Buy for a dollar and sell for two.

It’s the middleman’s credo, and lucrative — but not for the taxpayers getting fleeced.

America’s byzantine health system is beset with parasitic middlemen like pharmacy benefit managers and third party administrators, a key reason why it costs so much more per person than anywhere else in the world despite delivering mediocre results. Even in a supposedly public program like Medicaid — the federal/state partnership that provides care to low income and disabled Minnesotans — state government contracts with managed care organizations to actually administer it.

The Minnesota Legislature is staring at a gloomy, stormy fiscal horizon that includes structural budget deficits and the risk of a massive cut in federal Medicaid funding.

But there’s also a safe harbor in sight, if lawmakers can muster up the courage to cut out the middlemen.

Minnesota just has to follow Connecticut’s lead. In 2012, Connecticut was able to save on their Medicaid program by cutting out the unproductive managed care organization middlemen they had contracted with since the 1990s to run it. They were simultaneously able to ensure the cuts didn’t harm quality of care — in fact, they were able to improve quality — by prioritizing care coordination and accessibility in their new and more efficient MCO-free system.

In Minnesota, by contrast, MCOs to this day have the authority to set provider networks, limit patients to those networks, regulate how services can be delivered, require prior authorizations and other bureaucratic hurdles to receiving certain services, and set their own payment rates. In other words, they can do almost anything they want, especially when patients don’t feel confident enough to appeal denials.

The federal government claims MCO administration should “manage cost, utilization, and quality” in order to “reduce Medicaid program costs and better manage utilization of health services” as well as improve “health plan performance, health care quality, and outcomes.” Whether that’s actually true is both doubtful and unproven. For example, Medicaid MCOs nationwide deny over twice as many claims as privately-administered Medicare Advantage plans, which are themselves known for imposing incredibly onerous and expensive burdens on patients compared to publicly-administered traditional Medicare.

When Connecticut removed its Medicaid MCOs, the result was incredible. By 2023, Connecticut’s Department of Social Services reported that the state had reduced Medicaid administrative expenses to 2.75% of spending. Unfortunately, Minnesota still throws away money contracting out Medicaid. According to consulting firm Milliman, Minnesota’s administrative expenses were at 12.5% in 2023.

The benefits extend well beyond just a mere reduction in administrative costs.

When Connecticut cut out the Medicaid MCO middlemen, it was also able to do more to coordinate care for those on Medicaid. For example, by developing a special type of primary care clinic called the Patient Centered Medical Home, Connecticut Medicaid can better connect beneficiaries who frequently show up in the emergency room with the services they need to prevent expensive future emergencies. Efforts like these can generate even more savings, but are difficult to implement without first getting rid of the Medicaid middlemen because those middlemen tend to view necessary data about their enrollees as a trade secret.

Regardless, collecting and combining the differently formatted data from each one in order to gain useful insights for care coordination would be a statistician’s nightmare even if we make the big assumption that MCOs are willing to share their data and that combining it all is technically possible.

Estimating the precise savings from improved care coordination and reduced administrative costs is complicated, but we can make broad judgments by comparing Medicaid spending per beneficiary in Minnesota and Connecticut. To be sure, this is a simplification because the two states’ Medicaid programs differ in what they cover and the precise payment rates they use for specific services, but these differences are likely minor in the aggregate. Both Connecticut and Minnesota have been historically run by Democratic-leaning governments that tend to provide comprehensive benefits packages without creating onerous eligibility rules.

Doing that calculation, if Minnesota spent what Connecticut did on Medicaid per beneficiary, the state would have saved about $1.5 billion in 2024. The federal government would have saved about $2.6 billion, too. If MCOs save significant money, as is often claimed, such an extreme result shouldn’t be possible.

At the very least, $1.5 billion in savings would substantially reduce the state budget shock that would occur should Republicans in Congress follow through with their ongoing proposals to pass massive cuts to federal Medicaid funding. Former Rep. Jennifer Schultz, a health economist, recently estimated those cuts would cost Minnesota $2 billion.

It’s important to remember that federal Medicaid cuts don’t necessarily eliminate spending. They just pass the shirked expenses onto the states. State legislatures that must then decide whether to fill the gap with state tax dollars or actually cut health care for low income and disabled people. Our state Constitution requires that the state have a balanced budget, and meeting that requirement without cutting program benefits and eligibility — If Congress follows through on cuts to Medicaid funding — will be a fiscal nightmare if we do nothing about wasteful Medicaid MCO administrative costs.

This legislative session, Minnesota has divided control of government, requiring bipartisan cooperation.

Republicans might be willing to cut Medicaid spending to balance the state budget, but Democrats will definitely be hesitant to do so unless program benefits and eligibility can be protected.

The Connecticut model is a win-win for both. Cutting out the Medicaid middlemen is a great opportunity for both parties. They can fulfill their promises of bipartisan cooperation, reduce future budget deficits, and improve the quality of our Medicaid program, which funds crucial health care services for some of our state’s most vulnerable residents.

The legislation (SF1059/HF255) is ready to roll, but the clock is quickly ticking toward May 19.