Gov. Mark Dayton on Wednesday ordered sweeping changes in the way Minnesota handles health care programs by introducing more competition, aiming to save the state money in the fastest-growing part of its budget.

Dayton's plan would force providers to compete to provide the state's subsidized health care based on cost and outcomes, rather than negotiating prices based on history.

"For far too long, health care plans have simply been paid based on what's been done before," said Human Services Commissioner Lucinda Jesson. "I think it will be a fundamental shift in the way we buy health care as a state."

Any change in the state's health care business could have a major impact on Minnesota's bottom line. The state spends about $3 billion a year providing health care to more than half a million Minnesotans. While state officials do not expect massive cost savings in the short run, they said bringing more market forces to bear could pay dividends in the long run.

The governor also demanded a new public accounting of how the state's managed health care dollars are spent on public programs, including a website to display the programs' contracts and performance. Managed care is intended to both deliver quality care and control costs.

"It is critical for public trust that Minnesota's taxpayers understand how public dollars for health care are being used," Dayton said in his executive order.

The plan does not require legislative approval. But key DFL and Republican lawmakers praised the idea of introducing more competition into the state's multibillion-dollar health care business. "Typically, when you have a competitive bid process that helps," said Senate Health and Human Services Committee Chairman David Hann, R-Eden Prairie.

Like many lawmakers, he had not yet had a chance to study Dayton's plans closely. Hann has been busy putting together a Senate health care budget that cuts more than $1 billion in projected health care spending. "Our argument all along has been you need to have more of a market dynamic in health care," he said.

Sen. Linda Berglin, a Minneapolis DFLer who disagrees with Hann on most health care matters, said the new bidding process would "make our purchasing a lot more competitive and cost-effective." Berglin, who once chaired the committee that Hann now controls, recalled trying to get Republican Gov. Tim Pawlenty interested in the type of plan Dayton unveiled Wednesday, to no avail.

Health plan officials were cautious about the planned competition. "We hope the governor's proposal to change the contracting process isn't the first step to cut-rate health care," said Julie Brunner, executive director of the Minnesota Council of Health Plans. The competition may mean fewer choices for Minnesotans who get subsidized managed care, said Jesson. But she said none would be cut from care and they should actually receive better care. Jesson said she did not discuss the governor's plan with health insurance companies in advance, although some clues were in the governor's February budget plan.

The commissioner heard plenty from health officials Wednesday. "Anytime you make a large shift, a big change, there is going to be concern and perhaps even a little outrage. That's to be expected," she said.

Both the health plan council and Blue Cross Blue Shield of Minnesota praised Dayton's past moves to expand health care, but noted that the plans are already working to reform their business. "Gov. Dayton recognizes the need for system change in health care, and we agree. Blue Cross also is working for change," the company said in a statement.

Concern over reports

The plans also sounded the alarm about having to do more reporting. Brunner said the industry submits to 200 reports and audits each year that provide all the data Dayton wants -- and she hopes Dayton's order streamlines the process rather than adding another report.

As Minnesota lays the groundwork for a health care exchange in 2014, there's a renewed urgency to make it easier for consumers to do side-by-side comparisons. Dayton noted that managed care costs have more than doubled in the past decade. The plans counter that public programs are a volatile part of their business.

Profit margins have been an average of 0.91 percent of revenue on public programs in the past decade, according to the Minnesota Council of Health Plans.

Last week, UCare Minnesota contributed $30 million from its reserve funds to the state. Dayton welcomed the voluntary contribution and said it was time for other companies to follow suit. Separately, lawmakers have introduced measures that would cap health care business' profits from public contracts and recoup excess cash for the state.

Dayton on Wednesday proposed a new look at the health plans' reserves after April 1, when they are required to report their most recent numbers. "If ... they are holding excess reserves, the administration will ask them to return the appropriate amount to the taxpayers of Minnesota," Dayton's office said.

The reserve is an amount insurers set aside each year to pay for expected claims in its public and commercial businesses. State law puts no limit on how much money a health plan can keep in its reserves.

But health plans said they manage their reserves very carefully. "Each health plan is unique, and Blue Cross needs to have appropriate levels of reserves for our business to remain stable over the long term," Blue Cross said in a statement.

Hann said he, too, was uneasy about the state digging into how health plans set reserves. "You have to be ... careful about how deeply you are trying to manage these private entities."

Jackie Crosby • 612-673-7335 Rachel E. Stassen-Berger • rachel.stassen-berger@startribune.com