May 29, 2012 The Honorable Darrell Issa Chairman House Committee on Oversight and Government Reform 2157

Rayburn House Office Building Washington. DC 20515-6143 Dear Mr. Chairman, Thank you for the opportunity to provide additional information regarding Minnesotas Medicaid program. Below, I list your questions together with the responses. I would note that many of these questions involve the interaction between the former General Assistance Medical Care (GAMC) program and Medicaid. As you know, managed care contracting for GAMC ended in March 2010, well before the beginning of the Dayton Administration. Since January 2011, when Governor Dayton appointed me as Commissioner, we have made significant changes to internal DHS practices, hired a new management team for our state health care program operations, and received legislative authority to make Minnesota a smarter purchaser of health care. Our focus has been on reforming our purchasing and health care delivery system in Minnesota, to the benefit of both federal and state taxpayers. Our focus has been on changing course rather than investigating the past. Nevertheless, we have tried to answers questions about the past to the best of our ability. 1. There is still confusion around UCares $30 million refund to Minnesota last year. On March 15, 2011, the day before UCare sent its letter regarding the refund, you emailed Dan Pollock, a high-level staffer in your department, about the proper way to message the UCare contribution. You wrote, In order to have a good chance of keeping all this money, it must be characterized as a donation. If a refund, feds clearly get half. Can you work with Scott on redrafting? Also, I thought we were going to handle this through phone calls. In your response to a question from Chairman Gowdy at the Committees hearing, you explained that your email was correcting a draft press release. Were you referring to a press release from the state or from UCare? Please attach the referenced press release to your response. Additionally, you told Chairman Gowdy that your email was part of a larger email chain and that the phrase about handl[ing] this through phone calls was taken out of context. Please provide the entire email discussion that you referenced in your answer.

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Response: The chain of emails concerned two matters; 1) a draft press release that was to be issued from the Governors office on March 16, 2011 in consultation with DHS; and 2) draft letters to the Minnesota House and Senate Committee Chairs about the UCare matter. The email in question where I write I thought we were going to handle this through phone calls is in direct response to Mr. Pollock sending me a letter that he had drafted to legislative committee chairs regarding the contribution. His email to me stated in part . . . this is a draft letter I would like to send to Committee Chairs tomorrow that tracks the information in Scotts press release. The phrase about phone calls was referring to my desire to be more personal and responsive to the legislators by notifying them of significant events by phone rather than only sending letters. In that same email I also sought to correct a draft press release which was to be sent from the Governors office on the UCare contribution. To do so, I wrote that In order to have a good chance of keeping all this money, it must be characterized as a donation. If a refund, feds clearly get half. Can you work with Scott in redrafting? See attached documents. 2. At the hearing, the Committee learned that Karen Peed, Minnesotas former Director of Managed Care Contracting, stated that Minnesota was underpaying the states insurance companies for state-only funded programs and overpaying these same insurance companies through Medicaid. Between November 2010 and present, have you discussed Minnesotas rate setting process for its public health insurance programs with Ms. Peed. During any of your conversations with Ms. Peed did you discuss Minnesotas rate setting process for its public health insurance programs? Please provide all documents and written communications, including emails, between Ms. Peed and yourself over the past two years that refer or relate to Minnesotas rate setting process for its public health insurance programs. Response: The question provided here relies upon a statement attributed to Ms. Peed during discovery in a series of lawsuits between Mr. Feinwachs and Minnesotas health plans. The Department of Human Services was not a party to the lawsuits and does not have firsthand information of the complete record developed in that litigation. However, with regard to the past relationship between state-funded programs and Medicaid, we note that the Office of the Legislative Auditor indicated on page 43 of the report entitled Financial Management of Health Care Programs, Office of the Legislative Auditor, State of Minnesota, February 2008, that: In contrast, health plans reported losses every year on General Assistance Medical Care, a state-funded program that accounts for about 9 percent of the public programs revenues. As noted earlier, this is the only program that DHS is not required to demonstrate to be actuarially sound. DHS staff acknowledged that they have regularly set GAMCs rates at levels lower than the programs
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anticipated costs, with the expectation that the health plans will negotiate lower rates with providers, help clients transition from GAMC to MinnesotaCare, or cover their losses with surpluses from other programs. Minnesotas managed care contracting process for public health insurance programs was a top priority for me when I took office in January 2011. This process included developing a greater understanding of the historic managed care contracting and rate setting process used by previous administrations. The 2008 Legislative Auditors Report referenced above provided an excellent background in this regard. In addition, in order to better understand our historic process for contracting, I met with Ms. Peed on January 25, 2011, where I received a high-level briefing on the general mechanics of the rate setting process. During this meeting Ms. Peed never discussed cross-subsidization. During this meeting we did discuss the possibility of moving Minnesotas rate setting process to a competitive bid process. There was a subsequent meeting on July 28, 2011 that included Ms. Peed, where the purpose of the meeting was to discuss progress on implementing a competitive bidding process for Minnesotas managed care programs. There was a third meeting I was present at when the topic of the discussion was our Medicaid accountable care organizations (ACO) demonstration project. While the focus of this meeting was not managed care rate setting, and this issue was not discussed, I include it here for completeness. There may have been additional incidental conversation with Ms. Peed that occurred while passing one another in the building, but I do not recall discussing the rate-setting process with Ms. Peed outside of the above-mentioned two meetings.

Requested documents are attached. 3. In an interview with a local television station, you were asked whether Ms. Peeds statement that Minnesota was underpaying the states insurance companies for stateonly funded programs and overpaying these same insurance companies through Medicaid amounted to Minnesota defrauding the federal government. You stated, Let me be very clear. We are not doing it that way anymore and Karen Peed is no longer in charge of contracting with the plans. What were you referring to when you said that way? Response: In the February 13, 2012 interview I was referring to the previous method for developing rates that I believed was inherently inflationary. The phrase that way is a reference to the practice of using historical data plus some inflationary measure in addition to the fact that GAMC now no longer exists. It is significant that the changes the Dayton Administration made in contracting with health plans for public health care programs was to set rates through a competitive bidding process rather than relying primarily on historical data plus inflation. This instituted change plus additional managed care reforms resulted in estimated savings in excess of $600 million.

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4. In response to a question from Congressman Danny Davis, you stated, I very clearly thought that the state of Minnesota and the federal government were paying too much under our Medicaid contracts. When and how did you come to this conclusion? Response: Shortly after taking office in January, 2011, my concerns about past Medicaid managed care contracting results crystalized. I was aware of this issue generally upon taking office, because the issue of HMO margins on public programs is one that has been discussed in Minnesota quite publicly for the past several years. At least three reasons existed as to why I was concerned about the financial results from our past contracting practices. First, I felt that the margins earned on public health insurance programs were greater than they should be. Second, profit margins on public insurance programs were frequently greater than profit margins for commercial private insurance which demonstrated that the State was not driving the hardest possible bargain. Finally, I felt that the contributions being made to health plan reserves from public health insurance were disproportionate to those being made by private insurance coverage. The reserves for the four (4) largest health plans, each of which was made subject to our negotiated 2011 1% operating cap margin, averaged $1.326 billion dollars for years 2007-2011. This represented a 56% average increase in health plan reserves during that same time period.

While HMOs were being paid according to contracts approved by CMS, I believed there was substantial room for improvement in the HMO contracting process. I took swift action to address this issue. First, we sought to remedy the contracts we inherited from the previous administration that we felt did not produce the value the public expects. Second, we fundamentally revamped and changed the process by which we negotiate our managed care contracts. We are pleased with the results of these two efforts. In the first instance, we negotiated with the plans a 1% cap on their 2011 profits (the final year of the contracts we inherited). We anticipate a return in excess of $70 million from these capped profits. This $70 million plus will accrue to the state and federal governments. In the second instance, competitive bidding of our managed care contracts for the Twin Cities seven county metro area and related managed care reforms going forward resulted in an estimated taxpayer savings of over $600 million (this anticipated savings is split between the federal and state governments) for state fiscal years 2012 and 2013, and additional permanent savings beyond those years. We anticipate expanding our competitive bidding process to other parts of Minnesota to ensure we continue to derive the best possible value and outcome under our managed care program.

5. How long do you believe that Minnesota and the federal government were paying too much under the states Medicaid contracts? Response:

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While health plan profit margins on public health insurance programs have fluctuated over time, I believed that the margins earned during recent history, particularly 2009 and 2010, were too high and reflected substantial opportunity to improve our contracting processes. As mentioned in the answer to question 4, we have put in place a number of efforts to revamp and improve those processes, with good early success. In my testimony submitted to the Committee in April, I provided some exhibits related to our historical analysis of contracting and health plan profits and reserves. 6. Governor Dayton has stated that past contracts between the state and the insurance companies were too generous with the taxpayers money. During your testimony, you stated that you very clearly thought that the state of Minnesota and the federal government were paying too much under our Medicaid contracts. However, in response to a question from Senator Grassleys March 8, 2012, letter to Governor Dayton, you wrote: We are unaware of and do not believe that there were any miscalculations in the rates. Please reconcile these three statements. Response: My statement, in the Addendum to the April 2, 2012, letter to Senator Grassley, was in response to his question as follows: As 61.59% of the managed care payments that UCare received were from the federal government and UCare specifically pointed to miscalculations in the rates, why wasnt the federal share remitted to CMS within 60 days, as obligated by law? In my response, I was attempting to convey that there was no error in the payment that UCare receivedit received the payments to which it was entitled under the contract executed by the previous administration and approved by CMS. There was not a miscalculation in the payments provided UCare, rather, in retrospect it remains evident that the rates agreed to were over what was required while still permissible under CMS regulation. As I also explained in the March 8, 2012, letter to Senator Grassley and in my testimony before your committee, the rate development process in place prior to my appointment resulted in capitation rates that were unnecessarily high for several years even though permissible under federal law. 7. In response to a question from Chairman Gowdy, you stated that there was no evidence that UCare had been overpaid by the state and that its $30 million transfer to the state was a bona fide donation. In response to a question from Congressman Kucinich, you stated that Nancy Feldman, the CEO of UCare, told you about the donation at a March 14, 2011 meeting in your office. On March 16, 2011, Ms. Feldman sent a letter to top state officials stating that the $30 million represents what [UCare] consider[s] to be excess 2010 operating margins for state public programs. Ms. Feldman attributed the $30 million, in large part, to overpayments that the state made to UCare through the Medicaid program. According to Ms. Feldman: Historically, DHS rates set for General Assistance Medical Care resulted in health plan losses which were offset by higher Medical Assistance [Medicaid] payments. When GAMC moved out of managed care in mid-year 2010, Medical Assistance rates were not lowered to reflect this overpayment.

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During your March 14, 2011, meeting with Ms. Feldman, did she describe or explain the reasons surrounding UCares $30 million return to the state? Did you read UCares letter, referenced above, before the date of the Committees hearing? Response: During the March 14, 2011 meeting with Ms. Feldman, she indicated that UCare was contributing $30 million to the state to assist the state with the $5 billion biennial budget deficit it was facing for SFY 2012 and 2013. The conversation focused on the UCare contribution. Ms. Feldman described how UCare came to the $30 million contribution by looking at UCares current level of reserves and determining how much could be given to that state, while still maintaining adequate reserves. The March 16, 2011 letter that was subsequently sent by UCare was sent to state legislative leaders. I was not included in the list of persons the letter was sent to, nor was I copied. The first time I recall reading this letter was shortly before a February 14, 2012 legislative hearing on this topic when it was included in a set of documents circulated by David Feinwachs. 8. At the hearing, you stated that after you received CMSs July 2011 letter, you sought a legal opinion on the nature of UCares repayment. Please provide the legal opinion that you received. Response: In recognizing that the memo is attorney-client privileged, releasing such document is very unusual and is not a standard practice of the Department. However, I believe the memo provides clarity on the care and process the Department took in considering the nature and treatment of the UCare funds. Therefore, I believe, in this limited circumstance that waiving the attorney-client privilege with respect to this memo is warranted. I waive the privilege with regard to this memo. See attached. 9. When is the first time you became aware of the accusation that Minnesota was using federal tax dollars coming to the state through the Medicaid program to cross-subsidize the states underpayments for state-only health plans? Please detail, in chronological order, the subsequent steps you have taken since you became aware of the accusation. Response: I became aware of the accusation in May 2011 when the Office of the United States Attorney, District of Minnesota, approached the Minnesota Department of Human Services with a request for information. The Department, in response to this request, subsequently supplied the Office of the United States Attorney with information satisfying the request. At that time the U.S. Department of Justice instructed the Department to abstain from discussing any departmental actions or additional questions related to their inquiry. Absent consent between the parties we will abide by the DOJ request until such time as we are permitted to do otherwise. 10. During your testimony, you stated that the health plans have historically said that they lost money on the state-funded program. How long did the health plans lose

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money on state-funded program(s), such as GAMC? If you do not know, have you started an investigation to find the answer? Response: Please see attached historical health plan financials for the General Assistance Medical Care (GAMC) program. It should be noted that GAMC managed care ended March 31, 2010 and the program was completely repealed in state law as of February 28, 2011.

11. Now that GAMC is no longer operational, what program(s), if any, now provide insurance for individuals who previously received their coverage through the GAMC program? How are these programs financed? Response: Governor Daytons first executive order after taking office instructed me to apply for federal approval to adopt the option under the Affordable Care Act to provide Medicaid coverage for adults without children. CMS approved the state plan amendment on February 17, 2011. Medicaid is financed with appropriations from the state general fund, as well as Federal funds.

12. During the hearing, you stated that the Centers for Medicare and Medicaid Services (CMS) approved the rates Minnesota paid for its Medicaid managed care population. Does CMS approve Minnesotas Medicaid managed care rates every year? If not, please explain the process. Response: Yes. The Centers for Medicare and Medicaid Services (CMS) approves annual health plan contracts and rates for Minnesotas Medicaid program. 13. What information does Minnesota supply to CMS as part of CMSs rate approval process? Please provide all documents that Minnesota provided CMS when the state in 2011 applied for renewal of its 1115 waiver for its Medicaid managed care program. Response: DHS provides a detailed set of documentation to CMS for approval of its annual managed care organization (MCO) contracts and rates. DHS provides the contracts themselves, information on contract changes, information on compliance with federal managed care requirements, an explanation of the rate-setting methodology, actuarial documentation on rate development, the actuarial certification, and a spreadsheet of the statewide rates. Below is the documentation provided to CMS and attached actual examples from the submission for the CY2012 contracts. A cover letter explaining the reason for the submission (compliance with 42 CFR 438.806), and the DHS Quality Strategy. Model contracts, and scans of the actual executed contracts or amendments.
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An explanation of the basis for rate setting for each contract called the rates checklist. These documents include basic explanation of the relevant program, an overview of the risk contracting rate methodology, a projection of CMS cost for the upcoming contract year, and responses to specific questions such as how DHS makes actuarial adjustments to the base rate data (for example, to account for changes in benefits or legislated rate changes). This also includes the following supporting documentation included as attachments to the checklist. o actuarial certification o comparison of statewide rates from the previous year o memo from the actuaries regarding rate factors A document showing the changes from year to year in the contracts, and variations among the MCOs individual contracts or amendments, if any. In addition, DHS provides a courtesy copy of a crosswalk between each contract and its governing regulations, showing where in each contract the regulation is covered. A spreadsheet outlining all incentive payments made to the MCOs for the previous contract year.

Regarding all documents that Minnesota provided to CMS in its application for renewal of the PMAP+ waiver, please see attached.

14. During your testimony, you mentioned that the Dayton Administration implemented competitive bidding for public health insurance program contracts and the first round of competitive bidding was held last year. Did you provide potential bidders with historic encounter data so that an insurance company that had not previously participated could provide a well-based, competitive bid? Response: Health plans were provided a data book as part of the competitive bidding Request for Proposals in the Minneapolis/St. Paul seven-county metro area that was made available to all plans licensed to provide services in each county. This data book included historical health risk, aggregate expenditure data (e.g. by service category, large claim experience), and plan enrollment on recipients in managed care by county, program and eligibility group. This information was produced using historical encounter data submitted by health plans serving these populations. 15. Was last years bidding open to any and all managed care companies, including forprofit companies? Response: Non-profit health plans are required to submit proposals for state public health care programs as a condition licensure under Minnesota Statutes 62D.04 subdivision 5. All plans that previously participated in public health care programs in Minnesota submitted bids under the metro area competitive bidding process in 2011. Minnesota law requires all health maintenance organizations to be non-profit in accordance with Minnesota statutes 62D.03 as a condition of licensure.
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16. Are all the health insurance companies bids publicly available? Please provide a list of all the bids made by managed care companies last year for each of Minnesotas public health insurance programs. Response: Yes. Attached is a list of the bids received in response to Minnesotas 2012 competitive bidding procurement. This is the first time Minnesota has used competitive bidding, and bidding was for seven-county metro area including Minneapolis/St. Paul. The bids were specific to the Families and Children contract and include those non-disabled persons eligible for Medical Assistance under the age of 65 and all persons eligible for MinnesotaCare.

Sincerely,

Lucinda Jesson Commissioner Minnesota Department of Human Services

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