The $100 Million Health and Human Service Savings Challenge

When the state’s economic forecast is released, the bottom-line surplus or deficit figure gets the attention.   But the forecast also provides pieces of information that when put together exposes the underlying challenges lawmakers face in their budget decision-making.    The latest forecast provides such an example - and it’s a head turner.

According to the forecast, total general fund tax revenue growth in the forthcoming FY 22-23 biennium is projected to be $2.867 billion.   Total health and human services (HHS) general fund spending growth for the coming biennium is expected to be $2.735 billion.  Thus, 95 cents of every additional general fund tax dollar expected over the next two years is currently forecasted to be consumed by current law HHS spending.   Looking further out, the claim on new tax revenue isn’t quite as dramatic – about 44 cents for every dollar in FY 24-25.  But that’s in line with long term trends as HHS has grown over years to comprise nearly 30% of the general fund budget while consistently consuming 40-50% of all new general fund tax revenues.

This slow but steady general fund crowdout isn’t a particular surprise having been long ago “foretold by the prophets” – namely the 2009 report of the Budget Trends Study Commission and prior to that the Brandl/Weber Agenda for Reform in the mid-nineties.   But the relentless pressure explains the intense legislative scrutiny the Department of Human Services has been under and the creation of a Governor’s Blue Ribbon Commission on Health and Human Services charged with delivering $100 million in savings.

Blue Ribbons in a Time of COVID

Absent several efforts undertaken by DHS in recent years, the HHS budget puzzle would be much more challenging.   Over the past decade Minnesota embarked on several new human service delivery models that have adjusted cost curves and staved off some of the bleakest projections offered in the past.   For example, according to the DHS, average managed care capitation rates increased 8.3% per year from 2000-2010 — part of the history that informed the Budget Trends Study Commission’s findings.   From 2011-2016, average managed care capitation rates decreased 5.7% per year.

Nevertheless, demographics and rising health care costs continue to exert significant pressure leading to one of the more unusual budget agreement provisions in state history.   As part of the deal struck to resolve the FY20-21 state budget, the Governor and legislative leaders agreed to create a “Blue Ribbon Commission on Health and Human Services” charged with finding $100 million in cost savings for the FY 22-23 biennium.  If those savings could not be found, $100 million would come out of the budget reserve (unless the next legislature would decide to do something different).   Pursuant to the legislation the action plan was required to include strategies to increase administrative efficiencies and simplification, reduce health and human service expenditures, reduce fraud and improve program integrity, and address equity problems in HHS services.   Importantly, no recommendation could result in the loss of benefits for eligible individuals or exacerbate inequities in HHS access.

The 17-member commission was comprised of the Commissioners from the Departments of Health and Human Services, four state lawmakers, and 11 HHS stakeholder organization representatives.   The Commission had a year to assemble, discuss, and vet proposals with the assistance of staff and public input in making their recommendations.   To count toward the savings goal, strategies had to directly impact the state HHS budget and have implementation timelines that facilitate changes in spending in the FY22-23 biennium.

According to the final report, the Commission received 200 unique strategy submissions, ultimately choosing 47 of them for closer review.   However, the arrival of COVID had a major disruptive effect on the Commission’s work and also short-circuited some of their bigger system transformation investigation ambitions.   Commission staff and a supporting consultant were able to flesh out two dozen strategies for full consideration by the Commission.   But due to the pandemic, the Commission was not able to undertake a final review of these strategies or “render a final judgement” and make actual recommendations based on their efficacy and merits.   The 22 strategies included in the final report are presented “so that legislators may benefit from the policy analysis.”

“One person’s savings is another person’s revenue loss” 

For the deeply curious, the final report does a nice job of laying out for each strategy a concise problem statement; a description of the proposal; the existence, nature and degree of any supporting evidence; and a discussion of implementation matters including populations impacted and equity considerations.   However, a layperson’s grasp of the strategies is implicitly limited due to the highly technical details of the programs themselves and their complex administrative and regulatory features, formulas, and nuances.  There is no easy transparency remedy for the inherent “inside baseball” characteristics of government human service delivery.

The Commission report includes nine cost savings strategies in health care and six cost saving strategies focused on long term support services for older adults and people with disabilities.   Three other strategies focused on reducing waste and fraud and improving program integrity — only one of which the Commission concluded offered potential near-term savings supporting the biennial cost reduction target.   Initial estimates of the savings from these strategies totaled up to $106 million.   Savings from other strategies included for further consideration totaled up to $98 million.  

However, if legislators are hoping for discrete, detailed savings figures to plug into budget targets next year, they will likely be disappointed.    Savings estimates in the report fell into one of three broad categories: up to $1 million, $1 million to $9,999,999, and greater than $10 million.  Moreover, no information was presented on how these initial savings estimates were derived or what they actually were comprised of (e.g. direct labor, indirect labor, amounts of purchased services, price controls, etc.).  In addition, some savings may require additional upfront spending such as hiring new investigators for DHS’ Surveillance and Integrity Review Section.  

But perhaps the biggest hurdle in meeting the $100 million challenge will be overcoming organizational stakeholder opposition to these strategies that in many cases appears to be daunting.    The Commission solicited and included comments from a wide variety of governmental, non-profit, and for-profit advocacy and service delivery organizations, many of which expressly stated support or opposition to the strategies.   For one strategy (modifying certain Medical Assistance durable equipment payment rates to match Medicare rates) all the public comments included in the report were in opposition.  In others the number of organizational representatives opposing the strategy outnumbered those supporting it.

Even for strategies in which the majority of stakeholder organizations expressed support, politically the odds still often seem to be stacked against any change.   For example, only three strategies fell into the Commission’s “biggest ticket” category of cost saving opportunity-- savings estimates in excess of $10 million for the coming biennium.  One of those was the implementation of a uniform administration of non-emergency medical transportation.  The majority of commenting stakeholder organizations expressed support for it.  But among the five organizations expressing opposition were the Minnesota Hospital Association, the Minnesota Council of Health Plans, and the Association of Minnesota Counties.  It’s hard to imagine a more influential and formidable troika of organizations weighing in on this issue at the capitol.

Stated opposition to strategies were based on concerns about service access and quality impacts as well as unintended consequences of their implementation.  But it would be naïve not to acknowledge that at least some degree of organizational self-interest -- economic and otherwise -- is inevitably at stake in these proposals.   As Commissioner Harpstead observed in testimony to House Ways and Means, implementing program cost savings always represents some degree of challenge since “one person’s savings is another person’s revenue loss.” 

That Other Initiative

Process control problems leading to improper payments.  Breaches of management responsibility with no satisfactory explanation.  Resignations wrapped in mystery.  Questions surrounding the actions of the Inspector General.  Debate surrounding the rightsizing of a mammoth agency.  An agency in a quiet state of turmoil and suffering from a damaged reputation with the public.  This all may sound a little familiar but actually describes the Texas Health and Human Services agency several years ago and the circumstances leading to the creation of a Health and Human Services Strike Force by that state’s governor.

Minnesota is not alone in taking a “blue ribbon” approach to dealing with a complex agency’s complex problems. What makes this state’s task force experience interesting is that although the Texas’ governor made it clear that he set no limits on the scope of the strike force’s work, the group refrained from reviewing individual programs and instead focused intensively on HHS management and organization.   As their final report notes, the strike force concluded the high-profile problems afflicting some HHS programs “has as much to do with organizational structure and management relationships” as it did with specific agency processes and procedures.

Overlooked in the hunt for $100 million is a similar internal organizational effort now taking place within DHS.   Upon her appointment, Commissioner Harpstead instituted operations “Stop Gap” and “Swiss Watch” to tighten and improve a wide variety of process controls within the agency.  Organizational structures and reporting relationships have been changed, positions have been both added and eliminated, and some new talent has been secured.   All this presumably has been influenced by the work of the DHS Commissioner’s Advisory Panel (co-chaired by former Medtronic CEO Bill George) charged with reviewing progress and advising the commissioner on issues including organizational structure, management team development, and department culture.

It is not clear how this initiative may have influenced the Governor's Blue Ribbon Commission efforts, if at all.  Nor is there any sense of whether unlocking the full benefits and potential of these management and organizational changes are being impeded by state human capital policies frozen in mid-twentieth century amber.   As an organization which has been beating the drum of human capital reform for some time, we find it difficult to believe that cost effective, efficient, accountable human service delivery has not been affected by what the National Academy of Public Administration calls “human capital systems preoccupied with a process of internal compliance which force agency missions to fit personnel processes instead of the other way around.”  Parenthetically, we have observed with some amusement that it took an Emergency Executive Order (20-07) to provide state agencies “the flexibility to hire staff, schedule, assign, and reassign employees without adherence to existing limitations…that present barriers to the needs of state agencies to efficiently and effectively mobilize and deploy their workforce” — in short, the things most effective organizations do as a matter of course.   (Perhaps one solution would be to declare the HHS’ ever-growing resource demands a “peacetime budget emergency.”)

Challenges of an Historical Commitment

Minnesota takes caring for the needs of its most vulnerable citizens seriously and makes it a government priority.  The proof is in the numbers.  We have tracked state and local health and human service spending for over 50 years in our publication How Does Minnesota Compare.  State and local spending rankings in health and human services has never dropped out of the top ten nationally and seldom dropped out of the top 5.   Based on latest available Census information, Minnesota health and human service spending per person at or below 150% of the federal poverty level (adjusted for state price differences) is 204.9% above the national average, second highest in the nation.   State Medicaid spending appears to be the driving force behind this differential.  According to the latest information from the Kaiser Family Foundation, Minnesota Medicaid spending per enrollee is 27% above the national average.  Spending in every enrollment segment is above the national average (ranging from 9% for the aged to 64% for individuals with disabilities.)    But there’s more at work here than just Medicaid.   Based on the latest information available (FY 2016) the 50-state average ratio of state Medicaid spending to total state and local “public welfare” spending as defined by the Census Bureau is 82%.   In Minnesota it is just 70%. 

That type of commitment to the quantity and quality of public services comes with a major responsibility: a relentless and aggressive pursuit of innovation, efficiency, and reimagination in their delivery.  Otherwise, costs explode, taxes increase, other spending critical to the health and welfare of citizens and the state economy is crowded out, and the state economic climate deteriorates.  It’s a demand especially relevant to DHS as its cost savings investigation explicitly excludes any recommendations that would result in the loss of benefits for eligible individuals or exacerbate inequities in HHS access.  

For the reasons highlighted we are not particularly optimistic that $100 million in savings will materialize in the 2021 session out of the Commission’s report.  The strategies have not been fully reviewed, initial stakeholder skepticism and resistance appears stout, and questions remain on whether the current state of government’s organizational and human capital systems are positioned to deliver on service delivery reform or anything resembling transformational change.   But perhaps a biennial savings fix isn’t the best way to think about this initiative.   The Commission put a lot of hard work and thought into something that should have a life well beyond the biennial budget session and should continue to be built upon.  In many ways it’s the beginnings of a map for a much longer journey, one we absolutely can’t afford not to take.