Report The Life Cycle of Managing Medicaid Managed Care

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. 

Rate Setting  

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).  

The Thick of It 

Stakeholder Protections 

When MCOs are responsible for Medicaid services, they are also responsible for managing relationships with key stakeholders in the Medicaid program: the beneficiaries who receive services and coverage through the program and the Medicaid providers that furnish those services. If state policymakers learn about MCO practices that negatively affect stakeholders, the state may act.  

For example, a 2023 OIG report found that some Medicaid MCOs have high rates of denials for prior authorizations—requests for MCO approval of a service before it is performed—and identified state actions to oversee and ensure the appropriateness of denials. Before this report came out, states were already responding to stakeholder concerns over prior authorizations.   

For example, New York clarified the medical necessity standard and review processes Medicaid MCOs could apply to medically fragile children. Virginia passed legislation requiring the state Medicaid agency to collect data and report the number of claims submitted to MCOs that were denied, the reasons for denials, and certain provider types impacted by denials, including primary care providers. Indiana now requires its MCOs to post certain information about prior authorizations online and has recommended that an interim committee study whether health care providers with a history of approvals should be exempt from Medicaid MCO prior authorizations (sometimes referred to as gold-carding). 

States have also passed legislation to make it easier for providers to participate in Medicaid MCO networks. Ohio addressed provider challenges contracting with multiple Medicaid MCOs by creating a centralized credentialing process in the Ohio Department of Medicaid and requiring all MCOs in the state to accept the department’s credentialing decisions. Kentucky Medicaid MCOs must contract with any provider willing to meet the terms and conditions of participation in the MCO’s network and inform beneficiaries of these requirements.   

States may also establish standing advisory or oversight committees that include stakeholders to ensure ongoing oversight of Medicaid managed care. Illinois created the Medicaid Managed Care Oversight Commission to evaluate the effectiveness of the state’s Medicaid managed care program. The commission includes representatives from both the legislative and executive branches as well as stakeholder representatives from providers, MCOs, academia, and Medicaid consumers and consumer advocates. New York created a Medicaid Managed Care Advisory Review Panel with representation from the executive and legislative branches and consumer representatives to review the impact of managed care with specific attention to care for people with disabilities.  

Sanctions and Financial Penalties 

If something goes wrong in Medicaid managed care, federal rules require states to establish sanctions against MCOs for certain conduct, but states may choose the types of sanctions used and whether sanctions are publicly reported.  

New Mexico authorizes administrative penalties of up to $5,000 per violation if the state Medicaid agency determines that a Medicaid MCO has materially breached its contract obligations, violated any provision of state Medicaid laws or engaged in prohibited activities. Louisiana’s model contract also includes an attachment dedicated to monetary penalties for failure to meet contract requirements, including a penalty of $2,000 for each calendar day that performance measures or performance improvement project reports are late, inaccurate or incomplete. 

Florida has used liquidated damages provisions in the state contract to collect financial penalties from the state’s Medicaid MCOs for violations of provider network adequacy requirements and a software glitch that resulted in failed or improperly delayed payments to providers.  Texas passed legislation requiring the state Medicaid agency to post contract enforcement actions taken against Medicaid MCOs on the state website, including financial penalties. MCOs may be responsible for financial penalties for failures to meet access standards, timely appointment standards, timely adjudication of claims, quality performance standards and more.  

Reevaluation 

As the term of the MCO’s contract comes to an end, a new procurement or contract renewal cycle may start. However, when a state chooses to end its relationship with a MCO or if a procurement process results in changes in the state’s contracted MCOs, states may want to ensure continuity of care and operations for all stakeholders.  

States are required to create policies to address transitions of care from one MCO to another in the state’s quality strategy, but states maintain significant flexibility to specify the actions that MCOs must take during the transition period.  States may consider:  

• Beneficiary outreach to address questions about continuity of care and the providers and services that will be covered by the new MCO. 
• Specific processes for beneficiaries with complex health care needs.  
• Provider outreach to address contracting, payment rates and billing processes with new MCOs during the transition.  
• State Medicaid agency responsibilities and oversight of the transition process.  
• MCO responsibilities pre- and post-transition. 

For example, Kansas Transitional Care Requirements include specialized care coordination for enrollees who are changing from one MCO to another who have certain health care needs. A specific policy for MCO to MCO transitions requires that MCOs who receive beneficiaries from another MCO pay providers who are not yet in-network with the new MCO at 100% of the state’s Medicaid fee-for-service rate schedule for the first 90 days.  

North Carolina’s Transition of Care website and Transition of Care Policy includes specific transition of care requirements for certain populations, facilitation of clinical handoffs, assignment of a care manager to manage the transition, and a comprehensive assessment of the beneficiary care needs. Texas established continuity of care requirements for MCOs that serve beneficiaries with complex medical needs, so that these beneficiaries could continue to receive care from specialty providers that are not in-network with the new Medicaid MCO.  

New Federal Requirements? 

In 2023, the Centers for Medicare and Medicaid Services proposed new rules on prior authorization, managed care access, finance and quality, rate transparency and quality requirements that could result in significant updates to state oversight responsibilities in Medicaid managed care when implemented. The final rules may be different from their current versions and states will want to review any changes to state Medicaid managed care oversight requirements when these rules are finalized. 

Regardless of federal requirements, one thing is clear: MCOs are a critical state partner where managed care has been adopted and states will continue to play a key role in overseeing Medicaid managed care to ensure state expectations are met.