Editor’s Note: Since this post was published, CCF submitted formal comments on the Managed Care proposed rule. 

Earlier this month, CMS proposed changes to regulations that govern the operation of  Medicaid managed care in 41 states.  The main purpose of the proposals is to improve access to care (by, among other things, beefing up network adequacy standards), but there are other moving parts.  This blog looks at the proposed changes to the current Medical Loss Ratio (MLR) requirements—changes that move the ball forward but still fall short of what needs to be done to hold managed care organizations (MCOs) accountable for the use of Medicaid funds.

The MLR is one of the basic measures of financial performance in the health insurance industry.  It tells us how much of a health insurer’s premium revenues the insurer spends on health care services for its enrollees—i.e., its “loss”—and how much the insurer keeps for administrative costs and profit.  The lower the MLR, the smaller the share of premium revenue the insurer pays out for services, either because the enrollees don’t need the services, or because the enrollees can’t access the services they need due to narrow provider networks or restrictive prior authorization controls, or both.

Investors want to see a low MLR—say, 80 percent or less—because it can lead to an increase in a company’s earnings per share; this is a point of emphasis for the management teams of several publicly-traded companies in earnings calls.  In public programs like Medicaid, on the other hand, a low MLR is an indicator of a failure in fiscal stewardship: it means that a lower proportion of the state and federal funds flowing monthly to an MCO is being used to pay providers for furnishing services to program beneficiaries.

Current CMS Regulations

Currently, state Medicaid programs have the option of imposing an MLR; if they do so, as most have elected to do, the MLR can’t be lower than 85 percent. (In contrast, all Medicare Advantage plans and Marketplace QHPs are subject to MLR requirements).  States also have the option of collecting remittances from MCOs that don’t pay enough for covered services to meet the 85 percent standard; the majority of states that impose MLRs report that they collect remittances all of the time.  Regardless of whether a state imposes an MLR requirement, current regulations require that each MCO calculate an MLR using the Medicaid formula and report that MLR to the state on an annual basis.  Medicaid’s MLR formula is:

Correctly done, the annual MLR reports that MCOs are required to submit to the state Medicaid agency can be quite instructive.  CMS regulations require that an MCO’s report include twelve separate data points, including all the elements in the formula above. The state, in turn, is required to submit a summary of those reports annually to CMS.  This summary does not have to include all of the elements in the MLR formula—only the amount of the numerator, the amount of the denominator, and the MLR percentage.

Current regulations do not require state Medicaid agencies to post the annual MLR reports submitted by MCOs on their websites, and most do not.  Last year, the HHS Office of Inspector General (OIG) took a look at what information the MCOs were reporting.  It found that, of 495 annual MLR reports that MCOs had submitted to 28 states, nearly half were incomplete, missing at least one of the seven data elements required to be reported by all MCOs.  The data element most frequently missing was non-claims costs (expenses for administration).  As OIG noted, “Missing data on non-claims costs may reduce transparency into managed care spending and limit States’ ability to ensure that plans are appropriately spending Medicaid dollars on the health of enrollees rather than excessive administrative expenses.”

Lack of transparency extends to the federal level as well.  The annual summary reports submitted by state Medicaid agencies to CMS are not posted on the CMS website—at least not yet.  Last July, CMS announced the development of standard reporting template for these reports and indicated that it would make all reports available on Medicaid.gov once a page is established.  That has not yet occurred.  In the interim, CMS has made a plan-level compliance summary of these reports available on request.

Proposed Changes

In the preamble to the proposed rule, CMS indicates that it “recently conducted several in-depth reviews of States’ oversight of managed care plan MLR reporting” and uncovered a number of program integrity weaknesses.  To address these vulnerabilities, CMS has proposed a number of changes to close loopholes in MLR reporting and increase its ability (and that of the states) to better understand how MCOs are spending the funds that Medicaid is paying them. A theme common to several of these changes is stopping MCO gaming of MLR data elements.  (In a state that imposes an MLR requirement and collects remittances from MCOs that do not spend enough on covered services to meet the MLR, an MCO has a financial incentive to artificially inflate its MLR to avoid remitting money back to the state and federal government).   For example:

• Requirements for provider incentive arrangements. MCOs commonly make incentive or bonus payments to network providers. In its reviews, CMS found that “many” MCO contracts with network providers did not base incentive payments paid by the MCO on a requirement that the providers meet quality improvement metrics, and that “some managed care plans did not require a provider to improve their performance in any way to receive an incentive payment.”  This, CMS explains, “may create an opportunity for a managed care plan to more easily pay network providers solely to expend excess funds to increase their MLR numerator under the guise of paying incentives.”  The proposed rule adds several new requirements an MCO must meet if it wants to include incentive payments it makes to providers as “incurred claims” in its MLR numerator, including that “the provider bonus or incentive arrangement would have to require providers to meet clearly defined, objectively measurable, and well-documented clinical or quality improvement standards to receive the bonus or incentive payment.”
• Requirements for Quality Improvement Activities (QIAs). The Medicaid MLR formula allows MCOs to include spending on QIAs in the numerator; rather than being treated as an administrative expense, MCO spending on QIAs can substitute for payments the MCO makes to network providers for furnishing services to enrollees.  Current regulations do not require MCOs, in reporting QIA spending, to exclude indirect or overhead expenses.  As a result, CMS explains, “expenditures for facility maintenance, utilities, or marketing may be included in the MLR even though these expenses do not directly improve health care quality,” artificially increasing the numerator and inflating the MLR percentage.  The proposed rule would align the Medicaid definition of QIA with that used in the Marketplace, which prohibits the inclusion of overhead or indirect expenses that are not directly related to health care quality improvement.
• Reporting of State Directed Payments (SDPs). The proposed rule would also change the reporting of SDPs for MLR purposes.  SDPs, not to be confused with SDOH, another of the parade of initialisms  in Medicaid managed care, are payments that state Medicaid agencies direct MCOs to make to certain providers, such as minimum payments to safety net hospitals to ensure access to care. Current regulations do not require states or MCOs to provide CMS with the actual amounts spent on SDPs.  As CMS explains, that creates program integrity risk: “We are also aware that some States are permitting managed care plans to retain a portion of SDPs for administrative costs when plans make these payments to providers. Because States are not required to provide the actual expenditures associated with these arrangements in any separate or identifiable way, we cannot determine exactly how much is being paid under these arrangements and whether Federal funds are at risk for impermissible or inappropriate payment.”  Not good.  The proposed rule would require that MCOs include SDPs that are made to providers in the MLR numerator as incurred claims and include state payments to the MCO for SDPs in the MLR denominator as premium revenue. In addition, MCOs would have to include both the payments they make to providers and the payments the state makes to them as separate lines in their annual MLR report to the state.  States in turn would have to include both amounts for each MCO in their summary reports to CMS. 

Bottom Line

These proposals would bring much-needed transparency into state and MCO spending, reducing the diversion of Medicaid funds away from paying network providers for furnishing services to those enrolled in Medicaid into excessive administrative costs.  While most welcome, the new transparency requirements in the proposed rule do not go far enough. As a practical matter, only CMS will be able to follow the money.  State Medicaid agencies will still not be required to post the Annual MLR Reports, and the summary reports they are required to submit to CMS will still not include data on non-claims costs.  CMS should do better, and in the final version of this rule, it can.  And not to put too fine a point on it, CMS does not need new regulations to be more transparent with the state reports it already has.