In a strategy that could save taxpayers millions of dollars and harness the power of market forces, Gov. Mark Dayton has begun rolling out a plan that forces HMOs to bid competitively for $3 billion in annual state business providing health care to low-income families.

The four biggest insurers -- Medica, UCare, HealthPartners, and Blue Cross and Blue Shield of Minnesota -- are reacting cautiously. Millions of dollars are at stake, as well as the health care of 500,000 poor and disadvantaged patients. Some warn of a "race to the bottom'' as plans jockey for state business.

"This isn't like competing on building a bridge," said Ghita Worcester, a senior vice president at UCare.

But the plans recognize that dealing with Dayton might be better than the alternative -- a suspicious Legislature where both Republicans and Democrats think the nonprofits make too much money off the gigantic state insurance programs.

"There will be winners and losers" under competitive bidding, said Lucinda Jesson, Dayton's commissioner of human services. "Not everyone will have a seat at the table. I know that sounds harsh -- but that's competition. And it's the way we're hoping to drive a better system."

Jesson's department issued the first request-for-proposals in early April for managed-care contracts covering about 273,000 people in the metro area. It is the plans' first look at what Dayton has in mind.

The strategy, first laid out in an executive order in March, would mark a sharp departure from past administration of Medicaid, a program for the poor and disabled, and MinnesotaCare, a subsidized plan for the working poor.

Under current practice, the state sets payment rates based on each plan's historic costs, plus medical inflation. The new process will grade plans on a point system that assesses their ability to provide quality services while keeping costs low.

States are experimenting

While there has been talk in the past of tackling health plan profits, interest swelled this year -- partly because the Legislature's GOP majority hopes to erase a $5.1 billion deficit using only spending cuts, and partly because the plans made more money than expected.

Jesson wouldn't say exactly how much she expects the bidding process to save, but the governor's budget put savings from the bidding process and other changes at about $117 million in 2012 and 2013. Another $183 million in savings are expected in the following biennium.

Minnesota is one of at least a dozen states trying to squeeze greater efficiencies out of Medicaid at a time when health spending is crushing budgets.

"When a state does that -- takes a large book of business away from one contractor it finds wanting and sends it elsewhere -- that sends a powerful message to the market," said Allan Baumgarten, a consultant who publishes a respected review of the Minnesota health care market.

The plans say they welcome the changes, noting that they already compete with each other in the commercial market -- mainly large employers.

"We're going to sharpen our pencils, for certain," said Glenn Andis, senior vice president of government programs at Medica, which has the largest public enrollment in the state.

Yet doing the necessary financial analysis is no simple matter. The plans need to cover the risk of insuring the state's most needy patients without putting cost-cutting above quality of care.

"We have to boost our actuarial help significantly,'' Andis said. "It's going to be a lot more work and a lot more expense on our part."

Frank Fernandez, vice president of government programs at Blue Cross and Blue Shield, said the company will try to draw on its experience with competitive bidding in other states.

"Our greatest concern is the potential for disruption or confusion on the part of folks who participate in the programs," Fernandez said.

UCare's Worcester said she had similar concerns. UCare had a large number of Hmong and Somali patients, and the state must acknowledge the challenges of working with diverse immigrant communities that need transportation, interpreters and clinics that understand cultural differences.

The plans have spent much of this legislative session trying to fend off criticism that they frequently collect excessive profits from their state contracts. According to Baumgarten's research, the plans earned more than a third of their revenue off of the state's public programs last year. In 2009, they earned higher margins off state business than off their commercial business.

In 2010, the plans as a group posted operating margins of 3.84 percent, or $130.8 million, on revenue from state programs, according to the Minnesota Council of Health Plans. That was the highest since 2004, and well above the 10-year average of 1.77 percent.

Executives argue that the insurance business is cyclical, and there have been years when they lost money on state business.

In response to criticism, the health plans recently made a one-time deal with Dayton to limit profits to a 1-percent margin this year on the state programs. The agreement came as UCare said it would return $30 million to the state because it earned more than expected.

Legislature could go further

At the Capitol, some lawmakers think Dayton isn't pressing hard enough. One measure approved by the House would cut payments to health plans with Medicaid and MinnesotaCare contracts by 12 percent for the next two years -- about $350 million -- with the suggestion that they make it up by putting pressure on the highest-costs doctors and hospitals.

In addition, some Republican lawmakers are miffed that the governor implemented by executive order a change they were seeking in legislation.

"That seems to be his M.O.," said Sen. Sean Nienow, R-Cambridge, chief sponsor of bills to require competitive bidding and audits of the insurers.

Nienow and other Republicans say they may still pursue legislation because they aren't sure that the governor's plan will actually result in competition.

Still, the competitive bid process for the metro area is in its earliest stages, with deadlines for bids coming due in mid-May and June. Jesson said she views it as a test that will need to be evaluated before rolling it out much further.

"We think this is a really good way to do it," Jesson said. "But that's us thinking about it. We do want to step back and say, 'How is this working? Is there a better way?'" • 612-673-7335 wwolfe@startribunecom • 612-673-7253