Medicaid Managed Care: Even Government Watchdogs Could be More Transparent

The Congressional Budget Office recently posted its new Medicaid baseline.  These are CBO’s spending projections for Medicaid, which it uses in scoring legislative proposals.  This FY 2021, which ends on September 30, CBO estimates that the federal government will spend $234 billion matching state spending on acute care services through managed care, more than twice the $113 billion it will spend matching the purchase of that care on a fee-for-service basis.  Over the 11-year baseline period, CBO expects the federal government to spend $3.2 trillion (with a “t”) on Medicaid managed care for acute care services. And since the federal government picks up about 65 percent of the cost of Medicaid on average, under CBO’s projections total federal and state Medicaid managed care spending on acute care services over the 11-year period will reach $4.9 trillion (also with a “t”) by 2031.

What does this have to do with children and families?   CBO estimates that over this period about 30 million children will be enrolled in Medicaid each year (there is no break-out for parents).  We know from analysis by the Medicaid and CHIP Payment and Access Commission (MACPAC) that in the 40 states (and the District of Columbia) that purchase coverage from risk-based managed care organizations (MCOs), the large majority of children enrolled in Medicaid are enrolled in MCOs.  This means that a significant portion of this federal and state spending on Medicaid managed care is being made on behalf of children.  The portion being spent on behalf of parents, while not known, is also likely significant.  So how effective is that investment?

One common measure of effectiveness is an MCO’s medical loss ratio (MLR).  This tells you how much of the capitation revenue that an MCO has received from the state Medicaid agency is used to pay network providers for furnishing covered services and for quality improvement activities, and how much is used for administrative costs and profits.  Currently, the federal government does not require states to direct the MCOs with which they contract to meet a minimum MLR standard or to collect a remittance if the MCO does not meet the standard.  Federal regulations do, however, specify that if a state adopts an MLR standard it can’t be lower than 85 percent—that is, the MCO must spend at least 85 percent of its capitation payments on covered services and quality improvement rather than administrative overhead and profits.  The lower the MLR, the more the MCO can spend on administration and profits.

The designated watchdog for Medicaid and other federal health programs is the Office of Inspector General (OIG) in the Department of Health and Human Services.  The OIG recently issued a report that summarizes the implementation of the Medicaid MLR.  The OIG found that 43 states contracted with Medicaid managed care plans (including MCOs as well as other types of risk-bearing entities) subject to the federal MLR regulations and that 34 of these states had adopted minimum MLR requirements for annual reporting periods ending in 2017, 2018, or 2019.  Of the nine states that had not adopted minimum MLR requirements during these periods, three—Arkansas, New Hampshire, and Utah—indicated that they had set minimum MLRs as of September 2020.

That leaves six states that do not require MCOs to meet a minimum MLR:  Georgia, Kansas, Rhode Island, Tennessee, Texas, and Wisconsin.  One of these states—OIG does not indicate which one—is “planning to set a minimum MLR in future plan contracts.” As to the remaining five: “Two of these States said that the reason they do not set minimum MLRs is that they set plans’ capitation rates so that plans achieve target MLRs. Another State said that it has a profit-sharing mechanism built into plans’ contracts. The fourth State said that it did not need a minimum MLR because plans have ‘historically exhibited stable MLRs.’ The last of these States said that ‘it is not in the State’s best interest to pursue a minimum MLR.’”

Wow. It is not the State’s best interest to require that MCOs spend at least 85 percent of their Medicaid revenues on covered services and quality improvement?  How do you spell “cavalier”?

To be clear, there’s nothing magical about 85 percent. It’s just a minimum. If a state wants to require that MCOs spend a higher percentage on paying network providers for furnishing covered services and quality improvement activities, it can do so.  And, as the OIG report notes, some states have done exactly that: one set the minimum MLR at 86 percent for all plans, one at 88 percent, and one at 90 percent.  In addition, one state “lowers minimum MLRs if an MCO meets certain quality metrics. The State sets the minimum MLR at 89 percent, and if an MCO achieves any of four quality metrics, the State lowers the minimum MLR. If an MCO achieves one quality metric, the MCO’s minimum MLR would be 88 percent. If an MCO achieves all four quality metrics, the MCO’s minimum MLR would be 85 percent.” The report does not indicate which state this is, or which states have higher minimum MLRs.

Setting a minimum MLR is just the first step.  To enforce the MLR, a state could require an MCO that did not meet the minimum standard to remit the difference between what it was supposed to spend on covered services and quality improvement and what it actually spent for those purposes. Under federal regulations, states have the option of requiring MCOs to pay remittances. The OIG found that, as of September 2020, five of the 37 states that had adopted minimum MLR requirements chose not to require any of their managed care plans to pay remittances.  These states reported that they used other fiscal management strategies.  The OIG report does not identify the states.

Finally, what about the performance of individual MCOs?  In the states that set minimum MLR requirements, how many MCOs met them?  Federal regulations require MCOs to submit annual MLR reports to the state Medicaid agency whether or not the agency sets a minimum MLR.  OIG asked state Medicaid agencies to submit, for each plan (including MCOs) the most recent annual MLR report that had also been reviewed by the agency or, if the agency had not reviewed the report, the most recent “pre-review” report.  OIG then analyzed each report (513 in all, of which 137 had not been reviewed by the state agency).  OIG found that 39 plans did not hit their minimum MLRs and that of those, 19 reported owing a total of $198 million to six states, with the amounts owed ranging from $1.8 million to $40.2 million per plan.  OIG did not identify the individual plans or the states.

That OIG is focused on the fiscal stewardship of the hundreds of billions in federal and state Medicaid funds being paid to MCOs each year is highly encouraging. This report makes an important contribution to the public’s understanding of how effectively the state Medicaid agencies are managing managed care.  The next report, which will “(1) evaluate States’ oversight of their Medicaid managed care plans’ compliance with MLR reporting requirements and (2) assess the completeness of MLR data that plans have reported to the States,” should shed even more light on what has been, to say the least, an opaque process.

But without more transparency, OIG’s work won’t achieve its full potential for advancing what OIG recognizes as the purpose of federal Medicaid MLR policy: to “help ensure the use of Federal and State Medicaid dollars for health care services and quality improvements for Medicaid enrollees.”  To take just one example, how is federal Medicaid MLR policy served by withholding information about which six states are owed $198 million, or which 19 plans owe what amounts?  If policymakers in those states, as well as providers and beneficiary advocates there, had this information, they could work with their state agencies and individual plans to ensure that targets for spending on covered services and quality improvement are met. As things now stand, they have no clue; only the state Medicaid agencies, the individual MCO, and OIG know.

OIG can and should do better in the next report.  Hopefully, it will.

Andy Schneider is a Research Professor at the Georgetown University McCourt School of Public Policy.