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HMOs have always been nonprofit in Minnesota. What happens when that changes?

A deal struck during the 2019 legislative session extends a moratorium preventing nonprofit HMOs to be purchased or convert to for-profit companies. 

Minnesota and HMOs go way back, and the state has a long history of relying on nonprofits such as HealthPartners, UCare and Medica to deliver health care to individuals, employers and the state itself.
MinnPost photo by Peter Callaghan

It was one of the last arguments on the last bill on the last night for conference committees at the Minnesota Legislature to finish the 2019-21 state budget. No sleep and little consensus made agreement difficult.

So when a cobbled-together deal that became part of the omnibus health and human services appropriations bill was brokered by the governor and the two top legislative leaders — just in time for a one-day special session on May 24 — it included some agreements. But it also pushed off the hardest decisions into the future.

Sound familiar?

The deal addressed how the state regulates health maintenance organizations, which manage health care for nearly 1 million Minnesotans. Included was an extension of a moratorium on the ability of the state’s existing nonprofit HMOs to be purchased or convert to for-profit companies. And while the language contained in the bill, Senate File 12, didn’t go as far as the DFL attorney general and DFL House wanted in regulating those conversations, it also went further than Senate Republicans wanted. 

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Left undecided was what would happen to the billions of dollars in assets that the HMOs currently control if any of them convert to for-profit status once the moratorium expires in four years. Advocates argue those assets — accumulated in part because of the beneficial tax treatment and lucrative government contracts HMOs currently enjoy in Minnesota — could make the organizations attractive takeover targets if they aren’t protected by the state. 

“This HMO thing is one of the most important things that happened this session,” said Rep. Tina Liebling, the DFLer from Rochester who is chair of the House Health and Human Services Finance subcommittee. “It’s not well understood what’s at stake here: $6.5 billion of public assets.”

Concerns about conversions

Minnesota and HMOs go way back, and the state has a long history of relying on nonprofits such as HealthPartners, UCare and Medica and to deliver health care to individuals, employers and the state itself. 

But in 2017, Republicans who then controlled both the House and Senate pushed through a change that would also allow for-profit health insurance companies to operate as HMOs in Minnesota.

At the time, Minnesota was the last state in the U.S. to prevent such companies from using the HMO model of prepaid care via a fixed network of health providers. GOP leaders believed that more players in the health care system would be good for competition and rates, and that the HMO model was a useful one for providing care via the individual insurance market.

Although then-Gov. Mark Dayton was concerned about the change, he signed the 2017 measure, largely because it was part of a bill providing insurance premium relief he believed necessary to stabilize rates.

At the time, DFLers, led by then-Attorney General Lori Swanson, raised concerns about the bill’s unintended consequences. Allowing for-profit health insurance and provider companies to operate as HMOs in Minnesota could lead them to purchase existing nonprofits, for one thing. In addition, the nonprofits already operating could decide to convert to for-profit status. If either happened, for-profit companies could potentially control billions of dollars in assets — including real estate, infrastructure and brand goodwill — along with the reserves accumulated by the nonprofits, which are meant to provide solvency for insurance plans and cover claims should premiums not be adequate to cover the costs. 

The concerns about the conversions were not hypothetical. Advocates pointed out that other states had been caught off guard by HMOs switch to for-profit status and didn’t have adequate protections in law. Reserves accumulated by HMOs were then used to award bonuses or stock options to executives, or they were simply transferred to the new for-profit entity. 

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Swanson argued that those assets and reserves needed to be used for the original purpose of the HMOs — providing health care to Minnesota residents — and the bill she supported would have required an independent valuation of HMO assets, a ban on self-dealing by nonprofit HMO executives, and public hearings prior to the approval of any conversion. 

When consensus on Swanson’s 2017 request could not be reached, lawmakers instead agreed on a two-year moratorium on for-profit conversions.

During this year’s legislative session, DFLers, who gained control of the House after the 2018 election, pushed legislation with similar planks as Swanson’s proposal. House File 533, which was  later incorporated in the House HHS omnibus bill, would have stiffened state review of conversions and even partial transfers of assets to for-profit or out-of-state entities. It also would have required HMO assets to remain in the state and be devoted to the health care of Minnesotans, and not go to dividends or executive bonuses.

In a May letter to legislative leaders, new Attorney General Keith Ellison called nonprofit HMO assets “essentially public money.”

“This is the bargain that we, the people of Minnesota, struck with nonprofit HMOs,” Ellison wrote. “We will reserve public markets for you and shelter you from taxes and competition, and you will use your assets and make improving our health your sole mission.”

The House language became part of the House-Senate conference committee negotiations over the health and human services omnibus bill. By the time Gov. Tim Walz, Senate Majority Leader Paul Gazelka and House Speaker Melissa Hortman announced a “global” deal on budget targets, however, Liebling and her Senate counterpart, Sen. Michelle Benson, R-Ham Lake, had just one week to finish the details on the massive bill. 

“This was the last bill because it was the biggest,” said Rep. Jennifer Schultz, DFL-Duluth, who was on the conference committee. “We didn’t sleep for that last week. When we met with Gov. Walz, we told him we had to get this language in the bill, that this absolutely had to happen. Luckily, the governor was pretty persuasive to Gazelka.”

More moratorium 

The heart of the compromise was a provision extending the moratorium on conversions to July 1, 2023, a move that alleviates a DFL fear but that also doesn’t provide a permanent fix.

The agreement also states that all net earnings of nonprofit HMOs must be devoted to providing “comprehensive health care,” and includes language to prevent the payment of large bonuses or payments to executives or physicians unrelated to the provision of that care. The measure also gives the state Department of Health authority to pull the licenses of HMOs that violate those provisions. 

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Absent from the deal, however, is any attempt to determine how assets are dealt with should a nonprofit HMO convert to for-profit status or be purchased by a for-profit company. 

Schultz said that is the work to be taken on before the new moratorium expires in 2023. “This hopefully allows us to look at transfers and not allow certain types of transfers of charitable assets,” said Schultz, a professor of economics at the University of Minnesota Duluth. 

Yet she and others still worry whether the bill is adequate. “We’re kinda waiting to see what happens on July 1 because we don’t know if this language is strong enough to prevent a for-profit company from coming in and purchasing a nonprofit,” Schultz said. “We hope it is.”

The DFL is happy with the end result, “because we were looking at not having it at all because the Senate was so resistant to having this language in,” she said, adding that the current nonprofits were opposed to any new law that might make it more difficult to compete with for-profit HMOs and insurance companies.

“There’s a lot of work to do on this. I’m hopeful we can continue working on it with the Senate next year or the following biennium,” she said. 

Benson said the provisions the DFLers originally wanted “would have made our conversion language the most-extreme in the country,” and she tried to narrow it to be consistent to how other states have addressed the issue. 

Among other things, she said existing nonprofit HMOs need to be able to transfer funds among their various insurance lines and to hospitals that they might own, and they worried that the legislation could inadvertently restrict such operations.

Those HMOs also worry that, since the 2017 change in the law, they could face regulations that for-profit competitors don’t, Benson said. “For-profits in other states can do significant transfers and I wanted to treat for-profits and nonprofits similarly,” she said. 

Thus the compromise. “When the House, the governor and the attorney general all want it one way and we want it another, you end up with fewer choices,” Benson said. “Compromise is not graceful.”

Worried about competing with for-profit companies

Just as Schultz said health care advocates need to spend the next year pressuring the Legislature for broader regulation of conversion, Benson said the HMOs need to “be more aggressive in educating members of the Legislature that they’re not trying to be a for-profit.

“We have to be aware that as for-profits are coming in, our nonprofits have to be given the opportunity to compete fairly.” Benson said. “The nonprofit HMOs have been good partners in our public programs.”  

During the legislative session, representatives from the state’s seven nonprofit HMOs testified that they have no intention of  selling or converting to for-profit status. But they also don’t want laws that restrain their flexibility to compete against for-profits, a point that was emphasized when Minnetonka-based UnitedHealthcare received Minnesota’s first for-profit HMO license just as the session was beginning. 

Not all offer all types of HMO plans. HealthPartners has an HMO for private employers, for example, but some of the others only offer HMO plans via public programs like Medical Assistance or Medicaid.

Organized as Minnesota Council of Health Plans, the state’s existing nonprofits took no position on the 2107 change that allowed for-profits to operate as HMOs. In fact, said MCHP communications director Eileen Smith, they didn’t know about the language until just before it passed the Legislature.

“At the time, the worry was that nonprofits would rush to convert to for-profits and dissolve their medical reserves and do what happened in other states,” Smith said. But the council argued that there are other laws governing charities that would have given the state ways to intervene without adding new regulations. 

MCHP supports the language that eventually passed — including the moratorium on conversions — though not some of the provisions DFL lawmakers had originally proposed. “The nonprofit is so rooted in the community that there isn’t an intention to change that,” Smith said. “But it’s important that they remain private businesses and are able to compete now with the for-profits as they come in. So if the nonprofits have really different rules than the for-profits, that’s where we look at things more closely.”