About UsPress ReleasesPublicationsIssuesLinksHomeHome
 
PUBLICATIONS
Distribution, Utilization
and Impact of the
MinnesotaCare Provider Tax

January 2000

The Executive Summary

The Minnesota Care provider tax, and the Health Care Access Fund that holds it, result from a 1991 report produced by the Minnesota Health Care Access Commission. The group of 27 commission members and 87 consultants advocated: a) the establishment of a new subsidized health care program, b) creation of managed care networks statewide, and c) a transition from the employer-based health insurance system to a publicly funded health care system for all Minnesotans. To fund these initiatives, they recommended a tax on health care services.

 
Crafted behind closed doors by a group of seven legislators known as the Gang of Seven, the Minnesota Care bill (formerly called Health Right) easily passed in the Minnesota Senate but only narrowly passed in the state House of Representatives. Promoted primarily for expanding health coverage to the uninsured, the legislation also enacted various managed care initiatives, including an antitrust exemption for HMOs which initiated the consolidation of Minnesota's health care system into a few dominant managed care organizations. To pay for the new health care program, now called the MinnesotaCare subsidy program, and for the statewide transition to managed care, the legislature established the Health Care Access Fund and enacted a tax on adjusted grow revenues received by health care providers for the provision of services to patients.
 
Although the prohibition on public disclosure of the tax spurred a lawsuit, and federal permissibility of the tax was in doubt, collection of the MinnesotaCare provider tax began in 1993. In response, a significant number of physicians dropped their Minnesota medical license within the first year. Now, seven years after enactment of one of the nation's most sweeping health care reform laws, the impact of the comprehensive restructuring of Minnesota's health care system is evident. Most physicians have joined large group practices, few traditional fee-for-service health insurance options remain, three HMOs dominate the health care market, dissatisfaction has grown among patients and doctors, and the University of Minnesota Hospital has been sold to a private health care corporation.
 
Taxing the Sick
MinnesotaCare provider tax revenues have provided 78 percent, or $749.5 million, of the $960.4 million collected in the Health Care Access Fund since 1993. Health care providers have paid 51 percent of all provider taxes collected while payments from hospitals account for 33 percent. Of the $825.7 million collected in tax revenue, which includes a portion of cigarette taxes in 1992 and 1993, HMOs paid only $46.5 million through the gross premiums tax&emdash;a total of 5.65 percent. Provider taxes began in 1993 at 2 percent, decreased to 1.5 percent on January 1, 1998, and are scheduled to return to 2 percent on January 1, 2002. HMO premium taxes were suspended in 1998 and are scheduled to resume January 1, 2001.
 
Payment of the tax has been made more difficult by the State's lack of enforcement of the law's critical tax passthrough language. To assure health care providers that they were only required to act as the State's agents in collecting the tax from insurers, the 1992 legislature allowed providers to pass the tax through to all third party payers, which are required by law to pay the tax to hospitals and doctors.
 
However, no evidence exists that insurers pay the tax and there is little evidence of enforcement. Although the state Departments of Health and Commerce have regulatory authority over health insurers, neither receives funding to enforce or audit compliance. Interestingly, the Minnesota Department of Health, which has regulatory authority over HMO compliance with the tax passthrough requirement, has received over $51 million in health care access funds, but reports no specific funding to enforce passthrough compliance. As a consequence, the entire tax burden rests on persons who are sick, and the doctors, dentists, and hospitals who care for them.
 
Diverted Funds
Between 1992 and 1999, at the direction of the Minnesota legislature, nearly 29 percent of the Health Care Access Fund's resources were diverted from the MinnesotaCare subsidy program through fund transfers and legislative appropriations. This $276.3 million represents nearly 40 percent of all Health Care Access Fund expenditures and reserve fund designations, which totaled $695.6 million.
 
Table 1. Appropriations Not Used for the MNCare Subsidy Program - 1992 - 1999
 

NATURE OF USE

AMOUNT

Transfers to Other Funds/Depts

$82.3 million

MN Dept. of Commerce/MCHA

$30.9 million

Federal Contingency Fund

$81.9 million

MN Department of Health

$51.3 million

University of Minnesota

$18.0 million

Department of Revenue

$8.6 million

Interest on Tax Refunds

$2.5 million

Legislative Health Policy Research

$802,000

Subtotal

$276.3 million

Investment Income to General Fund

$17.0 million*

TOTAL

$293.3 million

 
Since 1993, health care access funds have been used to subsidize the state's General Fund ($69.6 million), provide start-up funding for a state insurance program [MEIP] that failed ($2.1 million), support the financially troubled Minnesota Comprehensive Health Association ($30.1 million), pay for legislative health policy research ($802,000) and begin a new "rainy day" contingency reserve fund (capped at $150 million). Between 1993 and 1999, the University of Minnesota and the Minnesota Department of Health also received $69 million for initiatives contributing to the growth of managed care including medical data collection, health policy development, and grants for hospital building projects. Although early transfers of health care access funds to the General Fund were based on projected costs that never materialized, the General Fund has yet to reimburse the Health Care Access Fund.
 
Subsidization of the General Fund by the Health Care Access Fund has also included investment income from the Health Care Access Fund and a shift in responsibility for health care programs. Between fiscal years 1993 and 1997, investment income from the Health Care Access Fund surplus, estimated at $17 million, accrued to the General Fund for usage unrelated to the MinnesotaCare subsidy program. In addition, to relieve budgetary pressures on the General Fund, approximately 2000 GAMC recipients will be terminated from GAMC after which they will be encouraged to enroll in MinnesotaCare. As a result of this shift in enrollment, an additional $10 million expense has been projected for the Health Care Access Fund in 2001.
 
Few Funds Used for Patient Care
Although several public statements have claimed that 80 percent of provider tax revenue is used for the MinnesotaCare subsidy program, research finds the percentage significantly lower. Until fiscal year 1999, state net costs for care of MinnesotaCare recipients and program administration equaled only 48 percent of all provider tax revenues collected between 1993 and 1998. During these six years, provider tax collections exceeded fund expenditures by 108 percent. When only hands-on patient care is considered, collections exceeded expenditures by 148 percent. In other words, collections were nearly 2 1/2 times the expense of direct patient care, and a little more than twice the expense of the entire subsidy program.
 
However, the provider tax is not solely responsible for payment of these expenses. The Health Care Access Fund, which funds all program and DHS administrative expenditures, contains income from additional sources (e.g. premium taxes, investment income, cigarette taxes, FFP). In addition, not all DHS expenditures pertain to operation of the subsidy program. Therefore, the actual percentage of provider tax dollars used for the MinnesotaCare subsidy program between 1993 and 1998 was even lower than the above listed figures.
 
Table 2. Total Subsidy Program Costs Compared to Provider Tax Collections
 

FISCAL YEAR

TAX REVENUE

STATE NET COSTS

COST AS % OF TAX

SURPLUS COLLECTIONS

REVENUE AS % OF COST

1992

$0

$45,000

0%

$0

0%

1993

$11,842,619

$3,887,000

32.8%

$7.9 million

304%

1994

$54,195,053

$28,161,000

51.9%

$26.0 million

192%

1995

$130,618,019

$50,603,000

38.7%

$80.0 million

258%

1996

$135,820,969

$55,322,000

40.7%

$80.5 million

246%

1997

$149,360,487

$75,741,000

50.7%

$73.6 million

197%

1998

$140,389,562

$85,092,000

60.6%

$55.3 million

165%

Subtotal

$622,226,709

$298,851,000

48.0%

$323.4 million

208%

1999

$127,312,232

$120,425,000Ý

94.6%

$6.9 million

106%

TOTAL

$749,538,941

$419,276,000

55.9%

$330.3 million

179%

 
 
In 1999, the percentage of revenue used for the MinnesotaCare subsidy program rose sharply to reflect increases in capitation rates to HMOs. Between 1998 and 2001, the appropriations for HMO capitation payments rise 117 percent&emdash;an increase which may or may not be reflected in upcoming HMO contracts with health care providers. In contrast, the 1999 legislature authorized a 3 percent cost-of-living increase for health care providers, but again did not require HMOs to pass on to providers the increases received in capitated payments from the State.
 
Ascertaining the percentage of health care access funds expended annually for patient care services has been made more difficult by the move to prepay health care expenses through capitation payments to HMOs. Capitation payments include prepayment for both patient care and administrative expenses without a requirement that individual recipient medical claims be reported to the State. State officials are therefore no longer able to accurately determine the amount of patient care services provided for each dollar spent out of the Health Care Access Fund. This determination is also hampered by disagreement over the definition of medical and administrative expenses.
 
Despite the placement of MinnesotaCare recipients into HMOs, DHS appropriations for administering the program continue to rise. This finding is surprising because capitated payments to HMOs include reimbursement for administrative costs related to the provision of patient care services.
 
According to state officials, this apparent contradiction results from an increasing workload at the department level related to maintaining the federal Medicaid waiver received by the State for the MinnesotaCare program. The waiver technically expands the state's Medicaid program through the MinnesotaCare program by granting Medicaid status&emdash;and with it, federal subsidies&emdash;to most MinnesotaCare recipients. In addition, as stated above, department officials report use of health care access funds for administrative expenditures unrelated to the operation of the MinnesotaCare program.
 
MinnesotaCare Enrollment Disappoints
State officials concede that the MinnesotaCare subsidy program has not decreased the rate of uninsurance in Minnesota. The program's high turnover rate and a 1997 survey suggest the primary use of MinnesotaCare as transitional coverage between private health insurance coverage. The program has also not met enrollment expectations. Concerns over stigma, cost, and application complexities have deterred public interest in MinnesotaCare coverage.
 
To expand enrollment in the MinnesotaCare program and to decrease the growing Health Care Access Fund surplus, state legislators have increased program eligibility, expanded benefits, transitioned GAMC recipients into MinnesotaCare, and allowed certain privately insured children to enroll and keep their insurance. Recipients who agree to pay the full premium may also choose to remain enrolled after their income exceeds eligibility limits. Although a 1994 audit found 17 percent of a sample of MinnesotaCare recipients ineligible for the program, no subsequent audits have been completed.
 
The 1997 legislature enacted an annual appropriation of $750,000 from the Health Care Access Fund for outreach efforts focused on increasing enrollment in MinnesotaCare. This appropriation is supplemented annually by federal funds of up to $450,000 for a total of $1.2 million in outreach dollars. In 1999, use of health care access funds was expanded to include outreach for enrollment in Medical Assistance and the state's General Assistance Medical Care program.
 
Surpluses Stir Discontent
Lower than expected enrollment and significant federal subsidies to the MinnesotaCare subsidy program have resulted in a healthy surplus in the Health Care Access Fund. For 78 percent of the 110,800 MinnesotaCare recipients, federal dollars cover 50 percent of all program costs. The Health Care Access Fund, which has long experienced a positive fund balance, otherwise known as a cumulative surplus, shows no sign of moving into deficit.
 
Until 1999, the Fund experienced structural (annual) surpluses. In other words, the money coming into the fund in any given year exceeded the amount of money leaving the fund in any given year. Starting in 1999, three successive years of structural deficits have been projected. However, with the HMO gross premiums tax reinstated in 2001 and the MinnesotaCare provider taxes rising to 2 percent in 2002, state officials expect the fund to begin experiencing structural surpluses in 2003. At no time is a negative fund balance expected. Even during the three years of structural deficits, the Fund is expected to maintain a cumulative surplus.
 
Although the Department of Revenue finds the provider tax to be one of the easiest and most efficient to administer&emdash;costing around 80 cents for every $100 collected&emdash;there continues to be disagreement over the use of health care access funds. Legislative limits on distribution of the tax dollars are vague, health care providers feel the burden to the tax, and few know or understand that comprehensive nature of the MinnesotaCare law. As the surplus in the Health Care Access Fund has grown, and constituent discontent rises, legislative support for the MinnesotaCare provider taxes appears increasingly tentative.
 
Conclusion
Although the 1992 Minnesota legislature fully intended&emdash;and subsequent legislatures have approved&emdash;the use of MinnesotaCare provider tax revenue for initiatives unrelated to the MinnesotaCare subsidy program, there appears to be a general public misconception regarding the amount and percentage of tax dollars actually used to insure the uninsured. Research reveals that a relatively small percentage of health care access funds, of which 78 percent are derived from the MinnesotaCare provider tax, has been directed toward the care and coverage of MinnesotaCare recipients in comparison to the level of health care taxation.
 
According to data from the Minnesota Departments of Finance, Human Services, and Revenue, collections from the MinnesotaCare provider tax have exceeded combined subsidy program and DHS appropriations by 108 percent and hands-on patient care by 148 percent.
 
A significant percentage of revenue within the Health Care Access Fund has been held in surplus, diverted to the state's General Fund, or used to implement the consolidation and restructuring of Minnesota's health care system into managed care networks. The provider tax collections alone equal 95 percent of all subsidy program and non-subsidy program expenditures and allocations from the Health Care Access Fund.
 
In addition, seven years after the passage of the comprehensive MinnesotaCare law, there is little evidence to suggest that the original goals of the 1992 legislature have been achieved. Changes in health care policy, funded by provider tax revenue and other health care access funds, have not been shown to sufficiently contain health care costs, broadly distribute the provider tax, lower the state's uninsured population rate, or improve patient access to health care services.
 
Instead, research finds that: a) the tax on health care services has increased the cost of health care by $750 million, of which at least 52 percent have been diverted from the provision of patient care; b) the burden of the MinnesotaCare provider tax rests on those who are sick, and the doctors, dentists, and hospitals who care for them; c) the state's uninsured population rate has not decreased as a result of MinnesotaCare; and d) patient access to health care services has become more restrictive with the statewide expansion of managed care networks, and the transition of MinnesotaCare recipients into HMOs.
 
Additionally, a healthy surplus in the Health Care Access Fund has led state officials and some legislators to view provider tax dollars as available for other projects and programs which technically can be designated as health care-related. As a result, public and legislative support for the MinnesotaCare provider tax has weakened.
 
Although many hospitals and health care professionals continue to support increased insurance coverage and improved access to medical and dental care, there remains much disagreement over the continued taxation and consolidation of health care services in Minnesota.
 
This report, detailing nearly $1 billion in health care access funds, will assist state legislators and members of the public in making informed decisions on the future of the MinnesotaCare provider tax and the Health Care Access Fund.
 
* Because the Department of Finance never tracked the interest earnings until 1998, this is an estimate of investment income based on 6 percent of annual fund balances in fiscal years 1993 through 1997.
 
Ý Explanation for this 41.5 percent increase can be found on page 64 ff. (Paying Providers and Health Plans) and page 76 ff. (Administrative Expenses Rise for State).
 
© 2000 Citizens' Council on Health Care
Amended, 2001
 
Questions for Policymakers to Consider

 

Did the 1992 legislature originally intend to direct extensive revenue to other initiatives beyond the MinnesotaCare subsidy program?
 
Should upcoming legislatures continue to direct extensive revenue to initiatives outside the MinnesotaCare subsidy program?
 
Should provider tax revenues continue to subsidize General Fund expenditures?
 
Should persons who are ill, and those who care for them, be responsible for funding hospital building costs, medical education, loan forgiveness programs, and public helath initiatives?
 
Should taxation be employed to expand managed care networks throughout the state?
 
If the provider tax is continued, should it be suspended until the pass-through provisions of the law are made enforceable?
 
Should providers without access to MinnesotaCare patients be required to pay the MinnesotaCare tax?
 
Have the provider taxes increased the cost of care by $750 million, decreased patient access to helath care, and increased the provider cost of uncompensated care?
 
If the legislature authorizes continuation of the provider tax, should the fund be specifically protected to prevent diversions of funds from the MinnesotaCare subsidy program?
 
Are physicians, hospitals and other health care providers entitled to a refund of the tax?
 
Should the Health Care Access Fund be reimbursed from the General Fund before a tax rebate from the state's General Fund surplus is considered?
 
The CCHC Report can be obtained by sending $30.00 (plus $3.50 for postage and handling of the first copy and an additional $0.50 for each additional copy) to:
 
Citizens' Council on Health Care
1954 University Ave. W., Suite 8
St. Paul, MN 55104
 
Questions: Call #651-646-8935 or email: info@cchconline.org


Citizens' Council on Health Care
1954 University Avenue West, Suite 8, St. Paul, MN 55104
Phone: 651.646.8935 / Fax: 651.646.0100, e-mail