How Medicaid Managed Care Works
States can adopt Medicaid managed care through either state plan or waiver authorities. Although there are some differences in these authorities, such as the approval process and populations that can be enrolled in managed care, some of the unique features of the MCO model are consistent.
The way MCOs are paid is one of the unique characteristics of the MCO model. Under the MCO model, the state Medicaid agency pays each contracted MCO a per member per month fee, called a capitated payment, to cover the costs of all benefits and provider payments for the Medicaid beneficiaries assigned to the MCO model. States set the capitation rate based on principles of actuarial soundness and use different approaches to risk-adjust rates to account for enrollee health status, MCO performance incentives, and to ensure payments are reasonable and appropriate to cover the costs of services and operations.
States can also choose which services are covered or “carved into” the MCO model and which services are not covered, or are “carved out.” When services are carved-into to MCO model, the MCO is at risk for the costs of providing the service and for coordinating care for the full scope of benefits offered in the MCO model. Services that are carved out of the MCO model are still provided in other delivery systems in the state. States may choose to add or carve out benefits such as behavioral health, long-term services and supports and pharmacy benefits.
Some states carve out a subset of benefits and cover them in a limited benefit plan. Limited benefit plans cover a limited subset of services, such as behavioral health, pharmacy, dental or long-term services and supports. Limited benefit plans are also generally paid on a capitated basis and may also be adjusted for risk.
The financial incentives of MCOs are another unique component of the MCO model and limited benefit plans. MCOs have a financial incentive to keep people healthy and out of the hospital by encouraging preventive and appropriate care to keep costs within the capitation rate. However, if the capitation rate is insufficient or inadequately risk-adjusted, MCOs may also have a financial incentive to undertreat patients or discourage enrollment of patients with more complex and expensive health needs to minimize costs.
The Rise of Medicaid Managed Care
Historically, Medicaid was delivered solely through state-operated FFS systems. While some states such as California and Arizona were early adopters of the MCO model in the 1970s and 1980s, federal policies limited statewide adoption. Federal policy changes in the 1990s added flexibility around managed care requirements that permitted states to adopt the MCO model statewide, required most Medicaid beneficiaries to enroll with MCOs, permitted MCOs to have Medicaid-specific plans and introduced standards for MCO operations, including quality review and complaint processes.
Since then, states have increasingly relied on MCOs to cover additional populations and services. Between 2003 and 2020, total enrollment in MCOs more than tripled. Medicaid expansion has also contributed to growth of the MCO model. Over 80% of adults in the expansion population are covered by Medicaid MCOs. Missouri, for instance, expanded Medicaid to non-disabled, childless adults in 2021 and enrolled all new expansion adults in Medicaid MCOs. As recently as July 2022, 40 states, Washington, D.C., and Puerto Rico have adopted the MCO model, accounting for about 65% of Medicaid beneficiaries nationally.
States continue to expand the use of Medicaid MCOs. Oklahoma enacted a bill to transition from PCCM to a MCO model, with implementation expected in 2024. North Carolina’s recent expansion of Medicaid—scheduled to go into effect in October—is expected to increase enrollment in MCOs in the state.
As enrollment in comprehensive risk-based managed care has increased, payments to MCOs make up an increasingly larger portion of total Medicaid spending. Payments to MCOs accounted for 52% of total Medicaid spending (more than $376 billion) in 2021. So what has been the impact of managed care?
Program Outcomes and Efficacy
States may choose to adopt managed care for a variety of reasons, including to improve access and outcomes, enhance care management and coordination and control costs. Since state programs vary so widely, it is difficult to make general conclusions about the efficacy of Medicaid managed care. Factors such as payment rates, covered populations, covered benefits, contract terms and provider network composition may affect costs, access to and quality of care.
Literature reviews on Medicaid managed care find little evidence of savings nationally, but individual states have found success in controlling costs through managed care. Among other reasons, evidence suggests that managed care may not significantly lower costs nationally due to high up-front costs, additional costs from increased primary care visits, and the fact that Medicaid payment rates are already low. Research also finds mixed and limited evidence on the impact of managed care on access to and quality of care. Although budget predictability is often listed as a feature of the MCO model, little research has been conducted on this topic, with one national study finding that changes in enrollment limited budget predictability for states.
While the available evidence does not indicate causal connection between managed care and improvements in cost, quality or access as a whole, individual states have had success with specific elements of managed care. For example, an evaluation of one Pennsylvania MCO found that proactive and data-driven case management drove inpatient savings, and medical home partnerships significantly reduced outpatient costs. An evaluation of Florida's mandatory statewide managed-care enrollment found that the enrollment led to significant cost savings due to reductions in preventable emergency room visits.
Policy analysts note the possibility for cost savings to be more likely among populations with higher health care needs compared with the large proportion of healthy children and adults currently enrolled in Medicaid managed care, although more research is needed. As states require MCOs to use consistent quality metrics, such as the Medicaid Adult and Child Core Sets or the Healthcare Effectiveness Data and Information Set, researchers may be able to evaluate delivery system performance on specific quality metrics across states.
State Policy Choices and Trends
As states continue to increasingly rely on managed care in Medicaid, state policymakers have the opportunity to play a key role in coordinating efforts and crafting policies that facilitate effective managed care systems.
States have increasingly carved in or integrated behavioral health benefits and quality metrics in the MCO model. For example, Arizona transitioned all behavioral health benefits to its MCO model. North Carolina integrated physical and behavioral health services statewide, with mandatory enrollment for most population groups when it adopted the MCO model. Additionally, 25 states tie MCO financial incentives to behavioral health quality metrics.
Other states are requiring individuals with more complex health care conditions to enroll in the MCO model. New York began mandatory MCO enrollment of children and youth in the foster care system in 2021. Ohio created a specialized Medicaid MCO plan for children with complex behavioral health needs that went into effect in 2022.
Another 21 states also use MCOs for managed long-term services and supports (MLTSS), which can include nursing home and home- and community-based services for older adults and people with disabilities. New Jersey included nursing home residents in the state’s MLTSS plan. Arkansas passed legislation to create a provider-led MCO to administer a MLTSS plan for people with disabilities and behavioral health needs.
As Medicaid managed care continues to grow, states legislatures are increasingly looking to MCOs to improve care for Medicaid beneficiaries and are evaluating how the MCO model is working in their state. The remainder of this brief series will take a deeper look at the state of Medicaid managed care.