Medicaid Managed Care: SDOH, MCO, and MLR

There is no shortage of acronyms or initialisms in government agencies and programs and Medicaid is no exception. The Medicaid and CHIP Payment and Access Commission or MACPAC (one of our favorite acronyms) devotes an entire glossary to them.  The most prominent initialism in Medicaid policy discussions these days is SDOH: social determinants of health, or, in a more recent iteration, social drivers of health. There’s even a Congressional SDOH Caucus (bipartisan no less!).  SDOH are the conditions in which people are born, grow, live, work, and age that shape health, including economic stability, adequate housing, and food security (or lack thereof). Addressing SDOH is integral to improving individual health and reducing health disparities, both of which are particularly important to Medicaid beneficiaries.

In most states, the majority of Medicaid beneficiaries are enrolled in managed care organizations (MCOs); in those states, if SDOH are to be addressed, MCOs and their network providers will have to play a role.  In 2021, over two-thirds of managed care states included in their contracts with MCOs provisions relating to SDOH, such as requirements to screen enrollees for behavioral health needs.  Individual MCOs are crafting their own interventions, including contributions to food banks and other community-based organizations.

So, what happens when MCOs and their MLRs (Medical Loss Ratios) meet SDOH?  This is really two questions: what MCO spending on SDOH will the federal government match, and how can the MCO treat spending in calculating its MLR?

First question: For what types of SDOH spending are federal Medicaid matching funds available?   In January 2021, CMS issued a 51-page letter to State Health Officials (SHO letter) detailing what services or activities addressing SDOH qualify for federal financial participation—or, as the initialism would have it, FFP. (Good Guidance alert:  “the contents of this document do not have the force and effect of law and are not intended to bind the public in any way…”).  Among the service categories described are targeted case management, FQHC, and rehabilitative services. (Oops, let another acronym slip by – FQHC stands for Federally Qualified Health Centers.)

What if a service or activity doesn’t make the cut for FFP under regular Medicaid rules?  There’s another possibility, crystallized in this acronym: CNOM (rhymes with phenom).  It refers to section 1115(a)(2) of the Social Security Act, which authorizes the Secretary of HHS to approve FFP for costs that would not otherwise be matchable by the federal government in connection with a demonstration that promotes the objectives of Medicaid.  For example, under this expenditure authority, North Carolina’s Medicaid Reform demonstration covers services to improve health-related needs for Medicaid beneficiaries, including “repairs of remediation for issues such as mold or pest infestation if [it] provides a cost-effective method of addressing occupant’s health condition.  More recently, in California’s CalAIM demonstration, CMS used the (a)(2) expenditure authority to approve federal matching for state spending on recuperative care and short-term post hospitalization housing services for individuals who are homeless or at risk of homelessness.

Second question: how is SDOH spending treated in the calculation and reporting of an MCO’s MLR?  This matters because in a majority of the managed care states, MCOs that don’t meet the minimum MLR their state imposes must remit to the state the amount it underspent on providing services.  Medicaid’s definition of MLR is:

There’s no SDOH bucket in the numerator, but the SDOH-related services for which FFP is available (whether under the regular Medicaid program or under a section 1115 demonstration) can fit into bucket (a) incurred claims.  When a state includes such a service in a risk contract with an MCO, the cost of that service is factored into the MCO’s capitation rate and the MCO can include the cost of providing that service in the numerator of its MLR.  In addition, with CMS approval, states can write provisions into their risk contracts that allow the MCO (with the beneficiary’s consent) to furnish services in place of services or settings that are covered under the state’s regular Medicaid program.  An example would be in-home prenatal visits for at-risk pregnant women instead of an office visit.  These are known as—here comes another initialism—“in lieu of” services and settings (ILOS).  The recently approved California 1915(b) waiver authorizes 12 of them, including Housing Deposits, Housing Tenancy and Sustaining Services, and Asthma Remediation.

Similarly, if an MCO’s spending to address SDOH meets the Medicaid standard of (b) a quality improvement expenditure, the MCO can include that spending in the numerator.  The definition of an activity to improve health care quality does not include many types of spending to address SDOH, such as bolstering internet infrastructure or providing a capacity-building grant for a housing non-profit. The insurance industry would like to see the definition broadened to include expenditures to address SDOH “so that these activities are treated as health-related instead of being categorized as administrative costs.”  Treating SDOH spending as an activity to improve health care quality would allow MCOs to increase the numerator of the MLR to meet a state-established minimum percentage (at least 85 percent) without increasing payments to providers for furnishing services to enrollees and without cutting into their profits.

State Medicaid programs have other tools at their disposal, including incentives and withholds and higher rates to encourage MCO spending on activities to address SDOH.  Six states, as part of their strategies to address SDOH and reduce health disparities, require community reinvestment by the MCOs with which they contract.  For example, the RFP (if you’ve gotten this far, I’m sure you don’t mind letting that acronym slide by without an explanation) recently released by California requires that proposers agree to contribute 5 to 7.5 percent of profits under the risk contract to “local community activities that develop community infrastructure to support Medi-Cal members.”

Bottom line: As things now stand, many actions to address SDOH do not qualify for federal Medicaid matching payments and do not fit into the Medicaid MLR numerator. Of course, nothing stops MCOs from spending part of the capitation revenues that they retain for administration and profit on addressing SDOH, even though this voluntary spending isn’t recognized in the capitation rate or in the MLR.  CMS has a term for this type of spending—“value-added services.”  But there is (thankfully) no acronym or initialism.  At least for now.