Medicaid Managed Care: OIG, MLRs, and the Future of Oversight

Last month, the Office of Inspector General (OIG) issued a report that speaks volumes about the oversight of Medicaid managed care organizations (MCOs).  As the OIG delicately puts it, CMS has “opportunities” to “strengthen States’ oversight.”  An alternative framing would be that CMS and many states have not met minimum standards of stewardship for Medicaid funds and the beneficiaries in Medicaid managed care.  There is, however, reason to hope that CMS will make the most of its oversight “opportunities” going forward.

The OIG review focused on the medical loss ratio (MLR) reports that MCOs are required to file each year with state Medicaid agencies. (Basically, MLR is a measure of how much an MCO spends on medical services for its enrollees as opposed to administration and profit).  Why look at these reports?  As the OIG explains: “States’ oversight of their plans’ annual MLR reporting is critical to improve fiscal transparency, monitor costs, and promote high-quality care in Medicaid managed care.” More than half of all Medicaid spending (about $400 billion) and over two-thirds of all Medicaid beneficiaries (over 50 million low-income Americans) are in MCOs.

States that contract with Medicaid MCOs are not required to impose a minimum MLR (this is inexplicable, since both Medicare and the Marketplaces impose a minimum 85 percent MLR). Nor are states required to recoup capitation payments from MCOs that do not meet whatever minimum MLR standard the state has established (it can’t be less than 85 percent).  States must, however, require each MCO to submit an annual MLR report within 12 months of the close of the contract year covered by the report. Those annual MLR reports are an important source of MCO financial information for state Medicaid agencies, providers, beneficiary advocates, and the public. Federal regulations list the data elements that these reports must include, but there is no standardized format. There is also no requirement that state Medicaid agencies post these reports on their websites, although some do.

OIG reviewed 495 annual MLR reports that it obtained from states for completeness.  (These reports covered reporting periods ending in either 2018 or 2019, the first two years during which states were required to collect these reports).  Specifically, OIG looked for whether the reports contained seven required data elements: claims costs; non-claims costs; quality-improvement expenses; premium revenue; taxes and fees; calculated MLR; and member months. These elements are essential to the calculation of an MLR, which is the ratio of (1) claims costs plus quality improvement expenses to (2) premium revenue minus taxes and fees.

The OIG’s findings are not pretty. Almost half—244 out of 495, or 49 percent—of the MLR reports submitted by MCOs in 28 states were missing at least 1 of the 7 required data elements. The data element that was most often missing was non-claims costs—215 of the 244 incomplete reports were missing this data element.  In about a third of the cases, the MCOs simply didn’t fill in the data field on the report.  But in most of the cases—136 out of 215—the report didn’t even have a data field for non-claims costs for the MCO to fill in.  Apparently, the states that submitted these deficient MLR reports to the OIG in September 2020 did not fill in the blanks themselves or direct the MCOs with which they contracted to do so.  So much for the federal requirement.

What are non-claims costs?  They’re the MCO’s expenses for administrative services.  They do not include the MCO’s spending on quality improvement activities, or the licensing or regulatory fees or taxes that it pays.

Why do non-claims costs matter?  They can tell you what portion of an MCO’s Medicaid revenues is going to administrative overhead instead of, say, payments to network providers for furnishing covered services to beneficiaries (claims costs).  They allow a comparison of an MCO’s administrative overhead with that of other MCOs in the state and nationally.  And when totaled across all the MCOs with which a state contracts, they enable state policymakers to calculate how much their state Medicaid program is paying in administrative costs for managed care.

OIG made a number of recommendations to CMS designed “to strengthen States’ oversight of MLR reporting and better ensure that plans are using Federal dollars for patient care.”  It recommended that CMS design a standardized annual MLR reporting template for MCOs to use.  It recommended that CMS provide specific guidance to states and MCOs about the types of administrative expenses that should be reported as non-claims costs. And it recommended that CMS “clarify” that states review the MLR reports that MCOs submit to them for both completeness and accuracy.  It’s unfortunate that, four years after this reporting requirement became effective, it’s necessary for CMS to “clarify” that states should review the annual MLR reports. But it is what it is so let’s focus on correcting this going forward.

CMS did not dispute OIG’s findings and accepted its recommendations.  It told OIG that it “plans to develop a handbook for state oversight of MLR reporting” that will include a recommended template for the annual reports, a clarification that states should verify the completeness and accuracy of the reports submitted to them by the MCOs, and information on the reporting of non-claims costs.  This response is consistent with recent—and welcome—emphasis of the new management at CMS on greater transparency as part of its oversight strategy for Medicaid managed care.

As it happens, however, transparency is what’s missing from both the OIG report and the CMS response.  The OIG did CMS, state Medicaid agencies, and the public a huge service by collecting from states and wading through 495 MLR reports and identifying data gaps and oversight weaknesses.  But it did not identify the MCOs that submitted the incomplete MLR reports.  Nor did it identify the states that either did not review or took no action to address the reporting gaps.  It’s not at all clear what the public interest is in shielding from accountability either state Medicaid agencies or the MCOs with which they contract.

And while OIG’s recommendations are sound, they don’t go far enough.  OIG should also have recommended that CMS amend its Medicaid regulations to require states to post the annual MLR reports submitted by MCOs on their Medicaid agency websites along with the other information that they are currently required to post. The take-away from OIG’s review of MLR reports is straightforward: lack of transparency is a formula for regulatory failure, even at the most basic level of reporting required data elements. Public access to MLR reports would bring many more eyes to bear on these reports to help state and federal regulators identify data gaps and red flags.

Of course, CMS doesn’t have to wait for an OIG recommendation to take the initiative on transparency. It can simply build on what it has already begun. Is an MCO-specific performance dashboard on that includes MLR data too much to hope for?

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