Review of Capitated Payments in Minnesota's Medicaid Managed Care Program, Minnesota Department of Human Services

EXECUTIVE SUMMARY:

The objectives of this review were to determine: (i) if payments made for enrollees in the Prepaid Medical Assistance Program (Program) exceeded expenses and, if so, (ii) to determine if the excess amounts (retained earnings) were reasonable.  Although payments made for enrollees in the Program exceeded plan expenditures in each of the years reviewed, the Minnesota Department of Human Services (State agency) generally reacted to excessive retained earnings by adjusting the capitated payment rates in the following year.  The overall average retained earnings rate for the nine Program managed care health plans for calendar years 1997 through 2001 was 6 percent, which we consider reasonable.  We noted that the State agency included administrative costs and a profit factor for its State-funded Prepaid General Assistance Medical Care (General Assistance) program in the actuarial rate calculations for the Program in 2001 and 2002.  This was contrary to Federal cost principles and misstated the actuarial calculations available for future rate setting.  To comply with new rules that must be implemented by June 16, 2003, the State agency needs to change its actuarial process by excluding costs from other programs and establishing Program rates that are actuarially sound.  By changing its procedures, the State agency will eliminate a possible overestimation of Program costs calculated under the current method.  By not acting, the State agency's current calculation methods inappropriately increase the Program's actuarial estimated expenses and reasonable profit by about $6.2 million.  We recommended that the State agency exclude General Assistance related administrative costs and profit factors from the Program in future rate calculations.  State agency officials concurred with the findings and recommendation.