May 29, 2012 The Honorable Darrell Issa Chairman House Committee on Oversight and Government Reform 2157

Rayburn House Office Building Washington. DC 20515-6143 Dear Mr. Chairman, Thank you for the opportunity to provide additional information regarding Minnesotas Medicaid program. Below, I list your questions together with the responses. I would note that many of these questions involve the interaction between the former General Assistance Medical Care (GAMC) program and Medicaid. As you know, managed care contracting for GAMC ended in March 2010, well before the beginning of the Dayton Administration. Since January 2011, when Governor Dayton appointed me as Commissioner, we have made significant changes to internal DHS practices, hired a new management team for our state health care program operations, and received legislative authority to make Minnesota a smarter purchaser of health care. Our focus has been on reforming our purchasing and health care delivery system in Minnesota, to the benefit of both federal and state taxpayers. Our focus has been on changing course rather than investigating the past. Nevertheless, we have tried to answers questions about the past to the best of our ability. 1. There is still confusion around UCares $30 million refund to Minnesota last year. On March 15, 2011, the day before UCare sent its letter regarding the refund, you emailed Dan Pollock, a high-level staffer in your department, about the proper way to message the UCare contribution. You wrote, In order to have a good chance of keeping all this money, it must be characterized as a donation. If a refund, feds clearly get half. Can you work with Scott on redrafting? Also, I thought we were going to handle this through phone calls. In your response to a question from Chairman Gowdy at the Committees hearing, you explained that your email was correcting a draft press release. Were you referring to a press release from the state or from UCare? Please attach the referenced press release to your response. Additionally, you told Chairman Gowdy that your email was part of a larger email chain and that the phrase about handl[ing] this through phone calls was taken out of context. Please provide the entire email discussion that you referenced in your answer.

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Response: The chain of emails concerned two matters; 1) a draft press release that was to be issued from the Governors office on March 16, 2011 in consultation with DHS; and 2) draft letters to the Minnesota House and Senate Committee Chairs about the UCare matter. The email in question where I write I thought we were going to handle this through phone calls is in direct response to Mr. Pollock sending me a letter that he had drafted to legislative committee chairs regarding the contribution. His email to me stated in part . . . this is a draft letter I would like to send to Committee Chairs tomorrow that tracks the information in Scotts press release. The phrase about phone calls was referring to my desire to be more personal and responsive to the legislators by notifying them of significant events by phone rather than only sending letters. In that same email I also sought to correct a draft press release which was to be sent from the Governors office on the UCare contribution. To do so, I wrote that In order to have a good chance of keeping all this money, it must be characterized as a donation. If a refund, feds clearly get half. Can you work with Scott in redrafting? See attached documents. 2. At the hearing, the Committee learned that Karen Peed, Minnesotas former Director of Managed Care Contracting, stated that Minnesota was underpaying the states insurance companies for state-only funded programs and overpaying these same insurance companies through Medicaid. Between November 2010 and present, have you discussed Minnesotas rate setting process for its public health insurance programs with Ms. Peed. During any of your conversations with Ms. Peed did you discuss Minnesotas rate setting process for its public health insurance programs? Please provide all documents and written communications, including emails, between Ms. Peed and yourself over the past two years that refer or relate to Minnesotas rate setting process for its public health insurance programs. Response: The question provided here relies upon a statement attributed to Ms. Peed during discovery in a series of lawsuits between Mr. Feinwachs and Minnesotas health plans. The Department of Human Services was not a party to the lawsuits and does not have firsthand information of the complete record developed in that litigation. However, with regard to the past relationship between state-funded programs and Medicaid, we note that the Office of the Legislative Auditor indicated on page 43 of the report entitled Financial Management of Health Care Programs, Office of the Legislative Auditor, State of Minnesota, February 2008, that: In contrast, health plans reported losses every year on General Assistance Medical Care, a state-funded program that accounts for about 9 percent of the public programs revenues. As noted earlier, this is the only program that DHS is not required to demonstrate to be actuarially sound. DHS staff acknowledged that they have regularly set GAMCs rates at levels lower than the programs
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anticipated costs, with the expectation that the health plans will negotiate lower rates with providers, help clients transition from GAMC to MinnesotaCare, or cover their losses with surpluses from other programs. Minnesotas managed care contracting process for public health insurance programs was a top priority for me when I took office in January 2011. This process included developing a greater understanding of the historic managed care contracting and rate setting process used by previous administrations. The 2008 Legislative Auditors Report referenced above provided an excellent background in this regard. In addition, in order to better understand our historic process for contracting, I met with Ms. Peed on January 25, 2011, where I received a high-level briefing on the general mechanics of the rate setting process. During this meeting Ms. Peed never discussed cross-subsidization. During this meeting we did discuss the possibility of moving Minnesotas rate setting process to a competitive bid process. There was a subsequent meeting on July 28, 2011 that included Ms. Peed, where the purpose of the meeting was to discuss progress on implementing a competitive bidding process for Minnesotas managed care programs. There was a third meeting I was present at when the topic of the discussion was our Medicaid accountable care organizations (ACO) demonstration project. While the focus of this meeting was not managed care rate setting, and this issue was not discussed, I include it here for completeness. There may have been additional incidental conversation with Ms. Peed that occurred while passing one another in the building, but I do not recall discussing the rate-setting process with Ms. Peed outside of the above-mentioned two meetings.

Requested documents are attached. 3. In an interview with a local television station, you were asked whether Ms. Peeds statement that Minnesota was underpaying the states insurance companies for stateonly funded programs and overpaying these same insurance companies through Medicaid amounted to Minnesota defrauding the federal government. You stated, Let me be very clear. We are not doing it that way anymore and Karen Peed is no longer in charge of contracting with the plans. What were you referring to when you said that way? Response: In the February 13, 2012 interview I was referring to the previous method for developing rates that I believed was inherently inflationary. The phrase that way is a reference to the practice of using historical data plus some inflationary measure in addition to the fact that GAMC now no longer exists. It is significant that the changes the Dayton Administration made in contracting with health plans for public health care programs was to set rates through a competitive bidding process rather than relying primarily on historical data plus inflation. This instituted change plus additional managed care reforms resulted in estimated savings in excess of $600 million.

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4. In response to a question from Congressman Danny Davis, you stated, I very clearly thought that the state of Minnesota and the federal government were paying too much under our Medicaid contracts. When and how did you come to this conclusion? Response: Shortly after taking office in January, 2011, my concerns about past Medicaid managed care contracting results crystalized. I was aware of this issue generally upon taking office, because the issue of HMO margins on public programs is one that has been discussed in Minnesota quite publicly for the past several years. At least three reasons existed as to why I was concerned about the financial results from our past contracting practices. First, I felt that the margins earned on public health insurance programs were greater than they should be. Second, profit margins on public insurance programs were frequently greater than profit margins for commercial private insurance which demonstrated that the State was not driving the hardest possible bargain. Finally, I felt that the contributions being made to health plan reserves from public health insurance were disproportionate to those being made by private insurance coverage. The reserves for the four (4) largest health plans, each of which was made subject to our negotiated 2011 1% operating cap margin, averaged $1.326 billion dollars for years 2007-2011. This represented a 56% average increase in health plan reserves during that same time period.

While HMOs were being paid according to contracts approved by CMS, I believed there was substantial room for improvement in the HMO contracting process. I took swift action to address this issue. First, we sought to remedy the contracts we inherited from the previous administration that we felt did not produce the value the public expects. Second, we fundamentally revamped and changed the process by which we negotiate our managed care contracts. We are pleased with the results of these two efforts. In the first instance, we negotiated with the plans a 1% cap on their 2011 profits (the final year of the contracts we inherited). We anticipate a return in excess of $70 million from these capped profits. This $70 million plus will accrue to the state and federal governments. In the second instance, competitive bidding of our managed care contracts for the Twin Cities seven county metro area and related managed care reforms going forward resulted in an estimated taxpayer savings of over $600 million (this anticipated savings is split between the federal and state governments) for state fiscal years 2012 and 2013, and additional permanent savings beyond those years. We anticipate expanding our competitive bidding process to other parts of Minnesota to ensure we continue to derive the best possible value and outcome under our managed care program.

5. How long do you believe that Minnesota and the federal government were paying too much under the states Medicaid contracts? Response:

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While health plan profit margins on public health insurance programs have fluctuated over time, I believed that the margins earned during recent history, particularly 2009 and 2010, were too high and reflected substantial opportunity to improve our contracting processes. As mentioned in the answer to question 4, we have put in place a number of efforts to revamp and improve those processes, with good early success. In my testimony submitted to the Committee in April, I provided some exhibits related to our historical analysis of contracting and health plan profits and reserves. 6. Governor Dayton has stated that past contracts between the state and the insurance companies were too generous with the taxpayers money. During your testimony, you stated that you very clearly thought that the state of Minnesota and the federal government were paying too much under our Medicaid contracts. However, in response to a question from Senator Grassleys March 8, 2012, letter to Governor Dayton, you wrote: We are unaware of and do not believe that there were any miscalculations in the rates. Please reconcile these three statements. Response: My statement, in the Addendum to the April 2, 2012, letter to Senator Grassley, was in response to his question as follows: As 61.59% of the managed care payments that UCare received were from the federal government and UCare specifically pointed to miscalculations in the rates, why wasnt the federal share remitted to CMS within 60 days, as obligated by law? In my response, I was attempting to convey that there was no error in the payment that UCare receivedit received the payments to which it was entitled under the contract executed by the previous administration and approved by CMS. There was not a miscalculation in the payments provided UCare, rather, in retrospect it remains evident that the rates agreed to were over what was required while still permissible under CMS regulation. As I also explained in the March 8, 2012, letter to Senator Grassley and in my testimony before your committee, the rate development process in place prior to my appointment resulted in capitation rates that were unnecessarily high for several years even though permissible under federal law. 7. In response to a question from Chairman Gowdy, you stated that there was no evidence that UCare had been overpaid by the state and that its $30 million transfer to the state was a bona fide donation. In response to a question from Congressman Kucinich, you stated that Nancy Feldman, the CEO of UCare, told you about the donation at a March 14, 2011 meeting in your office. On March 16, 2011, Ms. Feldman sent a letter to top state officials stating that the $30 million represents what [UCare] consider[s] to be excess 2010 operating margins for state public programs. Ms. Feldman attributed the $30 million, in large part, to overpayments that the state made to UCare through the Medicaid program. According to Ms. Feldman: Historically, DHS rates set for General Assistance Medical Care resulted in health plan losses which were offset by higher Medical Assistance [Medicaid] payments. When GAMC moved out of managed care in mid-year 2010, Medical Assistance rates were not lowered to reflect this overpayment.

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During your March 14, 2011, meeting with Ms. Feldman, did she describe or explain the reasons surrounding UCares $30 million return to the state? Did you read UCares letter, referenced above, before the date of the Committees hearing? Response: During the March 14, 2011 meeting with Ms. Feldman, she indicated that UCare was contributing $30 million to the state to assist the state with the $5 billion biennial budget deficit it was facing for SFY 2012 and 2013. The conversation focused on the UCare contribution. Ms. Feldman described how UCare came to the $30 million contribution by looking at UCares current level of reserves and determining how much could be given to that state, while still maintaining adequate reserves. The March 16, 2011 letter that was subsequently sent by UCare was sent to state legislative leaders. I was not included in the list of persons the letter was sent to, nor was I copied. The first time I recall reading this letter was shortly before a February 14, 2012 legislative hearing on this topic when it was included in a set of documents circulated by David Feinwachs. 8. At the hearing, you stated that after you received CMSs July 2011 letter, you sought a legal opinion on the nature of UCares repayment. Please provide the legal opinion that you received. Response: In recognizing that the memo is attorney-client privileged, releasing such document is very unusual and is not a standard practice of the Department. However, I believe the memo provides clarity on the care and process the Department took in considering the nature and treatment of the UCare funds. Therefore, I believe, in this limited circumstance that waiving the attorney-client privilege with respect to this memo is warranted. I waive the privilege with regard to this memo. See attached. 9. When is the first time you became aware of the accusation that Minnesota was using federal tax dollars coming to the state through the Medicaid program to cross-subsidize the states underpayments for state-only health plans? Please detail, in chronological order, the subsequent steps you have taken since you became aware of the accusation. Response: I became aware of the accusation in May 2011 when the Office of the United States Attorney, District of Minnesota, approached the Minnesota Department of Human Services with a request for information. The Department, in response to this request, subsequently supplied the Office of the United States Attorney with information satisfying the request. At that time the U.S. Department of Justice instructed the Department to abstain from discussing any departmental actions or additional questions related to their inquiry. Absent consent between the parties we will abide by the DOJ request until such time as we are permitted to do otherwise. 10. During your testimony, you stated that the health plans have historically said that they lost money on the state-funded program. How long did the health plans lose

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money on state-funded program(s), such as GAMC? If you do not know, have you started an investigation to find the answer? Response: Please see attached historical health plan financials for the General Assistance Medical Care (GAMC) program. It should be noted that GAMC managed care ended March 31, 2010 and the program was completely repealed in state law as of February 28, 2011.

11. Now that GAMC is no longer operational, what program(s), if any, now provide insurance for individuals who previously received their coverage through the GAMC program? How are these programs financed? Response: Governor Daytons first executive order after taking office instructed me to apply for federal approval to adopt the option under the Affordable Care Act to provide Medicaid coverage for adults without children. CMS approved the state plan amendment on February 17, 2011. Medicaid is financed with appropriations from the state general fund, as well as Federal funds.

12. During the hearing, you stated that the Centers for Medicare and Medicaid Services (CMS) approved the rates Minnesota paid for its Medicaid managed care population. Does CMS approve Minnesotas Medicaid managed care rates every year? If not, please explain the process. Response: Yes. The Centers for Medicare and Medicaid Services (CMS) approves annual health plan contracts and rates for Minnesotas Medicaid program. 13. What information does Minnesota supply to CMS as part of CMSs rate approval process? Please provide all documents that Minnesota provided CMS when the state in 2011 applied for renewal of its 1115 waiver for its Medicaid managed care program. Response: DHS provides a detailed set of documentation to CMS for approval of its annual managed care organization (MCO) contracts and rates. DHS provides the contracts themselves, information on contract changes, information on compliance with federal managed care requirements, an explanation of the rate-setting methodology, actuarial documentation on rate development, the actuarial certification, and a spreadsheet of the statewide rates. Below is the documentation provided to CMS and attached actual examples from the submission for the CY2012 contracts. A cover letter explaining the reason for the submission (compliance with 42 CFR 438.806), and the DHS Quality Strategy. Model contracts, and scans of the actual executed contracts or amendments.
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An explanation of the basis for rate setting for each contract called the rates checklist. These documents include basic explanation of the relevant program, an overview of the risk contracting rate methodology, a projection of CMS cost for the upcoming contract year, and responses to specific questions such as how DHS makes actuarial adjustments to the base rate data (for example, to account for changes in benefits or legislated rate changes). This also includes the following supporting documentation included as attachments to the checklist. o actuarial certification o comparison of statewide rates from the previous year o memo from the actuaries regarding rate factors A document showing the changes from year to year in the contracts, and variations among the MCOs individual contracts or amendments, if any. In addition, DHS provides a courtesy copy of a crosswalk between each contract and its governing regulations, showing where in each contract the regulation is covered. A spreadsheet outlining all incentive payments made to the MCOs for the previous contract year.

Regarding all documents that Minnesota provided to CMS in its application for renewal of the PMAP+ waiver, please see attached.

14. During your testimony, you mentioned that the Dayton Administration implemented competitive bidding for public health insurance program contracts and the first round of competitive bidding was held last year. Did you provide potential bidders with historic encounter data so that an insurance company that had not previously participated could provide a well-based, competitive bid? Response: Health plans were provided a data book as part of the competitive bidding Request for Proposals in the Minneapolis/St. Paul seven-county metro area that was made available to all plans licensed to provide services in each county. This data book included historical health risk, aggregate expenditure data (e.g. by service category, large claim experience), and plan enrollment on recipients in managed care by county, program and eligibility group. This information was produced using historical encounter data submitted by health plans serving these populations. 15. Was last years bidding open to any and all managed care companies, including forprofit companies? Response: Non-profit health plans are required to submit proposals for state public health care programs as a condition licensure under Minnesota Statutes 62D.04 subdivision 5. All plans that previously participated in public health care programs in Minnesota submitted bids under the metro area competitive bidding process in 2011. Minnesota law requires all health maintenance organizations to be non-profit in accordance with Minnesota statutes 62D.03 as a condition of licensure.
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16. Are all the health insurance companies bids publicly available? Please provide a list of all the bids made by managed care companies last year for each of Minnesotas public health insurance programs. Response: Yes. Attached is a list of the bids received in response to Minnesotas 2012 competitive bidding procurement. This is the first time Minnesota has used competitive bidding, and bidding was for seven-county metro area including Minneapolis/St. Paul. The bids were specific to the Families and Children contract and include those non-disabled persons eligible for Medical Assistance under the age of 65 and all persons eligible for MinnesotaCare.

Sincerely,

Lucinda Jesson Commissioner Minnesota Department of Human Services

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DATE: TO:

August 10, 2011 Scott Leitz David Godfrey Ann Berg Mike Turpin

FROM:

SUBJECT: Donation from UCare Minnesota and Medicaid funding THIS COMMUNICATION IS SUBJECT TO THE ATTORNEY-CLIENT PRIVILEGE AND PROTECTED FROM DISCLOSURE. ONLY THE COMMISSIONER OR DEPUTY COMMISSIONER OF THE DEPARTMENT OF HUMAN SERVICES MAY WAIVE THE PRIVILEGE. TO PREVENT UNINTENTIONAL WAIVER OF THIS PRIVILEGE, COPIES SHOULD BE DISTRIBUTED ONLY TO DHS EMPLOYEES WHOSE INPUT IS NECESSARY TO RESOLVE THE ISSUES. This memo is a discussion of the potential obligation of the State of Minnesota to pay the Centers for Medicare & Medicaid Services for the value of an imputed federal share related to the planned donation of $30 million to the State by UCare Minnesota. On July 19, 2011, DHS received a letter from Cindy Mann of CMS, which asserts that CMS would consider a contribution from UCare made from excess operating margins for state public programs including Medicaid to be a refund of Medicaid payments or applicable credit to a Medicaid expenditures, the federal share of which would have to be returned through the States reporting of Medicaid expenditures on the CMS-64 report. The letter also acknowledges the potential that Minnesota would characterize the contribution as a health care-related donation, and notes that CMS would need additional documentation to support that characterization. This memo addresses the following issues: 1. Whether the planned donation must be treated as a Medicaid overpayment, which would require a reduction in expenditures on the CMS-64 report and result in a reduction in the federal Medicaid grant award. 2. Whether the planned donation must be treated as an impermissible provider tax, which would require a reduction in expenditures on the CMS-64 report and result in a reduction in the federal Medicaid grant award.

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3. Whether the planned donation must be treated as an impermissible provider donation, which would require a reduction in expenditures on the CMS-64 report and result in a reduction in the federal Medicaid grant award. 4. Whether the planned donation must be treated as a rebate or applicable credit within the meaning of OMB Circular A-87, which would require a reduction in expenditures on the CMS-64 report and result in a reduction in the federal Medicaid grant award. 5. Whether the reporting of the planned donation as a bona fide donation would expose DHS to liability under the federal False Claims Act. 6. The process for obtaining federal approval/disapproval if Minnesota chooses not to reduce its reported expenditures by the value of the donation; and the portion of a disallowed donation that may be applicable to Medicaid. 7. The States right to administrative or judicial review of a CMS decision to disallow federal funding related to the planned donation. The conclusions in this memorandum are based on the assumption that the $30 million will be donated by UCare Minnesota to Minnesota Management and Budget (MMB) either unrestricted in terms of its possible uses, or specifically directed to funds and activities unrelated to Medicaid. Any requirement imposed by the terms of the donation that the funds are to be used to offset Medicaid expenditures, and any state payment to UCare that is related to the $30 million or designed to return the $30 million, would significantly affect the conclusions in this memorandum. Summary of Conclusions While CMS might disagree, it is a supportable interpretation of Title XIX, Medicaid regulations and CMS guidance that the $30 million contribution is not a Medicaid overpayment, impermissible tax or donation, or a refund or rebate of a Medicaid payment. Because this is a valid interpretation of federal law, the contribution need not be subtracted from reported expenditures that would have the effect of refunding a federal share to the federal government. Because this is a reasonable interpretation of law, and because neither DHS nor its employees are subject to suit under the False Claims Act in this situation, a decision to not pay a federal share of the contribution would not result in additional damages under the Act. CMS could choose to disallow an amount equivalent to 50 percent of the donation. If the donation is received in the July/Sept. quarter, DHS is required to report the value of the donation on the federal report due in October. Is CMS issues a disallowance, DHS has the right to administrative review through the Departmental Appeals Board within the U.S. Department of Health and Human Services. Discussion

1. Whether the planned donation must be treated as a Medicaid overpayment, which would require a reduction in expenditures on the CMS-64 report and result in a reduction in the federal Medicaid grant award. 2

Section 1903(d)(2) of the Social Security Act (42 U.S.C. 1396b(d)) describes the federal Medicaid grant award as the federal share of reported medical assistance expenditures net of any overpayments and underpayments. 42 C.F.R. 433.304 defines an overpayment as the amount paid by a Medicaid agency to a provider which is in excess of the amount that is allowable for services furnished under section 1902 [42 U.S.C. 1396a] of the Act and which is required to be refunded under section 1903 of the Act. Overpayments are not further defined in 1903, but the Departmental Appeals Board (DAB) 1 and has interpreted 1903(d) to require the return of excess payments to providers because they would not qualify as medical assistance within the meaning of this statute. New Jersey Department of Human Services, GAB 2 No. 480, p. 3 (1983). This interpretation has been upheld by three U.S. appellate courts: See Massachusetts v. Secretary, 749 F.2d 90 (1st Cir. 1984), cert. denied, 472 U.S. 1017 (1985); Perales v. Heckler, 762 F.2d 226 (2d Cir. 1985); and Missouri Dept. of Social Services v. Bowen, 804, F.2d 1035 (8th Cir. 1986). All three of these cases involved payments by the state Medicaid agency to providers that were in excess of the payment rates established in their respective state plans. There are cases in which CMS disallowed expenditures made consistent with state plan payment rates, but in CMS view should have been reduced by other payments received and treated as applicable credits to offset expenditures, in accordance with OMB Circular A-97. See for example, West Virginia Department of Human Services, DAB No. 956 (1988). However, there are no known cases in which CMS attempted to disallow a Medicaid payment made in accordance with an approved payment rate simply because the provider made a profit. Because Minnesotas capitation payment methodologies are approved by CMS for calendar year 2010 as based on actuarially sound methodologies, it is unlikely that CMS would attempt to disallow the capitation payments to UCare on the grounds that the capitation payments, in and of themselves, were excessive. The nature of a capitation contract includes the possibility of paying more than health plan cost for services delivered to enrollees. 42 C.F.R. 438.2 defines a capitation payment as a payment made periodically to a contractor on behalf of each enrollee for the provision of medical services, regardless of whether the recipient receives services during the period covered by the payment. In addition, section 438.2 defines a risk contract as one in which the health plan assumes risk for the cost of services covered under the contract and incurs loss if the cost of furnishing the services exceeds the payment under the contract. There is nothing in federal statute, regulation or case law that would require return of a capitation payment to the extent that a health plan experienced a profit (premium receipts in excess of claims cost and administrative expenditures), as long as the capitation rates are approved by CMS, certified as actuarially sound, and paid consistently with the terms of the approved contractin other words, not in excess of the amount allowable under section 1902 for services rendered. There is some argument, however, that the UCare donation is an applicable credit within the meaning of OMB Circular A-87 3, which in turn results in an excessive payment for medical assistance, which then must be treated as an overpayment. Applicable credits are discussed later in this memorandum.

The agency within the Department of Health and Human Services that hears appeals from CMS disallowances of Medicaid claims for FFP, among many other types of appeals. 2 The Grant Appeals Board (GAB) is the predecessor agency to the DAB. 3 OMB Circular A-87, Cost Principles for State, Local, and Indian Tribal Governments, establishes principles and standards for determining costs for federal awards carried out through grants, cost reimbursement contracts, and other agreements with state and local governments and federally recognized Indian tribal governments.

2. Whether the planned donation must be treated as an impermissible provider-related tax, which would require a reduction in expenditures on the CMS-64 report and result in a reduction in the federal Medicaid grant award. Section 1903(w) of the Social Security Act (42 U.S.C. 1396b(w)) and its implementing regulations at 42 C.F.R. Part 433 allow states to collect taxes and donations that are imposed predominantly on health care providers only if those taxes and donations fall within certain safe harbors. A health care provider tax is defined at 42 C.F.R. 433.55 as a mandatory payment that is related to the provision of or payment for health care services. Because there is no state law, nor any evidence of state behavior, that forced UCare Minnesota to make this donation, especially in light of similarly situated health plans that did not make similar donations, it is unlikely that the payment would be viewed through administrative or judicial review as a mandatory payment. 3. Whether the planned donation must be treated as an impermissible provider-related donation, would require a reduction in expenditures on the CMS-64 report and result in a reduction in the federal Medicaid grant award. Section 1903(w) and 42 C.F.R. Part 433 also regulate the receipt of funds donated to the state by health care providers or related entities. Health maintenance organizations are considered to be health care providers for purposes of this regulation. 42 C.F.R. 433.56(a)(8). A donation from a health care provider will be deducted from a states reported expenditures for Medicaid unless the donation is considered permissible. 42 C.F.R. 433.57. A permissible donation is one that is either bona fide, or was donated by a provider for costs associated with outstationed Medicaid eligibility workers. 42 CFR 433.66. A bona fide donation from a health care provider is one that has no direct or indiect relationship to Medicaid payments made to the health care provider, a related entity, or another provider in the same class (in this case, managed care organizations [MCOs]). Donations will be determined to have no direct or indirect relationship to Medicaid payments if those donations are not returned to the individual provider, the provider class, or related entity under a hold harmless provision or practice. 42 C.F.R. 433.54. A hold harmless practice includes any one of the following: -The state provides for a non-Medicaid payment that is positively correlated to the donation. A positive correlation includes any positive relationship between these variables, even if not consistent over time; -Any portion of a Medicaid payment to the donating provider or provider class varies only on the amount of the donation; or -The state provides for a direct or indirect payment, offset or waiver that operates to guarantee a return of any portion of the donation to the provider. Any donation of $5,000 or less by an individual provider in a year is presumed to be bona fide. 42 C.F.R. 433.54.

http://www.whitehouse.gov/omb/circulars_a087_2004/ It is incorporated by reference into the Medicaid program at 45 C.F.R. 92.22(b).

The first prong of the hold harmless test involves a non-Medicaid payment that is positively correlated to the donation. As originally promulgated, the positive correlation test was interpreted by the DAB to require a statistical analysis showing that the non-Medicaid payment increased as the total tax cost increased. Hawaii Department of Human Services, DAB No. 1981 (2005). CMS has since amended the regulation so that the tax 4 and the payment amounts are considered positively correlated when they have a positive relationship with each other even when that relationship is not evidenced through a strict correlation in a mathematical sense. CMS examples of positive correlations are: -statistical correlation, where a series of tax and payment amounts are analyzed to determine if there is a statistical relationship between both amounts; -the rate of a tax and the rate of the non-Medicaid payment are based on the same numeric factors (amount of revenues, bed days); -the non-Medicaid payment is conditional on payment of the tax; -evidence of the intended effect of linked tax and payment programs, especially when a state enacts the tax and/or payment programs in the same legislative session; and -if the calculation of the payment amount is determined in whole or in part by the tax amount, or if the tax amount is calculated in whole or in part based on the payment amount. 72 Fed. Reg. 13729 (March 23, 2007). The CMS commentary to the proposed regulation made clear that this is not an exclusive list, and that there may be other ways that this positive relationship could be found, and we only provide these examples as a demonstration of the broad interpretation of the positive correlation test. Id. DHS is unaware of any non-Medicaid payment by the state or local government to UCare Minnesota that would be positively correlated to the donation amount in the statistical sense. However, with the revised definition of positive correlation in 2008 that does not rule out a positive relationship that occurs purely by happenstance, there is a possibility that CMS would choose to reduce the Medicaid grant by a federal share of the $30 million. There are no administrative or judicial rulings involving a state challenge to a CMS disallowance in which CMS did not find some sort of causal relationship between the donation and the state payment to the provider. In addition, in CMS response to public comments on the proposed rule, CMS provided that non-Medicaid payments that occur in the regular course of business, such as procurements, would not be considered a hold harmless practice. 73 Fed. Reg. 9691 (February 22, 2008). CMS is unlikely to invoke this prong of the hold harmless test based on other, non-Medicaid payments by the State to UCare, unless those payments are linked in some way to the $30 million donation. The second prong of the hold harmless test involves a Medicaid payment, or portion thereof, that varies only on the amount of the donation. United States ex rel. Baker v. Community Health Systems, Inc. is a
4

This discussion relates to hold harmless provisions related to provider taxes, but the relevant hold harmless provisions for taxes and donations are virtually identical and intended by CMS to be interpreted in the same manner. 72 Fed. Reg. 13731 (March 23, 2007).

qui tam case in which the federal district court denied the defendant hospitals motion to dismiss on grounds that the complaint contained insufficient factual information regarding the alleged fraud. The alleged fraud involved an indigent care fund financed by contributions from New Mexico counties, but those county contributions derived from donations from hospitals eligible for payments from the fund. The court found that the payments from the hospitals were made pursuant to informal agreements with the counties that conditioned the Medicaid supplemental payments from the indigent care fund upon receipt of the donations from the hospitals. In finding that these payments were not bona fide and therefore in violation of the hold harmless rule, the court did not distinguish between the second and third prong of the test, but it is reasonable to conclude that the arrangement violated each of the last two prongs separately, since the Medicaid payments varied only based on the payment of the donation, and since the Medicaid payments guaranteed the repayment of the donations from the hospitals. United States ex rel. Baker v. Community Health Systems, Inc., 709 F. Supp. 2d 1084, (D.N.M., May 25, 2011). The donation from UCare is easily distinguished from the facts in Baker, absent a plan to return the payment through Medicaid or to guarantee the return of the $30 million through payments, waivers, offsets or any other means. It is conceivable that CMS could attempt to justify a disallowance on the grounds that Minnesotas Medicaid capitation payments to UCare would exceed the $30 million in any recent year, and that therefore those payments operate to offset the value of the $30 million contribution, in violation of the third prong. Howe1ver, such an interpretation is unlikely to be sustained through administrative or judicial review, given that the statute and regulations and numerous CMS statements indicate that bona fide donations received from Medicaid participating providers are permissible and therefore not required to be subtracted from state Medicaid expenditures on the CMS-64 report. If CMS were to assert that any Medicaid payment operates to guarantee repayment of a portion of a donation, then there would be no situation in which a Medicaid provider could make a bona fide donation, resulting in a failure to give meaning to the exception in section 1903(w) for bona fide donations from Medicaid providers. It is a cardinal rule of statutory construction that every statute must be given effect, if possible. Williams v. Taylor, 529 U.S. 362, 404 (2000), United States v. Menasche, 348 U.S. 528, 438539 (1955); Montclair v. Ramsdell, 107 U.S. 147, 152 (1883). For all of the above reasons, it appears that Minnesota has a legitimate argument that the $30 million from UCare is a permissible, bona fide provider-related donation. 4. Whether the planned donation must be treated as a refund or applicable credit within the meaning of OMB Circular A-87, which would require a reduction in expenditures on the CMS-64 report and result in a reduction in the federal Medicaid grant award. CMS letter to David Godfrey, received July 19, 2011, put DHS on notice that CMS would consider a donation from any MCO made from excess operating margins on Medicaid business to be a refund of Medicaid payments, or an applicable credit to Medicaid payments within the meaning of OMB Circular A-87, which is incorporated into regulations governing Medicaid program costs at 45 C.F.R. 92.22(b). OMB Circular A-87 requires that reported expenditures must be net of all applicable credits, which include receipts or reduction of expenditure type transactions that offset or reduce expense items allocable to federal awards as direct or indirect costs. Examples of such transactions are: purchase discounts, rebates or allowances, recoveries or indemnities on losses; sale of publications, equipment, 6

and scrap; income from personal or incidental services; and adjustments of overpayments or erroneous charges. OMB Circular A-87, Att. A, C.3.a. To the extent that CMS attempts to argue that any permissible provider-related donation from a Medicaid provider must be considered an applicable credit under OMB Circular A-87, the argument is weak because it fails to give meaning to the protection afforded to permissible donations under section 1903(w) allowed to be received by the state and not required to be deducted from reported Medicaid expenditures. There is some support in DAB decisions, although only one is directly related to provider donations. Texas Department of Human Services, DAB No. 381 (1983) involved an arrangement through which the State of Texas placed eligibility workers in local hospitals in order to ensure the rapid eligibility determinations of people who were hospitalized. The state only placed workers in those hospitals that agreed to fund the non-federal share of the cost of those workers. HCFA found and the Board agreed that this was not a donation within the meaning of 42 C.F.R. 433.60 because the funds were not donated without restriction because the hospitals realized a clear benefit from the donationMedicaid reimbursement for the cost of care for individuals admitted to the hospital. In Texas, the Board noted: HCFA conceded, without citing any reference in policy guides regulations or statutes, that a donation to a states Medicaid agency was permissible and could be used as part of a states share for Medicaid matching purposes as long as the donation was made unconditionally. Id, 4. Further support is provided in Oregon Department of Human Resources, DAB No. 1298 (1992), involving a 1992 disallowance of a transfer of funds to the non-federal share of Medicaid from the state of Oregons motor vehicle compensation fund. The state had taken a fund that was designed to compensate health care providers for the costs of treating uninsured victims of motor vehicle accidents, and transferred it to fund the non-federal share of Medicaid expenditures, thereby extending the impact of the available state funds through federal matching funds. The funds in question derived from a drivers license fee. CMS disallowed the value of the funds transferred, but was reversed by the DAB. Among other reasons, the DAB declined to accept CMS (then HCFA) argument that it had the discretion to disallow the use of funds specified in regulation as an allowable source of the non-federal share, where CMS finds that the funds operate to reduce the expenditures of the states Medicaid program. CMS had erroneously relied on an earlier ruling regarding an impermissible donation in the state of West Virginia as support for the argument that CMS may look behind the receipt of funds by a state and treat those funds as an applicable credit, when those funds are specifically permitted for use as the state share of a Medicaid expenditure. Id, 5. Georgia Department of Community Health, DAB No. 1973 (2005), involved transfers from publiclyowned hospitals in Tennessee to the State of Georgia. The decision turned on the definition of intergovernmental transfers from one state to another, but in its discussion of the history of the regulations governing provider taxes and regulations, the Board provides: The funds that a state recovers in the form of provider-specific taxes and donations that are related to the providers receipt of payments for Medicaid services [meaning an impermissible tax or donation] are effectively rebates or discounts in the costs of those services that states are required to share with federal funding sources. By requiring that [impermissible] providerspecific taxes and donations be deducted from the cost of medical assistance in which a state 7

claims FFP, section 1903(2) ensures that the states charges to federal funds for Medicaid expenditures will be limited to the states actual costs. Id, 13. This statement provides a basis for assuming that the opposite would also be true--that permissible taxes and donations under section 1903(w), such as bona fide donations, are effectively not rebates or discounts within the meaning of OMB Circular A-87, because they are specifically allowed and not required to be subtracted from Medicaid expenditures. In a 2007 decision, the Board completely rejected the potential for a revenue source (in this case, an intergovernmental transfer or IGT) to be both permissible under section 1903(w) and an applicable credit under the OMB circular. Minnesota Department of Human Services, DAB No. 2122 (2007) overturned a CMS disallowance related to Minnesotas payment of increased capitation payments to Metropolitan Health Plan that also involved an intergovernmental transfer from Hennepin County Medical Center to the State. Among other arguments, CMS asserted that the intergovernmental transfer should be treated as an applicable credit to the capitation payments in accordance with the circular. In Minnesota, the Board provided: As Minnesota points out, this Board said in Georgia that if a payment to a state was a protected intergovernmental transfer then it would not properly be treated as an applicable credit. In a footnote to that paragraph, the Board explains that This conclusion in Georgia was based on the Boards decision in Oregon Dept. of Human Resources, DAB No. 1298, at 10, (1992), which in turn noted that CMSs predecessor agency (HCFA) had conceded in prior Board cases that if funds qualify as states share, then they are not subject to the applicable credit cost principle requirements. CMS does not argue that this conclusion was in error. Minnesota, 16. The Board further explains in Minnesota that CMS arguments about the treatment of payment from a provider might be relevant as an applicable credit or donation 5, it is not relevant where the payment is an intergovernmental transfer protected by section 1903(w). Id, 18. Although this case involved an intergovernmental transfer instead of a permissible donation, both are protected in section 1903(w) from subtraction from reported expenditures. This is strong evidence that the Board would not entertain CMS argument that a bona fide donation must be treated as an applicable credit. The CMS letter to David Godfrey of July 19, 2011 is ambiguous as to whether current CMS leadership concedes that the previous Board decisions prevent the treatment of a bona fide donation as a rebate or applicable credit under OMB Circular A-87. The letter asserts that the donation would be an applicable credit, but that further documentation is necessary to determine whether the donation could be considered bona fide. Further analysis would be unnecessary if a bona fide donation could be nevertheless be considered an applicable credit because it derived from Medicaid payment. If CMS asserts and the Board agrees that a bona fide donation is nevertheless an applicable credit because is relates to a Medicaid payment, it may be difficult to argue that the $30 million from UCare is unrelated to a Medicaid transaction, since UCare derives all of its revenue from Medicare, Medicaid and state health care programs and investment income, and since UCare noted publicly that the amount was based on excess reserves related to Minnesota health care programs. 6 However, we are not privy to
5 6

The Board uses the word donation in the sense of an impermissible donation. The Star Tribune reported on March 17, 2011 that UCare said it was overpaid because of changes last year in state medical assistance programs, and that is has since lowered its rates. The donation to the state comes from the companys cash reserves and is based on UCares earnings above expenses from its management of state public program health care. Emphasis added.

UCares calculations, and there may be some help if the $30 million is more than or less than the actual excess reserves related to Minnesotas public program contracts. There may also be some support because state law governing health plans limits the ways in which a health plan can spend premium revenue, and those methods include both rebates and contributions for charitable, educational, religious or scientific purposes. Minn. Stat. 62D.12, subd. 9a. (2010). In conclusion, there are supportable arguments that UCares donation is permissible under section 1903(w) as a bona fide donation because the provider is not held harmless through Medicaid payments or other state or local government payments that are related to the donation, and therefore are protected from treatment as an applicable credit and offset from the reported expenditures on the CMS-64. 5. Whether reporting the planned donation as a bona fide donation would expose DHS to liability under the federal False Claims Act.

Among other provisions, the federal False Claims Act (FCA) imposes liability on any person who knowingly presents, or causes to be presented, to an officer or employee of the United States Government ... a false or fraudulent claim for payment or approval. . . , and on any person who knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government. 31 U.S.C. 3729(a)(1), (2). This liability may include civil penalties of up to $11,000 per claim, treble damages, and attorneys fees and costs. 31 U.S.C. 3729(a). As described above, to receive federal matching funds DHS must report various expenditures and revenues to CMS on the CMS-64. Given that this reporting amounts to making a claim for federal funding, there is a possibility that if the UCare donation is determined not to be a bona fide donation, some FCA liability could attach to reporting UCares donation as a bona fide donation on the CMS-64. However, as described below, there are at least two reasons why DHS or DHS staff would likely not be liable under the FCA for reporting the UCare donation as a bona fide donation on the CMS-64. First, neither DHS nor DHS employees would likely qualify as persons under the FCA. Under the FCA, liability extends to any person who makes for false claims as defined under the FCA. 31 U.S.C. 3729(a)(1). The FCA does not define the word person. The Supreme Court, however, has held that the various features of the FCA . . . far from providing the requisite affirmative indications that the term person included States for the purposes of qui tam liability, indicate quite the contrary. Vermont Agency of Natural Resources v. U.S. ex rel. Stevens, 529 U.S. 765, 787 (2000). Additionally, the 8th Circuit Court of Appeals has held that a state employee sued for money damages for actions taken in an official capacity stands in the shoes of the sovereign and is not a person under the FCA. U.S. ex rel. Gaudineer & Comito, L.L.P. v. Iowa, 269 F.3d 932, 936 (8th Cir. 2001). 7 Based on these precedents, it is unlikely that DHS or DHS employees would qualify as persons under the FCA, and, therefore, would likely not be subject to qui tam liability. Second, it is unlikely that either DHS or DHS staff would have the requisite standard of knowledge required for liability to attach under the FCA. Under the FCA, a person makes a false claim knowingly when he or she (i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity
Although the Court did not reach the issue of whether a state employee acting in their individual capacity could be a person under the FCA, it stated the mere assertion that [a state employee] issued standards that conflicted with state law does not allege actions outside his official duties that would give rise to liability in his individual capacity. Id. at 937.
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of the information 31 U.S.C. 3729(b)(1)(a). Therefore, to be exposed to liability it must be proven that a person not only made a claim that was false or fraudulent, but that the person did so with the requisite knowledge either actual knowledge, deliberate ignorance, or reckless disregard for the falsity of the claim. In interpreting the standard of knowledge required to support a claim under the FCA, the 8th Circuit Court of Appeals has recently held that a statement that a defendant makes based on a reasonable interpretation of a statute cannot support a claim under the FCA if there is no authoritative contrary interpretation of that statute. U.S. ex rel. Hixson v. Health Management Systems, Inc., 613 F.3d 1186, 1190 (8th Cir. 2010). The court reached this conclusion based reasoning used by other Circuit Courts of Appeal in similar cases, specifically that it is hard to see how [the relators] could ... have satisfied even the loosest standard of knowledge [under the FCA], i.e., acting in reckless disregard of the truth or falsity of the information, when the relevant legal question was unresolved and that a defendant does not act with the requisite deliberate ignorance or reckless disregard by tak[ing] advantage of a disputed legal question. Id. quoting United States ex rel. Siewick v. Jamieson Sci. & Eng'g, Inc., 214 F.3d 1372, 1378 (D.C.Cir.2000) and Hagood v. Sonoma County Water Agency, 81 F.3d 1465, 147879 (9th Cir.1996). As described in Section 3 above, both statute and regulation state that all provider-related donations are to be deducted from expenditures, unless the provider-related donations are permissible. 42 U.S.C. 1396b(w)(1)(A)(i)(I); 42 C.F.R. 433.57. Statute and regulation define a permissible provider-related donation as a donation that is bona fide. 42 U.S.C. 1396b(w)(1)(A)(i)(I); 42 C.F.R. 433.66. Regulation defines a bona fide donation as one where there is no direct or indirect relationship between the donation and Medicaid payments made to the provider, the provider class, or a related entity. 42 C.F.R. 433.54(a). Regulation also states that the donation will be determined to have no direct or indirect relationship to Medicaid payments if the donation is not returned through a hold harmless provision. 42 C.F.R. 433.54(b). The type of hold harmless provisions cited in regulation, the existence of which would prevent a donation from being considered bona fide, include a positive correlation between a non-Medicaid payment and the donation, a variation of a Medicaid payment based on the amount of the donation; or any kind of payment or offset intended to guarantee repayment of the donation. 42 C.F.R. 433.54(c). Based on the information currently available, a reasonable interpretation of the applicable statutes and regulations would lead to the conclusion that UCares donation constitutes a bona fide donation. Although UCare is a health care provider, its donation appears to have no direct or indirect relationship to Medicaid payments to it, its provider class, or any related entities and no hold harmless provisions appear to exist. Additionally, although there appears to be no statute, regulation, or case law which specifically prohibits classifying a donation of this type as a bona fide donation, unless or until CMS disallows classification of UCares donation as a bona fide donation and provides more information about its reasons for disallowance, it is difficult to say with certainty whether an authoritative contrary interpretation exists which would prohibit classification as a bona fide donation. Therefore, since a statement by DHS that UCares donation is a bona fide donation would be based on a reasonable interpretation of the applicable statutes and regulations and no authoritative contrary interpretation appears to exist, it is unlikely that such a statement could subject DHS or DHS staff to liability under the FCA.

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6. The process for obtaining federal approval/disapproval if Minnesota chooses not to reduce its reported expenditures by the value of the donation; and the portion of a disallowed donation that may be applicable to Medicaid. Medicaid regulation requires states to submit quarterly information to CMS regarding taxes and donations (bona fide and otherwise) received by the state. The CMS-64 is the quarterly report of Medicaid expenditures, and there is a section in that report for provider taxes and donations. If a state fails to report revenues in accordance with this section, CMS has the authority to reduce future grant awards by the value of the unreported donation until such time as the state properly reports. 42 C.F.R. 433.74. If the UCare donation is received between July 1 and September 30, it must be reported as a revenue source on the CMS-64 report due in October, 2011. Although the regulations are not explicit about the CMS process for review and approval, the commentary preceding the proposed rule in 1992 provides that donations in excess of $5,000 requires explicit authorization from CMS prior to being considered bona fide, and that it is the states responsibility to request that authorization. The commentary also makes clear that states can request that approval at the time of the submission of the CMS-64 report. 57 Fed. Reg. 55138 (Nov. 24, 1992). CMS has the right to defer federal funding for expenditures reported on the CMS-64 in accordance with 42 C.F.R. 430.40 where the agency questions the validity of the claim and needs additional information. If CMS determines that the donation is not bona fide, 42 C.F.R. 433.54(e) provides that CMS will deduct the amount of provider donation that is not bona fide from the states expenditures before calculating FFP. 42 C.F.R. 430.42 provides that when CMS determines that a claim is not allowable, it issues a notice of disallowance, and the state has 30 days from receipt of the notice to appeal to the Departmental Appeals Board. If CMS determines that the state should reduce the expenditure claim because the donation is not bona fide, the entire $30 million would be subtracted from expenditures, resulting in a loss of $15 million in federal matching funds. If CMS determines that the $30 million must be treated as an applicable credit, there is some possibility that the loss would be slightly less than the $15 million, because the credit would apply to capitation payments for state-funded programs as well (GAMC for the first quarter of 2010, and adults without children in MinnesotaCare). That analysis might also be affected by information on how UCare arrived at the $30 million sum. 7. The States right to administrative and judicial review of a CMS decision to disallow federal funding related to the planned donation. As noted above, the state may appeal a disallowance to the DAB. 42 U.S.C. 1316(e) and 45 C.F.R Part 16. If the state has been paid the FFP prior to the notice of disallowance, it may choose to retain those funds throughout the duration of the appeal, but then is liable for the interest if the disallowance is affirmed by the Board. If the state has not been paid the FFP prior to disallowance, CMS retains the funds during the duration of the appeal, and is not liable to the state for interest if the disallowance is reversed. 42 U.S.C 1396b(d)(5). Judicial review of an adverse decision of the DAB is available by filing an action in the United States District Court for the District of Minnesota. 42 U.S.C 1316(e)(2)(C). 11