Serious problems with the Health and Human Services omnibus bill

The House and Senate conferees on the Health and Human Services (HHS) omnibus supplemental budget bill finished their work late last night. The conferees managed to hit their budget targets and delivered a Conference Report that reduces the general fund deficit by $114 million in the current biennium and by $155 million in the next biennium.

Unfortunately, there are two serious problems with this bill. First, the approach they chose to reduce the deficit relies primarily on reducing rates paid to health care providers and increasing taxes. The trouble with this approach is that it brings down costs in public health care programs only by increasing costs for private payers. On top of being an additional financial burden to Minnesota families, the added costs are often inequitable and hidden from view. Second, the bill prematurely expands Minnesota’s troubled Medicaid program and, in doing so, abandons the GAMC compromise. The following comments address these two problems as well as some additional issues with the HHS budget bill.

Reducing the rates that public health programs pay to providers is an improper and arguably fraudulent technique to reduce government spending. Year after year, Minnesota lawmakers turn to provider reimbursement rate reductions as the quick and easy solution to budget shortfalls. In fact, according to a recent study by the Urban Institute, Minnesota was the only state to actually decrease Medicaid fees paid to providers between 2003 and 2008. This year is no different. Both the governor’s supplemental budget and the HHS budget bill rely on this technique.

Despite bipartisan support, reducing provider rates is improper because it results in a hidden tax that is never accounted for in the state budget. When the state reduces provider payments, providers must either stop treating people on government programs or make up the reduction by raising the rates they charge to private payers. Most, due largely to government prodding, raise rates on private payers. This rate increase amounts to a hidden tax.

Because this tax is never identified as a line-item on patients’ bills, it is arguably fraudulent. It’s a lot like getting a “free” box of steaks with your windshield. The steak is, of course, not free. The cost of the steak is hidden in your auto insurance bill. In the same way, cuts to provider rates hide in Minnesotans’ health insurance bills.

Moreover, because the tax is hidden, a significant portion of the state’s public health care budget is hidden from view, making it impossible for the public and their lawmakers to make informed judgments on spending levels and how well these programs operate.

Another insidious aspect of cutting provider rates is that the cuts are not evenly distributed. Inpatient care, outpatient specialties, mental health, primary care, dental, and long-term care have been subject to varying cuts over the years. The Urban Institute study referenced earlier shows that, due to this unevenness, Minnesota’s primary care physician Medicaid fees are at 85 percent of the national average while the average Minnesota physician is paid a much higher 98 percent. Not surprisingly, providers with the strongest lobby at the Capitol receive more generous payments.

When the state subsidizes housing and food, landlords and grocers still receive market rates. And when the state requires natural gas utilities to administer low-income programs, the cost of these programs is identified on ratepayers’ bills. For instance, CenterPoint’s Gas Affordability Program adds $.00504 per therm to a customer’s bill. Similarly, public health care programs should either pay market rates or, at the very least, itemize the cost of the program when they bill private payers.

The increased Medicaid surcharge on health care providers amounts to an unnecessary and unfair tax increase. The HHS budget bill includes a tax surcharge on hospitals, HMOs and facilities for the disabled. Proponents of the surcharge argue that it’s not a tax because the surcharge is taken from providers and then allocated right back to providers. (This take-and-give is all done in order to qualify for more federal Medicaid funding.) The trouble is, while the surcharge hits providers equally, the surcharge is not paid back equally. Providers with more Medicaid patients receive a higher payback. Thus, the providers that treat the rich redistribute funds to providers that treat the poor. That’s not necessarily a bad thing, but it is a tax. If government redistribution from the haves to the have nots is not a tax, then what is?

Far more troubling is the extreme inequity in the tax surcharge. The increased HMO surcharge is particularly unfair. It hits lower-income individuals and small to mid-sized businesses that tend to be insured through an HMO’s commercial product line and misses the large businesses that self insure. In other words, the tax surcharge hits the very people that are struggling the most in this economy. The surcharge is also unfair to PreferredOne, an HMO based in Golden Valley. PreferredOne never receives any payback because they do not service Medicaid populations. While the tax surcharge on hospitals and facitlities for the disabled are distributed more fairly, they are still a redistribution and there is no accounting for whether that redistribution is fair or not.

Eliminating and reducing additional public programs would, at the very least, make the tax surcharges unnecessary. The governor’s budget shows that the additional federal funding that the surcharge garners can be achieved through various program eliminations and reductions. These cuts obviate the need for a surcharge, which allows Minnesota to do right by both the state budget and the federal budget. Many lawmakers argue that we should be maximizing federal funding opportunities for Minnesota. But by maximizing federal funding, Minnesota lawmakers also maximize the federal debt being left to future generations. The fact is, the consistent push to maximize federal dollars is one of the prime reasons the Medicaid budget has grown so large over the years.

The HHS budget bill prematurely expands Minnesota’s Medicaid program. The recently passed federal health care legislation provides federal matching funds to help finance an early Medicaid expansion in Minnesota. The HHS budget bill takes advantage of these federal matching funds and expands Medicaid to childless adults with income up to 75 percent of the federal poverty guideline. This expansion effectively replaces the GAMC compromise reached between the governor and the legislature in March.

  • While Minnesota should certainly continue to help impoverished adults access health care, expanding the current Medicaid program is premature for at least four reasons.
  • First, the expansion creates new financial obligations in the near term. The expansion adds $102 million in costs in 2011 and another $87 million to the next biennium.
  • Second, the expansion effectively reinstates a broken GAMC program. Governor Pawlenty vetoed GAMC because it was experiencing rapid cost escalation and was not meeting the needs of the population it served. Lawmakers worked hard to craft the GAMC compromise that improves the program. Despite it’s current shortcomings, this compromise remains the best chance to truly reform how Minnesota serves the GAMC population.
  • Third, moving forward with an expansion will make it more difficult to reform the program in the future. Once the entitlement is expanded, moving to a new model will be politically difficult, because any new model will likely place more responsibility on patients and providers. Moreover, expanding the program now will eliminate the current urgency and drive to reform the program.
  • Fourth, there is no guarantee the federal government will take over payments for this population in 2014. While the federal law now states the federal government will pay 100 percent of the cost to expand Medicaid from 2014 to 2016, power shifts in Washington, D.C. could change matters and leave Minnesota with a larger Medicaid bill.

Various provisions empower the government to further manage the health care market, which adds complexity and risks steering the health market in costlier, lower-quality directions. Minnesota’s 2008 health care legislation included a number of provisions aimed at managing and reshaping the health care market. The government got into the business of constructing health care homes, designing baskets of care, inventing a value index that compares providers, measuring quality, creating provider incentive systems, and establishing interopable electronic medical records. It remains to be seen whether any of this will work, yet the HHS budget bill would add a number of new items to the list. While new ideas to contain costs in the state’s Medicaid program are always welcome, it is not the right time to step forward on most of these proposals. Doing so will add a further layer of complexity and detract from the work the state is already doing. Furthermore, everyone needs time to digest the new federal health care legislation and how it will impact Minnesota’s health care system.

Many people seem to forget that there are often serious risks attended to government health care proposals. Implementing the wrong idea can increase costs and reduce quality. And, more often than not, states implement the wrong idea. Indeed, the last thirty years of state efforts to reform health care is littered with failure, from Maine, to Tennessee, to Washington. These failures impose tremendous costs on taxpayers and consumers. In the current proposals, Accountable Care Organizations pose the most risk.

That said, trying new things and introducing an entrepreneurial spirit to the state’s public sector needs to be encouraged. In fact, adopting new ways of doing the state’s business is essential in the face of of current and future budget shortfalls. But the state needs to move with care. When businesses leap forward and take risks, they can quickly change direction when failure is in sight. State government is not nearly as nimble. Government policies are too quickly entrenched by vocal special interests and, therefore, must be more calculated and deliberative.

The health and human services budget is tasked with too much of the budget-balancing burden. While it may be late in the game to talk about budget targets, it’s still worth mentioning that Minnesota lawmakers should take a more balanced approach to cutting budgets. The education and health and human services budgets represent the two largest portions of the state budget and, therefore, present the largest targets for budget cuts. They’re also prime targets because both have reputations for innefficiency, waste and unneccessary programs. Nonetheless, the health and human services budget bears nearly the entire burden while the education budget remains unscathed. While the health and human services budget can and should bear most of these budget cuts, it would be helpful if these cuts could be phased in over longer time frames. This would allow lawmakers time to better assess wants versus needs and consider more efficient ways to meet those needs. Sharing the budget-balancing burden with the education budget today would allow a more thoughtful approach to trimming both budgets moving forward.

The state’s budget shortfall and future outlook put lawmakers in an incredibly difficult position. The state must implement substantial budget cuts while at the same time meeting the needs of its most vulnerable citizens and implementing new demands from the federal government. Most of the program eliminations and reductions being discussed this session are reasonable proposals that do not cut off vulnerable Minnesotans. These cuts move Minnesota toward living within its means. As such, lawmakers should rely more on program elimination and reduction to cure our current budget deficit versus the current focus on lowering provider rates and increasing taxes. It’s a responsible approach that keeps health care more affordable and protects Minnesota’s taxpayers.

Peter Nelson is a Policy Fellow at Center of the American Experiment

Center of the American Experiment is a nonpartisan, tax-exempt, public policy and educational institution that brings conservative and free market ideas to bear on the hardest problems facing Minnesota and the nation. Our work is made possible by the generosity of our donors. Please consider making a tax-deductible contribution to support our important mission by clicking here, or contacting us at: 12 South 6th Street, Suite 1024, Minneapolis, MN 55402, (612) 338-3605; Thank you.