Joint Meeting

Medicaid Oversight and Advisory Committee

Medicaid Cost Containment Task Force


<MeetMDY1> December 1, 2010


Call to Order and Roll Call

A joint meeting of the Task Force on Medicaid Cost Containment and the Medicaid Oversight and Advisory Committee was held on<Day> Wednesday,<MeetMDY2> December 1, 2010, at<MeetTime> 10:00 AM, in<Room> Room 171 of the Capitol Annex. Senator Katie Kratz Stine, Co-Chair, called the meeting to order at 10:10 AM, and the secretary called the roll.


Present were:


Members:<Members> Senator Katie Kratz Stine, Co-Chair; Representative Jimmie Lee, Co-Chair; Senators Tom Buford, Denise Harper Angel, Bob Leeper, Dan Seum, and David L. Williams; Representatives Tom Burch, Bob DeWeese, Joni Jenkins, Rick Rand, Greg Stumbo, and Jill York.


Guest Legislators: Senator Tim Shaughnessy and Representative John Will Stacy.


Guests: Crit Luallen, Auditor of Public Accounts; Brian Lykins, Office of the Auditor of Public Accounts; Eric T. Clark and Wayne Johnson for the Kentucky Association of Health Care Facilities; John Cooper for the Kentucky Medical Association; Bryce McGowan, KYNHN; Linda Sims, LTDHD/KHDA; and Mary Sparra, CSE.


LRC Staff: Miriam Fordham, Pam Thomas, Cindy Murray, Mike Clark, DeeAnn Mansfield, Frank Willey, Jonathan Scott, and Gina Rigsby.


Approval of Minutes

The minutes of the November 15, 2010 and November 16, 2010 meetings of the Medicaid Cost Containment Task Force were approved without objection by the members of the Medicaid Cost Containment Task Force.


Discussion of State Auditorís Examination of the Passport Health Plan

Auditor Luallen stated the Examination of Certain Policies, Procedures, Controls, and Financial Activity of University Health Care, Inc. (UHC), dba Passport Health Plan, and its Affiliation with the University of Louisville and the Cabinet for Health and Family Services was released November 9, 2010. Passport holds the stateís largest contract at $793 million for the current year. The exam calls for more accountability and transparency in the management and oversight of the Medicaid managed-care provider. The report identifies 20 findings and offers 85 recommendations to strengthen the management, oversight, and the transparency of Passport to provide consistent good stewardship over Medicaid funds. The scope of the examination encompassed records and information for the period January 1, 2007 through December 31, 2009, unless otherwise specified. The objectives developed the Auditory of Public Accounts (APA) for this examination included: review controls and organizational oversight; determine the appropriateness of capital and other significant distributions by UHC; determine the comparability of Passport Health Plan costs to other Medicaid fee-for-service costs; determine whether actual cost savings could be attributed to UHC; determine whether expenditures support the mission of Passport Health Plan; determine whether conflicts of interest exist; and report findings and recommendations related to these and other matters identified in the examination.


Passport was created for the purpose of offering Medicaid services to beneficiaries in 16 counties for 164,000 poor and disabled beneficiaries residing in Breckinridge, Bullitt, Carroll, Grayson, Hardin, Henry, Jefferson, LaRue, Marion, Meade, Nelson, Oldham, Shelby, Spencer, Trimble, and Washington Counties. Passport has been ranked among the best Medicaid plans in the nation based on access to care, overall member satisfaction, prevention services, and treatment. The exam by the Auditorís Office did not address the quality or delivery of medical services in the national ranking.


The Auditorís Office examined issues concerning certain financial activity of Passport. The exam recommends Passportís policies regarding expenditures and cash distributions should be consistent with the original goal of controlling growth in Medicaid costs. Passport exceeded its state-required cash reserves for each of the three years reviewed. At the end of 2009, Passport had approximately $77 million of excess reserves over the amount insurance regulators require, even after a distribution of $30 million to the original investors. The exam questions whether these $30 million in distributions are in compliance with Kentucky law and the IRS tax code related to non-profits, and whether they were properly communicated to the Department for Medicaid Services. The exam recommends Passport seek an opinion from the Kentucky Office of Attorney General and or the IRS on these distributions.


As Passportís excess revenues grew, it increased spending on lobbying, public relations, travel and salaries, and provided financial benefits that favored its original investors over other area providers. Passport spent nearly $14 million on consulting and outsourced services, including $1 million for lobbying and public relations. The Auditorís Office found that staff travel costs, primarily for two UHC executives, for the three years reviewed totaled approximately $230,000. Approximately $73,000 was spent on meals; $242,000 was given to AmeriHealth Mercy employees as anniversary bonuses; $423,000 was contributed to local sponsorships; and $250,000 was spent on memberships to various organizations. The executive vice-presidentís average annual income for the three years reviewed was $285,000, including salary and bonuses from UHC and the University of Louisville. The executive vice-president received compensation as a partner in the consulting firm that received more than $354,000 from AmeriHealth Mercy for consulting services, and were cited as a conflict of interest. The exam recommends the board strengthen oversight of spending.


Auditors found that the governing board of Passport is incorrectly structured based on federal guidelines and recommends restructuring the board to have equitable regional representation by all providers and significant beneficiaries.


In addition to the report findings and recommendations, Chapter 2 of the report discusses the concept of budget neutrality, including the Section 1115 federal Medicaid demonstration waiver. The Kentucky Health Care Partnership Demonstration in Region 3 was implemented on November 1, 1997, by UHC, dba Passport Health Plan, a sole-source, non-competitive managed care provider. Passport is the only model of its type without competition that exists in the nation. The initial capitalization for Passport was provided by the University of Louisville Medical School Practice Association (now known as University Physicians Associates); the University Medical Center, dba University of Louisville Hospital; Jewish Hospital Healthcare Services (now Jewish Hospital and St. Maryís Healthcare); the Alliant Health System (now Norton Healthcare); and the Louisville and Jefferson County Primary Care Association. The total capitalization investment in UHC of all contributors was $10.5 million, which was returned to the original investors in December 2008. UHC is a nonprofit corporation managed by a Board of Directors which represents the original five investors in Passport Health Plan. Additionally, a Partnership Council representing both public and private providers has authority for health care oversight and guidance for the Passport Health Plan.


The Cabinet for Health and Family Services pays Passport a monthly, per member capitation payment, whether or not a member receives services during the period covered by the payment. Since approximately 86 percent of its funding is derived and expended are from state funds, Passport is considered to be a public agency. UHC contracts with AmeriHealth Mercy Health Plan as its third party administrator to perform the day-to-day functions for the operation of Passport. AmeriHealth Mercy earns incentives if it meets, in whole or in part, one or more of the operational goals and meets at least 75 percent of the quality goals set by UHC/Passport Health Plan.


Budget neutrality requires that federal expenditures for Medicaid services allowed under a waiver program not be greater than a cost ceiling projected by the Centers for Medicare and Medicaid Services (CMS) based on historical trends. The actual cost of the program must be less than the calculated maximum cost, or ceiling, in order to be deemed budget neutral. For a Medicaid waiver program to be considered budget neutral, the state must illustrate over the life of the waiver program that the program, Passport Health Plan, will not be expected to cost the federal government more than the maximum ceiling it projects. Kentucky is at risk for repayment of federal dollars if the CMS imposed budget neutrality limits are exceeded by Passport. Therefore, the Department for Medicaid Services (DMS) monitors budget neutrality on a regular basis to ascertain that, for the waiver period, Passport is budget neutral, according to the definition of budget neutral. To gain a true analysis that will determine whether there are actual savings for the Commonwealth, the Auditorís Office recommended a detailed study that compares costs in every category and evaluates what it would cost the state under a fee-for-service model to perform the same functions in that region. The cabinet has agreed in their response to the report to contract for such an analysis.


Recommendations were also made for the Department for Medicaid Services to strengthen contract negotiations with Passport. Specifically, the department needs to analyze more detailed financial information, including the levels of reserves, and evaluate cost comparisons before the final contract rate is negotiated. Passport plays such a vital role in the lives of many Kentuckians, that it is imperative that it use state and federal Medicaid funds in an equitable, appropriate, and transparent manner. Any cost savings generated by the program should take the form of lower costs to the state or additional services for the beneficiaries. The report does not express an opinion on the viability of a managed care model for delivery of Medicaid services; but a managed care approach can prove to be an effective method for controlling growth in Medicaid costs. If the state is going to continue to use this model and consider additional managed care approaches, it is critical that there is strong accountability and oversight of these public funds.


Both the UHC and the Department for Medicaid Services have responded to the audit and their responses are included in the report. A meeting has been scheduled for December 7 to discuss a corrective action plan for Passport being developed by the cabinet. Passport officials indicate their willingness to consider the auditís recommendations. State officials commit to strengthen oversight and contract negotiations as recommended in the audit. The Auditorís Office will be involved as the cabinet initiates additional audits of Passport and its subcontractors.


In response to a question by President Williams, Auditor Luallen stated that information was given to the Auditorís Office by several sources that helped developed the scope necessary to answer questions raised about Passport. The controls and organizational oversight was looked at and looked specifically at the distribution of capital issue and to see if there was an easy way to compare Passportís costs to other fee-for-service cost. The only question that could not be answered without additional work would have been a more detailed cost analysis, but a recommendation was made. Examination procedures included the review of thousands of pages of documents and interviews of Passport Health Plan executive staff members, the secretary and DMS staff of the Cabinet for Health and Family Services, providers, hospital administrators, current and previous Passport board members, trying to find the best documented way to answer all the questions that had been raised.


In response to a question by Senator Stine, Auditor Luallen stated that the exam did not compare the Passport model with the cost for a fee-for-service model. It would be difficult to compare Passport with a fee-for-service model because it does not conduct business like the rest of the state.


In response to a question by Senator Stine, Auditor Luallen stated that a letter had been sent to the General Assembly from the cabinet that stated it costs more for Passport than it did in the rest of the state. What it did not point out is what it would cost to perform the same services that Passport is serving in its region. There is a detailed section in the audit about the question of how to define budget neutrality and how it can meet the federal guidelines and still cost more. The cabinet has agreed to contract with an independent contractor to do a detailed cost analysis. It is difficult to compare Passport with the rest of the state, because it does not provide services like the rest of the state. An analysis needed to be done to show what it would cost the state to provide the same services as Passport in the same region under a fee-for-service model. A consultant with expertise in analyzing health care data who has actuaries available during the process to look at every detail of exactly what Passport is providing and analyze every area of its cost and then compare that to what it would cost the state in the same region to perform the same service.


In response to a question by President Williams, Auditor Luallen stated that Kentucky had to apply for a waiver to perform services different from the fee-for-service delivery of Medicaid services. A baseline and growth level established under federal guidelines would be allowed. As the Passport contract and revenues grew, there was not an adjustment in terms of having a stronger level of compliance and oversight to see exactly how the money was being spent because that is not how the model started.


In response to questions by President Williams, Auditor Luallen stated that the original investors, who put up the money assume the risks if cost exceeds the capitated payments. It was appropriate to return the $10 million original investment to the original investors. The contract states that Passport has to contact the cabinet 30 days before the distribution of funds. The problem with the next $20 distribution was they were labeled indigent care grants and given back to the original investors in the same proportion as the same original investment, not based upon how much indigent care that was provided. There was no formal process for determining how the money replaced indigent care expenses, it just went back into the general fund. Documentation was provided that said that each of the entities had spent at least that much on indigent care. The problem was not so much that the funds were labeled indigent care as much as the minutes show the there was a discussion about the need to distribute the money to improve their negotiating position with the state. Passport sought legal counsel on how to appropriately distribute the money. Indigent care costs are not part of the investorsí responsibility for providing Medicaid services, because all the entities have indigent care costs that are absorbed in normal operations. There is not enough attention given by the Passport governance or the cabinet to ensure that the state is getting every possible dollar to be used on Medicaid services. Passport is a non-profit entity formed for the sole purpose of providing services for the poor and disabled, but they have developed a culture that is more like a for-profit vendor. Passport should be considered a public agency and should be held accountable to the taxpayers. Even though the original investors are non-profit entities, they have varying sources of revenues. Passport exists solely based a contract of state and federal funds.


In response to questions by President Williams, Auditor Luallen stated that the governing authority for UHC did not have regional representation in the conduct of the financial administration of Passport. UHC, through its board, is responsible for all financial decisions of Passport Health Plan, while the Partnership Councilís role is defined as primarily to provide guidance and oversight to the operational aspects of the third-party providers. This is the first time the state has ever contracted with a non-profit group of providers, but they were not performing and leading the organization with the responsibility back to the taxpayer. In her opinion, she feels the Passport staff and the board felt their responsibility was to the original investors more than the taxpayers.


In response to a question by President Williams, Auditor Luallen stated that the cabinet makes sure it is in compliance with federal guidelines on budget neutrality and looking at data related to delivery of service. The cabinet agrees it should have done a better job monitoring the activities of Passport and are working on implementing the recommendations in the report. Hopefully, the report will help the cabinet on how to build in the proper financial analysis, cost comparisons, accountability, and contract compliance when negotiating other managed care contracts.


In response to a question by President Williams, Auditor Luallen stated that other private companies who provide these services understand and know how to enter into a contractual relationship and hold up their end of the bargain, because the company knows it will be monitored by the state. Passport did not think they should be accountable as if it was a public agency.


In response to a question by President Williams, Auditor Luallen stated that AmeriHealth Mercy was awarded the third-party administrator without any competitive bidding. The cabinet will seek audits of all vendors, including AmeriHealth Mercy.


In response to a question by President Williams, Auditor Luallen stated that anyone conducting business with the executive or legislative branches should register as lobbyists. Passport had two employees who were registered as lobbyists and had 11 contract lobbyists and the audit shows that this was excessive. Passport used Medicaid funds intended for the health care for the poor and disabled to hire contract lobbyists to enhance its position with the legislative and executive branches.


In response to a question by President Williams, Auditor Luallen stated that Passport is a public entity because it receives 100 percent state funds. If a private entity enters into a contract and performs services only for the Commonwealth, it should be held accountable on how it spends the money. She agreed that Passport went outside of its mission and the cabinet was not set up to find or utilize the information to appropriately negotiate with this vendor.


In response to a question by Senator Stine, Auditor Luallen stated that all cabinets should have detailed financial analysis, oversight, and accountability for all entities that have contracts with the state. Senator Stine referenced a draft report, Medicaid Management and Program Integrity: Update on Recommendations From Three Program Review Reports, prepared by the Program Review and Investigations Committee staff of the Legislative Research Commission, that contains a detailed follow-up describing the status of the recommendations and provides current findings. Anything that can be put in legislation that ensures that any cabinet negotiating on behalf of the state needs to have a detailed cost analysis to ensure the best deal possible. Once the contract has been negotiated, there needs to be proper reporting and oversight. If the state is going to contract out more services, it has to do a better job of building in more levels of accountability, and the only way to do it is to have accurate detailed financial information.


In response to a question by Representative Burch, Auditor Luallen stated that in order to have better management, oversight, and accountability of programs, people with the best expertise are needed.


In response to questions by Speaker Stumbo, Auditor Luallen stated that after six years of operations, Passport started to have excess revenues. Speaker Stumbo asked staff to prepare a year-by-year timeline of what transpired at the cabinet that allowed Passport to accumulate excess revenues and information on what hampered the cabinetís ability to oversee Passportís contract. Auditor Luallen stated that there needs to be a comparable chart of rate increases being awarded at the same period of time. In the contract negotiations, the state gives a percentage increase for the capitated rates. During the recession, approximately 3,000 new recipients have been added to the Medicaid rolls monthly. There have to be economies of scale. If one just keeps adding more people and getting exactly the same amount of money no matter how many people are added, it needs to be looked at to see if that is one reason Passport began to accumulate so much excess money. Passport receives money for all 164,000 recipients, and it is their job to manage the population. Not enough analysis is being done before negotiations to see if there is a better way to do that. She questioned whether Passport should be allowed to accumulate more money as they add more beneficiaries without looking at the underlining costs of the new recipients.


In response to questions by Senator Stine, Auditor Luallen stated that the Department of Insurance (DOI) determines the level of reserves that should be maintained by an insurance company based on population and the risk of caring for that population. Currently, $88 million is required for reserves. At the end of 2009, Passport had $77 million above the required reserves even after the $30 million distributions. The primary concern of the Department of Insurance is to ensure there are adequate reserves.



In response to questions by Senator Buford, Auditor Luallen stated that UHC/Passport is required to submit to DOI an annual statement that contains significant details on the financial operations which include detailed reserve calculations. The Department of Insurance monitors Passport as an insurance provider. Mr. Lykins stated that the actuarial process will identify expenditures not directly related to providing health care services and eliminate the expenditures to look at the actual cost of providing the service and determine if the rate structure is adequate to support expenditures and have adequate reserves. It is the cabinetís responsibility to design and monitor the contract and hold the vendor accountable, not the DOI.


In response to a question by Senator Buford, Auditor Luallen said the financial information provided to the cabinet did not have a breakout of the amount of reserves, but this information was provided to DOI. The cabinet then requested more information from DOI about the reserve levels.


In response to questions by Senator Leeper, Auditor Luallen stated that the first disbursement was the $10 million return of capital investment in 2008, and the second and third disbursements of $10 million each were made in 2008 and 2009. Before the first distribution of funds, Dr. Cook and Secretary Miller discussed the amount of the reserves, and how it would be on the cabinetís mind during negotiations. Her understanding is there was no discussion about how Passport should spend the money. The audit points out that if there are cost savings of that magnitude, it should either accrue back to the state or take the form of new services to the recipients. The cabinet is very aware they need stronger oversight and more accountability. In a previous administration, the current executive vice president at Passport was the commissioner of the Department for Medicaid Services, and the influence this group had affected their relationships with both the legislative and executive branches. Medicaid is the toughest challenge in the state, and it is critical that Secretary Miller has the right expertise around her to implement the necessary things that need to be done. The administration recognizes it has to try some new innovative approaches and initiatives to save money.


In response to a question by President Williams, auditor Luallen stated that Medicaid funding provided to and by Passport for graduate medical education (GME) lacked proper documentation to demonstrate whether the Medicaid funds Passport received for GME were actually paid to eligible hospitals for GME, whether they were used for GME purposes, and whether they were excessive. Mr. Lykins stated there should be a consistent approach to the GME calculation, and if there are other supplemental payments made to entities, a process would be followed to make sure that the calculation and payment of the supplemental payments would be transparent. During the 2010-2011 negotiation process, UHC officials requested over $30 million for GME to be included in the per member capitated rate, but did not provide to DMS cost report data or calculations to support their request. Documentation made it appear the funding provided in the contract for Intensity Operating Allowance and the Urban Trauma Center may have been duplicated in the capitated rate.


In response to questions by President Williams, Auditor Luallen stated that the audit takes issue with the $1.2 million expenditures for salaries, lobbyists, and memberships and the $20 million distributions. The broader concern is if Passport receives too much money. There needs to be stronger oversight from both the state and the governance body of the organization to make sure they are fulfilling the original mission of controlling costs in Medicaid. The audit did not recommend specific outcomes but that Passport needed to have more accountability and stronger governance. Also, the cabinet needs to have better information and negotiate on behalf of the taxpayers from a stronger position. The audit does not question whether distributing the $20 million for indigent care was the wrong thing to do, but having the extra $20 million and looking for a way to spend it says the cabinet should make sure it holds Passport accountable and negotiate the best contract on behalf of the taxpayer. Passport has to share in the responsibility for the problem and recognize they are accountable for public money.


Senator Buford requested that the DOI provide the last three years of financial statements from Passport and DOI recommendations and analysis done on statements.


In response to questions by Senator Stine, Auditor Luallen stated that the databook used during the contract negotiation between an entity and the cabinet is the compilation of all the information related to their utilization, delivery of medical services, everything that comprises the bulk of what they perform under the contract and the delivery of care. Price Waterhouse removed the $30 million distributions in the actuarial analysis provided to the cabinet before negotiations with Passport.


In response to comments by Senator Shaughnessy, Auditor Luallen stated that there were some in-kind contributions from some of the original investors. There was no specific information related to the safety net program or the medical education program that is different from the GME.


There being no further business, the meeting was adjourned at 12:12 p.m.