Setting the Stage
Scope and Geography
Before the state starts vetting MCOs, it must first decide the number of MCOs and where they will operate. The geographic service area and number of MCOs that works best for the state may depend on who is covered by Medicaid managed care, differing needs of rural and urban counties, whether the state prioritizes competition between MCOs and the capacity of the state agency to oversee the number of contracted MCOs.
Oregon has 16 different MCOs, each responsible for one geographic service area, although some MCOs serve in more than one geographic region. Beneficiaries are automatically assigned to the MCO for that service area and the MCOs do not compete against each other for beneficiaries. New Jersey, on the other hand, has five MCOs that operate statewide and beneficiaries can choose which MCO to use. The largest number of states contract with three to five MCOs (17 states) but states may contract with as few as one (North Dakota) and as many as 26 (California).
Procurement and Contracting
Medicaid MCO contracts are some of the largest and most complex contracts held by the state and can account for billions of dollars in costs and multi-year state commitments. Although federal rules outline the minimum provisions that must be included in the contract between the state and MCO, no minimum standards exist for the procurement process. States can tailor procurement requirements and contract terms to reflect state policy priorities and innovations in the Medicaid program. Some states, like Arizona, also emphasize transparency in the procurement and contracting process by making information about open and closed procurements and MCO contract amendments publicly available on the state website.
In its procurement process, North Carolina requested information on MCO capacity to perform care management, ensure access to providers in rural and underserved areas, use program flexibilities to address social drivers of health and partner with community-based organizations. Michigan’s model contract requires MCOs to contract with at least one full-time community health worker for every 5,000 beneficiaries to assist beneficiaries in navigating dental benefits, to support integrated behavioral health care, and address social drivers of health.
New York lists the factors that may be considered in the bidding process, including experience, organizational structure, details about service and operations, the three most recent years of quality measures, national quality accreditation, network adequacy, and the financial condition of the organization. In anticipation of the state’s next Medicaid managed care procurement, Washington passed legislation requiring the state agency to adopt network adequacy standards for behavioral health providers and identify options to minimize provider administrative burden, which could include limiting the number of MCOs operating in a region.
A thoughtful procurement and contracting process may also help align stakeholder, state and MCO expectations before the contract starts, ensure readiness, and avoid later challenges. Louisiana’s model contract includes detailed descriptions of both state agency and MCO responsibilities during the readiness review process when the state is determining whether the MCO is prepared to start operating. Ohio included feedback from 17 community listening sessions and two public requests for information when developing its procurement vision for Medicaid managed care.
Because managed care contracts account for a significant portion of state Medicaid spending, states play a key role in establishing and overseeing Medicaid managed care capitated payment rates, the per member per month fee paid to MCOs for services and administration. If rates are set too high, states may spend more taxpayer dollars than are needed to account for costs of the program. If rates are set too low, MCOs may not be able to cover the costs of services and administration and may stop participating in the Medicaid program.
To protect Medicaid from paying for excessive administrative costs or profits, states are also required to collect data on each MCO’s medical loss ratio (MLR). The medical loss ratio is the percentage of revenue the MCO spends on health services and quality improvement activities. One of the data elements needed to calculate MLR is non-claims cost data. Non-claims costs are the MCO’s administrative expenses and may include expenses associated with provider contracting, utilization management, claims processing and profit.
The minimum federal MLR threshold is 85%, which means that 85% of MCO expenditures must go towards health services or quality improvement and the remaining 15% can go towards the MCO’s administrative costs and profits. If MCOs spend less on services and more on administration than the MLR threshold, states can choose to recoup excess revenue from the MCO or adjust capitation rates in future years. States may set their own minimum MLR thresholds. Regardless of whether states set minimum MLRs, 92% of all MCOs nationwide met or exceeded the 85% federal minimum MLR in 2021.
Accurate MLR data is important to accurate rate-setting and state budgets. However, the data reported and collected by states may not be sufficient for accurate audits and rate-setting.
In a September 2022 report, the U,S, Department of Health and Human Services Office of Inspector General (OIG) found that most Medicaid MCOs submitted reports with data to calculate the medical loss ratio, but 49% of the reports were incomplete, and non-claims cost data was missing from most of the incomplete reports. The report also found that two-thirds of incomplete reports did not contain a field for the MCO to enter or report one of the data elements needed to calculate MLR. Additionally, the OIG report found that 16 states reported that they did not review all MLR data elements for accuracy.
To ensure rates are set properly, states have taken a variety of actions. Thirty-four states have established minimum MLRs for Medicaid MCOs ranging from the federal minimum MLR of 85% up to 90%. California, Florida, Missouri and Nevada have rate-setting units within state agencies that develop and update capitation rates for MCOs. Texas contracts out rate setting to an actuarial consulting firm. Texas does not have a minimum MLR but instead requires Medicaid MCOs share a percentage of profits back with the state. This pool of funds may be used to provide incentive payments for MCOs to improve quality of care, encourage payment reform, or reduce inappropriate or preventable services (among other things).