CrossroadsApproximately a quarter of all Medicaid expenditures is spent on the more than half of all beneficiaries (approximately 39 million by 2011 figures cited in the 2014 MACPAC Report) currently accessing part or all of their benefits through capitated, risk-bearing health plans or managed care organizations (MCOs). Although the government’s reliance on MCOs to manage healthcare coordination and payment for the Medicaid population has grown exponentially over the last decade, federal regulations governing Medicaid managed care have not been issued since 2002. Consequently, significant excitement surrounds the Centers for Medicare and Medicaid Services (CMS) long-awaited proposed rulemaking directed at modernizing an aging regulatory framework for Medicaid managed care (Proposed Rules).

The overarching goal of the Proposed Rules is to standardize and align the Medicaid managed care rules with Medicare managed care (MedicareAdvantage), commercial insurance industry regulations, and the newer Affordable Care Act (ACA) individual marketplace Exchanges on which qualified health plans (QHPs) are sold. While this summary cannot comprehensively cover the level of detail contained in the Proposed Rules, we have identified issues of significant importance, including revised standards related to rate development and actuarial soundness, medical loss ratio (MLR), and quality and performance improvement.

Medical Loss Ratio Alignment

In their attempt to “align” Medicaid managed care requirements with Medicare and the ACA, the Proposed Rules require that MCOs meet an expected MLR of at least 85 percent by January 1, 2017. The MLR is used by regulators to set a limit on the component of premium dollars spent on administration versus clinical care and can be used to assess whether capitation rates are appropriately established and actuarially sound.

The Proposed Rules would define the MLR as the sum of the MCO’s incurred claims, expenditure on activities that improve healthcare quality, and certain specified activities divided by the adjusted premium revenue collected with a “credibility adjustment” for the MCO’s enrollment. The Proposed Rules, found at 42 CFR §438.8, detail the “credibility adjustment” methodology and data that must be accounted for in the numerator and denominator of the formula, including stop-loss payments, claims recoveries, penalties, fraud prevention activities, and many other factors.

Although CMS allows states the discretion to determine whether a penalty should be paid, if the minimum MLR standard is not met, states will be required to take past MLR experience into account as part of the rate-setting process.

The health plan industry has been quick to register its objections to the MLR requirements set forth in the Proposed Rules.

Network Adequacy and Actuarially Sound Rate Setting

The Proposed Rules recognize that network adequacy and establishing actuarially sound rates go hand in glove. CMS builds upon the existing definition of “actuarially sound capitation rates,” proposing to define it in §438.4(a) as “all reasonable, appropriate, and attainable costs that are required under the terms of the contract and for the operation of the MCO … for the time period and the population covered under the terms of the contract.”

CMS describes the elements that it will review when approving a proposed actuarially sound capitation rate, including that the rate:

  • Is appropriate for the populations to be covered and the services to be furnished,
  • Is specific to each rate cell (a newly recognized method that groups people with similar characteristics and expected healthcare costs),
  • Is certified by an actuary,
  • Reasonably achieves a minimum MLR of at least 85 percent, and
  • Meets the availability of services (§438.206), adequate capacity and services (§438.207), and coordination and continuity of care (§438.208) requirements.

Ensuring availability of services would require an MCO to: (1) “meet state timely access to care and services, taking into account the urgency of the need for services,” (2) ensure that services included in the contract are available 24 hours a day, seven days a week, when medically necessary, and (3) ensure parity with hours of operation offered to commercial enrollees.

The term “access” is further defined within the sections defining quality-of-care requirements to mean “the timely use of services to achieve the best possible outcomes, as evidenced by successfully demonstrating and reporting on outcome information for the availability and timeliness elements defined under the network adequacy standards [§438.68] and availability of services standards [§438.206].”

Notably, this proposal does set forth a requirement for enrollees with special healthcare needs; rather it specifies that MCOs provide such enrollees with direct access to a specialist “appropriate to the enrollee’s condition and identified needs.”

The preamble makes clear CMS’s intent to correct the significant variation in network adequacy standards used by states. While CMS proposes minimum parameters for a “network adequacy standard” (§438.68) based on the rules for QHPs and MedicareAdvantage plans, the agency defers the development of specific details to the states. The following are a few of the minimum factors a state must consider in developing network adequacy standards: (1) the anticipated Medicaid enrollment, geographic location of such, and means of transportation; (2) the expected utilization of services; (3) the characteristics of healthcare needs of specific Medicaid populations covered; and (4) the numbers and types (in terms of training, experience, specialization, communication barriers) of network healthcare professionals required to furnish the contracted Medicaid services. The proposed regulatory framework relies heavily on the attestation and certification by the health plans about the adequacy of their networks.

States are required to develop time and distance standards (that are not defined) for the following provider types: (1) primary care (adult and pediatric), (2) OB-GYN physicians, (3) behavioral health, (4) specialist (adult and pediatric), (5) hospital, (6) pharmacy, (7) pediatric dental, and (8) additional provider types when associated standards promote the objectives of the Medicaid program.

CMS is requesting comments on whether a different national measure should be employed for further defining network adequacy, such as provider-to-enrollee ratios, or whether greater flexibility should be permitted in defining measures for network adequacy of certain provider types.

Accountability Improvements

Several provisions are aimed at addressing prior abuses in the Medicaid managed care program. The Proposed Rules clarify that capitation payments are intended to be inclusive of all services and associated administrative costs under contract so as to avoid any issues with additional payments made to network providers. They also make clear that while the contracted MCO is ultimately accountable, subcontractors and delegated entities are responsible for fully complying with all applicable laws, regulations, subregulatory guidance, and contract provisions. Based on recommendations from two reports issued by the Office of Inspector General, U.S. Department of Health and Human Services, CMS proposes to require proper credentialing and screening of network providers.


Proposed revisions to the current Medicaid managed care marketing regulations (§438.104) include: (1) amending the definition of marketing to specifically exclude communications from a QHP to Medicaid beneficiaries, even if the issuer of the QHP is also the entity providing Medicaid managed care, (2) amending the definition of “marketing materials,” and (3) adding a definition for “private insurance” to clarify that QHPs certified for participation in the Exchanges are excluded from the term “private insurance” as it is used in the Proposed Rules.


CMS proposes to strengthen quality measurement and performance improvement efforts by focusing on transparency, alignment with other systems of care, and consumer and stakeholder engagement. These provisions are designed to encourage states to use the health plans as partners in delivery system and payment reforms. The proposed quality provisions would: (1) implement a state review and approval process for health plans by a CMS-recognized private accreditation entity, (2) permit CMS to specify standardized performance measures and performance improvement projects, (3) expand the Medicaid managed care quality strategy to all delivery systems (fee-for-service and managed care) in all states for both Medicaid and CHIP, (4) add a new mandatory external quality review activity to validate network adequacy, and (5) extend the external quality review to state-contracted prepaid ambulatory health plans.

A Medicaid managed care quality rating system that would report performance information on all health plans and align with existing rating systems based on clinical quality management; member experience; and plan efficiency, affordability, and management would also be established in each state.

Children’s Health Insurance Program

The Proposed Rules would align the Children’s Health Insurance Program (CHIP) managed care regulations, where appropriate, with the proposed revisions to the Medicaid managed care rules to ensure CHIP beneficiaries have the same quality and access in managed care programs.


CMS proposes broad federal parameters for state Medicaid managed care enrollment processes to ensure “active” choice on the part of the beneficiary. The agency identifies new regulations governing the two kinds of enrollment approaches that states use – voluntary and mandatory enrollment. In either case, the Proposed Rules require that states provide an enrollee with access to continued fee-for-service coverage for at least 14 calendar days to allow the enrollee sufficient opportunity to actively select an MCO.

With regard to mandatory programs utilizing enrollment by default, the Proposed Rules require the state to develop a process that will “preserve existing provider-beneficiary relationships and relationships with providers that have traditionally served Medicaid beneficiaries.” The state must also distribute its Medicaid beneficiaries equitably among the MCOs and not arbitrarily exclude any MCO from consideration. CMS does offer leeway for a state to consider additional criteria to conduct the default enrollment process, including enrollment preferences of family members, previous plan assignment, and quality assurance and performance improvement.

Beneficiary Appeals and Grievances, Long-Term Services and Supports, and Electronic Health Records

The Proposed Rules contain elements to update beneficiary appeal and grievance proceedings. Long-term services and supports would be required to comply with 10 key principles (addressed in prior guidance) that include stakeholder engagement, qualified providers, and quality, among others. States would also be allowed to make incentive payments available for the use of technology that supports interoperable health information exchange by health plan network providers not otherwise eligible for electronic health record incentive programs.

Comment Deadline and Preparation

Comments on the Proposed Rules are due to CMS no later than 5 p.m., July 27, 2015. BakerHostetler has been requested to provide comments on behalf of some of its clients. Any inquiries regarding the opportunity to provide comments to CMS or interest in joining others in commenting should be directed to Susan Feigin Harris.