Once skittish conservatives are discovering modest privatization steps in one US state.
Jindal Continued Louisiana Privatization Push in 2011
Initiatives advanced in Medicaid, public employee health care and more
May 15, 2012
In the last year of his first term in office, Louisiana Gov. Bobby Jindal continued to advance privatization as a central component of his broad government reform agenda. And with his re- election to a second term in November 2011, privatization is likely to continue to play a major role in the Pelican State’s streamlining efforts for the next several years.
The Commission on Streamlining Government (CSG), which held its final meeting in November 2011, proposed several of the largest privatization initiatives advanced to date. CSG was a two- year commission created by Jindal and the state legislature in the spring of 2009 to recommend reforms to reduce the cost of government through downsizing, streamlining and privatization. According to media reports, commissioners received a progress report that estimated that 62 of the commission’s 238 proposals had been implemented, with 62 others not acted on yet and the rest underway; ongoing savings to date from CSG recommendations put into place to date exceed $750 million.
In December 2009, the CSG had issued a report to the governor and legislature outlining 238 recommendations estimated to save over $1 billion through privatization, streamlining, consolidation and elimination of government activities. Regarding privatization alone, the CSG recommended over a dozen privatization initiatives estimated to save the state at least $88 million, including ongoing initiatives to outsource the administration of state employee group medical benefits and transition the state’s Medicaid program into a privately delivered managed care system (see discussion below).
The state’s streamlining efforts continued to yield dividends in 2011. In May, credit rating agencies Standard & Poor and Fitch both upgraded the state’s credit rating, citing the state’s strong fiscal management, strong employment levels and sustainable levels of public debt. The upgrades are the sixth and seventh under Jindal’s first term and come at a time when many other states have faced downgrades.
In 2011, the Jindal administration made progress on some of its key privatization initiatives, though some met with significant resistance from the state legislature and public employees. For example:
Medicaid Privatization: In July 2011, the Louisiana Department of Health and Hospitals announced the selection of five healthcare insurers that will provide state-subsidized policies to over 800,000 state Medicaid patients under the largest single privatization initiative advanced to date under Jindal’s watch. Under the plan, the state will transition away from its current fee-for- service model—where the state pays healthcare providers directly for services delivered to Medicaid recipients—and place recipients into “coordinated care networks,” where the state will pay the private insurers to cover Medicaid patients, and the insurers will manage patient benefits and reimburse providers for services rendered.
According to the administration, the current fee-for-service system creates a patchwork of fragmented, uncoordinated care that poorly serves patients and drives up the costs of service delivery. The new privatization program—known as “Bayou Health”—is designed to coordinate care among physicians, hospitals and other healthcare providers to save an estimated $135 million per year out of the state’s $6.7 billion Medicaid budget. At full implementation, approximately two-thirds of the state’s 1.2 million Medicaid recipients will be served through the coordinated care networks, with approximately 400,000 recipients remaining in the current fee-for-service program.
Under the Bayou Health program, the five private networks will operate on a statewide basis under three-year contracts. Three of the networks—Amerigroup Louisiana Inc., Amerihealth Mercy of Louisiana Inc., and Louisiana Healthcare Connections Inc.—will be paid a monthly, prepaid fee by the state for each of its Medicaid enrollees, and the firms will manage benefits, approve services and pay providers. Two other firms—Community Health Solutions of America Inc. and UnitedHealth of Louisiana Inc.—will operate a “shared savings” model, a managed fee-for-service model in which the firm shares in the savings generated by improving health outcomes and reducing costs, while continuing to pay providers on a fee-for-service basis.
Eligible Medicaid recipients will choose from one of the five plans, which have a consistent set of core benefits and services while offering different packages of enhanced benefits to furnish a range of choices. Under the contracts, the amount, duration and scope of services provided by Bayou Health insurers cannot be less than those provided under the existing state Medicaid plan.
Recipients will transition to Bayou Health in three phases beginning in February 2011. Recipients will have a 45-day window to choose a plan, and those who do not select a plan will be assigned to one that includes their primary health care provider. Recipients will receive an insurance card for their plan and can receive care from any provider in their respective firm’s provider network. State health officials have launched a statewide education campaign to inform Medicaid recipients on how to navigate the new system.
In November 2011, the federal Centers for Medicare and Medicaid Services (CMS) informed state officials that it had formally approved the Bayou Health program. Any changes to a state’s Medicaid delivery system must be submitted to CMS and approved as an amendment to the state plan that outlines how the state operates Medicaid.
“Because Louisiana is one of only a few states not already coordinating recipients’ care through these kinds of networks, we had the advantage of other states’ experience to draw from in creating our [coordinated-care network] model,” Medicaid Deputy Director and Bayou Health Project Director Ruth Kennedy said in a July 2011 press release. “We studied Medicaid programs in more than two dozen states, looking at what worked and what didn’t. Based on these ‘lessons learned,’ we were able to develop very detailed network requirements that allowed our evaluation team to select the best entities for Louisiana, ones that demonstrated they can deliver the health care improvements our recipients deserve.”
Despite the significant progress toward implementation, Bayou Health faced some challenges along the way in 2011. First, the process was slowed by legal challenges from several of the insurers whose bids were not selected among the five chosen by the state; all were ultimately resolved. Additionally, the state legislature enacted a bill (House Bill 207) that would have created an annual reporting requirement on program implementation and would have terminated the Medicaid privatization program at the end of 2014 if not renewed by the legislature. Proponents suggested that the law would afford legislators the opportunity to review the program at the end of the three-year contract, but opponents countered that it was a move to undermine the administration’s contracting authority. Gov. Jindal ultimately vetoed the legislation.
State Public Employee Health Care PPO: The Jindal administration began taking steps to explore the potential privatization of a health insurance plan run by its Office of Group Benefits (OGB), which administers several health care plans for approximately 250,000 current and retired state employees and their dependents.
While some of OGB’s health insurance plans are already operated by private firms today, the administration is exploring the potential privatization of OGB’s preferred provider organization (PPO), which arranges for discounted care for over 60,000 policyholders in a network of physicians and hospitals. According to the administration’s 2012 budget proposal, privatization of PPO operations could save the state an estimated $10.1 million and reduce OGB staff by 149 positions, roughly half of the 300 current employees administering the program today. The administration also expects that a privatization could net the state over $150 million in a one-time upfront payment.
In May 2011, OGB issued a request for proposals seeking a financial advisor to explore the potential privatization of functions related to OGB’s statutory mission and provide a market valuation of the OGB’s book of business. In July, state Commissioner of Administration Paul Rainwater announced that Morgan Keegan & Co. was selected over bidders Goldman Sachs and UBS Investment Bank to advise the Jindal administration on a potential OGB privatization.
Earlier in the year, the administration contracted with a separate firm, Chafee and Associates, to establish the fair market value of OGB’s operations. A Senate committee issued a legislative subpoena in June 2011 to get a copy of the report, which the Jindal administration had not previously released publicly, claiming that it fell within the scope and protections of the deliberative process privilege. The report found that the market value of OBG operations was between $133 million and $217 million as of January 2011.
However, the proposed privatization garnered significant pushback from state public employees and some in the legislature who fear that policyholder premiums would increase under privatization and that benefits could be reduced. In August 2011, the state Legislative Auditor’s Office issued a report suggesting that privatizing the administration of the PPO might result in higher insurance premiums to state employees under a private insurer because of an increase in marketing costs, premium taxes, necessary profit margin and reinsurance costs, which the report suggested could be points for negotiation with the potential vendor. The auditor report also suggested that privatization may diminish the legislative and/or state administrative control over costs, benefits or changes to the plans, which would need to be addressed in the contract. Rainwater responded to the audit in a letter noting that the report’s speculation on higher insurance premiums is not supported by its own research, failed to factor in cost savings from improved efficiency, and ignored the reality that premium costs are regularly increasing already under the current structure.
He also reiterated the administration’s position that any privatization would not proceed unless it could be implemented to ensure that plan members continue to receive the same level of benefits and eligibility rules, with increased premium rates continuing to be tied to medical market rates. Rainwater added that if a decision were made to move forward with privatization, it would not be implemented until the beginning of 2013.
According to Rainwater, Louisiana and Utah are the only two states that self-administer health insurance plans, putting government in the health insurance business and into competition with the private sector. Gov. Jindal echoed the point more succinctly in an April 2011 speech, asking: “What makes the state of Louisiana uniquely qualified to run a health insurance company?”
Prison Sales and Outsourcing: One of Gov. Jindal’s major budget proposals—the proposed sale of three prisons to generate approximately $100 million to help close a gap in state healthcare spending—was scuttled in June 2011 when the House Appropriations Committee voted 13 to 12 to reject a bill (House Bill 545) that would have set the plan into motion.
Jindal’s proposed FY 2012 budget included a plan to privatize the operation of two prisons (Avoyelles Correctional Center and Dabadie Correctional Center) and sell three prisons (the Allen, Avoyelles and Winn Correctional Centers) to a private operator. In addition to the expected upfront payment from the prison sales, the administration estimated that the outsourced prison operations would lower the state’s prison operating costs by over $200 million over the next 20 years.
The plan was immediately met with a skeptical response from public employee unions and state legislators who objected to the proposed use of one-time revenues to cover ongoing operational costs and raised other concerns related to the potential public safety impact. Prior to the HB 45 vote, the House of Representatives had already removed language from the budget that would have facilitated the transfer of prison sale proceeds to healthcare, and HB 45 would have only authorized the spending of sale proceeds on one-time capital expenditures.
At press time, it is unclear whether the Jindal administration will revive the prison plan in 2012, but if it does it is likely to receive significant private sector interest. In February 2011, six potential bidders submitted responses to a request for information issued by the Louisiana Department of Public Safety and Corrections seeking market interest in the proposed operational outsourcing at the Avoyelles and Dabadie facilities.
Behavioral Health Services: The Department of Health and Hospitals announced in early September that it had selected Magellan Health Services, Inc. as the winning bidder on a contract to serve as the operator of the Statewide Management Organization (SMO) that will provide behavioral health services to 100,000 adults and 50,000 children.
Gov. Jindal signed an executive order earlier in the year making Louisiana one of the first states in the nation to formally bring together the leadership of the state’s four child-serving agencies—DHH, the Office of Juvenile Justice, the Department of Children and Family Services, and the Department of Education—to form a statewide, coordinated system of care for youth with significant behavioral health needs. The system is part of the Louisiana Behavioral Health Partnership, created by DHH to improve coordination of behavioral health services for all eligible children, as well as adults with serious mental illness and/or addictive disorders. The partnership covers both those in the Medicaid and uninsured populations, which will ultimately be enrolled with the SMO.
Like the larger Medicaid privatization initiative, the SMO will be responsible for improving the access, quality and efficiency of behavioral health services for its enrollees, and it will develop a network of qualified behavioral health care providers to offer a full array of services to behavioral health patients. DHH’s Office of Behavioral Health was tasked as the implementing agency for the program and will serve as the lead agency overseeing the SMO contract. If both the Louisiana Division of Administration and CMS approve the contract, then the SMO will begin operations on March 1, 2012.
Business-Charter School Partnerships: In June, Gov. Jindal signed into law House Bill 421, a key legislative priority that authorizes partnerships between Louisiana businesses and charter schools (e.g., a “Business-Charter Partnership”). Under the bill, companies can receive preferred enrollment of up to 50% of school seats for dependents of its employees and a minority percentage of the charter school’s board seats in exchange for a gift or free use of land or a facility, the major renovation of an existing facility or a major donation of technology. Individual businesses or groups of businesses can apply to open new schools, or in collaboration with a school district, convert an existing school to charter status. The administration advanced the bill to increase the involvement of the business community in public education and offer charter schools a new tool for facility financing.
Leonard Gilroy is director of government reform at Reason Foundation. A modified version of this article was published in Reason Foundation’s Annual Privatization Report 2011: State Government report.
 “Louisiana streamlining commission wraps up its work,” The Associated Press, November 1, 2011.
 Melinda Deslatte, “Jindal: La. shouldn’t run health insurance program,” The Associated Press, April 29, 2011.
 Jan Moller, “Gov. Jindal’s plan to sell state prisons is killed by House committee,” The Times-Picayune, June 06, 2011.
Leonard Gilroy is Director of Government Reform