See more of the story

New managed care contracts that promise big savings for the government also will deliver a big blow to UCare, the Minneapolis-based insurer that's currently the largest HMO in the state's public health insurance programs.

Gov. Mark Dayton announced Tuesday the results from the latest round of competitive bidding on HMO contracts, saying the state and federal governments should save nearly $450 million in 2016 from a process that will drop UCare as an option for most enrollees.

There's also another $200 million in repayments from HMOs and county-based purchasing organizations, state officials announced Tuesday, because public health insurance enrollees didn't use as much care as expected ­during 2014.

"It's a great thing for taxpayers. But it's also, I think, a really good thing for our enrollees," said Lucinda Jesson, the state Human Services commissioner, during a news conference near the Capitol. Jesson said state officials evaluated bids from health plans in terms of both cost and quality.

For decades, Minnesota has hired managed care organizations for people in the Medicaid and MinnesotaCare programs. Until this year, competitive bidding resulted in more enrollees shifting to UCare, which currently manages care for about 360,000 people in the public programs.

This fall, those enrollees will need to pick a new health plan for next year.

The news didn't generate cheers at UCare, which currently employs about 900 people.

"We will have to eliminate jobs," said Jim Eppel, the health plan's chief executive, in an interview. "Obviously, it's a reality that we have to face given the downsizing in our business."

About 800,000 enrollees in Medicaid and MinnesotaCare currently have their benefits managed by HMOs and county-based purchasing organizations. The state hires these groups through contracts that were worth about $4 billion in 2014.

The new contracts for next year will have a value of about $4.9 billion due to significant enrollment growth. Public program coverage has grown significantly under the federal Affordable Care Act, which let states significantly expand Medicaid programs that cover people with income near or below the poverty line.

MinnesotaCare covers a slightly higher income group.

In September, the state plans to begin helping current UCare enrollees pick a new plan, Jesson said. That's a month earlier than normal, she said, adding that the extra time should help with the transition.

The state is in the process of a difficult switch to the MNsure system for management of the public insurance programs, but enrollees don't use the system for selecting managed care plans, she said.

More than half of the $650 million in savings announced Tuesday will go to the federal government, which jointly funds the public programs along with the state. The state's share comes to about $246 million, she said.

"For those enrollees whose health plan options will change, we do not anticipate significant inconvenience, as there will be minimal difference in provider networks between many of the plans," Jesson wrote in a Tuesday letter to legislators.

Starting in 2011, Minnesota launched competitive bidding among managed care organizations for public program contracts in some parts of the state. The 2016 contract, however, is the first time competitive bidding was used statewide.

"This is by far the most individuals and families have had to switch plans in a given year," said Jim Schowalter, executive director of the Minnesota Council of Health Plans, a trade group for the state's nonprofit health ­insurers.

State public programs accounted for roughly half of UCare's $3 billion in revenue last year, said Allan Baumgarten, an independent health care analyst in St. Louis Park.

Public health insurance programs also provided a lot of UCare's income in 2014, which Baumgarten said cushioned losses in the individual market and the insurer's break-even business providing coverage for Medicare beneficiaries.

"It's a significant blow," Baumgarten said of the state's announcement.

Eppel said he couldn't comment on Baumgarten's analysis, since UCare only just learned of the state's decision and was still gauging the financial impact. But UCare will survive, he said.

"UCare has been around a long time," Eppel said. "If you look at the size that we will be after this action, it's about equivalent to where we were in 2009."

Dayton's announcement was the latest twist in a long and winding road for UCare and the public health ­insurance programs.

The nonprofit was created in 1985 solely to provide HMO coverage to Medicaid beneficiaries, although it has since expanded into other markets. In 2011, UCare wrote a $30 million check to help the state chip away at a $5 billion projected budget deficit.

UCare officials say they want more information from the state about why the nonprofit lost out in the competitive bidding process. Jesson said she could not offer details because the procurement technically is still open.

Without specifically mentioning UCare, she said in an interview that "one of them scored very differently in this round of competitive bidding than they did in the past."

Rep. Matt Dean, R-Dellwood, said lawmakers next year will debate how to spend the state's share of the $650 million in savings.

Dean said he was surprised that UCare wasn't among the competitive bidding winners, but said of the process overall: "Competition is yielding good results from the standpoint of taxpayers saving money."

Christopher Snowbeck • 612-673-4744

Twitter: @chrissnowbeck