President Biden’s FY 2024 Budget includes a number of provisions relating to Medicaid and the Children’s Health Insurance Program (CHIP). Two of these would improve Medicaid managed care. One involves recovery of overpayments to managed care organizations (MCOs); the other, a new tool for enforcing MCO compliance with federal rules. Judging from the lack of Republican enthusiasm for the President’s Budget— “DOA! DOA!” —these proposals almost certainly will not be enacted in this Congress. But it’s still worth understanding them: they’re examples of policy changes that will reduce federal and state Medicaid spending without cutting eligibility, scaling back benefits, lowering payments to providers, or shifting the costs of health and long-term care services from the federal government to the states and localities.
Recovering Overpayments. The budget proposes to require that MCOs spend at least 85 percent of the amounts they receive in per member per month payments from state Medicaid and CHIP agencies on covered services for beneficiaries and quality improvement. This percentage—the Medical Loss Ratio (MLR)—is basically a measure of how much value Medicaid and CHIP programs are getting for the money they pay MCOs. The lower the MLR, the more the MCO retains for administrative costs, including executive salaries and overhead and marketing expenses, and profit (or, in the case of nonprofit MCOs, surplus). The budget estimates this policy would reduce federal Medicaid spending by $20 billion and federal CHIP spending by $1.7 billion over the next ten years.
This is the first time this proposal has appeared in any President’s Budget, but it has been hidden in plain sight for years. Of the three major federal health care programs—Medicare, Medicaid, and the Marketplace—Medicaid is the only one that does not impose a minimum MLR. In Medicare, managed care plans must meet an 85 percent MLR each year; if they fail to do so, they must remit excess funds to CMS, and if they fail to do so for five consecutive years, the Secretary must terminate their Medicare contract. In the individual health insurance market, including the Marketplaces, insurers must meet an 80 percent MLR (in the large group market, which is comparable in scale to Medicaid, the minimum MLR is 85 percent). If an insurer fails to meet the minimum MLR, it must rebate the excess premiums to its enrollees. In 2022, insurers were expected to issue $600 million in rebates to individual market enrollees, including those in the Marketplace.
In Medicaid and CHIP, states have the option of imposing a minimum MLR; if they do so, they can’t set the MLR lower than 85 percent. They also have the option of recovering any excess amounts paid to the MCO in the form of a “remittance” from the MCO to the state. A majority of states contracting with Medicaid MCOs impose a minimum MLR; in a 2021 KFF survey, 30 states reported they always (21) or sometimes (9) collect remittances if an MCO does not meet the MLR requirement, while 7 states, including Florida, Georgia, and Texas, reported that they never collect remittances if an MCO does not meet the MLR requirement. In section 4001 of the SUPPORT Act, Congress enacted a fiscal incentive for states to adopt minimum MLRs and collect remittances, that that provision expires in 2023.
The President’s Budget proposes to require all state Medicaid and CHIP programs that use managed care as a delivery system to impose a minimum MLR of 85 percent on the MCOs with which they contract and to collect the excess amount from those MCOs that do not achieve this minimum rather than allowing them to keep it. The rationale is straightforward: “A minimum MLR and required remittance will encourage investments in health care services and quality improvement activities and prevent excessive profit retention.” The budget projects $21.7 billion in savings to the federal government because remittance amounts would be shared between the state and federal governments in the same proportion as they share in the cost of the Medicaid or CHIP program; for example, if the federal government matches two-thirds of a state’s Medicaid spending, it would recover two-thirds of remittances.
Enforcing Compliance. The President’s Budget also proposes to give CMS greater ability to enforce compliance by MCOs with federal Medicaid requirements. More specifically, CMS would be authorized to withhold federal matching payments on a portion of a Medicaid managed care contract with an MCO that is out of compliance with requirements rather than to deny matching funds for the entire contract. Currently, CMS has the authority to defer or disallow federal funds only if an MCO does not fully comply with encounter data reporting requirements. The proposal would expand the range of federal requirements that CMS could enforce. It appeared in last year’s budget as well, but the estimated savings have been reduced from $2.3 billion last year to $1.5 billion this year.
Currently, if CMS determines that an MCO is not complying with program requirements other than reporting encounter data (for example, having an adequate provider network), and if the state Medicaid agency does not take action to bring the MCO into compliance, CMS’s only remedy is to withhold federal matching payments on the entire contract with the MCO, effectively defunding it. The threat of imposing such a sanction is an empty one; everyone knows CMS would only use it (if ever) in the most extreme, egregious circumstance. As the budget points out, this is “an untenable compliance option given potential beneficiary harm and disruption to the state’s Medicaid program.”
The proposal could use more detail. The explanation says only that the proposal “conditions federal match in Medicaid managed care plan contract capitation payment amounts on a service-by-service basis and provides CMS with additional enforcement options.” There’s no information on what those “additional enforcement options” would be. Still, the proposal is significant because it reflects CMS’s explicit acknowledgement that it has “inadequate financial oversight and compliance tools in Medicaid managed care, lacking maximum flexibility to disallow and defer individual or partial payments associated with [MCO] contracts”.
Taken together, these two proposals would save the federal government an estimated $23.2 billion in Medicaid and CHIP over the next ten years, all without cutting eligibility, benefits, reducing payments to providers, or shifting costs to states and localities. That is more than enough to offset the estimated cost of, say, mandating coverage for pregnant women during the 12-month post-partum period ($2.4 billion), and converting the Certified Community Behavioral Health Clinic (CCBHC) demonstration project to a permanent state option ($20.1 billion). And they would address a glaring gap in oversight of Medicaid managed care at the federal level. Nonetheless, it is virtually certain that this Congress will not enact either.
Even though it is not likely to get new oversight authority, there is much that CMS can do within its existing authority that does not require congressional action or new funding. One obvious starting point would be to improve transparency about the performance of individual MCOs for children and other beneficiary populations. If performance metrics for each MCO were publicly available, beneficiaries, providers, competitor MCOs, the press, and other stakeholders would be able to tell which MCOs are performing well and which are not, and to hold those which are not—along with their state regulators—accountable. And if managements knew that their MCO’s performance would be made public, they would have a greater incentive to improve that performance.
At the state level, transparency is uneven. Not only does this undermine accountability in low-transparency states, but it makes state-to-state and national comparisons extremely difficult. A national, publicly available dashboard containing performance data for all MCOs contracting with state Medicaid and CHIP programs would solve both problems.
As it happens, CMS routinely collects information about the performance of individual MCOs. CMS receives MCO enrollee encounter data in its T-MSIS database. It collects and analyzes the EQRO Annual Technical Reports that contain MCO-specific performance metrics. It recently began collecting annual state reports on Medicaid managed care programs that include MCO-specific data on grievances, appeals, and state Fair Hearings, as well as standardized state reports on MCO-specific MLRs. And beginning in 2024, states will be required to submit Child Core Set measures to CMS annually; if these metrics are reported not just on a statewide basis but also on an MCO-specific basis—as they should be—CMS could use them to build a powerful oversight tool.
CMS could consolidate this data into a profile of each MCO and post that information on its website to help stakeholders analyze how well each MCO is managing care. There would be no new reporting burden for either MCOs or state Medicaid or CHIP agencies, and no additional program costs for states. For CMS, the cost of standing up and maintaining a dashboard would be minimal (CMS already pays at least half the cost of the data now collected). And by making MCO-specific performance information publicly available, CMS would enlist other stakeholders in ensuring MCO compliance with federal requirements, greatly improving monitoring and oversight—all without congressional action.
As compelling as these policy arguments are, there is the reality of operational bandwidth. The PHE unwinding will undoubtedly strain CMS capacity over the next year. Nonetheless, recent transparency-friendly actions by CMS provide some basis for optimism.