Medica's decision to stop managing care next year for more than 300,000 people in public health insurance programs included a dire prognosis for the health of the ­Medicaid market.

The Minnetonka-based HMO said insurers are losing their shirts due to government contracts that don't adequately factor how enrollees in the program are using much more care than they used to.

The state countered that it considered recent cost trends and offered appropriate payment adjustments, while arguing Medica wanted to unfairly limit its business to certain counties while not addressing ­efficiency problems.

The claims in letters released this week by Medica and the state Department of Human Services (DHS) offer their sides of the dispute, but they don't provide a unified message on whether something's wrong with the programs.

"My first impression is: Where's the truth here?" said Roger Feldman, a health insurance expert at the University of Minnesota. "Is it in side A? Side B? Or somewhere in the middle?"

Medica notified the state on Wednesday that it would not renew its contract as an HMO for most people in the Medicaid and MinnesotaCare programs due to mounting financial losses. Enrollees don't need to take any action now, since Medica's move won't take effect until May.

On Friday, DHS sent letters to other health plans, saying discussions would start next week on "the strategy for moving forward to ensure a smooth transition for these enrollees." DHS says it will look for other health plans to step in and fill any gaps left by Medica.

Lawmakers on Friday were beginning to assess whether the outcome represents an unacceptable degree of disruption for enrollees, or is simply a growing pain as the state continues its multiyear shift to managed care contracts that are bid competitively. Consumer advocates, meanwhile, are bracing for yet another big enrollment shift.

Last year, more than 300,000 people in the public programs had to leave UCare when the Minneapolis-based HMO lost out in the first statewide competitive bid.

"This feels like déjà vu," said Meghan Kimmel, president of Portico Healthnet, a St. Paul-based group that helps people find health insurance coverage.

Through the first nine months of the year, Medica's HMO division — which consists primarily of Medicaid and MinnesotaCare enrollees — lost $105 million, according to a regulatory filing. The losses drove an overall loss of $99 million during the time period across Medica's three primary health insurance divisions, according to a Star Tribune analysis.

The mix of enrollees in the programs changed significantly between 2014 and 2016, Medica says, due to major enrollment growth of more than 200,000 people. As people gained coverage, some started using more care as they learned about the benefits, the insurer says. And more people started moving in and out of coverage starting this year, as the state improved its system for checking eligibility.

"These rates are in no way sustainable and we cannot subject the more than 1 million Minnesotans covered by Medica in other programs to additional instability by accepting them," Geoff Bartsh, a Medica vice president, wrote in a Nov. 30 letter. Projected losses of more than $150 million for 2016, he wrote, "will exceed any earnings in this business since 2005 and will diminish Medica's reserves to unstable levels."

State officials countered that they proposed higher payment rates for Medica next year due in part to the 2016 experience. But data from 2013-2015 showed costs were moderating, "a negative trend that could have been applied to your 2016 bid rate for 2017," wrote Marie Zimmerman, the state Medicaid director, in a Dec. 1 letter to Medica.

Drug costs push up rates

The state pushed up rates to account for increases in pharmacy costs and how ill some in the program were, Zimmerman wrote. She suggested that Medica had proposed withdrawing from certain counties where it didn't like the payment rates, writing that the move would have been "unfair to other companies and unfair to our enrollees."

"Finally, as negotiations took place throughout the last several months, Medica failed to acknowledge in any way that they have not implemented sufficient efficiencies to help manage utilization and cost or that you would going forward," Zimmerman wrote.

Sen. Jim Abeler, R-Anoka, said he believed both sides could take some blame for what happened, adding that "it's not OK to disrupt 300,000 people." The bottom line, Abeler said, is that Minnesota needs more options when it comes to hiring managed care groups. He said that Minnesota should change a state law that blocks for-profit HMOs from bidding.

Sen. Tony Lourey, DFL-Kerrick, said the disruptions are not ideal, but suggested they are not the new normal as the state continues with competitive bidding. The bidding process is a reaction, Lourey said, to old payment arrangements that seemed to routinely generate HMO profits.

"They're losing money on their bid," he said of Medica. "Every time you fall on the wrong side of risk, because of the bid you put in, you can't come to us and have us just eliminate the losses."

Twitter: @chrissnowbeck