Freedom Echoing: A legislative fix for health care?

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by Kip Sullivan JD

This is a long one covering managed care and value-based care healthcare in Minnesota. The topic being why it hasn’t worked. It is worth the read. Angry Bear has covered Kip’s message on healthcare in an effort to show why healthcare costs are out of control.

“The commission recommends the new state program control health care costs through managed-care organizations, such as HMOs and PPOs, the types of health plans that have proven most efficient in providing and insuring health care…. [They] will … lower costs for the state.”

Except HMOs and PPOs did not “lower costs for the state” of Minnesota.

Fifty years of attempting to introduce healthcare to Minnesota through the use of HMOs.

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For over 50 years, Minnesota’s method of containing health care costs has not changed. Beginning with the Health Maintenance Act of 1973, we have relied on one iteration or another of the tactics pioneered by HMOs, including exposing doctors to financial incentives to reduce services, robbing doctors of their autonomy by imposing prior authorization and other forms of micromanagement, and limiting patient choice of provider. These tactics, known collectively as managed care since 1985 and more recently as value-based payment, have not worked. In fact, they have backfired. The managed-care approach to cost containment drove prices up by driving up administrative costs and triggering massive consolidation of our health care system. That was a lethal combination: Consolidation made it easier for the dwindling number of insurers and providers to pass on their rising administrative costs in the form of higher prices.

The combined effect of rising administrative costs and consolidation drove Minnesota’s per capita health care costs up from approximately even with the national average during the 1980s and early 1990s to 10% above over a short time period, 1994 to 2000. According to the latest report by the Office of the Actuary within the Centers for Medicare and Medicaid Services (CMS), Minnesota’s per capita spending has remained about 10 % above the national average ever since (with the exception of a dip in the COVID year 2020).

As the Minnesota Business Partnership put it in its 2015 Minnesota’s Health Care Performance Scorecard, “Overall, Minnesota spends more per capita than the national average, ranking 36th in a 2009 study conducted by CMS….”

Despite this miserable track record, the Minnesota legislature and the six health care commissions it has appointed that have met since 1989 have refused to subject our managed-care approach to anything resembling a rigorous evaluation. This happy-go-lucky remark by the Minnesota Health Care Commission in its January 1991 Final Report to the Legislature illustrates the disdain for evidence exhibited by Minnesota policymakers over the last half century: “The commission recommends the new state program control health care costs through managed-care organizations, such as HMOs and PPOs, the types of health plans that have proven most efficient in providing and insuring health care…. [They] will … lower costs for the state.” The commission offered not a single footnote, not a shred of evidence, for those glowing remarks about HMOs and PPOs. Neither of those sentences was accurate. HMOs and PPOs did not “lower costs for the state.”

That Old-Time Religion

During the 2023 session, the legislature enacted a half-dozen bills that suggest the legislature may at long last be willing to inquire why the state’s cost-containment strategy has failed. Instead of appointing yet another commission to recommend yet another iteration of managed-care ideology, the legislature enacted SF 2995, a bill that authorized the Minnesota Department of Health (MDH) and other state agencies to submit reports to the legislature over the next two years that analyze the most important issues raised by the failure of the managed-care strategy. SF 2995 does not explicitly concede that managed care has failed, and some provisions in the new law even endorse warmed over managed care. But if the reports commissioned by SF 2995 are based on evidence, they should provoke an honest evaluation of Minnesota’s 50-year reliance on managed-care ideology.

This ideology has two parts: (1) an evidence-free diagnosis of health care inflation; (2) an evidence-free solution that doesn’t address the causes of inflation but does have toxic side effects. The managed-care diagnosis has always consisted of two evidence-free assumptions: Minnesota’s high health care costs are due to excessive volume of medical services, not excessive prices for those services, and the cause of the alleged overuse is the fee-for-service method of paying doctors. This was the diagnosis peddled successfully by Minnesota physician Paul Ellwood, “father of the HMO,” to Fortune 500 companies headquartered in the Twin Cities, to Congress, and to the Minnesota legislature in the early 1970s, and to the Al Quie administration in the early 1980s to induce the old Department of Public Welfare to start turning Medical Assistance enrollees over to HMOs.

Price times quantity yields total spending in any sector of the economy, including health care. If you buy the managed-care diagnosis that excessive quantity, not excessive price, in that equation is the inflationary factor that must be addressed, and if you buy the argument that excessive quantity is caused by fee-for-service, your mind is primed to accept the evidence-free Ellwood solution: Minnesota should reduce the quantity of services by encouraging the spread of HMOs and PPOs. HMOs and PPOs, which according to their advocates, would reduce volume by subjecting doctors to prior authorization and other forms of micromanagement, replacing fee-for-service with capitation and other forms of payment that shift risk onto doctors, and, to make those first two tactics work, limiting patient choice of provider. And when HMOs and PPOs don’t work and you still cling to the excess-quantity-caused-by-fee-for-service diagnosis, you’re vulnerable to accepting endless iterations of managed care, including integrated service networks (the euphemism for HMO adopted by the legislature in 1993), accountable care organizations aka integrated health partnerships, health care homes, baskets of care, and report cards. Conversely, your mind is not primed to inquire what role soaring prices and consolidation are playing in driving up health care costs.

The limited research available on Minnesota’s above-average health care costs indicates they are high because our prices are high, not because we use services more often. For example, MDH reported in 2003, “[U]tilization of services in the state is below the national median,” and the Star Tribune reported “Minnesota has the fifth-highest average prices overall.” MDH and the other agencies responsible for the studies commissioned by the 2023 legislature should make a good faith effort to review existing research on the role of excessive prices versus excessive quantity as causes of Minnesota’s high costs and report their findings. If the studies commissioned by SF 2995 are based on evidence, not opinion, and if they include thorough analyses of the most important issues – the role of excessive price versus excessive volume, Minnesota’s per capita expenditures versus the rest of the country; managed care’s net impact on cost and quality; and the role of administrative costs and consolidation in driving up Minnesota’s costs — those studies should provoke a thorough and well-informed debate about why the managed-care diagnosis and solution failed and what to do about it.

Two Reports Due by January 15, 2026

Of the reports commissioned by SF 2995, the two that should provoke the most thorough and critical appraisals of Minnesota’s 50-year experiment with managed care are a report from MDH on the Minnesota Health Plan (a single-payer bill) and a report from the Department of Human Services (DHS) on direct payment of clinics and hospitals that treat MinnesotaCare and Medical Assistance enrollees (in other words, removal of the HMOs from those programs). In the case of the Minnesota Health Plan study, MDH must compare total spending and numerous other outcomes under the proposal known as the Minnesota Health Plan, proposed in the 93rd Minnesota Legislature as Senate File No. 2740/House File No. 2798 with those under the current multiple-payer system. In the case of the direct payment study, DHS must calculate the projected cost of a direct payment system relative to the cost of the current system. Both reports must be submitted to the House and Senate health policy committees by January 15, 2026. 

The Minnesota Health Plan and direct payment reports will require the agencies that write them, and eventually the legislature, to review both components of managed-care ideology – the assumption that excessive quantity, not excessive prices, explains high U.S. and Minnesota health care costs, and the assumption that managed-care tools (financial incentives, prior authorization, and so forth) can eliminate the alleged overuse without driving up administrative costs, provoking consolidation, harming patients, and burning out doctors.

For example, to write the direct payment study, DHS will have to make an accurate estimate of the savings Minnesota could achieve in the form of reduced administrative costs at all levels (DHS, HMO, provider) if HMOs were removed from the MinnesotaCare and Medical Assistance programs, as well as the savings from reduced utilization of medical services HMOs achieve using their managed-care methods. The added administrative costs minus the savings due to reduced use of medical services will yield the net impact of HMOs on total spending. The research on the administrative costs that insurance companies add to both the Medicare and Medicaid programs indicates insurance companies divert about 15% of their revenues to administrative costs (marketing, setting up networks, micromanaging doctors) and profit. We have virtually no reliable data on the extent to which HMOs reduce expenditures by reducing utilization; 5% is a reasonable estimate according to several experts. Assuming that DHS’s administrative costs didn’t rise after privatization, and ignoring the increase in provider administrative costs managed care causes, these numbers indicate privatization raised MinnesotaCare and Medical Assistance costs by 10% (15% overhead minus 5% for reduced utilization) and that deprivatization should cut spending by about 10%.

Limited research also indicates all that extra spending on HMO overhead did not improve the quality of care enjoyed by MinnesotaCare and Medical Assistance enrollees, and may have worsened it for many by denying necessary services. Half of the 5% HMOs and PPOs save by cutting services is probably due to denied necessary services. Experts who testified at the House Health Policy and Finance Committee hearing on December 1, 2023, said the evidence is mixed. That’s also how the Medicare Payment Advisory Commission and other experts characterize the impact of the Medicare Advantage program on quality of care. If DHS’s final report on direct payment concludes that privatization raised spending by 10% or thereabouts with no measurable improvement in quality of care and possibly a decline in quality of care, that would be compelling evidence that Minnesota’s reliance on managed-care ideology was a mistake.

MDH’s report on the Minnesota Health Plan should have a similar impact if the study is based on evidence. Dozens of studies have concluded that single-payer systems cut costs substantially, not by denying services, but primarily by reducing administrative costs, both for the insuring and the provider sectors, and secondarily by reducing drug prices. The submission of two reports in or around January 2026, one that concludes that MinnesotaCare and Medical Assistance costs could be cut if HMOs were bypassed, and another that concludes the $65 billion Minnesota spends annually on health care could be reduced by a single-payer system that bypasses insurance companies, should, if they are based on evidence, provoke an informed and long overdue discussion about whether it’s time for Minnesota to adopt a new approach to health care cost containment. 

Additional Reporting

In addition to the direct payment and Minnesota Health Plan studies, SF 2995 requires MDH to issue other reports that should address why Minnesota’s health care costs are high and what to do about it. One section of SF 2995 requires MDH to “develop recommendations for strategies to reduce the volume and growth of administrative spending by health care organizations and group purchasers, and the magnitude of low-value care delivered to Minnesota residents,” and to publish its recommendations by March 31, 2025. Another section authorizes MDH to create a Center for Health Care Affordability that will conduct similar research and make periodic reports. This section states that MDH, “through the center, shall … analyze the drivers of health care spending growth in order to … identify strategies that help to reduce waste and low-value care ….”

The mischaracterization of low-value care in these sections of SF 2995 as a driver of health care inflation, and the assumption that MDH will be able to identify strategies to reduce low-value care, demonstrate that managed care ideology is still very influential with Minnesota legislators. For two reasons, MDH will not be able to identify strategies to reduce meaningful amounts of low-value care. Low-value care is very difficult to identify with just claims data; the interventions required to reduce low-value care are expensive and may swamp any savings from eliminating truly low-value care.

Low value care became a fashionable topic within the U.S. health policy community following the establishment of the Choosing Wisely campaign by the American Board of Internal Medicine Foundation in 2012. The Choosing Wisely campaign does not claim to know when services fall into the category of low value. Rather, its goal is to encourage patients and doctors to discuss a list of several hundred services that member organizations think are sometimes of little value. The American Academy of Family Physicians, for example, lists “imaging for low back pain within the first six weeks, unless red flags are present” and “routinely prescribing antibiotics for otitis media in children aged 2-12 years” as examples of services that might be of low value. Because Choosing Wisely’s list of possible low-value services is based on suggestions; because they are often couched in vague language (“red flags,” “routinely”); and because Choosing Wisely does not claim that the services on its list should be treated as unnecessary, the organization warns against using their suggestion list to establish coverage decisions or exclusions. Rather, they are meant to spur conversation about what is appropriate and necessary treatment. As each patient situation is unique, providers and patients should use the recommendations as guidelines to determine an appropriate treatment plan together. 

To illustrate how difficult, and how expensive, it’s going to be for MDH to recommend tactics that reduce documentable (not merely hypothesized) unnecessary services, consider the results of what might be the only review of the literature on overuse ever published, “Overuse of health care services in the United States: an understudied problem,” published in Archives of Internal Medicine in 2012. The authors, Deborah Kornstein et al., examined 114,000 studies published between 1978 and 2009 in search of studies that documented overuse but found only 172 that actually documented overuse. The majority of these cases focused on four interventions: antibiotics for URI [upper respiratory infection] – and three cardiovascular procedures. They concluded, “The robust evidence about overuse in the United States is limited to a few services.”

The second reason MDH will not be able to recommend strategies that substantially reduce low-value care is that any strategy they propose will cost money. U.S. health policymakers and analysts have long had a bad habit of assuming that whatever intervention they dream up to cut services – prior authorization, drug formularies, disease management, report cards – cost nothing to implement. The limited research on this topic indicates prior authorization, the most widespread strategy for reducing low-value care, is expensive, for both insurance companies and providers, and often harms patients. Similarly, a review by the Congressional Budget Office of 34 Medicare disease management demonstrations concluded they raised Medicare spending by 11% and did not reduce hospital admissions or Medicare expenditures. A paper by Edward Hannen et al. concluded that New York’s report card on just one service (cardiac surgery) requires 40 full-time employees – five at the state’s Department of Health and approximately one each at the three-dozen hospitals where the service is provided.

Breaking the Cycle

Fifty-one years ago the Minnesota legislature enacted the Health Maintenance Act of 1973. That law stated,

“It is … the policy of the state to eliminate the barriers to the organization, promotion, and expansion of health maintenance organizations.”

The legislature endorsed HMOs solely on the basis of opinion, not research. Or as the late Uwe Reinhardt wrote in the Milbank Quarterly in 1973,

“[T]he much touted idea of a national network of presumably competitive Health Maintenance Organizations appear[s] to have been proffered on the basis of intuition or faith rather than on the basis of convincing empirical evidence.”

But the legislature at least had the good sense to insert into the law these words:

“It is further the intention of the legislature to closely monitor the development of health maintenance organizations in order to assess their impact on the costs of health care.”

That never happened. In the 51 years since those words were written, no legislative committee, no commission, no state agency ever subjected Minnesota’s endorsement of HMOs and managed care to rigorous evaluation. The closest we came was a report on the privatization of Medical Assistance prepared by DHS staff in 1993. But according to a front-page story in the Star Tribune published on March 13, 1994, under the headline “Study shelved after HMOs complained,” the report was suppressed by the Carlson administration at the behest of “the HMOs.” The legislature uttered not a word of protest.

The studies authorized by the 2023 session of the Minnesota legislature suggest a majority of today’s legislators are no longer content to keep doing the same thing over and over and hoping for different results. A majority appear to want a rigorous evaluation of Minnesota’s failed health care cost-containment policy. These signs are very encouraging, but we should not assume the studies will be free of bias, nor that the legislature will act on recommendations in these studies that conflict with managed-care ideology. Physicians should let MDH and DHS know they want to be consulted prior to the publication of these studies, and they should let legislators know they are fed up with corporate control of physicians. If the studies are based on evidence, not groupthink, and if the legislature takes them seriously, Minnesota may at long last adopt a cost-containment policy that actually contains costs without harming patients or burning out doctors.

Freedom Echoing: A legislative fix for health care?