Who’s minding the store? Billions in contracts without competitive bids or auditing


Over the years, many items in the state budget have been scrutinized with a fine-tooth comb. Even relatively small expenditures and contracts are reviewed to see if there is a way to save money or perform the task more efficiently.

Sometimes, however, there are big-ticket items that get nowhere near the scrutiny they deserve.

I receive looks of disbelief, when I tell people at the capitol that there is one area of the budget where huge contracts – totaling over $3,000,000,000 per year – are made, without competitive bidding or auditing, and with minimal reporting.

Unlike all other parts of the budget, these contract holders are not required to use the standard “GAAP” (Generally Accepted Accounting Principles), that businesses, accounting firms, and other government agencies use. And, the system is rigged in a manner that whatever the contractors spend, the state will pay the bills.

Where is this shameful lack of oversight? It is in our public health programs, including Medicaid and MinnesotaCare. These are important programs, providing health care for hundreds of thousands of people, yet nobody is watching the store. We know how much the state pays health plans to provide care, but have no way of knowing how much money is going to the people who need care and how much is eaten up by insurance company overhead. The state blindly accepts whatever numbers the HMOs provide.

Now, with a $6 billion deficit, we can no longer stick our heads in the sand.

This is not meant to vilify health plans. There are good people working for them, and they help people access medical care. But that doesn’t mean that we should leave the cash register open, and blindly let them take as much money as they want.

This situation occurred as the state privatized delivery of health care for low income and disabled people over the last twenty years. It started as a pilot project on the theory that private insurance companies could deliver health care at a lower cost. Instead of paying medical bills directly, Minnesota would contract with Health Maintenance Organizations (HMOs) to provide care for low-income people.

The pilot project was to be evaluated by the Department of Human Services (DHS), but that was never really done. In 1993, the Department conducted a study to find if HMOs were saving money, but the study was hampered by a lack of data from the HMOs. Even so, the study raised questions about whether the state was getting its money’s worth. Rather than demand more data from the insurance companies, the agency buried the study. A front-page newspaper story at the time was titled, “Study Shelved After HMOs Complained.” The story reported that DHS “reassigned the researcher.and abolished his job.”

Instead of trying to learn whether the HMOs were spending money appropriately, the state brushed aside concerns and continued turning more public business over to them.

Despite two Legislative Auditor reports calling for greater scrutiny, DHS has not conducted any audits.

In these contracts, Minnesota allows the HMOs to define what they count as administrative costs and what they count as health care, enabling them to hide spending on administrative overhead. Even more surprising, the state covers all those costs, no matter how great they are. The director of these contracts at DHS said the administration believes the state must cover all of the costs, including the administrative costs, so that the HMOs will be “actuarially sound.”

During the 2010 session we offered legislation that would require the HMOs to meet a medical “loss ratio,” refunding money to the state if they spent too much on administrative overhead. But under the current irresponsible method of contracting with the health plans, the administration claims that if the HMOs broke the law and were required to pay a penalty, the taxpayers would have to reimburse even the costs of those fines!

As the state was cutting services to people who are sick and disabled, the HMOs made – even after unlimited administrative expenses – over $130 million in profit just from these public contracts in 2009 (technically they are “earnings,” not profits, because the HMOs are non-profit). It’s time that we show more interest in the financial soundness of the state budget than in higher profits for the insurance companies.

The 2010 legislation contained a provision that would require HMOs to use standard accounting practices like every other government contract requires, and be subject to audits. A Pawlenty administration official said that requiring the insurance companies to account for their spending this way would cost more, which the state would have to pay for. In other words, the administration suggests that taking off the blindfold and finding out whether we are being shortchanged, might cost us more money. That’s absurd.

Unfortunately, pressure from the HMOs succeeded in blocking this legislation, so there is still no oversight of this $3 billion in public contracts.

David Feinwachs, an attorney for the Minnesota Hospital Association, is spearheading the effort to bring greater transparency and accountability to these programs because of his concern over the waste of taxpayer money. Although savings from this reform would benefit the hospitals, Feinwachs was recently fired after 30 years at the association, apparently because the HMOs put pressure on the Hospital Association to silence him.

This scandal is finally being exposed, with a TV investigative report and other media coverage. Even in good financial times, waste of public money is unacceptable. In times of financial crisis it is inexcusable.

Fortunately, there will be a new administration in just a few weeks. The Dayton administration has a great opportunity to open the books and provide some financial accountability here.