Proposed Medicaid Managed Care Rule Seeks to Modernize Entire Delivery System

Stay ahead of developments in federal and state health care law, regulation and transactions with timely, expert news and analysis.

By Nathaniel Weixel

May 26 — A long-awaited proposed rule released May 26 by the CMS aims to align Medicaid and Children's Health Insurance Program (CHIP) managed care plans with other sources of health insurance coverage.

The proposal (RIN 0938-AS25, CMS-2390-P) would overhaul the entire Medicaid managed care delivery system and represents the first update to managed care regulations since 2002. The rule will be published in the Federal Register June 1. Comments are due July 27.

Among many provisions, the proposed rule would set a minimum medical loss ratio (MLR), establish a Medicaid managed care quality rating system and strengthen the delivery of managed long-term services and supports (LTSS).

Under the Medicaid statute, states have the freedom to design and operate their own managed care plans, with only some federal oversight. “This has resulted in inconsistencies and, in some cases, less than optimal results,” the Centers for Medicare & Medicaid Services said in the rule.

“[T]he current regulatory framework is no longer the most appropriate or efficient to achieve program goals. We believe that it is necessary to modernize the Medicaid and CHIP managed care and quality regulations to support health care delivery system reform, improve population health outcomes, and improve the beneficiary experience in a cost effective and consistent manner in all states,” the CMS said in the proposal.

Medicaid managed care is an ever-growing sector of care delivery. To date, 38 states and the District of Columbia enroll beneficiaries in comprehensive managed care plans. In addition, states that are expanding Medicaid under the Affordable Care Act are increasingly relying on managed care to reach the millions of newly eligible beneficiaries. According to the CMS, total Medicaid managed care spending (federal and state) exceeded $132 billion in 2013, with expenditures rising annually as new beneficiaries and programs move into a managed care delivery system

According to statistics from managed care plans and the Department of Health and Human Services, more than half of all Medicaid beneficiaries receive all or some of their care from risk-based managed care organizations (MCOs).

Medical Loss Ratio

Managed care industry representatives had been concerned that the CMS would impose a nationwide medical loss ratio, which they said would be overly restrictive. Among many other provisions, the proposal would set a minimum MLR for managed care plans of 85 percent.

“We don't believe a nationwide MLR serves a purpose,” Jeff Myers, president and chief executive officer of the Medicaid Health Plans of America, told Bloomberg BNA May 26. Myers said MHPA was still looking over the details of the rule, but he was initially pleased it addressed actuarial soundness as well as transparency in rate setting.

According to the agency, Medicaid and CHIP are the only health benefit coverage programs that don't utilize a minimum MLR for managed care plans. The proposal would change that by requiring a minimum 85 percent MLR—which means that at least 85 percent of premium dollars should be spent on medical care, while no more than 15 percent can be spent on administrative costs.

“We believe that considering the MLR as part of the rate setting process would be an effective mechanism to ensure that program dollars are being spent on health care services,” the agency said.

The insurance industry also responded negatively to the MLR proposal, calling it an “arbitrary cap.”

“This latest proposed guidance ensures that health plans and states have the flexibility to structure their programs and benefits to meet the unique health needs of their enrollees. However, an arbitrary cap on health plans’ administrative costs could undermine many of the critical services—beyond medical care—that make a difference in improving health outcomes for beneficiaries, such as transportation to and from appointments, social services, and more,” Dan Durham, interim chief executive officer of America's Health Insurance Plans, said in a May 26 statement.

Industry Standard

Gerard Campagna, a Bloomberg Intelligence analyst, told Bloomberg BNA he's not sure the proposed MLR would be too limiting, as the 85 percent minimum is the industry standard for Medicare Advantage and large employers in the private market. He said states and plans should welcome the standardization the rule provides.

“There's a lot of administrative burden when 50 states are doing 50 different things,” Campagna said.

The CMS in the proposed rule also noted the need for standardization in the MLR methodology.

“A consistent methodology across multiple markets (private, Medicare, and Medicaid) would allow for administrative efficiency for the states in their roles regulating insurance and Medicaid and for issuers and managed care entities to collect and measure data necessary to calculate an MLR and provide reports,” the CMS said. “In addition, a consistent standard would allow comparison of MLR outcomes consistently from state to state and among commercial, Medicare, and Medicaid managed care plans.”

The CMS said its process for setting the MLR was more closely aligned with the commercial rules for plans in the exchanges, such as those offered by companies including Aetna Inc. and Humana Inc.

The proposal also didn't specify a maximum MLR; it left it up to the states to decide. Instead of proposing a maximum percentage, the CMS outlined the standard states should use to establish a maximum threshold.

“States are better positioned to establish and justify a maximum MLR threshold, which accounts for the type of services being delivered, the state’s administrative requirements, the maturity of the program and the managed care plans,” the CMS said.

Quality Ratings

The proposed rule would also establish a Medicaid managed care quality rating system in each state that would report performance information on all health plans and align with existing rating systems like the five-star system for MA and the rating system for qualified health plans in the insurance exchanges.

The proposal would establish a public notice and comment period to determine a core set of performance measures and performance improvement projects for states related to managed care plans. The standards for the Medicaid quality rating system would be refined over a period of three to five years prior to implementation, the agency said.

“Given that the overall Medicaid population more closely resembles that of the Marketplace, modeling the quality rating system for Medicaid on that of the QHPs [qualified health plans] offered through Marketplaces makes the most sense; however, there are some instances in which performance measures from the MA five-star rating system may be appropriate for use for some Medicaid populations, such as dual eligible beneficiaries,” the agency said in the proposal.

But the CMS wants states to maintain flexibility and independence, and so the proposal would let them use an alternative or pre-existing quality rating system in place of the rating system established by the agency. “This would allow states that have already invested in the development and implementation of their own quality rating system the option of either adopting or modifying the preexisting system,” the CMS said.

To contact the reporter on this story: Nathaniel Weixel in Washington at

To contact the editor responsible for this story: Brian Broderick at

A summary of key provisions is at


Request Health Care on Bloomberg Law