Minnesota Medicaid Revisits the Question: Managed Care or Fee-for-Service?

In the beginning, there was fee-for-service (FFS). In this case, the beginning was 1965, when Medicaid (and Medicare) were enacted. FFS was the way that these public programs, as well as almost all private insurers, purchased health care. Fast forward to today. Propelled by an interest in budget predictability and federal policy changes giving them greater flexibility, 41 states, including the District of Columbia, now contract with managed care organizations (MCOs) to deliver health care to some or all individuals enrolled in Medicaid. Oklahoma is on track to make that 42 in April. Over 72 percent of all individuals enrolled in Medicaid—and 85 percent of all children—are in MCOs.

Swimming against the managed care tide, Minnesota has adopted legislation directing its Medicaid agency to

“develop an implementation plan for a direct payment system to deliver services to eligible individuals in order to achieve better health outcomes and reduce the cost of health care for the state. Under this system, eligible individuals must receive services through the medical assistance fee-for-service system, county-based purchasing plans, or county-owned health maintenance organizations.”

In other words, tell us how we can remove private MCOs from our Medicaid program and replace them with FFS for “eligible individuals,” defined as children and families and adults without children. The implementation plan is due to the legislature on January 15, 2026.

Minnesota is not a state one would expect to break ranks with the other forty. It was an early adopter of Medicaid managed care, launching demonstration projects in 3 counties in the mid-1980s. Today the overwhelming majority of individuals enrolled in Medicaid in the state—86 percent—are in MCOs. Nine MCOs currently hold contracts with the state; 1 is county-owned and licensed as an HMO (Hennepin Health); 3 are county-owned and licensed as county-based purchasing organizations (Itasca Medical Care, PrimeWest Health, and South Country Health Alliance); and 4 are nonprofit (Blue Cross Blue Shield, Health Partners, Medica, and UCare). Only 1 of the Medicaid MCOs in Minnesota is for-profit: UnitedHealthcare Community Plan, a subsidiary of UnitedHealth Group, the nation’s fifth largest company by revenue (which, as it happens, has its headquarters in the state). This is in sharp contrast to most other managed care states, where Medicaid markets are dominated by for-profit MCOs.

One of the drivers of this legislation appears to be concern about profits earned by the MCOs while the continuous coverage requirement was in effect during the public health emergency, including a reported $675.8 million in 2022 alone. A recent StarTribune article quoted one state legislator as follows: “We have this situation where some of them are making big bucks and the Medical Assistance system is really under stress—and the providers are really under stress. So, how do you put those things together? My issue is: Why are we paying them so much and getting so little?”

Whatever the politics of enactment, the legislature was clear that it wants the state Medicaid agency to develop a plan for implementing a direct payment system—that is, one in which the Medicaid program pays providers directly on a fee-for-service basis rather than paying MCOs on a capitation (per member, per month) basis. There is more than a little nuance here: while MCOs receive monthly capitation payments from the state agency, it is still not unusual for them to pay their network providers on a fee-for-service basis, despite the interest of many policymakers in promoting “value-based payment” arrangements. The legislation does not speak to network provider payments. It does, however, ask the agency to address several questions the answers to which will be of interest beyond Minnesota.

One is how projections of the cost of a direct payment (FFS) system compare with projections of the cost of the current managed care system. Presumably these estimates will focus on the populations specified in the legislation, children and families and adults without children, and will incorporate the agency’s recommendations for changes to FFS payment rates that are “necessary to ensure provider access and high-quality care and to reduce health disparities” for those populations. (Any such changes could also affect payment rates for MCO network providers).

To state the obvious, this cost estimate will be tricky. There are lots of moving pieces, including: the trend rate in health care price inflation; the effects of FFS and managed care arrangements on the use of services by enrollees; the administrative costs to the state Medicaid agency of operating a FFS system compared with the administrative costs incurred by MCOs in operating provider networks; the size of any surplus or profits retained by the MCOs after paying providers and accounting for administrative costs; the inherent predictability of fixed monthly capitation payments for the state’s budget; etc.

The legislation also directs the Medicaid agency to “evaluate the effectiveness of approaches other states have taken to coordinate care under a fee-for-service system.” Once Oklahoma implements managed care, there will be 9 states that do not contract with MCOs: Alabama, Alaska, Connecticut, Idaho, Maine, Montana, South Dakota, Vermont, and Wyoming. (A number of states contract with MCOs for some populations or services and cover others on a FFS basis). Of these 9 states, only 1—Connecticut—initially contracted with Medicaid MCOs and then, in 2012, reversed course and replaced those arrangements with what one advocate characterizes as “managed fee-for-service.” (Vermont, with a population one ninth of the size of Minnesota’s and smaller than that of any state other than Wyoming, operates a “managed care-like model” out of its Medicaid agency under a section 1115 waiver).

It’s not clear how all this will play out. The legislation directs the agency to prepare an implementation plan, not just a feasibility study, and to submit the plan to the committees of jurisdiction, so this is a serious undertaking. Although the deadline for submission is two years away, the policy conversations have already begun. On the other hand, it is hard—at least from this distance—to envision a scenario in which the state terminates contracts with five MCOs that in total enroll 90 percent of the state’s 729,000 Medicaid children and families and 85 percent of its 267,000 Medicaid adults without children.

Whatever the outcome, the ball is now in the court of the state Medicaid agency to run the numbers and lay out an alternate FFS-based system for children and families and adults without children. The ball is also in the court of the nonprofit and for-profit MCOs to make the empirical case for their continued participation in the state’s Medicaid program. Hopefully the resulting data and analyses will give advocates in other states a framework and evidence base for thinking about the trade-offs between Medicaid managed care and FFS.

Andy Schneider is a Research Professor at the Georgetown University McCourt School of Public Policy.