How Can We Tell Whether Medicaid MCOs are Doing a Good Job for Kids?

How Can We Tell Whether Medicaid MCOs are Doing a Good Job for Kids?

Top Lines

  • Medicaid managed care organizations provide health care services for two thirds of kids covered through Medicaid.
  • There is no single set of metrics used by state Medicaid agencies and CMS for measuring quality of care for children enrolled in Medicaid MCOs.

In This Report:

Key Findings

  • Medicaid managed care organizations (MCOs) are responsible for the provision of needed health care services for the large majority of the 37 million low-income children enrolled in Medicaid.
  • Federal and state governments have a major investment in Medicaid MCOs; in FY 2018, they are projected to spend about $275 billion paying MCOs for all enrolled populations.
  • Under their contracts with state Medicaid agencies, Medicaid MCOs assume financial risk for the provision of covered services to enrollees; as a result, they have an incentive not only to coordinate care for enrollees in order to reduce unnecessary use of high-cost services but also to limit enrollee access to services and shift risk to providers.
  • Federal Medicaid regulations are designed to mitigate the incentives to limit services as well as to ensure accountability of MCOs for the accessibility and quality of care; transparency requirements are one of the key regulatory oversight mechanisms.
  • Currently there is no single set of measures in common use by state Medicaid agencies and the Center for Medicare & Medicaid Services (CMS) to assess whether children enrolled in MCOs are receiving quality care, and there is no publicly accessible national database with information on how well individual MCOs are serving enrolled children.
  • The federal Medicaid regulations are being reconsidered by CMS; if the transparency requirements are weakened, the public will have less information with which to tell whether individual Medicaid MCOs are doing a good job.


Nearly 40 percent of the nation’s children—37 million—are covered by Medicaid.1 Of those, over two thirds are enrolled in managed care organizations (MCOs). While not all state Medicaid programs enroll children in MCOs, in 24 of the states that do, more than 80 percent of Medicaid beneficiaries who are children are enrolled in “comprehensive managed care”—i.e., MCOs.2 In all likelihood, the percentage of Medicaid children enrolled in MCOs is even higher today.3

As of March 2017, a total of 275 Medicaid MCOs operated in 38 states and the District of Columbia to provide covered services to Medicaid beneficiaries; 12 state Medicaid programs did not contract with MCOs.4 Federal and state Medicaid spending on managed care (including MCOs and other types of managed care) will total an estimated $275 billion in FY 2018.5

MCOs contract with state Medicaid agencies to ensure that beneficiaries receive covered Medicaid services when medically necessary. MCOs may be private for profit, private nonprofit, or public. Regardless of corporate structure, under the contract with the state Medicaid agency, MCOs agree to take responsibility for arranging for the provision of services specified by the state to enrolled beneficiaries through a network of providers that the MCOs (or their subcontractors) have assembled. In exchange, the MCOs receive a capitation payment from the state for each enrollee— a fixed amount per member per month (pmpm). The payment must be “actuarially sound”—basically, it must be sufficient to enable an MCO to assemble and pay a network of providers for the covered services that are needed by the particular beneficiaries who enroll with the MCO and to do so without excessive administrative costs or profits.

To oversimplify, this contractual arrangement, with its use of capitation payments, shifts financial risk for the costs of Medicaid services from the state Medicaid agency and the federal government to the MCO.6 In doing so, it provides a measure of fiscal predictability for state and federal budgets. Within limits, if the MCO spends more on covered services than the capitation payments from the state Medicaid agency, the MCO absorbs the loss; if it spends less, it keeps the difference. This gives the MCO an incentive to limit what it pays its network providers, either by reducing the use of covered services by enrollees or constraining its reimbursements to providers, or both.7 Depending upon the capitation rates, the cost of an adequate provider network, the use of services by enrollees, and other factors, a Medicaid risk contract can be highly lucrative for an MCO8 and its management9 or a losing business proposition.10

The implications for Medicaid beneficiaries are fundamental. Under these risk contracts, the state Medicaid agency will pay only the MCO for the services covered under the contract; if the enrolled beneficiary is unable to obtain needed services from the MCO’s provider network even though the services are covered under the contract, he or she may go without or seek care at the emergency room. If the capitation rates paid to an MCO are not adequate, it may not have the resources to pay its network providers adequately or to make the investments in information systems and case management to ensure adequate quality of care. If an MCO does not pay providers adequately, and is therefore unable to recruit or retain sufficient numbers of providers into its network, access to services may be compromised. And if the providers that the MCO does recruit to its network are not good at what they do, then the quality of care available to enrollees may be substandard. Finally, the complex corporate structure of some MCOs, involving multiple layers of “subcapitation,” may enable bad actors to divert Medicaid funds from patient care and compromise the reporting of performance data.11

Capitation payment can also provide incentives for MCOs to manage the care of enrollees more effectively than would occur in less formal, fee-for-service arrangements. If MCOs implement strategies to improve the coordination of services, especially for high-cost enrollees, they can reduce the use of expensive inpatient services while at the same time increasing access to primary and preventive care. There is evidence that preventable hospitalization rates are lower in Medicaid managed care than in Medicaid fee-for-service.12 There is also evidence that some MCOs are implementing innovative approaches to care coordination of children with special health care needs.13

Federal regulations contain a number of beneficiary protections that are designed to ensure that the incentive inherent in capitation does not result in the denial of access to covered services or substandard quality of care.14 State Medicaid agencies that elect to contract with MCOs must incorporate these protections into the contracts15 and monitor compliance with them.16 Among the state agency oversight responsibilities are ensuring the transparency of information relating to the performance of individual MCOs.

These access and quality regulatory requirements do not apply to the Medicaid fee-for-service delivery system. This uneven regulatory playing field makes head-to-head comparisons between Medicaid managed care and feefor-service delivery systems difficult. Because such a high percentage of Medicaid-eligible children are enrolled in MCOs, however, the more important question is how the quality of care received by children in one MCO compares with that in another. The Medicaid and CHIP Payment and Access Commission (MACPAC) recently noted, “it is difficult to evaluate the effect of managed care on quality of care,” which may explain why research findings on Medicaid managed care quality outcome “are scarce and have mixed results.”17

The purpose of this paper is to describe the current federal transparency requirements and explain how they can be used to assess how well individual MCOs are serving the Medicaid-eligible children enrolled with them. The paper starts with a summary of the obligations Medicaid MCOs have toward children, reviews the measures for MCO quality performance vis-à-vis enrolled children, and identifies the information that is required to be publicly available to assess the performance of individual MCOs. It concludes with suggestions for using transparency to improve the quality of care for children enrolled in MCOs.

Full Report

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  1. Source for 40 percent: “Public Health Insurance Coverage by Type 2016: American Community Survey 1-Year Estimates,” U.S. Census Bureau’s 2016 American Community Survey, available at; source for 37 million, “Unduplicated Number of Children Ever Enrolled, FY 2016,” Center for Medicaid and CHIP Services, available at (37 million).
  2. MACSTATS, “Percentage of Medicaid Enrollees in Managed Care by State and Eligibility Group, Updated FY 2013, 2014”
    (Washington: Medicaid and CHIP Access and Payment Commission, December 2017), available at
  3. Total Medicaid enrollment in MCOs increased by 17.5 percent between 2014 and 2015. Given this trend, it is likely that the share and number of children enrolled in MCOs is currently higher than it was in FY 2013, as reflected in the MACStats data cited above. Centers for Medicare and Medicaid Services, “Medicaid Managed Care Enrollment and Program Characteristics, 2014” (Washington: Centers for Medicare and Medicaid Services, 2016), available at
  4. The 12 states without MCOs were AL, AK, AR, CT, ID, ME, MT,
    NC, OK, SD, VT, and WY. Kaiser Family Foundation, “Total Medicaid MCOs” (Washington: Kaiser Family Foundation, September 2017), available at,%22sort%22:%22asc%22%7.
  5. The Congressional Budget Office estimates the federal government will spend $174 billion on managed care in FY 2018 and that this amount will represent between 63 percent and 65 percent of total Medicaid spending, which implies a state expenditure of $102 billion. Congressional Budget Office, “Detail of Spending and Enrollment for Medicaid for CBO’s January 2017 Baseline” (Washington: Congressional Budget Office), available at
  6. The federal government is at risk because it matches the capitation payments that the state Medicaid agency makes to an MCO under an approved risk contract at the matching rate applicable to the population enrolled.
  7. An MCO can also transfer some of its financial risk “downstream” to groups of providers by entering into subcapitation arrangements with those groups.
  8. Chad Terhune and A. Gorman, “Enriched by the Poor: California Health Insurers Make Billions Through Medicaid,” Kaiser Health News, November 6, 2017, available at
  9. Chad Terhune, “Couple Makes Millions Off of Medicaid Managed Care as Oversight Lags,” Kaiser Health News, February 22, 2018, available at Texas State Auditor’s Office, “The Health and Human Services Commission’s Management of Its Medicaid Managed Care Contract with Superior HealthPlan, Inc. and Superior HealthPlan Network, and Superior’s Compliance with Reporting Requirements” (January 2018), Report No. 18-015, finding that the State Medicaid agency allowed an MCO to report approximately $29.6 million in bonus and incentive payments paid to affiliates’ employees even though the payments were unallowable under State’s contract with the MCO. See
  10. Jason Clayworth, “Skepticism Over Iowa’s Medicaid Math Led
    AmeriHealth to Pull Out,” DesMoines Register, November 2, 2017, available at
  11. Chad Terhune, “Whistleblower: Medicaid Managed-Care Firm Improperly Denied Care to Thousands,” Kaiser Health News, (December 1, 2017), available at
  12. A. B. Bindman et al., “The Impact of Medicaid Managed Care on Hospitalizations for Ambulatory Care Sensitive Conditions,” Health Services Research 40:1 (February 2005), pp. 19-38.
  13. NORC at the University of Chicago, “ Innovative Approaches in Care
    Coordination and Care Delivery for Children with Special Health Care Needs among Safety Net Health Plans,” (Washington: Association of Community-Affiliated Plans, February, 2017), available at
  14. For analyses for these regulations from the perspective of children,
    see Georgetown University Center for Children and Families, “Medicaid/CHIP Managed Care Series” (Washington: Georgetown University Center for Children and Families, June 22, 2016), available at
  15. 42 CFR 438.3
  16. 42 CFR 438.66
  17. Medicaid and CHIP Payment and Access Commission, “Managed care’s effect on outcomes” (Washington: Medicaid and CHIP Payment and Access Commission, June 2017), available at
Andy Schneider is a Research Professor at the Georgetown University McCourt School of Public Policy.