Managed care is the predominant method for delivering Medicaid services, with 72% of beneficiaries enrolled in comprehensive managed care organizations (MCOs). States have flexibility in designing their Medicaid programs, leading to variation in coverage and services across states. Payments to MCOs accounted for over half of Medicaid spending in 2021. States use financial incentives tied to quality measures to improve care quality. MCOs often have discretion in network management and payment methods. Many states are incorporating social determinants of health into MCO contracts to reduce disparities. Large health insurance companies play a significant role in the Medicaid-managed care market.
Managed care serves as the predominant framework for delivering healthcare services to Medicaid beneficiaries. Nationally, a staggering 72% of Medicaid recipients are enrolled in comprehensive managed care organizations (MCOs). These MCOs have played a pivotal role in responding to the challenges posed by the COVID-19 pandemic, and they are anticipated to collaborate with states in the process of unwinding the continuous enrollment requirement, offering outreach and support to enrollees. It’s important to note that although managed care dominates Medicaid delivery, individual states have the authority to determine which populations and services are included in these arrangements, leading to significant variability across states. Additionally, while state requirements for Medicaid managed care plans can be tracked, these plans have some degree of flexibility, particularly in areas such as setting provider payment rates and offering supplementary benefits beyond state-mandated requirements. In Spring 2023, the Administration is expected to release updated regulations about Medicaid managed care and ensuring access within the Medicaid program. This brief delves into 10 key themes related to the utilization of comprehensive, risk-based managed care in the Medicaid program.
1. Presently, capitated managed care represents the primary approach through which states deliver services to Medicaid enrollees. States have the authority to design and manage their Medicaid programs within federal guidelines. They make decisions regarding the delivery and payment structure for care provided to Medicaid beneficiaries. Nearly all states have adopted some form of managed care, including comprehensive risk-based managed care and primary care case management (PCCM) programs. As of July 2022, 41 states (including the District of Columbia) have entered into contracts with comprehensive risk-based managed care plans to provide care to at least a portion of their Medicaid beneficiaries. North Carolina implemented its first MCO program starting July 1, 2021, enrolling over 1.8 million Medicaid beneficiaries in MCOs by January 2023. Oklahoma is set to implement comprehensive Medicaid-managed care in October 2023. Medicaid MCOs offer comprehensive acute care and, in some cases, long-term services and support, receiving a predetermined monthly payment per member for these services. Traditionally, states have employed managed care models to enhance budget predictability, control Medicaid spending, and enhance access to care and value. While the shift to MCOs has improved budget predictability, evidence regarding the impact of managed care on access to care and costs is limited and mixed.
2. A significant majority, 72%, of all Medicaid beneficiaries receive their care through comprehensive risk-based MCOs. As of July 2020, approximately 57 million Medicaid enrollees received care through risk-based MCOs, with more than 75% of Medicaid beneficiaries in 28 MCO states covered by these organizations. The COVID-19 pandemic led to substantial growth in Medicaid enrollment, primarily due to the Families First Coronavirus Response Act (FFCRA), which required states to maintain continuous enrollment for Medicaid recipients in exchange for a temporary increase in the Medicaid match rate. The Consolidated Appropriations Act of 2023 put an end to the continuous enrollment provision, allowing states to recommence disenrollments from April 1, 2023. While the exact number of Medicaid enrollees at risk of losing coverage during this transition remains uncertain, it is estimated that millions may be affected. CMS has issued guidance and strategies for states to facilitate the retention of eligible individuals after the continuous enrollment requirement ends, including guidance on how managed care plans can assist states in ensuring continuity of coverage.
3. Children and adults are more likely to be enrolled in MCOs compared to adults aged 65+ and individuals eligible through disability. However, states are increasingly incorporating beneficiaries with complex needs into MCOs. As of July 2022, 36 MCO states reported covering 75% or more of all children through MCOs. Of the 39 states that had implemented the ACA Medicaid expansion as of July 2022, 32 states used MCOs to cover newly eligible adults, with the majority covering over 75% of beneficiaries in this category through MCOs. Additionally, 35 MCO states reported covering 75% or more of low-income adults in pre-ACA expansion groups, such as parents and pregnant women. Only 16 MCO states reported covering 75% or more of adults aged 65+ and individuals eligible through disability. While this group is less likely to be enrolled in MCOs compared to children and adults, states have been gradually including them in MCO arrangements over time.
4. In fiscal year 2021, payments to comprehensive risk-based MCOs accounted for over half of Medicaid spending. During FY 2021, state and federal spending on Medicaid services reached over $728 billion. Payments to MCOs constituted roughly 52% of total Medicaid spending, reflecting a 3% increase from the preceding fiscal year. The proportion of Medicaid spending allocated to MCOs varies by state, with more than three-quarters of MCO states directing at least 40% of total Medicaid funds to MCO payments. State-to-state variations are influenced by multiple factors, including the proportion of the state’s Medicaid population enrolled in MCOs, the health profile of the Medicaid population, the inclusion or exclusion of high-risk/high-cost beneficiaries (e.g., persons with disabilities, dual-eligible beneficiaries) in MCO enrollment, and the incorporation of long-term services and support in MCO contracts. As states extend Medicaid managed care to include higher-need, higher-cost beneficiaries, costly long-term services and supports, and adults newly eligible for Medicaid under the ACA, the share of Medicaid funds directed to MCOs may continue to rise.
5. Annually, states develop actuarially sound MCO capitation rates, which may encompass risk mitigation strategies. States remunerate Medicaid managed care organizations through a fixed monthly payment per member for the specified Medicaid services outlined in their contracts. Federal law mandates that payments to Medicaid MCOs adhere to actuarial soundness criteria. Actuarial soundness implies that capitation rates must be projected to cover all reasonable, appropriate, and attainable costs as stipulated in the contract and the operation of the managed care plan for the designated period and population. In contrast to fee-for-service (FFS) models, capitation offers upfront fixed payments to plans to account for the expected utilization of covered services, administrative expenses, and profit margins. Plan rates are typically established for a 12-month rating period and require annual review and approval by CMS. States employ various mechanisms to modify plan risk, incentivize plan performance, and ensure payments fall within a reasonable range. These mechanisms may encompass risk-sharing agreements, risk and acuity adjustments, medical loss ratios (MLRs, which reflect the portion of total capitation payments received by an MCO spent on clinical services and quality enhancement), and incentive and withholding arrangements.
CMS provided states with the flexibility to modify managed care contracts in response to unforeseen COVID-19-related costs and conditions that led to decreased utilization. Many states implemented COVID-19-related risk corridors, leading to fund recoupment. Data from the National Association of Insurance Commissioners (NAIC) indicate that average loss ratios in the Medicaid managed care market remained three percentage points lower in 2021 compared to 2019, suggesting increased profitability. As the continuous enrollment provision concludes and states resume disenrollments, Medicaid MCOs may witness an increase in the overall acuity of their membership, which could have implications for per-member utilization and costs, potentially resulting in member churn, where enrollees temporarily lose coverage and then re-enroll within a short period.
6. In recent years, numerous states have opted to include behavioral health services, pharmacy benefits, and long-term services and supports in MCO contracts. Although MCOs provide comprehensive services to beneficiaries, states have the flexibility to carve specific services out of MCO contracts and direct them to fee-for-service systems or limited benefit plans. Frequently carved-out services include behavioral health, pharmacy, dental, and long-term services and supports (LTSS). Nevertheless, there has been a notable trend across states to include these services within MCO contracts. While the majority of states contracting with MCOs include pharmacy benefits in managed care (34 out of 41), six states reported carving out pharmacy benefits from MCO contracts as of July 2022. California removed the pharmacy benefit from managed care as of January 1, 2022. Two states indicated plans to carve out pharmacy benefits from MCO contracts in FY 2023 or later (New York and Ohio).
7. Several large health insurance companies have substantial involvement in the Medicaid-managed care market. States have contracted with a total of 285 Medicaid MCOs as of July 2020, which encompass a mix of private for-profit, private non-profit, and government-run plans. In July 2020, 14 firms operated Medicaid MCOs in two or more states, referred to as “parent” firms, accounting for 62% of enrollment in that year. Out of these 14 parent firms, six are publicly traded for-profit entities, while the remaining eight are nonprofit organizations. Five firms—UnitedHealth Group, Centene, Anthem (renamed “Elevance” in 2022), Molina, and Aetna/CVS—have MCOs operating in 12 or more states and account for 50% of all Medicaid MCO enrollment. All five of these firms are publicly traded and listed in the Fortune 500. Earnings reports from 2022 indicate that these five for-profit parent firms experienced membership growth ranging from 6% to 17% compared to 2021, and for the three firms that provided Medicaid-specific revenue information (Centene, Molina, and UnitedHealth Group), Medicaid revenues grew between 11% and 21% from 2021 to 2022.
8. Within the framework of federal and state regulations, managed care plans often have discretion in facilitating access to care for enrollees and determining provider payment methods. The efforts of plans to recruit and maintain their provider networks can significantly impact enrollees’ access to care, including factors such as travel times, wait times, and provider choices. Federal rules require states to establish network adequacy standards, but states have the flexibility to define these standards. The 2020 CMS Medicaid managed care final rule eliminated the requirement for states to use time and distance standards to ensure provider network adequacy, instead allowing states to choose any quantitative standard. Plans can employ various strategies to address provider network issues, including direct outreach to providers, financial incentives, automatic member assignment to primary care physicians, and prompt payment policies. However, network adequacy may be affected by overall shortages in the provider supply. In 2022, CMS issued guidance, reporting templates, and toolkits related to the monitoring and oversight of Medicaid-managed care programs. CMS also initiated a Request for Information in early 2022 to gather input for developing a comprehensive access strategy across Medicaid fee-for-service and managed care delivery systems. The Administration is anticipated to release revised regulations regarding Medicaid managed care and ensuring access to Medicaid in the Spring of 2023.
To ensure provider participation, many states include minimum provider rates in their contracts with MCOs, which may be linked to fee-for-service rates. States that contract with managed care plans may also establish uniform dollar or percentage increase payment requirements, most commonly for hospitals. In response to the COVID-19 pandemic, states had the option to use existing managed care rules to direct additional payments to Medicaid providers and preserve access to care for enrollees.
9. States employ a variety of financial incentives linked to quality measures. States incorporate quality metrics into the ongoing oversight of their programs, including the integration of financial incentives such as performance bonuses or penalties, capitation withholds, or value-based state-directed payments linked to quality measures. As of July 2021, over three-quarters of MCO states reported utilizing at least one financial incentive to promote the quality of care. Areas most frequently targeted by financial incentives included behavioral health, chronic disease management, and perinatal/birth outcomes. Despite the activity in this area, detailed performance information at the plan level is not commonly made publicly available by state Medicaid agencies, which limits transparency and the ability of Medicaid beneficiaries and other stakeholders to assess plan performance on key indicators related to access and quality.
As part of managed care plan contract requirements, state Medicaid programs have also focused on the use of alternative payment models (APMs) to reimburse providers and incentivize quality. APMs replace volume-driven provider payments and encompass a range of arrangements, from those involving limited or no provider financial risk (e.g., pay-for-performance models) to those placing providers at greater financial risk (e.g., shared savings/risk arrangements or global capitation payments). As of July 2021, about half of MCO states identified specific targets in their MCO contracts for the percentage of provider payments or plan members that MCOs must cover through APMs. Of these states, approximately half reported that their MCO contracts included incentives or penalties tied to meeting or failing to meet APM targets. Most states set APM requirements in the range of 25% to 50%, with variations depending on the services and populations covered under the managed care contract. Thirteen states reported that their APM targets were aligned with the Health Care Payment Learning & Action Network’s (LAN’s) APM Framework, which categorizes APMs into tiers.
While there is some evidence of positive impacts stemming from state use of financial incentives to engage managed care plans in quality improvement and outcomes enhancement, the results are mixed and more limited at the provider level.
10. States are leveraging Medicaid MCOs to develop strategies for identifying and addressing social determinants of health and reducing health disparities. Many states utilize MCO contracts to promote strategies aimed at addressing social determinants of health and improving health equity while reducing health disparities. The current Administration has prioritized advancing health equity within the Medicaid program. In January 2023, CMS released guidance on the use of “instead of” services (ILOS) in Medicaid-managed care to reduce health disparities and address unmet health-related social needs (HRSN). In December 2022, CMS issued guidance on how states can address HRSN through Section 1115 demonstration waivers.
Most MCO states reported leveraging Medicaid MCO contracts to promote at least one strategy addressing social determinants of health in FY 2022. Over half of MCO states reported requiring MCOs to screen enrollees for social needs, screen for behavioral health needs, provide referrals to social services, and collaborate with community-based organizations (CBOs). Fewer states reported mandating MCO community reinvestment (linked to plan profit or MLR) compared to other strategies.
States employ various financial incentives to enhance quality, including financial incentives tied to health equity-related performance objectives, such as reducing disparities based on race/ethnicity, gender, disability status, and more. In FY 2022, approximately one-quarter of MCO states reported having at least one MCO financial incentive linked to a health equity-related performance goal in place. In addition to financial incentives, states can leverage managed care contracts to promote health equity-related objectives in other ways. In FY 2022, a similar number of states (approximately one-quarter) reported requiring MCOs to have a health equity plan in place, meet health equity reporting requirements, and provide staff training on health equity and implicit bias. States may also require MCOs to participate in Performance Improvement Projects (PIPs) focused on reducing health disparities. In FY 2022, states reported various state-mandated PIP focus areas with an emphasis on reducing disparities and enhancing health equity, including maternal and child health, diabetes education and management, substance use disorder (SUD), and access to culturally and linguistically appropriate services.
