The Centers for Medicare & Medicaid Services (CMS) recently issued a 1,425-page regulation (Rule) on managed care in Medicaid and the Children’s Health Insurance Program (CHIP), dubbed the first overhaul of these regulations in over a decade. CMS also issued nine “fact sheets,” indicating the Rule “supports delivery system reform efforts, strengthens program integrity by improving accountability and transparency, and aligns key rules with those of other health coverage programs.” The Rule and its preamble shed light on the lack of uniformity existing in Medicaid – not surprising as it is principally a state-run program. The Rule attempts to align Medicaid managed care requirements with those of Medicare Advantage, Qualified Health Plans (QHPs) and other commercial plans, while still ensuring state flexibility in areas such as network adequacy.

Similar to insurance coverage programs, the Rule requires Medicaid and CHIP health plans, which are the only health benefit plans for which a medical loss ratio (MLR) does not apply, to calculate and report an MLR. Additionally, appeals, consumer information, and provider screening and enrollment procedures would also be aligned. Although the Rule’s intent is to obtain greater efficiencies between and among the various products, the Rule and CMS acknowledge that since many large insurers offer plans in all three markets, conformance with three programs can be difficult.

Medical Loss Ratio

Under the Affordable Care Act, both commercial health insurance plans and Medicare Advantage plans are required to spend at least 80 to 85 percent of premium dollars on medical care, or refund the difference to consumers. While some states already impose similar MLR requirements in their Medicaid programs, the Rule ensures such obligations will exist for all Medicaid managed plans. Beginning with contracts starting on or after July 1, 2017, Medicaid managed care plans will be subject to a national MLR standard of at least 85 percent.

MLR refers to the share of the revenues (capitation payments from the state) that a plan spends on the provision of patient care and quality improvement activities as opposed to administration. CMS advises that the “common national standard for calculating MLR will allow comparability across states, facilitate more accurate rate setting, and reduce the administrative burden on managed care plans that operate in multiple states or have multiple product lines.”sistent with the standards applied by Medicare Advantage plans and the private market, CMS acknowledges that “the unique characteristics of the Medicaid and CHIP programs” require some variations. For example, Medicaid MLR standards allow for the inclusion of costs associated with outreach, case management/care coordination and quality improvement in the numerator of the calculation. However, in other areas CMS maintained consistency with the requirements for private plans. While CMS originally suggested in the proposed rule that fraud prevention activities would be included in the MLR calculation, it ultimately decided in the Rule to maintain consistency with private plans and not allow fraud prevention costs to be included in the numerator of the calculation.

Although CMS does not require penalties if plans fail to meet MLR thresholds, it allows states the flexibility to require rebates, which if collected must be shared with the federal government in accordance with federal financial participation. Additionally, states would be expected to take failure to meet MLR thresholds into account when setting future payment rates. Indeed, CMS links the MLR to the development of actuarially-sound rates, defined as rates that are projected to provide for all reasonable, appropriate, and attainable costs under the terms of the contract and for the time period and population covered under the contract. CMS estimates that between 2018 and 2020 the federal government would save from $7 billion to $9 billion from plans failing to meet established MLRs.

Special Contract Provisions Related to Payment – Section 438.6

This provision may be one of the more important sections in the Rule, as it sets forth the various changes and expectations involved in establishing rates between the states and managed care organizations (MCOs), as well as CMS expectations for how the entire payment model differs between fee-for-service (FFS) Medicaid and Medicaid managed care. Of significant importance is the preamble discussion of how intergovernmental transfers and the use of the upper payment limits to finance Medicaid must change in a managed care environment, eliminating over the course of the next 10 years the use of what some states have dubbed “pass-through” payments to help providers supplement budgetary shortfalls.

Several changes were made to financial incentive arrangements that states use with MCOs to institute financial rewards for meeting performance targets specified in the contract, such as risk corridors and risk-sharing mechanisms. Provisions regarding the manner in which states incorporate graduate medical education (GME) payments into actuarially-sound MCO rates are modified in the Rule, as are provisions ensuring that states have the flexibility to specify delivery reform initiatives, such as the patient-centered medical homes, efforts to reduce the number of low-birthweight babies, and broad provider health information exchange projects. States are “permitted” to set minimum reimbursement standards and raise provider rates, including specifying a uniform dollar or percentage increase for all providers that supply a particular service under a contract. States may also set a maximum fee schedule, as long as the MCO retains the ability to reasonably manage risk. States are provided the flexibility to direct expenditures or make participation in value-based purchasing or delivery or performance improvement to a specific class of providers rather than to all providers.

Most significant, however, is the preamble discussion and changes with regard to a new subsection (d) to Section 438.6 governing the use of pass-through payments, defined as any amount required by the state to be added to the contracted payment rates between the MCO and providers – hospitals, physicians or nursing facilities – not for a specific service or benefit covered under the contract, but rather as a supplemental payment. The Rule phases out the ability of states to use pass-through payments by allowing states to direct MCO expenditures based only on the utilization or delivery of services to enrollees or the quality or outcomes of services. Since so many states have used these payments as an important revenue source for safety-net providers, the Rule institutes a phased-in transition for removal of this funding device. CMS indicates clearly, in its preamble, that it believes the statute and regulations prevent states from making a supplemental payment to a provider through a managed care plan.

Network Adequacy

The Rule also creates a new section 438.68 to address the development of network adequacy standards for medical services and long-term services and supports (known as LTSS). States are required to develop and make publicly available time and distance network adequacy standards for primary care (adult and pediatric), OB/GYN, behavioral health, specialist (adult and pediatric), hospital, pharmacy, pediatric dental, and additional provider types that promote the objectives of the Medicaid program. Consistent with the regulations for QHPs, the Rule does not include detailed and specific time-and-distance standards or provider-to-enrollee ratios, but rather defers to each state to develop specific standards.

With regard to the large number of comments received requesting CMS to identify more specific provider types in areas such as pediatric specialties and cancer hospitals, the agency repeatedly responded “We believe it is inappropriate to add federal requirements on such a state-specific basis.” CMS indicated that states are in the best position to engage a variety of stakeholders when defining specialist categories or other specific service providers in setting forth network adequacy standards.

The Rule lists factors states should consider in establishing delivery network requirements, including direct access to women’s health specialists, availability of second opinions, and access to out-of-network providers. Additionally, states must consider the ability of providers to communicate with enrollees who have limited English proficiency and to accommodate disabilities and the access to telemedicine, electronic medical records and other innovative technologies in healthcare delivery. CMS is the ultimate arbiter of network adequacy, as the state is required to submit documentation that supports the assurance of the adequacy of the network for each MCO.

Beneficiary Protections

The Rule implements most of CMS’s proposed provisions intended to close a perceived “gap” in beneficiary protection in the existing Medicaid managed care regulations. The Rule contains many grievance and appeals provisions and focuses on how to better ensure that continuity of care and care coordination are incorporated into the Medicaid program.

With regard to care coordination, in particular, CMS finalized its proposal to establish minimum standards for care coordination, patient assessment times and treatment plans. While many states were already incorporating these provisions into their contracts, the Rule now requires that all MCOs and states meet these standards. The focus is on ensuring that Medicaid, Medicaid FFS and CHIP plans all coordinate with one another to ensure that individuals make smooth transitions in and out of such programs. Initial health screenings must occur within 90 days.