Medicaid Managed Care: Congress Falls Short on Medical Loss Ratios

On March 9, the President signed into law the Consolidated Appropriations Act, 2024 (P.L. 118-122). Buried in the 428-page text is a 3-line provision delightfully, if somewhat obscurely, titled “Promoting Value in Medicaid Managed Care.” This is a classic in the genre of offsets, flying well under the radar to carry out its mission of providing savings in order to reduce spending from other provisions in the same legislation. In this case, the Congressional Budget Office estimates that the provision will reduce federal Medicaid spending by $1.7 billion over the next 10 years; these savings helped lower the cost of Medicaid improvements that caught a ride on the CAA.

Where does CBO expect the savings to come from? Repayments of federal and state Medicaid funds by managed care organizations (MCOs) that do not spend the minimum amount states require them to spend on services for enrollees (as opposed to administration and profit). Congress had used this same offset once before, in the 2018 SUPPORT Act, but that version was temporary, running only through FY 2023. This new iteration is permanent, and while it could have been stronger, it’s worth understanding what it does and doesn’t do.

Let’s start with the big picture. The three Ms—Medicare, Medicaid, and the Marketplaces—all buy health insurance coverage for their enrollees largely through private managed care plans. Medicare requires that those plans meet a minimum medical loss ratio (MLR) standard of 85 percent. That is, of the Medicare premiums that plans receive, at least 85 percent must be spent on furnishing covered services to enrollees or on quality improvement activities. The plans can keep the remaining 15 percent for administrative costs and profits. Plans that do not meet the 85 percent minimum standard must return the excess to Medicare. In the Marketplaces, the minimum MLR is 80 percent because the health plans enroll on an individual rather than a group basis, incurring higher administrative and marketing expenses. For large group insurers, the minimum MLR is 85 percent. In both cases, any excess premiums collected by plans must be returned by the plans to the enrollees; in 2023, those rebates totaled $1.1 billion.

There is no minimum MLR requirement in Medicaid, even though the federal government’s spending on Medicaid managed care ($264 billion in FY 24) is much larger than its spending on Marketplace premium subsidies ($84 billion in FY 24) and more than half as large as its spending on Medicare Advantage plans ($447 billion in FY 24). Instead, states that choose to contract with MCOs have the flexibility to decide whether to impose a minimum MLR requirement on those MCOs, and if so, whether to collect remittances from the MCOs that do not meet the state’s MLR requirement. (The same policy applies to separate CHIP programs). States that elect to impose a minimum MLR may not set it lower than 85 percent, but they may set it higher; some, including Illinois (88 percent) and New Mexico (90 percent), have done so.

According to KFF, of the 41 state Medicaid agencies (including the District of Columbia) contracting with MCOs as of July 1, 2022, a total of 37 had a minimum MLR in place, and the remaining four (GA, TN, TX, and WI) did not. In the 37 states with minimum MLRs, 28 reported always collecting remittances from MCOs that did not meet the minimum; five (CA, MA, NC, SC, and UT) reported sometimes collecting remittances; and three (AZ, FL, and NM) reported that their policy was not to collect remittances (AR did not respond).

The President’s Budget for FY 2025 to require that all MCOs participating in Medicaid and CHIP meet a minimum MLR of 85 percent and to require all states to collect remittances from MCOs that do not meet the minimum. The rationale is that this policy will “encourage investments in healthcare services and quality improvement activities and prevent excessive profit retention.” The Budget estimates federal savings of $8.4 billion in Medicaid and $1.7 billion in CHIP over 10 years. This same proposal was included in the President’s Budget for FY 2024 and is likely to be ignored once again.

Instead, what Congress has mind has just been enacted in the CAA 2024. Rather than impose a national minimum MLR requirement, Congress opted to provide a financial incentive to encourage states to impose a minimum MLR and collect remittances from MCOs that do not meet the minimum. The financial incentive takes the form of a reduction in the share of any remittances collected that states must return to the federal government, from the enhanced 90 percent federal matching rate (FMAP) for Medicaid expansion adults to the state’s regular FMAP.

For example, assume that a state with an FMAP of 50 percent and an MLR requirement of 85 percent pays an MCO $100 million for enrolling expansion adults over the course of a contract year, and that the MCO only achieves an MLR of 80 percent for that year; the remittance owed to the state would be $5 million. Normally the state would return 90 percent of that $50 million, or $4.5 million, to the federal government; under the CAA provision, the state would only return 50 percent of the $5 million remittance, or $2.5 million, effectively receiving an incentive payment of $2 million.

Like its SUPPORT Act predecessor, the CAA provision is convoluted. First, the incentive only applies to the subset of managed care states that have also taken up Medicaid expansion. The non-expansion managed care states—FL, GA, KS, MS, SC, TN, and TX—by definition can’t benefit from this incentive (just one of the many benefits they and their residents are losing out on). And second, the incentive only applies if an expansion state imposes an MLR of 85 percent; if the expansion state adopts a higher MLR, the state can’t qualify for the incentive. (States that had higher MLRs in place on or before May 31, 2018 can still qualify for the incentive so long as they don’t raise their MLRs higher than the level they set prior to that date).

Whether this incentive is sufficient to drive state MLR policy one way or another is an open question. CBO evidently thinks it will result in more states starting (or continuing) to collect remittances, since it estimated that the provision would generate some savings. But there’s no need for budgetary uncertainty here. A straightforward policy that saves the federal government (and states) even more money is in plain sight. Require Medicaid MCOs to meet a minimum MLR requirement of 85 percent; allow states to increase the minimum MLR percentage; and require states to collect remittances if MCOs don’t meet the MLR.

It’s just not that hard.

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