programs. Quality of care would also improve. Scientific research and an ocean of HMO horror stories indicate that the cost-containment tools pioneered by HMOs--"managed care" is the term applied today to these tools--have damaged quality of care, especially for the weakest and sickest patients. In short, privatization brought us the worst of all possible worlds--much higher costs and diminished quality.
The HMOs have warded off accountability for two decades. Two decades is long enough. The Legislature should boot the HMOs from the state programs now--and then go on to merge the three programs into one and use this consolidated program as the centerpiece for a single-payer system that covers all Minnesotans. ||
Kip Sullivan is the health system analyst for the Minnesota Universal Health Care Coalition, which represents 13 organizations. He is the author of more than 100 articles about health policy, and of a new book entitled "The Health Care Mess," available at Arise! Bookstore, Amazon Books, Mayday Books, Magers and Quinn, and Orr Books in Minneapolis, Mikawbers' and Amore Coffee in St. Paul, and at authorhouse.com and muhcc.org.
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