DHS, the state’s Medicaid agency, is currently facing a third-party investigation into its fraud-ridden social services after criminal networks stole millions of Medicaid dollars from Minnesota’s federally funded public assistance programs.

The federal government has since threatened to withhold the state’s Medicaid payments, and Minnesota DHS sued in response to immediately unblock the flow of Medicaid funds.

Walz billed his proposed overhaul of Minnesota’s Medicaid reimbursement and enrollment system this week as a centralized approach to combating widespread billing schemes in DHS programs.

DHS to pay providers directly

The sweeping changes, if passed by the state legislature, would consolidate all Medicaid billing under a fee-for-service model through which the state directly pays providers for services rendered.

Minnesota currently contracts with insurance companies to pay out Medicaid claims, and they manage the overwhelming majority of submissions billed to the safety net system. These private insurers, classified as managed care organizations, administer more than 80% of Minnesota’s Medicaid benefits.

Widely considered the first line of defense against fraud, MCOs have the power to freeze Medicaid funds for suspected fraudulent activity and are contractually obligated to report credible findings of fraud to DHS.

HOW MINNESOTA’S SOMALI FRAUD INDUSTRIAL COMPLEX HAS STOLEN MILLIONS FROM MEDICAID

MCOs are incentivized by the terms of their contract with the government to identify fraud because they receive capitation rates: Fixed amounts of money paid upfront for the predicted cost of care. In this arrangement, the financial risk is transferred from the state to MCOs, as they must cover all agreed-upon costs, regardless of actual services rendered. In practice, if MCOs fail to stop fraud, they lose money and won’t break even.

Hennepin Health, a county-run MCO based out of Minneapolis, sounded the alarm about rampant fraud in the state’s Housing Stabilization Services over a year before DHS cut off Medicaid payments to the program. In fact, HSS was so riddled with fraud that DHS ultimately had to shut it down.

Staff at Hennepin Health sent DHS several fraud referrals, flagging improper billing patterns among certain HSS providers, missing or falsified documentation, and fabricated records, including for services supposedly provided long after clients had died.

DHS, however, continued to pay questionable HSS providers despite Hennepin Health’s repeated warnings. Hennepin Health banned those suspicious businesses from billing its own clients, but DHS allowed them to continue billing other insurance providers.

Counties cut out of the vetting process

In addition to Walz eliminating MCO contracts and establishing, in their place, a single state-managed claims processing system, DHS would determine who is eligible to enroll in Medicaid, rather than individual counties.

Minnesota’s healthcare system is supervised by the state but delivered at the local level by the state’s 87 counties.

It is unclear how many county officials would lose their jobs if the vetting of Medicaid applicants were shifted to DHS. 

The price tag of Walz’s plan

Walz argued that the state takeover of Medicaid disbursements and the eligibility process would “streamline” the system, which he called “antiquated,” moving it away from the “complex, layered” patchwork of counties and MCOs to a single entity.

“We think this is a way of simplification,” Walz said. “It’s a way to use best practices, AI, and what that does is take the burden off the counties, the managed care organizations. And that gives the state and the taxpayers a much more transparent view on how the system works.”

Walz added, “It’s antiquated computer systems. It’s decentralized control.”

The transition project is projected to cost taxpayers $72 million to carry out, including $17 million in the first fiscal period and another $55 million in the following budget cycle.

Initial estimates did not indicate exactly how much Walz’s proposal would cost in terms of technology fees to upgrade DHS’s computer software.

Pushback from state lawmakers, including Democrats

Some lawmakers, including Democratic leadership in the Minnesota legislature, pushed back on Walz’s plan to give DHS greater control over Medicaid’s administration in the state.

The governor would need GOP support to pass the proposal that would extensively expand DHS’s role. Republicans, who control half of the Minnesota House, pointed out that DHS failed to detect fraud for years.

“To put more responsibility on a state agency that acts irresponsibly, to me, is just a very stark, bad idea,” Republican state Rep. Paul Torkelson, co-chair of the House Ways and Means Committee, told reporters outside the governor’s Minnesota state Capitol office.

MINNESOTA’S FRAUD DEBACLE DEMANDS ELECTED WATCHDOGS IN EVERY STATE

Democratic state Sen. John Hoffman, chairman of the Senate Human Services Committee, accused Walz of not collaborating with the legislative body on the proposed project beforehand, nor of notifying committee members.

In a statement, Hoffman said he was “disappointed to learn about this proposal just last night without a thorough conversation with the committee that has primary jurisdiction over Minnesota’s human services system.”

“Major structural changes to a system that serves hundreds of thousands of Minnesotans require thoughtful collaboration between the executive branch and the legislature,” Hoffman said, noting that his committee “exists specifically to examine these types of proposals, hear from stakeholders, and ensure reforms are implemented responsibly.”

Walz acknowledged that he will “need legislative buy-in,” but insisted that his office has the authority to spearhead such efforts independently.

“The executive branch is responsible for carrying these out,” Walz said in response at Tuesday’s news briefing. “And to be very candid, we’re telling you that the way some of these things are structured are antiquated.”

Walz has faced criticism in recent weeks for a series of other administrative actions.

Late last month, Walz permanently appointed the official who oversaw the agency’s financial operations at the time much of the healthcare fraud occurred as DHS commissioner.

THESE ARE THE WALZ APPOINTEES WHO FAILED TO STOP RAMPANT MINNESOTA FRAUD

The Washington Examiner found that Optum, the “third-party” auditor that DHS had hired via a $2.3 million contract to investigate patterns of Medicaid fraud, previously received millions in state Medicaid funds through DHS. An initial Optum report released on the audit’s findings contained completely blacked-out pages full of redactions.

Republican state Rep. Kristin Robbins, chairwoman of the House Fraud Prevention and State Agency Oversight Policy Committee, questioned whether Optum has flagged any of its own providers in the audit.

“The majority of the report was redacted, so I don’t know what they found,” Robbins told the Washington Examiner. “The frustrating thing to me, as a legislator, is that they say they’re on it, and they’re finding fraud, and they’re flagging all these vulnerabilities, except they can’t possibly tell us what they are.”

“Yet they want us to spend millions and millions of dollars on technology upgrades,” Robbins said. “Well, until we understand better what the vulnerabilities are, we’re not writing them a blank check.”