The Centers for Medicare & Medicaid Services (CMS) on June 1, 2015, published its first set of proposals to revise the Medicaid and Children’s Health Insurance Program (CHIP) managed care regulations in over a decade (the Proposed Rule). More than 200 pages in length and effectively re-writing the existing Part 438 of Title 42 of the Code of Federal Regulations, the Proposed Rule would establish national Medical Loss Ratio (MLR) standards for Medicaid and CHIP managed care programs, enhance state oversight of network adequacy, promote quality improvement by requiring comprehensive state quality programs and implementing a quality rating system, strengthen care coordination and managed long-term care, and provide states with flexibilities to incentivize delivery system reform. Among all of these proposals is a theme common within the managed care industry in the post-Affordable Care Act world: tension between increased federal oversight (and administration) of Medicaid and CHIP managed care plans and deference to state agencies.

Comments on the Proposed Rule are due to CMS no later than 5 pm EDT on July 27, 2015.

CMS Strives to Update Managed Care Regulations While Preserving the Role of the States

The proposed changes are the first substantive revisions to the Medicaid managed care program since 2002 and reflect the rapidly growing prominence of managed care within Medicaid. CMS notes in the Proposed Rule that, as of 2011, 39 million Medicaid enrollees across 39 states and the District of Columbia (i.e., 58 percent of all Medicaid enrollees) were enrolled in Medicaid managed care, a number that has only increased since then. Noting the significant developments across the U.S. health care financing and delivery system over the past 10 years, CMS also emphasized in the Proposed Rule that one of its goals is to align Medicaid managed care, where feasible, with other sources of health care coverage, including commercial markets, Exchange-based Qualified Health Plans (QHPs) and Medicare Advantage (MA) and Part D Programs. CMS notes the import of coordinating Medicaid managed care regulations with those governing QHPs and MA Plans due to the interconnection of these programs for individuals who move in and out of eligibility for Medicaid and for premium tax credits and cost-sharing subsidies through QHPs, as well as for individuals who are dually eligible for Medicare and Medicaid benefits.

Despite the intended expansion of CMS’s role in administering state Medicaid and CHIP managed care programs, CMS also strives to recognize with this Proposed Rule the role of the state in this federal-state partnership. Many of the proposals establish minimum standards and defer to states to determine how best to implement the proposed policy—or engage in appropriate oversight—for their respective programs, including potentially adopting higher standards or more rigorous requirements for program participants. This deference, however, perpetuates the state-by-state variance present in Medicaid managed care and among states’ Exchanges, and may minimize potential cost-savings for program participants through standardization of operations.

Medical Loss Ratio

CMS proposes several medical loss ratio (MLR) provisions for managed care organizations (MCOs), entities sponsoring pre-paid ambulatory health plans (PAHPs), and entities sponsoring prepaid inpatient health plans (PIHPs) (collectively, Sponsors) to align Medicaid and CHIP managed care requirements with those of the MA and commercial marketplaces, and to enhance the actuarial soundness of capitation rates, addressing an issue that has plagued CMS and states for years. (The definitions for MCOs, PAHPs and PIHPs generally are consistent with those currently set forth in 42 C.F.R. §§ 438.2 and 457.10.) The proposal (Medicaid MLR), which also would apply under CHIP, comes as no surprise, given previous indications from CMS that it was considering such a move.

MLR as a Component of Actuarial Soundness

Under the Proposed Rule, one factor CMS would consider in evaluating the actuarial soundness of state capitation rates is whether Sponsors “would reasonably achieve” an MLR of at least 85 percent for the rate year, as calculated under the Medicaid MLR methodology. The 85 percent threshold is “the appropriate minimum threshold” as the industry standard for several marketplaces. After consideration, CMS declined to propose a maximum Medicaid MLR that would protect Sponsors from rates that are too low to support reasonable administrative costs and profit, but CMS recommends that states “should consider an appropriate maximum threshold to ensure that the capitation rates are adequate for necessary and reasonable administrative costs . . . .” CMS also proposes that states “take into account” Sponsors’ past and projected MLRs when developing future rates.

Medicaid MLR Requirements Align with Other Markets

Although Sponsors, under the Proposed Rule, would be required to calculate and report their MLRs, CMS proposes to give states the option to mandate a minimum Medicaid MLR for MCOs, PAHPs and PIHPs. States that do adopt such a requirement would be required to establish a minimum Medicaid MLR of no less than 85 percent, but could implement a higher threshold. CMS identifies 85 percent MLR as an “industry standard” for MA and Part D Plans and large employers in the commercial market, and cites the opportunity to promote comparability across states and lower the administrative burden for Sponsors operating across multiple state and product lines. Furthermore, CMS proposes to grant states the discretion to determine whether to require Sponsors that fail to achieve any Medicaid MLR requirement to return a portion of their aggregate payments to the state (and CMS). The decision to grant states discretion in whether to establish a minimum Medicaid MLR and the corresponding repayment requirement stands in contrast to rules governing MLR for health insurance issuers in the commercial market and MA and Part D Plans, where the issuer is required to repay monies if the issuer misses the MLR threshold.

CMS also proposes to align the Medicaid MLR expense classifications with existing commercial MLR requirements set forth at 45 C.F.R. § 158.221, with certain narrow modifications to account for differences in the Medicaid program and CHIP. For example, under the Proposed Rule, Sponsors may include in the numerator expenses that would be categorized as “quality improvement expenses” under the commercial MLR regulations as well as certain expenses relating to Medicaid managed care External Quality Review. CMS acknowledges in the preamble that health care quality activities would include activities related to services coordination and case management, which may be more significant in Medicaid managed care than the commercial counterpart because of the “more complex populations” enrolled in Medicaid managed care plans. Notably, CMS would cap expenditures related to fraud prevention activities at 0.5 percent of premium revenue, for purposes of positive treatment under the Medicaid MLR calculation. The Medicaid MLR would be reported at the contract level unless the state mandates a different level of aggregation, and would be based on 12 months of experience.

CMS’s proposal is designed to establish greater consistency, limit administrative burden, and promote more accurately set capitation rates and consistency in the standards by which Sponsors calculate their Medicaid MLR relative to calculations in other marketplaces. The proposal does much to streamline what otherwise could be a diverse set of requirements for Sponsors participating in multiple states. Nevertheless, industry stakeholders have expressed concern that minimum Medicaid MLR requirements will adversely affect Sponsors’ ability to provide beneficial non-medical services, such as social services and transportation to appointments, that facilitate better enrollee outcomes but may not constitute permissible numerator expenses under the Medicaid MLR requirements. Safety net and smaller regional plans that experience financial fluctuations from year to year as a result of outlier events also could experience financial challenges under the Medicaid MLR requirements, as they may be limited in their ability to grow reserve funds.

Actuarial Soundness

Presently CMS requires that Medicaid managed care capitation rates be “actuarially sound” as determined according to generally accepted actuarial principles, certification by a qualified actuary, and appropriateness for the populations and services to be covered. State Medicaid managed care programs, CMS and Sponsors have been challenged in recent years, however, regarding the adequacy of rates for Sponsors, and the methodologies used to determine capitation rates and CMS’s oversight of the same have been called into question. The Government Accountability Office in 2010, for example, issued a report in which it concluded that CMS had been inconsistent in reviewing states’ rate setting for compliance with the Medicaid managed care actuarial soundness requirements (see generally, Government Accountability Office, “Medicaid Managed Care: CMS’s Oversight of States’ Rate Setting Needs Improvement,” GAO-10-810 (Aug 4, 2010)), and several states, such as Kentucky, have been plagued with controversy regarding the inadequacy of payment rates for participating MCOs that negatively affected Sponsors, providers and Medicaid enrollees.

Under the Proposed Rule, CMS would implement additional parameters for how states may set plan capitation rates, including around appropriate data sources for rate setting and trend factors, adjustments, non-benefit costs, risk adjustment, and other factors. As described by CMS, these proposals (along with the MLR-related provisions) would be intended to shift the focus of rate setting from a “process-based” framework to one more focused “on a substantive review and assessment of the actuarial assumptions and methodologies underlying the development of the rates.” For example, CMS proposes that base data used for rate setting be Medicaid-specific data (e.g., validated encounter data or audited financial reports) for the three most recent years completed prior to the rating period under development, and trend factors used to set rates would have to be “reasonable” and based on “actual experience from the same or similar populations.” 

CMS also proposes to codify its long-standing prohibition on states directing Sponsors’ expenditures, along with exceptions to this policy that would facilitate states’ pursuit of delivery system and payment reform. Specific provisions address adoption of value-based purchasing models and requirements for participation in specific initiatives, such as patient-centered medical homes and imposition of uniform dollar or percentage increases for providers of a particular service.

CMS seeks comments on the various proposals to enhance the transparency of the rate development process, the uniformity of the rate review and approval process undertaken by CMS, and the proposed codification of policies for Sponsors in their payments to providers. Sponsors may need to consider whether these proposed changes would provide a stronger foundation for the development of actuarially sound rates, including whether the codification of certain policies—and exceptions thereto—may create too much flexibility for states.

Network Adequacy

Adequate access to health care providers has been a continuous challenge for state Medicaid programs, confirmed as recently as December 2014 in a report issued by the Office of the Inspector General. (See generally, Office of the Inspector General, “Access to Care: Provider Availability in Medicaid Managed Care” OEI-02-13-00670 (Dec. 2014)). Under current standards, each Sponsor must maintain a provider network that “is sufficient to provide adequate access to all services,” and in developing these networks, Sponsors “must consider” anticipated enrollment, expected utilization, the numbers and types of providers required to furnish the contracted services, the number of contracted providers accepting (or not accepting) new patients, and the geographic location of providers and Medicaid enrollees. States have adopted a variety of tests for evaluating and monitoring compliance with these requirements. 

Under the Proposed Rule, CMS would establish minimum standards for network adequacy while maintaining state flexibility to determine whether a Sponsor has made services sufficiently accessible and available to enrollees. Rather than adopting specific access standards similar to those applicable under the MA Program, CMS proposes to require states to establish and publish on their websites time and distance standards for select provider types: 

  • Hospitals
  • Primary care (adult and pediatric)
  • Specialists (adult and pediatric)
  • Behavioral health
  • Obstetrics/gynecologists
  • Pharmacy
  • Pediatric dental

In developing network standards, states would be required to consider the same concepts (expected utilization, anticipated enrollment, etc.) currently required under the applicable regulations, as well as other considerations, such as the ability of health care professionals to communicate with limited-English-proficient enrollees in their preferred language. CMS requests comments on these proposed requirements, including whether it should “define the actual measures to be used by states,” and whether a national standard (e.g., provider-to-enrollee ratios or geographically based standards) is warranted.

The proposed network adequacy standards would extend to CHIP.

Program Integrity

The regulatory provisions that CMS would implement to strengthen program integrity requirements for Medicaid managed care plans and state Medicaid agencies seem to originate from similar mandates adopted by CMS for MA Organizations and Part D Plan Sponsors, although the Medicaid proposals would extend beyond managed care entities and would affect health care and administrative service providers as well. For example, CMS would require all health care providers that participate in a Sponsor’s network and are not enrolled in fee-for-service Medicaid to enroll with the state Medicaid agency. CMS also proposes to require that Sponsors (i) certify the accuracy, completeness and truthfulness of data and information that must be submitted to the state; (ii) implement new compliance program requirements; (iii) bolster requirements associated with subcontracting relationships and delegation by incorporating standards similar to those required for first tier, downstream and related entities in the MA and Part D Programs; and (iv) automatically suspend payment to a network provider following a state’s determination of a credible allegation of fraud. CMS also would require states to audit Sponsors’ encounter and financial data at least every three years. CMS generally would extend the proposed program integrity requirements to CHIP.

CMS also proposes, for the first time, regulatory language to codify the 60-day overpayment provisions enacted under the Affordable Care Act. The proposed regulations provide limited information regarding the application of the requirement, specifying under the “program integrity” requirements that states’ contracts with Sponsors (and their downstream contracts) must contain a provision to “ensure” that the Sponsor “reports . . . when it has identified the capitation payments or other payments in excess of amounts specified in the contract.” Unlike the corresponding Medicare managed care regulations, the Proposed Rule includes no discussion regarding what constitutes “identification” of a payment “in excess” of the specific contract amount. Also unlike the Medicare managed care regulations, the Proposed Rule does not limit the overpayment provisions to capitation payments to the managed care entity, but rather expects Sponsors to obligate their network providers to report and return any overpayment within 60 days of identification.

Care Coordination

CMS proposes to expand the definition of care coordination beyond medical care to include a range of community-based social support services. The Proposed Rule also would establish standards for care coordination, assessment and treatment plans, including a requirement that Sponsors coordinate transitions between settings of care and make best efforts to complete initial health risk assessments for new enrollees within 90 days of their enrollment effective date. Additionally, CMS would require states to have transition of care policies governing the movement of Medicaid enrollees between Medicaid fee-for-service and managed care, or between managed care plans. These policies must contain a transition period in which an enrollee changing plans could continue to receive services from his or her current providers. CMS would extend the proposed care coordination requirements to CHIP.

Beneficiary Protections

CMS proposes to enhance several provisions intended to protect Medicaid and CHIP enrollees during their enrollment in a Medicaid managed care plan, and to enhance the quality of care made available to these individuals.For example, states would be required to provide a period of at least 14 calendar days of fee-for-service coverage for a potential Medicaid enrollee to make a choice regarding his or her Medicaid managed care plan. States also would be required to provide choice counseling, using enrollment brokers who meet independence and conflict-of-interest standards, during initial enrollment periods and during circumstances when an enrollee has an opportunity to change plan enrollment.

The Proposed Rule also would update Medicaid managed care marketing regulations to allow QHPs to market to Medicaid enrollees even in instances when the QHP also is a Medicaid managed care plan. CMS observes that some Medicaid enrollees experiencing churn may be best served by being able to select a carrier that offers both types of products. CMS further would update the definition of marketing to include social media and electronic communications.

CMS proposes to establish a standardized set of performance measures and performance improvement projects for Medicaid managed care plans to complement state-specified measures. CMS intends to develop such measures through a separate public notice and comment process. The Proposed Rule also would require states to review and reissue approval of plans at least once every three years on the basis of plan performance determined through standards at least as stringent as those used by CMS-recognized private accreditation entities. Further, CMS would require states to develop a comprehensive quality strategy across all state Medicaid programs and to update such comprehensive strategy at least once every three years.

CMS also proposes to establish a Medicaid managed care quality rating system, akin to those used in MA and Part D and for QHPs. CMS expects that the Medicaid quality rating system would be consistent in format and scope with the QHP quality rating system, and would be developed through a robust public engagement process with additional refinements over a three-to-five-year period prior to implementation. States would be required to establish their rating systems by utilizing summary indicators of clinical quality management; member experience; and plan efficiency, affordability and management. CMS generally would extend the proposed quality measurement and improvement and quality rating system requirements to CHIP.

Managed Long-Term Services and Supports

Recognizing the significant growth in managed long-term services and supports (MLTSS) over the past decade, CMS proposes to codify assorted best practices identified in existing MLTSS programs within the Medicaid managed care regulations. These standards include but are not limited to (i) state-developed time and distance standards to ensure network adequacy, (ii) development of regularly updated treatment plans for enrollees, (iii) assurances that medical management and service authorization standards do not disadvantage enrollees with chronic conditions or long-term support needs, and (iv) removal of Sponsors’ authority to discontinue coverage pending an appeal should existing authorizations expire.

CMS also would allow Medicaid enrollees receiving MLTSS to switch to fee-for-service Medicaid if their providers are not in network. This provision was advanced by patient advocates, but Sponsors have noted that it may compromise their ability to negotiate with long-term care providers that will be able to continue to see these patients under fee-for-service Medicaid.

Behavioral Health/Institutions for Mental Disease

In a move that could have significant implications for the accessibility and quality of behavioral health services, CMS proposes to allow states to provide Sponsors with monthly capitation payments for an enrollee receiving inpatient treatment in an institution for mental disease, provided that the stay is no more than 15 days.

State Oversight

Under the Proposed Rule, CMS would require states to assume a more robust monitoring and oversight role. States would be required to implement a monitoring strategy addressing particular portions of the managed care program and to conduct readiness reviews of Medicaid managed care plans prior to their effective start dates. States would have to submit such results to CMS prior to contract approval.

State-Led Payment and Delivery System Reform

Under the Proposed Rule, CMS would formalize mechanisms for states to implement active purchasing strategies and accelerate delivery system reform. Specifically, states could (i) require managed care plans to adopt value-based purchasing and reimburse providers based on quality or outcome measures; (ii) require plan participation in delivery system reform or performance improvement initiatives, such as patient-centered medical homes or provider health information exchange projects; and (iii) establish a minimum fee schedule or provide a uniform dollar or percentage increase for all providers that provide a particular service under the contract. CMS also proposes to add a requirement that incentive arrangements be designed to support program initiatives tied to meaningful quality goals and performance measure outcomes.

Considerations and Next Steps

The Proposed Rule represents the most significant considered changes to the Medicaid managed care program in more than a decade. The Proposed Rule has the potential to alleviate reported coverage and access challenges faced by Medicaid and CHIP enrollees, minimize disruptions resulting from churn through improved care coordination, and improve quality of care. It remains to be seen, however, which proposals (and variations thereof) will move forward given the competing interests of beneficiary advocates, providers and Sponsors on issues such as network adequacy and payment rates.