Call to Order and Roll Call
The 12th meeting of the Task Force on Medicaid Cost Containment was held on Thursday, December 2, 2010, at 10:00 AM, in Room 171 of the Capitol Annex. Representative Jimmie Lee, Chair, called the meeting to order 10:09 AM, and the secretary called the roll.
Present were:
Members: Senator Katie Kratz Stine, Co-Chair; Representative Jimmie Lee, Co-Chair; Senators Tom Buford, Julie Denton, Denise Harper Angel, Bob Leeper, and David L. Williams; Representatives Tom Burch, Rick Rand, Greg Stumbo, and Jill York.
Guests: Linda Sims for the KHDA/LTDHD; Mike Coppol; Julie McKee for the Department for Public Health, Kentucky Office of Health Policy, Cabinet for Health and Family Services; Jodi Mitchell for the Kentucky Voices for Health; Gene Huff for the CHI; Dayle Johnson and Eric T. Clark, Kentucky Association for Health Care Facilities; Bryce McGowan, KYNHR; and Marty White and Bill Doll for the Kentucky Medical Association.
LRC Staff: Miriam Fordham, Pam Thomas, Cindy Murray, Mike Clark, DeeAnn Mansfield, Frank Willey, Jonathan Smith, and Gina Rigsby.
Discussion of State Auditor’s Examination of the Passport Health Plan
Sharon Clark, Commissioner, and Bill Clark, Chief Financial Analyst, Department of Insurance (DOI), were present to respond to questions about the role of the DOI in regard to Passport Health Plan. Commissioner Clark stated that financial reports are submitted quarterly and annually from Passport, and the department will receive the 2010 statement in March 1, 2011. As of December 31, 2009, Passport had $91 million in capital and surplus funds respectively. Based on the risk-based capital models, Passport is only required to have a minimum of $57 million surplus funds, so no regulator action was taken by DOI.
In response to a question by Representative Lee, Commissioner Clark stated that the DOI is charged to review the reserves of the Medicaid managed care partnerships to verify the reserves meet statutory requirements; certify the license status of any risk-bearing entity designated by the partnerships; monitor quarterly and annual financial reports of the partnership to verify compliance with financial solvency requirements; work in cooperation with the Department for Medicaid Services (DMS) and exercise any authority DOI has to rehabilitate or to liquidate a partnership; and, if asked, provide financial technical assistance.
In response to questions by President Williams, Commissioner Clark stated that UHC/Passport is licensed as a health maintenance organization (HMO) in Kentucky. An HMO is a managed care entity and not a full health insurance company, but has a specific limited design. Humana, Anthem, United Healthcare of Kentucky, and Bluegrass Family Health are domestic health entities. Passport and the four other insurance companies file on the same format as all health entities, but the difference is Passport is a Medicaid-only line of business. Other entities could operate a similar business as UHC, and would have to file for a certificate of authority and undergo a review by the DOI.
In response to questions by President Williams, Commissioner Clark stated that the department utilizes a risk-based formula to measure the amount of appropriate capital for a reporting entity to support its overall business operations in consideration of its size and risk profile. KRS 304.3-080(2) outlines the DOI’s authority to investigate the professional experience, credentials, and background of all the directors, officers, and managers of any insurance company that is seeking admission to do business in the Commonwealth. When insurance companies make any changes in these positions, these changes also must be submitted to DOI for review. Surplus reserves ensure future policy benefits.
In response to questions by President Williams, Commissioner Clark stated that all health insurance companies use the same formula to determine capital and surplus funds needed on hand. Passport needs to have $57.4 million dollars on hand to make sure it remains solvent to address the risk assumed to do business in Kentucky as an HMO. If reserves fall below this amount, by statute it is considered a company action level and a corrective action plan would have to be submitted to the DOI explaining how it would correct the situation and get back above the reserve level.
In response to a question by President Williams, Commissioner Clark stated that the University Physicians Associates owns 51.35 percent of Passport; the Louisville Association/Jefferson County Primary Care Association, 10.4 percent; the University Medical Center, 12.53 percent; Jewish Hospital and St. Mary’s Healthcare; 12.86 percent; and Norton Healthcare, 12.86 percent. The University of Louisville is not one of the sponsors. As of the September 30, 2010, quarterly financial filing, UHC reported $207 million in total assets and $106.8 million in capital and surplus. If Passport fell below its reserves, there are two actions that could be taken. One is a company action where a company is ordered to increase its reserves, and if that does not take place, then there is a regulatory action where the DOI would step in and take control of the company. There is a guarantee fund for regular insurance companies, but not for HMOs. The IRS code for a non-profit organization is 501(c)(3).
In response to questions by President Williams, Commissioner Clark stated that statutory language states that the DOI either disapproves or does not disapprove transfers. Concerns by the DOI were expressed to Passport if a non-profit could distribute funds for indigent care and a legal opinion was provided from Passport. The Memorandum of Agreement between the Cabinet for Health Services, Department for Medicaid Services, and the Public Protection and Regulation Cabinet, Department of Insurance dated August 27, 1997 states that the DOI can, upon request, assist the DMS in its review and analysis of monthly, quarterly, and annual financial reports received by the DMS from the partnerships. In January 2010, the DMS requested information about the level of reserves and what would be appropriate for the DMS to require. After the review by DOI, the cabinet believed Passport had sufficient reserves for lower contract level negotiations.
In response to questions by Speaker Stumbo, Commissioner Clark stated that the DOI had performed the same financial analysis for Passport as it had done for other insurance companies. The department only looked at the reserves to make sure there was enough money to pay outstanding claims in the event the contract was terminated.
In response to questions by Senator Buford, Commissioner Clark stated that no one asked if the DMS suggested to UHC how to handle and distribute funds. The DOI approves rates for traditional health insurance companies, and the cabinet approves the rates for Passport.
In response to questions by Representative Lee, the DOI has no authority with any insurance company on the rates to providers. There is no mandate to have control over rate increases. One of the main missions of the DOI is ensure financial solvency of all insurance companies.
In response to questions by President Williams, Commissioner Clark stated that the DOI will track the $20 million to determine where it went. The money was not dedicated toward an account but dedicated for a purpose. Passport was scheduled for one of its five-year financial examination in 2011, but because of the schedule of the DOI examiners it has been moved up earlier.
In response to a question by Speaker Stumbo, Commissioner Clark stated that the DOI did not negotiate Passport’s contract. It only reviews claims to make sure reserves were adequate enough to pay claims if a contract had been cancelled.
Janie Miller, Secretary for the Cabinet for Health and Family Services, stated that since early 2008, the DMS had increased its financial analysis of Passport. For rate years starting in July 2008 through the most recent negotiation, the department utilized all information available to ascertain Passport’s financial information necessary to evaluate the cost of Passport relative to the costs of the same services for the same eligible categories in the balance of the state. The department did review and pull from the financial statements information regarding reserves, net underwriting gains and losses, changes in investments, and their total adjusted capital. There were discussions with Passport officials about excess reserves above and beyond what the required level of capital and surplus was. An analysis of Passport’s reserves reveals that Passport’s solvency, as defined by total capital and surplus, grew significantly between 2004 and 2007 from $43.8 million to $88.4 million. Passport showed significant net profits from both its underwriting operations and from investments with net income reported as $11.5 million, $7.3 million, $15.4 million, and $20.5 million in net income gains from 2004, 2005, 2006, and 2007 respectively. The cabinet negotiated a lower capitation rate increase in lieu of per capita payments to the extent that Passport would agree to continue with its program. The history of rate increases shows that rate increases relative to the increase in the per capita rates have been held to 3.1 percent, 3.1 percent, and 0 percent for the last three rate periods, averaging slightly over 2 percent per year. Currently, the value of a one percent increase is approximately $8 million. In the 2010 Regular Session, there were a number of budget bill provisions passed that would either give Passport special benefits or tie the cabinet’s hands with regard to dealing with Passport, but Governor Beshear vetoed the measures. Every dollar of taxpayer money spent by Passport must be necessary for the administration of Medicaid benefits for the recipients in the Passport area.
The cabinet agrees with the Auditor of Public Accounts that it relies on contract performance monitoring and independent financial audits conducted by Passport’s audit firms. The resources allocated to administering the DMS have been extremely limited for several years. Approximately two percent of total Medicaid funding has been allocated to administration. The short tenure of Medicaid commissioners during the prior four years has created a challenging environment for creating experience, knowledge, stability, and capacity for the Medicaid program analysis and development. Another major factor that has affected all of state government is the loss of historical, long-term institutional program knowledge and expertise, largely due to the retirement window available to employees at the end of calendar year 2008. The cabinet has experienced eight separate rounds of budget reductions that have exacerbated the shortage of experience and expertise at all levels of state government. In addition, The Michele P. lawsuit, programmatic challenges at Oakwood, and a backlog of hospital and other provider rate appeals have consumed an inordinate amount of administrative and management time that could have been directed to other program management issues. The cabinet canceled some contracts for functions that did not sufficiently add to the effective administration of the Medicaid program. Some functions that had previously been contracted to outside vendors were successfully returned to the department and have proven to be more cost efficient and effective.
The cabinet has restored the program integrity function in the department, and restored the relationship between the cabinet and the Office of the Attorney General’s Medicaid Fraud and Control Unit in order to more aggressively pursue detection and prosecution of waste, fraud, and abuse. The cabinet is working with the U.S. Attorney’s Office to take advantage of the tools available under the federal law for the prosecution of egregious instances of health care fraud. The cabinet is establishing a Managed Care Contract Oversight Unit to oversee Passport’s implementation of the Corrective Action Plan and the development of the scope of the financial audit in conjunction with the Auditor of Public Accounts’ office. The unit will be enlarged as needed in conjunction with the release and issuance of the Requests for Information (RFI) and forthcoming Requests for Proposals (RFP) and managed care contracts.
The 11-point Corrective Action Plan outlines the steps that Passport must take to come into compliance and address the structural issues with governance, management, and oversight. The UHC Board of Directors has appointed a new interim CEO. In conjunction with the Auditor of Public Account’s office, the cabinet will develop the scope of work for the full financial audit of Passport and its subcontractors.
In response to a question by Representative Lee, Secretary Miller stated that in the 11-point Corrective Action Plan, the cabinet will conduct a financial and programmatic audit done by an accounting firm to assure that the expenses in the general ledger are being matched appropriately to financial statements and determine how the money is being spent. The purpose of the audit is to assure that the funding and expenditures are necessary to the support of the program to provide services to Medicaid beneficiaries. The cabinet will hire an independent entity that has the qualification and abilities to do a cost effectiveness analysis. The entity would have to develop the approach, the methodology, and then do the analysis. The time frame for the completion of the cost effective analysis would hopefully be four to five months.
In response to questions by Representative Lee, Secretary Miller stated that the cabinet wants management of the patients’ needs and services and medical conditions in such a way that the it is willing to make the investment of the right things at the right time to drive down the cost to get the outcomes and improve health outcomes.
In response to a question by Senator Harper Angel, Secretary Miller stated that the two-fold problem that needs to be addressed is the level of reserves and how to negotiate rates to assure the net income at the end of the year does not grow and add to the capital surplus and reserve level for the next year.
In response to questions by Representative Burch, Secretary Miller stated that the rate increases to Passport were not for services in additional counties. In 2006, adjustments were made in rates because of the passage of the Part D Medicare drug program. Passport has an aggressive formulary making sure generic products are used to lower costs, and they pay a lower dispensing fee. Over the past 13 years, fee-for-service has significantly improved its supplemental rebates. The cost per member for pharmacy services is not very different for the managed care and fee-for-service models. The savings are achieved in different ways.
In response to questions by Representative Burch, Secretary Miller stated that the Medicaid program has access to a beneficiary’s medical information after a point of service transaction. An RFI has been issued for pharmacy management that will address many issues under the pharmacy benefits program. Another cost savings initiative announced was related to making sure a prescriber was enrolled in the Medicaid program that should address the doctor-shopping issue.
In response to questions by Senator Denton, Secretary Miller stated that an independent firm that has actuarial and health care expertise and qualification would develop an approach on how to go back and do the cost effectiveness analysis. The cabinet has some basic activities for provider education for drug management.
In response to questions by President Williams, Secretary Miller stated that the first 3.1 percent rate increase was negotiated before the first $10.5 million dollar distribution to return the initial capital contributions of the original investors in November 2008. The second $10 million distribution was made in December 2008. In 2010 when the DMS was uncertain about the distributions, she contacted Commissioner Clark who told her to file an open records request to get the information. Two of the distributions were reported on the financial statement under medical and hospital expenditures and were not disclosed anywhere as distributions for indigent care. The two distributions were found when the actuary reconciled the medical expenditures that were showing on the medical and hospital expense line on the financial statement with the actual encounter data supplied by the plan and noticed a difference. The information was found when Price Waterhouse was preparing the databook for the last rate negotiation. The cabinet has agreed to hire an outside independent agency to prepare a cost effectiveness analysis to compare what the fee-for-service costs would be in the Passport region if Passport did not exist. The cabinet has extensive data on the costs of fee-for-services and the cost of Passport services that could be used in the cost effectiveness analysis.
In response to questions by Speaker Stumbo, Secretary Miller stated that with limited information, it would be hard to say why a rate increase is needed. In the negotiation process, the cabinet and the entity both do the best job to negotiate what is best for each of them. Speaker Stumbo stated that in contract negotiations, the cabinet needs historical data to determine the reasons for a rate increase.
Speaker Stumbo recommended that there needs to be a state Medicaid False Claims Act that would address Medicaid fraud abuse. A motion to accept the recommendation was made by Speaker Stumbo, seconded by Representative Rand, and accepted by voice vote.
President Williams recommended that task force members submit their findings or recommendations to the co-chairs for accumulation of a draft final report to be circulated to members and when a sufficient amount of yeas have been obtained, it be filed as the final report of the task force without the necessity of incurring the cost of an additional meeting. A motion to accept the recommendation was made by President Williams, seconded by Speaker Stumbo, and accepted by voice vote.
A motion to request the Legislative Research Commission, upon the request of the co-chairs, the authority to take depositions to be submitted as part of the record was made by President Williams, seconded by Speaker Stumbo, and approved by voice vote.
Representative Lee made a motion to take the task force recommendations and allow the Medicaid Oversight and Advisory Committee to consider the recommendations and continue discussions in future committee meetings.
There being no further business, a motion to adjourn at 1:11 p.m. was made by Representative York, seconded by Speaker Stumbo, and approved by voice vote.