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Medicaid Managed Care in a Post-ACA World: CMS Continues Convergence in Healthcare Regulation in Medicaid Managed Care Final Rule


Today the Centers for Medicare & Medicaid Services (CMS) published the Medicaid Managed Care final rule (the “Final Rule”) in the Federal Register. The Final Rule comes 14 years since the last Medicaid managed care rulemaking, when CMS promulgated the regulations implementing the Balanced Budget Act of 1997’s changes to the Medicaid program in 2002. The healthcare world has changed dramatically since then both through the enactment of the Affordable Care Act (ACA) and substantial growth in Medicaid managed care (the Final Rule notes that as of July 2013, 73.5 percent of Medicaid beneficiaries received at least some benefits through managed care).

The Final Rule continues CMS’s regulatory philosophy of harmonizing the post-ACA healthcare regulatory world, seeking to align Medicaid regulations with the requirements imposed under the Medicare Advantage and Exchange programs. For example, it includes an 85 percent medical loss ratio (MLR) component calculated like the commercial and Medicare Advantage MLR schema, and requires states to develop a Medicaid managed care quality rating system similar to the Exchange quality rating system and Medicare Advantage Star Ratings.

At more than 400 pages, the Final Rule covers a lot of ground, much of which remains unchanged from last summer’s proposed rule. It specifies requirements addressing, among other topics:

  • Actuarial soundness and rate setting.
  • Beneficiary protection, information, and support.
  • Network adequacy and access to care.
  • Quality of care.
  • Program integrity.
  • State monitoring and oversight.

Given the breadth of the Final Rule, Crowell & Moring is publishing a series of client alerts and blog posts covering key areas and developments in Medicaid Managed Care. Part I, regarding actuarial soundness, MLR, and rate setting, is below.

Part I: CMS Revises Actuarial Soundness Regulations and Requires MLR Calculation for Improved Federal Oversight of Rate Setting

The Final Rule refines the standards by which states set actuarially sound capitation rates and CMS reviews and approves actuarial certifications. The Final Rule’s approach to rate setting and review is based on three principles:

  1. Capitation rates should be sufficient and appropriate both for the anticipated utilization, populations, and services covered under the contract and provide adequate compensation to the managed care plans for reasonable benefit costs.
  2. The actuarial rate certification of the capitation rates should provide sufficient detail, documentation, and transparency of the rate setting components in the regulation such that another actuary can assess the reasonableness of the methodology and assumptions used to develop the final capitation rates.
  3. Both CMS and the state should apply a uniform and transparent rate review and approval process based on actuarial practices.

Each of these principles evolved from the sub-regulatory guidance that sprang up to fill the gaps in the 2002 rule. The Final Rule teases out and unifies the standards outlined in the sub-regulatory guidance, rate-setting checklists, actuarial practice notes, and Actuarial Standards of Practice (including the recently-adopted ASOP 49, Medicaid Managed Care Rate Development and Certification, which became effective on August 1, 2015), that followed the 2002 rules.

Where the prior rule compressed actuarial soundness and rate setting into one paragraph, 42 C.F.R. § 438.6(c), the Final Rule expands the regulation to include more precise articulations of the elements required for capitation rate setting and actuarial soundness across four new sections:

  • 42. C.F.R. § 438.4, Actuarial Soundness
  • 42. C.F.R. § 438.5, Rate Development Standards
  • 42. C.F.R. § 438.7, Rate Certification Submission
  • 42. C.F.R. § 438.8, Medical Loss Ratio (MLR) Standards

The Final Rule is the next step for CMS in the shift from the process-oriented review established by the 2002 regulations to a more hands-on analysis of whether the proposed rates account for all reasonable, appropriate, and attainable costs under the terms, population, and time period covered under the contract. As CMS explained in the preamble to the 2002 rule:

We believe that by reviewing the process used in setting the rates under a risk contract, we will fulfill our regulatory responsibilities to the fiscal integrity of the Medicaid program and will assure that States have considered all relevant factors in this process.
[. . .]
We do not believe it is necessary, or in some cases appropriate, for other actuaries to be able to independently evaluate the results and assumptions in setting the rates (other than for our actuaries in cases where their assistance is required).

67 Fed. Reg. 40989, 40998, 41002 (June 14, 2002). But now, CMS will “look under the hood” of rate setting to test the assumptions and methodologies applied by states and MCOs and will leverage actuarial resources, such as the Office of the Actuary and/or actuarial contractors, to assist Regional Offices in reviewing rate certifications.

The Final Rule reiterates and makes more explicit the 2002 rule’s actuarial soundness requirements. For example, the preamble to the 2002 rule explained that, “all rate cells, as well as the entire contract, and all payments made under the contract” must be actuarially sound (67 Fed. Reg. at 40998), but the Final Rule goes a step farther by clarifying that rate cells cannot cross-subsidize one another. Likewise, the Final Rule explains that although states may develop and use a rate range as part of the rate setting process and contract negotiation, states may not certify a rate range; the state must certify the capitation rates on a rate cell by rate cell basis for each MCO. CMS explained that some states used rate ranges to adjust capitation rates without updating the certifications provided to CMS or explaining the consideration for the rate change. The rule does permit states to adjust rates up or down by 1.5 percent without needing to submit a revised certification.

States must submit rate certifications and supporting documentation to CMS at least 90 days before the anticipated effective date of the rates. Although CMS does not intend to check or verify each and every calculation, it does intend to play a more active role in reviewing and understanding how the state developed the proposed capitation rates. The Final Rule seems to be designed to enable CMS to apply generally accepted actuarial principles and practices to evaluate the reasonableness of the assumptions underlying the rates. Notably, however, CMS did not create an appeals process for the actuarial certification of capitation rates and CMS shall not act as “an arbiter of payment disputes between the state and managed care plans.” But CMS did express willingness to meet with plans informally during the capitation rate review process to listen to their concerns. And CMS acknowledged that its approval of capitation rates constitutes a final administrative action.

Certain of the actuarial soundness and rate setting provisions are effective on July 5, 2016, 60 days after publication of the Final Rule, while others apply to the rating period for contracts starting on or after July 1, 2017.

Additionally, CMS established an MLR floor of 85 percent, consistent with the MA/PDP and commercial MLR requirements. There is no penalty for failing to meet the MLR, but the Final Rule gives states the flexibility both to set a higher MLR and to require remittances to the state (from whom CMS will recoup its share) in the event a plan does not satisfy the MLR. The MLR requirement is designed to work in tandem with the new rate setting requirements. As explained by CMS, MLR, “is one tool that can be used to assess whether capitation rates are appropriately set . . . .” An excessively high MLR may signal that rates were set too low and jeopardize enrollees’ access to services, quality of care, network adequacy, and plan viability.

The Final Rule requires that capitation rates are set in a way that a plan “would reasonably achieve” an 85 percent MLR as calculated in accordance with the regulations. CMS intends that consideration of the projected MLR and the actual MLR reported by plans will inform the rate setting process and may result in an adjustment—upward or downward—of the capitation rates and expects actuaries to explain how MLR experience factored in the rate development. States must consider plans’ prior MLR when setting capitation rates under the contract.

The MLR reporting period is 12 months consistent with the rating period used by the state. CMS did not use the three-year rolling average applied in the commercial setting because it “expect[s] rate setting to be done on an annual basis . . . .” The regulation also specifies the minimum data elements that states must obtain from plans in annual MLR reports and gives states the flexibility to require separate reporting and MLR calculations for specific populations.

The calculation method for the Medicaid managed care MLR largely mirrors the MA/PDP and commercial MLR methodologies. A simplified version of the MLR calculation methodology is as follows:

Incurred Claims + Activities that Improve Health Care Quality
Adjusted Premium Revenue1

Although the proposed rule included fraud prevention activities in the numerator, the Final Rule omitted that element, consistent with CMS’s determination in the commercial market under the 2017 Notice of Benefit and Payment Parameters final rule. Instead, the Final Rule provides that fraud prevention activities may be included in the numerator “as adopted for the private market at 45 CFR part 158.” And, as of yet, those expenses are not included in the commercial MLR calculation.

Unlike the MA/PDP MLR guidance, which incorporated by reference sub-regulatory guidance CCIIO published for the commercial MLR, the Final Rule did not include the guidance. Specifically, the Final Rule declined to impose the four-part test for clinical risk-bearing entities articulated in the February 10, 2012 CCIIO technical guidance. Rather, the Final Rule vested states with the direction whether to apply the four-part test. That said, the Final Rule’s discussion of payments to third-party vendors and subcontractors for clinical and administrative services largely tracks the CCIIO guidance from May 13, 2011, July 18, 2011, and February 10, 2012 — payments for non-clinical services generally must be counted as administrative expense for MLR purposes.

The MLR requirement is effective beginning with the rating period for contracts starting on or after July 1, 2017.

1 Adjusted premium revenue is the result of: (capitation payments + kick payments + withhold payments + unpaid cost-sharing amounts that could have been collected + changed to unearned premium reserves + net payments or receipts to risk sharing mechanisms) – Governmental Taxes and Fees. See 42 C.F.R. § 438.8 (f).

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