As noted in a post published yesterday, CMS issued the final rule regarding Medicaid managed care earlier this week.  With this rule, CMS is taking a much more active role in overseeing states’ Medicaid managed care contracts.  CMS will now require states to submit managed care contracts and rates for review.  Given that 80% of Medicaid enrollees are served through managed care delivery systems, this action is significant.

This regulation impacts state Medicaid managed care contracts in three major areas.

• Actuarial Soundness.  State must now demonstrate that payments to Medicaid managed care are actuarially sound.  Before, CMS let states determine their own methods to certify actuarial soundness, but that was clearly lacking.  A 2010 GAO report found that CMS inconsistently reviewed state Medicaid plans’ rate setting and had not even reviewed rates for Medicaid programs in Nebraska and Tennessee.  With the new regulation, CMS will now require more stringent documentation and transparency in rate certification.

• Medical Loss Ratio.  The new regulations create a medical loss ratio (MLR) for Medicaid managed care plans.  Previously, there was no MLR federal policy for Medicaid.  The final rule aligns Medicaid with commercial Qualified Health Plans and Medicare Advantage Plans, which have been operating under an enforceable 85% MLR since they were created through the Affordable Care Act, and this change will require additional tracking and accountability on state Medicaid spending.

• Network Adequacy Standards.  CMS will now require states to establish network adequacy standards that mirror those in commercial Qualified Health Plans, to ensure that Medicaid beneficiaries also have access to important services.  Now, states must set time and distance standards for specific providers in Medicaid managed care plans.  Further, these plans will now be required to provide provider directory updates.

For many years, Medicaid advocates complained that CMS was far too laissez faire in their review of state Medicaid managed care contracts.  With this regulation, CMS is taking an active role to ensure that state Medicaid managed care plans meet the standards set for commercial Qualified Health Plans.  As states look to managed care plans to address rising Medicaid costs (e.g., Iowa), these new regulations will be critical to the negotiations between CMS and the states.