The Centers for Medicare & Medicaid Services (“CMS”) has released the final version of its much anticipated revisions to the regulations governing Medicaid managed care (the “Final Rule”). First proposed in May 2015, the Final Rule updates and expands the federal rules governing the operation, contracting, oversight, and payment of Medicaid managed care plans. Major themes articulated in the Final Rule include a desire to improve consistency between Medicaid managed care plans and plans operating in the commercial or Medicare markets, to increase protections and access to care for enrollees, and to promote value-based, patient-centered care within the context of the Medicaid program. State Medicaid programs have until the contract years commencing after July 1, 2017 to come into compliance with many of the provisions of the Final Rule; however, some changes have later effective dates and some are effective immediately. The Final Rule is likely to prompt significant changes to the Medicaid landscape, and stakeholders should look for opportunities to work with their state Medicaid agency and legislatures to determine how best to implement the new provisions. The Final Rule will be published in the Federal Register on May 6, 2016.

Development of Capitation Rates

The Final Rule updates federal requirements related to the development of capitation rates paid to Medicaid managed care plans, including the requirement that rates be “actuarially sound.” To be actuarially sound, capitation rates paid to Medicaid managed care plans must be projected to provide for all reasonable, appropriate, and attainable costs required under the plan’s contract with the state. Capitation rates must be appropriate for the specific populations to be covered and the services to be provided, and must be adequate to meet the network adequacy, access, and coordination of care requirements for the plan. In addition, capitation rates must be projected to allow the Medicaid managed care plan to reasonably achieve a medical loss ratio of 85% for the rate year.

The Final Rule also prohibits states, and their actuaries, from certifying a range of actuarially sound capitation rates. Some states currently modify rates paid to Medicaid managed care plans within certified “rate ranges” without submitting a new certification to CMS. Under the Final Rule, states must certify the final rate paid to each plan; however, effective for contracts after July 1, 2018, states have explicit authority to increase or decrease payments to a Medicaid managed care plan by 1.5% without submitting a new certification to CMS.

Medical Loss Ratio

The Final Rule requires states to impose a medical loss ratio (“MLR”) reporting requirement on Medicaid managed care plans. The MLR is calculated as the ratio of the expenditures the Medicaid managed care plan makes or incurs for claims, health care quality activities, and fraud reduction activities, to the adjusted premium revenue the plan receives.

When establishing capitation rates for a Medicaid managed care plan, the state and its actuaries are required to take into account the plan’s past MLR, as well as the plan’s projected medical loss ratio. As a result, CMS states that Medicaid managed care plans that do not meet an MLR of 85% would experience adjustments to future year rate development. However, states have discretion to determine whether a remittance of funds to the state is required if a minimum MLR is not achieved. If states mandate a minimum MLR, the minimum must be equal to or higher than 85%, and must meet be based on the reports required by the Final Rule.

Managed Care Supplemental Payments

The Final Rule will prompt significant changes to payment programs that have been developed in many states to support designated Medicaid providers through supplemental payments from Medicaid managed care plans. The Final Rule prohibits states from “directing” a Medicaid plan’s expenditures under its contract with the state unless an exception is met. Available exceptions include state-directed value-based purchasing programs, performance improvement or delivery system reform initiatives, or a minimum fee schedule for a service; specific requirements are applicable to such exceptions.

To allow states time to transition current payment arrangements to achieve compliance with the prohibition on directing funds, the Final Rule contains a temporary exception under which states may continue to make qualifying “pass-through payments” to hospital providers for a 10-year period. The amount of allowable pass-through payments for hospital providers is capped by a calculation of the difference between Medicare rates and the Medicaid plan or fee-for-service payment rates (excluding the pass-through payments), and the total allowable amount phases down each year until 2027. States may also continue to require pass-through payments to nursing facilities and physicians until July 1, 2021.

IMD/Alternative Settings

The Final Rule contains new authority clarifying the ability of Medicaid managed care plans to offer alternative services (or services in alternative settings) from those covered under the state’s Medicaid plan (“State Plan”). Services that are provided “in lieu of” State Plan services must be identified and authorized in the Medicaid managed care plan’s contract with the state, and must be determined by the state to be medically appropriate and cost effective substitutes for State Plan services. While capitation rates paid to Medicaid managed care plans must be based only on the cost of providing services available under the State Plan, the utilization and cost of “in lieu of” services may be taken into account when developing the component of the capitation rates that represents the covered State Plan services. This authority should allow states and Medicaid managed care plans to experiment with offering alternative services without creating a financial disincentive for the Medicaid managed care plan.

The Final Rule also contains authority for states to pay, and claim federal financial participation for, capitation rates for enrollees who spend less than 15 days during a month in an institute for mental disease (“IMD”). Services for adults age 21 through 64 who are in an IMD are not covered by the Medicaid program because of a federal statutory exclusion. In the Final Rule, CMS has determined that short term stays in an IMD do not violate this statutory exclusion, allowing Medicaid managed care plans to extend coverage of inpatient psychiatric services in an IMD to enrollees for at least short term stays.

In addition, the Final Rule requires Medicaid managed care plans to provide additional mental health and substance use disorder services required to achieve parity with physical health benefits available to enrollees, even if similar benefits are not available through the fee-for-service program.

Access to Care and Network Adequacy

The Final Rule imposes obligations on states to ensure that covered services are available to enrollees in a timely manner. States are required to ensure that Medicaid managed care plans contract with a network of appropriate providers to provide such access, and that they will provide necessary services outside of the network if the provider network is unable to provide necessary services. In addition, states must develop and enforce standards for network adequacy that meet requirements set forth in the Final Rule. The provisions in the Final Rule addressing access to services and network adequacy in the context of Medicaid managed care complement the separate CMS rule published on November 2, 2015 establishing standards by which states are to measure access in the Medicaid program, and how they may respond to remedy identified deficiencies in access.

Beneficiary Support

The Final Rule requires states to develop and implement a beneficiary support system to support beneficiaries both before and after enrollment into a Medicaid managed care plan. The support system must include choice counseling, assistance understanding managed care, and assistance for enrollees who use, or desire to receive, long-term services and supports. In addition, the Final Rule requires Medicaid managed care plans to have written policies regarding enrollee rights, including rights to participate in health care decisions. In the Final Rule, CMS sets forth new requirements for the enrollment of beneficiaries into managed care, including requirements for both voluntary and mandatory programs. CMS declined to finalize a proposed requirement for states to offer a 14-day period of access to fee-for-service benefits prior to enrollment into Medicaid managed care.

Program Integrity

The Final Rule enhances the program integrity requirements to which states, Medicaid managed care plans, and their subcontractors and network providers will be subject. Medicaid managed care plans, and subcontractors of such plans, will be required to implement and maintain arrangements to prevent fraud, waste, and abuse. The Final Rule sets forth minimum standards for such arrangements, including a compliance program that meets certain federal standards, provisions for the prompt return of identified overpayments, and methods to verify (such as through sampling) whether services were actually provided.

In addition, states are required to conduct the following program integrity efforts:

• Screen and enroll, and periodically reevaluate, all network providers of Medicaid managed care plans, under the standards applicable to fee-for-service Medicaid providers. While network providers will need to be enrolled by the state Medicaid agency, the Final Rule clarifies that network providers of a Medicaid managed care plan are not required to treat fee-for-service Medicaid beneficiaries.

• Review ownership and control disclosures from plans and plan subcontractors

• Conduct routine checks of the Federal database of excluded individuals

• Conduct or contract for period audits of the encounter and financial data submitted by plans

• Receive and investigate information from whistleblowers regarding the integrity of plans, their subcontractors, or network providers receiving Federal funds

• Make available on its website the Medicaid managed care plan contracts with the state, documentation of the availability of services and the adequacy of the plan’s provider network, information on individuals or entities with an ownership or control interest in the plan, and the results of any audits

Quality of Care

The Final Rule revises and expands the quality-related requirements applicable to Medicaid managed care plans. Under the Final Rule, Medicaid managed care plans will be required to conduct a quality assessment using performance measures specified by the state and other mechanisms to detect under- and over-utilization of services and to assess the quality and appropriateness of care furnished to enrollees with special health care needs. Medicaid managed care plans are also required to undertake performance improvement projects focusing on both clinical and non-clinical areas.

Some areas of quality reporting and assessment in the Final Rule will be further developed through future guidance. The Final Rule establishes that CMS, following consultation with states and stakeholders and an opportunity for comment, will publish national quality performance measures and performance improvement projects that will be required for all Medicaid managed care plans. CMS estimates that these will be published every 3 years, but cautions that this is only an estimate. In addition, the Final Rule provides that CMS will publish a methodology for a Medicaid managed care quality rating system following a stakeholder engagement process and public opportunity to comment. States will be required to follow the methodology once published or to submit a request for CMS approval to utilize a different rating system. The quality rating system will be aligned with the system applicable to qualified health plans.

Each state is required to develop a state quality strategy that includes elements identified by CMS in the Final Rule. Medicaid managed care plans also must be accredited by a qualified private agency, and are subject to review by qualifying external quality review organizations (“EQROs”) unless they fall within enumerated exceptions.

Provider Appeals and Grievances

The Final Rule modifies the regulations governing plan appeals and grievance procedures to increase uniformity with the procedures that apply to Medicare Advantage and the private insurance market. Contrary to the current framework in some states, the Final Rule requires that enrollees pursue the manage care plan’s internal appeals process before accessing a state fair hearing. However, it permits states to offer an independent, external medical review to enrollees as long as the review is not required and not used to deter enrollees from proceeding to a state fair hearing. The Final Rule also includes a new basis for appeal to dispute enrollee financial liability, including cost sharing, copayments, premiums, deductibles, and coinsurance. It continues to restrict the ability of a provider to appeal on behalf of an enrollee to circumstances when state law permits the representation and the provider obtains written consent from the enrollee.

Covered Outpatient Drugs

Since 2010, state Medicaid agencies have been able to claim rebates on covered outpatient drugs provided through Medicaid managed care plans through the Medicaid Drug Rebate Program. The Final Rule furthers the implementation of this requirement by requiring Medicaid managed care plans to report drug utilization data to the state so that the rebates can be claimed. Under the Final Rule, Medicaid managed care plans are required to establish procedures to exclude utilization data for covered outpatient drugs that are subject to discounts under the 340B Program.