Health insurer Medica sues Minnesota over Medicaid contract

March 15--One of Minnesota's major health insurance companies says the state Department of Human Services broke the law when it negotiated new contracts with competing insurers to run Medicaid and MinnesotaCare.

Medica, a Minnetonka-based nonprofit insurer, sued the state Tuesday over the Medicaid and MinnesotaCare contracts.

It's not trying to overturn the new 2017 contracts, which are already in the process of being implemented. Rather, Medica wants a judge to force DHS to bid out contracts again for 2018 instead of continuing the current contracts into 2019 or later.

"DHS's unlawful and arbitrary conduct ... has shut Medica out of the competitive-bidding process for years," the insurer says in its lawsuit.

THE BACKGROUND

The squabble dates back to 2015, when Minnesota competitively bid out the business of managing its public health care programs. Led by Medica, the state's health insurers offered much lower bids than previous years, saving taxpayers an estimated $400 million in 2016.

But now Medica says the low rates were too low, and that it lost money on the contract.

That's where the dispute with the state starts. When it came time to renew its state contract for 2017, Medica cited a clause in the contract saying that all payments must be "actuarially sound" -- sufficient to pay costs. Arguing that the rates it had agreed to were not actuarially sound, Medica proposed to renegotiate the contract at higher rates.

The Department of Human Services refused.

"My obligation is not to ensure the profit margins of health plans in the state," DHS Commissioner Emily Johnson Piper said in December. "Rather, my obligation is to ensure the best value for the taxpayers in our state and the best health care that I possibly can for the people on public health care programs in the state of Minnesota."

Unable to secure more money, Medica pulled out. DHS then reached out to the insurers who had lost the 2015 bidding and offered them a chance to take over Medica's business.

NEW CONTRACTS WITH COMPETITORS

The new contracts were based on the 2015 bids, not a new round of proposals. But the contracts were constrained: the price could be no more than 5 percent higher than the lowest bid in each county.

UCare, which had been the big loser in the 2015 bidding after proposing considerably higher rates than other insurers, got most of the counties where Medica had been providing service.

Though its new rates are in almost all cases lower than it offered, UCare CEO Jim Eppel said the rates are "something that works for all parties" -- UCare and DHS.

But in addition to revisiting the 2015 bids, DHS also negotiated a special "transitional factor" -- millions of extra dollars that the new insurers will get for their costs taking on Medica's old cases.

Overall, state and federal taxpayers will pay $55 million more under the new contracts than they would have had Medica stayed in. But this is offset by $21 million in savings -- Medica will manage plans for the first four months of the year before getting replaced, and these four months won't include the minor increases other insurers got over their 2016 rates.

MEDICA'S CASE

In its lawsuit filed Tuesday, Medica says the state "violated the law" by negotiating new contracts with Medica's competitors.

Those new contracts, it says, were "on unequal and materially different terms," in part because the competing insurers got to look at Medica's financial results before signing off.

"DHS's conduct is arbitrary, capricious, and contrary to law and jeopardizes long-standing principles governing public procurement, including the requirements of competition, best value, and an equal opportunity to bid," the lawsuit says. "This conduct... will irreparably harm Medica and will cause... disruption for hundreds of thousands of Minnesotans who rely on this program."

Medica will lose about $1.5 billion in revenue as a result of this lost business, one-third of its total, and is laying off staff.

It managed care for around 310,000 Medicaid and MinnesotaCare customers, who will switch to a new carrier on May 1. These customers have until April 14 to switch plans, or they'll be assigned to a default plan in their county.

THE STATE'S CASE

The Department of Human Services defended its conduct with Medica.

"We have an obligation to ensure continued coverage for the more than 300,000 people affected by Medica's decision last fall to terminate its contract with the state," the department said in a statement. "Throughout this process, we have negotiated in good faith, fully aware of our responsibilities to the taxpayer and our duties under the law."

Marie Zimmerman, the state's Medicaid director, said Medica's request to re-open the contract would have had huge consequences.

"We couldn't have given just Medica an increase," Zimmerman said last month.

State officials also said Medica's requests were exorbitant and would have cost taxpayers even more money than they're paying now.

"If the state had agreed to the rates that Medica was proposing, the cost would have been at least double," said Nathan Moracco, DHS's assistant commissioner. (Medica disputes this claim.)

WHAT'S NEXT

Medica is asking for a judge find DHS broke the law in negotiating the 2017 contracts, and to temporarily block the state from negotiating on 2018 rates until after Medica's lawsuit is decided.

It wants DHS to re-bid all its public programs for 2018, or at least to let Medica participate in 2018 contracting in some form.

Medica also wants DHS to pay its attorney's fees.

A judge will likely rule on some parts of Medica's lawsuit quickly, including the insurer's request for the state to preserve and produce documents related to its dispute with Medica.

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