How Did We Get Here? A Recent Legislative History of Medicaid Managed Care

Just over 25 years ago, Congress enacted a major change in federal policy on Medicaid managed care.  It eliminated the 75/25 rule—the requirement that no more than 75 percent of the enrollees in a Medicaid managed care organization (MCO) could be Medicaid or Medicare beneficiaries. The logic of the rule was that if an MCO had to persuade employers to enroll their employees, the federal government could have some confidence that its matching funds were helping to purchase a reputable insurance product offering accessible services of reasonable quality.

In the Balanced Budget Act of 1997, Congress replaced the 75/25 rule with an option for states to require most groups of Medicaid beneficiaries to enroll in MCOs with exclusively Medicaid enrollees.  To protect beneficiaries from underservicing and federal funds from being diverted, Congress enacted a regulatory structure relying primarily on state Medicaid agency monitoring of MCOs, supplemented with annual external reviews of MCO performance and CMS oversight.  The rise and fall of the 75/25 rule are outlined in a companion blog.  This blog summarizes the significant federal statutory changes relating to Medicaid managed care since the 1997 BBA.

As an industry report recently noted, up until its repeal in 1997, the 75/25 rule had “sharply limited managed care growth.”  Since then, enrollment of Medicaid beneficiaries in MCOs has increased dramatically, from 8 million in 1997 to 57 million in 2020.  The number of states that require some or all of their Medicaid beneficiaries to enroll in MCOs is now up from 14 in 1997 (by waiver) to 40 plus the District of Columbia.  The total number of MCOs with which those states contract now exceeds 280; the MCO market is dominated by five national companies.

As enrollment in Medicaid managed care has grown, so has the federal government’s investment. By 2006, according to the Congressional Budget Office, federal spending on Medicaid managed care was $32 billion, or about 18 percent of total federal Medicaid spending; by 2022, those numbers had increased to $272 billion and 46 percent, respectively.  CBO is currently projecting that federal spending on Medicaid managed care will continue to rise over the next 10 years, to $440 billion and 50 percent of total federal Medicaid spending in 2033.

Despite this growth in federal spending, the federal government’s statutory role has not changed significantly since 1997.  States that decide to require Medicaid beneficiaries to enroll in MCOs continue to have primary responsibility for holding the MCOs with which they contract accountable for performance. (States must engage an External Quality Review Organization (EQRO) to conduct an independent assessment of each MCO and must post its findings annually). The federal government’s role continues to be limited largely to issuing regulations and other guidance implementing federal statutory requirements; reviewing the contracts between a state and its MCOs for compliance with those requirements; ensuring that the capitation rates the state pays its MCOs are actuarially sound; and collecting MCO encounter data in the Transformed Medicaid Statistical Information System (T-MSIS).

The Medicaid and CHIP Payment and Access Commission (MACPAC) reports that since 1997 Congress has enacted a total of 33 laws that contain provisions amending the Medicaid statute.  Despite all of this legislative activity, there have been almost no modifications to the 1997 regulatory framework for Medicaid managed care.  Here are the most important statutory changes since 1997:

  • MCO Taxes (2006). When Congress gave states the authority to impose taxes on providers to raise revenues to meet their share of Medicaid spending, it allowed them to tax only those MCOs participating in Medicaid.  In the Deficit Reduction Act of 2005, Congress broadened the definition of MCO for purposes of provider taxes so that a state could no longer impose taxes just on Medicaid MCOs; if a state wanted to tax managed care organizations, it would have to tax all of them uniformly.  As of FY 2022, 18 states had enacted MCO taxes (compared to 46 with taxes on nursing facilities and 44 with taxes on hospitals).
  • False Claims Act (2006). The federal False Claims Act is not specific to Medicaid or to managed care, but it has been used to hold MCOs accountable for the proper expenditure of federal funds. It supplements the 1997 regulatory framework, relying on whistleblowers, not state Medicaid agencies or CMS. In the Deficit Reduction Act of 2005, Congress created an incentive for states to adopt their own FCAs, and it also required all MCOs and other entities with more than $5 million in annual Medicaid payments to include in their employee handbooks a discussion of their rights as whistleblowers under the FCA to report fraud.
  • Drug Rebates (2010). Prior to the Affordable Care Act, pharmaceutical manufacturers were required to pay rebates on outpatient drugs purchased by state Medicaid programs on a fee-for-service basis.  As part of its cost containment provisions, the ACA required manufacturers to pay rebates on drugs purchased by MCOs for their enrollees under their risk contracts with state Medicaid agencies, closing a major loophole in the Medicaid Drug Rebate Program.
  • Encounter Data (2010). Holding MCOs accountable for the provision of covered services requires accurate, timely encounter data. The ACA included in its program integrity provisions a requirement that MCOs submit encounter data to their state Medicaid agencies per CMS specifications and authorizes CMS to withhold federal matching payments from states that do not timely report the data to CMS.
  • Network Providers (2016). To protect Medicare, Medicaid, and CHIP beneficiaries from fraudulent providers, the ACA in 2010 required that all providers be screened before enrolling in the programs.  The 21st Century Cures Act clarified that all MCO network providers must be enrolled in the state Medicaid program (after being screened for program integrity risk).  The purpose of this provision was to eliminate MCO provider networks as safe harbors for bad actors.
  • Medical Loss Ratio (2018). Conspicuously absent from federal Medicaid law is a requirement that MCOs spend at least 85 percent of their Medicaid capitation payments on health care services for enrollees and for quality improvement (managed care companies participating in Medicare and the Marketplaces are held to this standard of fiscal stewardship).  In the SUPPORT for Patients and Communities Act of 2018, Congress provided a time-limited financial incentive for most states to establish a minimum MLR of 85 percent or more.  The incentive applied only during the three-year period that ended on September 30, 2023.
  • Provider Directories (2023). The Consolidated Appropriations Act of 2023 requires each MCO to post, on a public website, a searchable directory of network providers containing data elements specified in the statute. The directory must be updated on a quarterly basis.  The requirement takes effect July 1, 2025.

This list does not reflect all of statutory changes since 1997 that affect MCOs.  For example, in the Bipartisan Budget Act of 2018, Congress required state Medicaid programs to report quality measures in the Child Core Set to CMS starting in 2024.  In managed care states, the sources of data for these measures will be the MCOs with which the state agency contracts.  Depending on the measures the state agency currently collects, this may require the reporting of additional measures by the MCOs.  (The 2024 Child Core Set contains 27 measures).

The list does make clear, however, just how little the Medicaid managed care regulatory structure has changed since 1997.  The absence of provisions requiring greater transparency about the performance of individual MCOs is particularly striking.  It certainly helps to explain why Medicaid managed care is still opaque after all these years.

[Editor’s Note: Read more from Andy Schneider about the early legislative history of Medicaid Managed Care here.]

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