States would have the option to create binding Medicaid MLR requirements modeled after existing commercial market MLR standards.

The Centers for Medicare & Medicaid Services’ (CMS’s) Medicaid proposed rule (Proposed Rule) would, for the first time, create a medical loss ratio (MLR) requirement for Medicaid and Children’s Health Insurance Program (CHIP) managed care contracts (Medicaid MLR). The Medicaid MLR standards would be similar to those that apply by statute in the commercial markets and in the Medicare Advantage (MA) and Part D Programs. However, since there is no statutory requirement that CMS apply a Medicaid MLR standard, or do so in a particular way, CMS has taken the opportunity to accommodate unique features of the Medicaid program. 

Under the Proposed Rule, states would have the option of mandating a minimum Medicaid MLR with associated financial penalties or making the Medicaid MLR standards a reporting requirement only. States setting a minimum Medicaid MLR would need to require at least an 85 percent MLR, but would have the option of imposing a higher MLR standard. In addition to calculating Medicaid MLR performance for completed contract years, CMS would require that the projected Medicaid MLR be greater than 85 percent in order for a state’s proposed capitation rates to be considered actuarially sound. The Medicaid MLR requirements would apply to contracts beginning on or after January 1, 2017.

MLR standards are not new to the Medicaid managed care program. They have existed in a number of states for years, and there were prior indications that CMS was considering a Medicaid MLR standard. One benefit to the proposal is that it would establish a uniform MLR approach rather than the current state-by-state variation that is often characterized by ambiguous standards. Nonetheless, there are likely aspects of the proposed rule that Medicaid managed care organizations, prepaid ambulatory health plans and prepaid inpatient health plans participating in the Medicaid Program and/or CHIP (collectively, Sponsors) may want CMS to clarify or alter in the final rule.  

Comments on the Proposed Rule are due to CMS no later than 5 pm EDT on July 27, 2015.

CMS Would Draw on Existing Commercial MLR Standards

At its most basic level, MLR measures the percentage of premium revenue an entity spends on health care expenses and quality improvement activity (QIA) expenses as opposed to administrative expenses and profit. Given the nature of this comparison, the issue of which expenses qualify as health care expenses and quality improvement activity expenses is critically important. CMS proposes for the Medicaid MLR standards to draw largely from the existing commercial MLR expense classifications—which were also the basis for the MA and Part D MLR standards—so that Sponsors will be able to utilize consistent expense classifications across their lines of business. States would not be able to adopt modifications or supplements to these expense classification standards.

The proposal to use existing commercial standards means that Sponsors may include a variety of QIA expenses in the Medicaid MLR numerator along with incurred claim costs (i.e., health care expenses). There also are several Medicaid-specific expense classification standards that are unique to this proposal. For example, costs related to Medicaid External Quality Review Organizations would qualify as QIA expenses. Also, in addition to the permitted inclusion of claims payments recovered from fraud reduction efforts (up to the amount spent on fraud reduction efforts), amounts spent on Medicaid-specific program integrity requirements could be included in the numerator, subject to a cap of 0.5 percent of premium revenue. Finally, although the proposed regulation does not specifically address the treatment of care management expenses, CMS states in the preamble that QIA would include Sponsor “activities related to service coordination, case management, and activities supporting state goals for community integration of individuals with more complex needs such as individuals using [long-term services and supports].”

As with the commercial standards, the Proposed Rule would exclude from the Medicaid MLR numerator Sponsors’ payments to third-party vendors for administrative fees, network development, claims processing and utilization management. From a policy standpoint, the exclusion is designed so that Sponsors’ expenses do not receive different treatment depending on whether a service is performed by the Sponsor or delegated to a third-party vendor. The third-party vendor rules affect reporting of payments to pharmacy benefit managers, behavioral health vendors and other vendors that represent significant expenditures for Sponsors. The consistent treatment of these expenses among the commercial, Medicare managed care and Medicaid/CHIP managed care markets should simplify for health insurers and other managed care organizations allocation of these vendor expenses across multiple lines of business, as applicable.

CMS has issued a number of Frequently Asked Question (FAQ) guidance documents that relate to the commercial market MLR standards and address third-party vendor reporting and other critical topics, such as clinical risk-bearing entity payments. The Proposed Rule does not address whether Sponsors can rely on this commercial market MLR guidance when applying similar Medicaid MLR standards. The clinical risk-bearing entity FAQ, for example, sets standards for when payments to Accountable Care Organizations (ACOs) and other clinically integrated providers may be treated as an incurred claim without being subject to the third-party vendor reporting standards. (CMS, CCIIO Technical Guidance (CCIIO 2012—001): Questions and Answers Regarding the Medical Loss Ratio Interim Final Rule (Feb. 10, 2012)). This FAQ is particularly relevant given that the Proposed Rule contemplates that states would require Sponsors to implement various value-based purchasing models for provider reimbursement, which often involve arrangements with ACOs and other clinically-integrated providers. This issue also arose in the Medicare MLR context; in response to questions from MA Organizations, CMS ultimately indicated in its MLR reporting form instructions that MA Organizations and Part D Plan Sponsors may rely on commercial market guidance. This will be an important issue to follow in the final rule and as implementation proceeds.

States Would Have Flexibility to Mandate Minimum MLR

The Proposed Rule would give states the option of mandating a minimum Medicaid MLR standard with a repayment obligation, or simply requiring Sponsors to report their MLR (with no repayment requirement). This is a critical difference from the existing commercial and Medicare managed care MLR standards, pursuant to which managed care organizations failing to meet the minimum MLR standard must repay premium amounts until their MLR is equal to the minimum MLR. States may not set a minimum Medicaid MLR lower than 85 percent, but states would be permitted to impose a higher standard, as several states already do. 

By allowing states to determine whether the MLR is mandatory and, if so, the minimum MLR percentage, the proposed rule would set the stage for future state-specific discussions and negotiations. Sponsors therefore will need to not only consider how to influence initial state discussions about implementing these requirements for 2017, but also monitor state requirements for potential changes on an ongoing basis. CMS’s proposal appears to gives states flexibility in the mechanism used to implement Medicaid MLR standards, so states may consider various approaches, from passing formal legislation to using the state contracting process.

For states that choose to require repayment if a Sponsor’s Medicaid MLR is below a minimum, the Proposed Rule would require that the federal government receive its share of any remittances that are returned by Sponsors. This is a critical issue for Sponsors because adoption of such a requirement creates potential federal False Claims Act risk for Sponsors that fail to accurately report their Medicaid MLR or otherwise fail to repay MLR rebates that should have been returned. States may also have state false claims acts that could apply to the state portion of Medicaid MLR rebates that should have been paid.   

CMS Would Consider Projected Medicaid MLR when Assessing the Actuarial Soundness of Rates

Under the Proposed Rule, CMS proposes that state agencies would have to take into account Sponsors’ projected Medicaid MLR when evaluating the actuarial soundness of proposed payment rates. A Sponsor’s rates must be projected to result in a Medicaid MLR that is no lower than 85 percent in order to be approved as actuarially sound by CMS, so this requirement effectively operates as a cap on the percentage of premium revenue that can be projected for administrative costs or profit. 

Notably, CMS considered but elected not to establish a maximum projected Medicaid MLR as part of the process for setting actuarially sound rates. Rather, rates simply must be “adequate for necessary and reasonable administrative costs” (42 C.F.R. § 438.4(b)(8)). Sponsors in other circumstances have argued that, in certain situations, states have set rates too low, and as a result CMS should not have approved the rates as actuarially sound. Payment rates that are too low relative to incurred costs put downward pressure on provider payment rates, thus threatening Medicaid enrollee access to services and network adequacy, and also lead to poor performance in other areas, such as customer service. (See generally, The Menges Group, Medicaid Health Plans: Ensuring Appropriate Rates in an Era of Rapid Expansion (Oct. 2013)). CMS seemed to recognize these concerns when it released a rate-setting guide for 2014 and 2015 (see generally, CMS, 2015 Managed Care Rate Setting Consultation Guide (Sept. 2014); CMS, 2014 Managed Care Rate Setting Consultation Guide (Sept. 2013)), but CMS’s decision not to hold states to a maximum projected MLR deprives Sponsors of additional protection against rates that are set too low to accommodate reasonable administrative costs and profit. 

CMS’s Proposal Would Streamline Existing Medicaid MLR Approaches

Although no uniform federal MLR requirement currently exists, MLR requirements have existed for a number of years. Several state Medicaid managed care programs impose MLR requirements either through statutory or regulatory guidance or through provisions in state contracts with Sponsors. In addition, in 2011, CMS required Florida to institute an 85 percent MLR requirement for its Medicaid managed care organizations as a condition of approving a section 1115 Demonstration request from Florida’s Medicaid managed care program.

In lieu of the existing patchwork of state standards, CMS’s proposal would create a more consistent approach for how expenses are classified and how Medicaid MLR requirements are applied. State approaches currently vary in how expenses are classified (e.g., which expenses receive positive MLR treatment) and in the level of detail in state guidance. In certain cases, Sponsors have found it difficult to determine how expenses will be treated for purposes of the state-specific MLR because of limited state guidance. The more consistent approach may be a welcome change for Sponsors participating in certain states’ Medicaid programs.

Considerations and Next Steps

The comment period provides Sponsors and other industry stakeholders with the opportunity to shape the final policies adopted by CMS and, to a degree, any requirements or modifications adopted by state agencies. Potential areas on which Sponsors may focus include the following:

• Supporting CMS’s decision to align the Medicaid MLR expense classifications with the existing commercial standards

• Identifying certain expenses that may not be specifically incurred medical costs and may not meet the stringent QIA definitions but nonetheless are material costs incurred by Sponsors in arranging for the provision of health care services to enrollees

• Requesting that CMS establish a maximum projected Medicaid MLR for purposes of the actuarial soundness evaluation

• Requesting clarification about the application of existing commercial market FAQ guidance