The Centers for Medicare and Medicaid Services (CMS) released its long awaited Medicaid managed care proposed rules on May 26; the rules were published in the Federal Register on June 1 (80 Fed. Reg. 30198-31297). The last time the federal government seriously tackled Medicaid managed care was in a 2002 regulation (67 Fed. Reg. 40989, June 14), a response to the Balanced Budget Act of 1997 (Pub. L. 105-33), which itself amounted to a major new chapter in Medicaid’s relationship to what by then had become known as managed care.

In both vision and sweep, the new proposal represents a defining moment in the life of Medicaid. The proposal amounts to a basic advance in thinking about how to organize and deliver health care for tens of millions of people, as well as how Medicaid-sponsored coverage arrangements should integrate with private coverage, in particular, qualified health plans sold in the Exchange. Furthermore, the proposed rules create a framework for making managed care work for high-need populations receiving long term services and supports, whose integration into managed care arrangements is still in a relatively early stage.

Comments on the proposed rule are due by July 27, 2015. CMS is likely to be deluged, given the sweeping nature of many of the proposed reforms. While the proposal addresses both the Medicaid and CHIP managed care markets, this post considers the Medicaid regulation only.

Background And Policy Context

Federal law has permitted voluntary beneficiary enrollment into what once were known as prepaid group plans since the law’s 1965 enactment. The modern regulatory framework, following years of scandals involving high-pressure enrollment tactics and grossly substandard care, began in 1976, when Congress first set standards for state Medicaid contracts with health maintenance organizations; the most notable requirement was that no more than 75 percent of the members of plans sold to Medicaid agencies could be Medicare and Medicaid beneficiaries (80 Fed. Reg. at 31100). This rule, designed to avert Medicaid mills, also effectively prevented the growth of an exclusively Medicaid managed care industry.

By the early 1990s, the Clinton Administration had begun waiving the 75/25 rule as states sought to expand adult eligibility while tying their expansions to conversion to managed care. The Balanced Budget Act (BBA) eliminated the 75/25 requirement altogether while establishing a new regulatory framework aimed at what ultimately would become a large (and lucrative) specialized part of the managed care industry. The BBA also built on earlier reforms enacted in 1981, which had opened the door to compulsory managed care enrollment, by permitting states to opt for enrollment into full-risk plans as a basic condition of eligibility for families with children. At the same time, the BBA maintained a compulsory enrollment exception for certain populations, including dual enrollees, special needs children, and American Indians and Alaska natives, for whom mandatory enrollment may be pursued through the so-called §1915(b) waiver process or via a §1115 demonstration.

The Affordable Care Act did not tinker with the BBA framework. It did, however, extend Medicaid to all nonelderly low-income adults and effectively assumed that newly eligible adults, entitled to a “benchmark” benefit package, would be enrolled in Medicaid managed care arrangements. Furthermore, following the United States Supreme Court’s decision in National Federation of Independent Business v. Sebelius, which permits states to opt out of the expansion, the Administration has allowed Arkansas and Iowa to purchase coverage from the qualified health plan market for some or most newly eligible people, as a quid pro quo for agreeing to expand coverage.

The ACA also opened the door wider to the use of managed care for higher-risk and special-needs populations, through a combination of demonstrations targeted at dual enrollees and persons in need of long term services and supports, as well as a growing emphasis—across all payers—on clinical and financial integration of health care and health care financing, in order to improve quality and efficiency. Today, the only groups of Medicaid beneficiaries whose movement into managed care does not appear to be the subject of widespread interest or action are severely disabled children and adults entitled to Medicaid as Supplemental Security Income beneficiaries and institutionalized populations.

As MACPAC has reported, in 2011 (the latest year for which complete data are available) 58 percent of all Medicaid beneficiaries (about 39 million people) were enrolled in some form of managed care, through which they obtained some or most coverage. Managed care accounted for about 24 percent of all Medicaid spending that year.

The exponential growth of Medicaid managed care—propelled by eligibility expansions, advances in thinking about how to organize, deliver, and finance care, and a powerful emerging market—occurred at the same time that health reform created an entirely new subsidized insurance market for low- and moderate-income people, which now accounts for more than 10 million enrollees. Periodic income fluctuations mean that a significant proportion of this group with incomes near the Exchange threshold (100 percent of federal poverty in non-Medicaid-expansion states, and 139 percent of poverty in expansion states (PPACA §1401)) will periodically migrate between Medicaid and Exchange subsidies, facing potential disruptions in plan membership and care.

These reasons—the growth of Medicaid, the reach of the Medicaid managed care market into new populations, the emphasis on clinical and financial integration as part of system transformation, and the establishment of what can be thought of as a companion market serving lower-income people at risk for disruption in coverage and care–all led CMS to re-engineer its managed care rules, which had been designed for somewhat simpler times.

The Proposed Rule’s Aims

Noting that “the health care delivery landscape has changed substantially both within the Medicaid program and outside of it,” CMS has proposed “to modernize the Medicaid managed care regulatory structure to facilitate and support delivery system reform initiatives to improve health outcomes and the beneficiary experience, while effectively managing costs.” The agency additionally seeks to “align” managed care “with other . . . sources of coverage,” explicitly identifying Medicare Advantage and Exchange plans.

The rules have multiple, direct purposes: to improve “the accountability of rates paid in the Medicaid managed care program”; to “ensure beneficiary protections” in the areas of provider networks, coverage standards, and treatment of appeals represent specific aims; and to strengthen “program integrity safeguards.” In so doing, the proposal rule effectively seeks to balance greater regulatory oversight and accountability of both state and industry practices with wider deference to states in how they choose to design managed care and utilize contractors.

Key Proposed Reforms

Most fundamentally, the new rules would extend a more rigorous regulatory structure to all forms of capitated managed care, whether full-risk managed care organizations or partially capitated plans. The reforms themselves sweep across a broad landscape.

Market Alignment

The proposed rules would make a number of changes designed to align Medicaid managed care operating standards with those used in other markets.

Cross-Market Advertising. Since 1976 the statute has regulated marketing, and CMS has barred high-pressure sales tactics, tie-ins, and fraudulent misrepresentation. The proposed rules maintain these protections. But they also for the first time allow carriers to advertise the full range of products offered across the Medicaid and Exchange markets, given the potential that individuals might have to reduce the impact of multi-market churn by selecting a carrier that can serve them across both the Medicaid and Exchange markets. CMS notes that “selecting a carrier that offers both types of products . . . may be the most effective way for some consumers to manage their health care needs.”

Grievances and appeals. The proposed rule would align time frames for appeals in order to make the process more consistent across markets. Of particular note, most capitated, risk-bearing forms of Medicaid managed care—whether full or partial risk—would be expected to offer an internal appeals process with specified time frames, with external appeal to the state Medicaid fair hearing process in the event of an adverse determination. The rule would introduce new appeals timeframes, timeframes for plan compliance with favorable beneficiary rulings, and would clarify the right of beneficiaries to introduce new evidence at each stage of appeal.

The rule would require all states to offer a 60-day time period to request external review through a fair hearing (some states now allow a far shorter time period) and would clarify members’ right to their case file, medical records, and other documents such as the plan documents used to conduct coverage determinations. The expedited appeal time frame would be tightened, as would notice and recordkeeping requirements. At the same time, the proposed rule would also for the first time require beneficiaries to exhaust internal appeals procedures before seeking a state fair hearing, a significant change since some states now allow beneficiaries to bypass the internal process.

Medical loss ratios. The most widely publicized change thus far has been introduction of a nationally uniform 85 percent medical loss ratio (MLR, the percentage of the premium payment allocated to coverage and quality improvement efforts), as well as a standardized calculation methodology. The proposed rule would adopt the National Association of Insurance Commissioners’ approach to calculation, including use of “credibility adjustments” that take into account random events skewing loss ratios, particularly in the case of smaller plans. While plans whose MLRs fell short would not have to make state rebates, states would be expected to take excess payments into account in setting future rates.

In moving to create a minimum Medicaid MLR (states would be permitted to set a higher MLR but those currently using a lower standard would be required to update their requirements), CMS notes that a reasonable MLR requirement helps guard against actuarially unsound managed care payments while aligning Medicaid with the group market. The proposed rule would begin MLR reporting with contracts beginning on or after January 2017. CMS estimates that 28 states already maintain an MLR equal to or higher than the level proposed.

Standard Contract Provisions

Managed care arrangements are governed by complex contracts that delineate the relationship between states and companies, including an extensive description of the benefits covered under the contract and the health care access, quality, and plan administration duties that contractors must carry out on the state’s behalf. The proposed rules would strengthen contract structure as well as the federal oversight and approval process.

Prescription drug coverage. Emphasizing the agency role that contractors play for state programs in terms of compliance with federal law, the rules would clarify that plan contracts covering outpatient prescription drugs must adhere to federal Medicaid requirements applicable to state programs directly, including the amount, duration and scope of coverage, coverage limits, utilization management, and prior authorization.

Mitigating the IMD exclusion. Federal Medicaid law excludes payments for adult beneficiaries ages 21-64 who are residents of institutions for mental diseases (IMDs). This exclusion, which dates to Medicaid’s enactment, has been repeatedly cited as outmoded and harmful, given the appropriateness of certain forms of inpatient treatment and the move toward mental health parity, including parity in Medicaid managed care.

To partially mitigate the exclusion, the proposed rules would distinguish between short-term treatment and residential care, permitting states to include short-term stays in their capitation payments. Stays would be limited to fewer than 15 days in any month, with flexibility to create longer stays by aligning stays over two consecutive months (14 days in one month and 14 in the next). CMS would permit this short term stay policy using IMDs if “the facility is a hospital providing psychiatric or substance use disorder (SUD) inpatient care or [a] subacute facility providing psychiatric or SUD crisis residential services and the stay in the IMD is for less than 15 days in that month.”

CMS estimates that 7.1 percent of adults in the 21-64 adult age category meet the criteria for serious mental illness requiring at least some inpatient treatment and that 13.8 percent experience serious substance abuse disorders. CMS anticipates that this loosening of Medicaid financing for short term stays may help address widespread reports of shortages in short-term inpatient mental health and SUD treatment, which could be alleviated through better financing options.

In lieu of. In a potentially far-reaching move, CMS proposes to clarify what is known as the “in lieu of” standard, that is “the flexibility that managed care plans have had historically to furnish care in alternative settings that meet an enrollee’s needs.” The clarifying rule would underscore that “managed care plans have had the flexibility under risk contracts to provide alternative services or services in alternative settings in lieu of covered services or settings if cost-effective, on an optional basis, and to the extent the managed care plan and the enrollee agree that such setting or service would provide medically appropriate care.”

The “in lieu of” standard provides a basis for modification of the IMD exclusion short stays, and also enables risk plans to depart from other state plan coverage limits. These limits might amount to limits on coverage, such as exclusion of clinical preventive services for traditional adult beneficiaries[1], as well as limitations on coverage in certain otherwise legally permissible care settings, such as services in homes or schools, and limitations on the types of health professionals who can lawfully furnish care but whose participation is excluded under the state plan.

Actuarially Sound Capitation Rates

Actuarial soundness. The proposed rules clarify the concept of actuarial soundness, the standard that governs Medicaid managed care payment rates. CMS proposes to adopt the American Academy of Actuaries approach: A rate is actuarially sound “if for business for which the certification is being prepared and for the period covered by the certification, projected capitation rates and other revenue sources provide for all reasonable, appropriate, and attainable costs.” CMS notes that under this standard, incentives and withholds tied to performance would count toward actuarial soundness only if their attainment is reasonable and attainable. CMS further notes that costs that “are not reasonable, appropriate, or attainable should not be included in the development of capitated rates,” and that improper payment recoveries would be excluded from the calculation, since such recoveries must be returned to the state.

In calculating actuarial soundness, CMS specifies that payments for beneficiaries falling within different rate cells must not be expected to cross-subsidize one another, and that the data used to set rates be relevant and timely, that is, tied to the Medicaid population and reflecting the three most recent years for which data are available. Because adjustments in health status, programmatic changes, and non-benefit costs “are important to rate development,” the proposed rules anticipate explicit standards for health risk adjustment (i.e., differences among plans) and acuity adjustments (differences among different types of plan enrollees).

Special contract terms. The proposed rule clarifies that although states may partner with their plans to pursue broader goals, they may not, as a general matter, “direct” risk contractor expenditures; although agency plays a role in Medicaid contracts, contracts of risk also represent a legal bargain, with autonomy given the risk-bearing entity. At the same time, the proposed rules would carve out critical exceptions to this general non-direction rule, by permitting states to “require” contractors to implement value-based purchasing models, “participate in . . . multi-payer delivery system reform” initiatives, or to adopt minimum provider payment fee schedules or certain types of uniform provider payment incentives.

In permitting some level of contractor direction, the proposed rules also would set standards for the types of multi-payer demonstrations in which contractors may be permitted to participate, requiring that demonstrations must “use a common set of performance measures across all payers and providers” so that it is possible to measure whether any particular multi-payer initiative achieves its goals. CMS explicitly seeks comments on “the extent to which the three exceptions” to the bar against directed contract expenditures “are adequate to support efforts to improve population health and better care at lower cost while maintaining [contractors’] ability to fully utilize the payment under that contract for the delivery of services to which that value was assigned.”

Subcontractual arrangements. The proposed rules would clarify contractor obligations to bind their subcontractors to program and contractual requirements and would specify contractor compliance with Program Integrity requirements so that there are no managed care “safe havens” for health care providers excluded from traditional Medicaid.

Beneficiary Protections

The proposed rule would address numerous limitations in the current rules.

Enrollment. The proposed rules would make clear that knowing and informed selection of a health plan, rather than auto-assignment into a plan, is the federal expectation. CMS states that “[i]n both voluntary and mandatory managed care programs, we believe that beneficiaries are best served when they affirmatively exercise their right to make a choice of delivery system or plan enrollment.” Auto-assignment would be permitted but only after a minimum 14-calendar-day time period of fee-for-service coverage during which beneficiaries can make an “active choice” of their managed care plan. Acknowledging that such a choice period is not necessary where beneficiaries have only a single plan choice (in rural areas or pursuant to a §1115 demonstration), CMS nonetheless seeks to extend to Medicaid beneficiaries the same expectation of choice that, according to the agency, is standard in the commercial market.

The proposal would permit states to notify beneficiaries that auto-assignment will be used in the absence of an active choice and would permit agencies to “complete the default enrollment” process “prior to beginning the notice and education process.” But beneficiaries would be permitted to override default enrollment through active choice. Default enrollments would be required to emphasize preservation of existing provider relationships and “equitable” principles in how such enrollments are distributed. Additionally the proposed rule would clarify the statutory 90-day disenrollment-without-cause protection while clarifying state obligations surrounding the disenrollment process. CMS seeks specific comments on its proposed enrollment reforms.

Coverage and authorization of services. The proposed rules would bring new standards to coverage authorizations and the obligations of risk contractors and states in situations in which a plan proposes to reduce or eliminate treatment. As CMS notes, the right of plan members to maintain a current treatment level while appealing a reduction or termination depends on the level of treatment authorized. Thus, where a plan authorizes treatment for a specified duration (e.g., ten physical therapy visits), members may find themselves in a continual loop in which they must scramble to constantly request new treatment periods rather than maintain treatment while an adverse determination is pending. This practice raises special concerns according to CMS, as managed care increasingly reaches populations with long term and chronic health conditions.

Reflecting Medicaid’s seminal requirement that treatments be reasonable in amount, duration, and scope and not arbitrarily discriminate based on condition, the proposed rule would require that managed care contracts adhere to the program’s reasonableness standards and use service authorization standards that are “appropriate for and do not disadvantage those individuals that have ongoing chronic conditions or needing [long term services and supports]. The expectation is that clinical services that support individuals with ongoing chronic conditions, as well as LTSS would be authorized in a manner that reflects the beneficiary’s continual need for such services and supports,” and that limits would be consistent with an “enrollee’s current needs assessment and . . . the person-centered service plan.”

Contracts would also be required to incorporate the special “early” and “ameliorate” medical standard that applies to EPSDT benefits for children. CMS expressly seeks comment on whether the free-choice principles that govern family planning benefits and methods under Medicaid should be explicitly addressed in the final rule, a notable request given the fact that unlike the ACA’s preventive benefit regulations, federal Medicaid regulations have never made choice of FDA-approved method an explicit guarantee for beneficiaries.

Coordination and continuity requirements would be tightened under the proposed rules. Plans would be required to ensure a primary care provider for all beneficiaries, and coordination requirements across all plan services would be added, especially for beneficiaries using long term services and supports. Transition standards would be adopted for beneficiaries moving into managed care or from one form of managed care to another “when an enrollee without continued services would experience serious detriment to their health or put them at risk of hospitalization or institutionalization.” Such policies would have to be a contractual part of a state’s comprehensive quality strategy and would be subject to minimum requirements: allowing beneficiaries to continue to receive care from current providers for a specified time period; referring beneficiaries to network providers, ensuring that medical records are transferred to the new provider; and ensuring that transferring plans comply with utilization data requests.

Long term services and supports. Acknowledging that the current rules were written prior to the significant extension of managed care to long term services and supports (LTSS), the proposed rules would codify existing 2013 guidance governing managed LTSS waivers under §1915(b), which sets forth 10 principles for managed long term services and supports. The discussion of these principles is extensive. Additionally, for the first time the proposed rule would adopt a clear LTSS definition as part of managed care regulation: “Services and supports provided to beneficiaries of all ages who have functional limitations and/or chronic illnesses that have the primary purpose of supporting the ability of the beneficiary to live or work in the setting of their choice, which may include the individual’s home, a provider-owned or controlled residential setting, a nursing facility, or other institutional setting.”

Modernizing Regulatory Standards

Availability of services, assurances of adequate capacity and services, and network adequacy standards. Proposed rules governing access to care, issued in 2011, virtually disappeared from the regulatory agenda. The proposed rules would rectify this problem, in part, through extensive rules designed to create an access framework that aligns with other markets, most notably the market for health plans sold in Exchanges. Although the proposed rules make virtually no mention of the “essential community provider” requirement applicable to qualified health plans sold on the Exchange, the proposed rules would require states to establish network adequacy standards that ensure access to all contractual services, that is, all services included in managed care contracts.

Time and distance standards would be required for ob/gyn services, primary care (adult and pediatric, separately), pharmacy, pediatric dental, and other services when it is in the best interest of the program to set such standards; CMS requests comments on whether a different type of standard, such as provider-to-patient ratios, should be used, as well as whether standards should be set for pediatric and adult behavioral health care and family planning services (which are covered by special statutory free choice guarantees permitting access to out-of-network care). CMS further requests comments on “approaches to measuring enrollee’s [stet] timely access to covered services and to evaluating whether managed care plans networks are compliant with such standards . . . and the value of requiring some or all of these mechanisms for ensuring that access standards are being met.” Plan documentation requirements would also be increased.

The proposed rules further delineate factors that states must consider in setting their standards, including anticipated enrollment, expected service utilization, population health needs, the number and types of providers needed to deliver contractual services, the number of network providers not accepting new patients, and geographic accessibility of providers to enrollees. The proposed rules would be applied to all risk plans, whether comprehensive (MCOs) or partial capitation plans offering only selected inpatient and outpatient care or ambulatory care. With respect to managed long term services and supports, where “there are no commonly used access standards,” states would be expected to set time and distance rules and to apply the same factors, but in the context of care delivered in home and community settings. Standards would have to reflect state consideration of community integration as the ultimate goal of MLTSS and would have to reflect the different needs of the population in community and residential settings.

Quality Of Care

Reflecting the enormous evolution in thinking about system-wide quality improvement generally, CMS cites these developments in proposing an expansion of quality improvement efforts, in accordance with principles of transparency (public reporting), alignment with Medicare and Exchange standards, and consumer and stakeholder engagement.

In setting forth the elements and requirements of a comprehensive quality improvement program, the proposed rules address both the obligations of state agencies and plans, as well as the role of external quality review. The participation review process for risk plans would have to be “at least as stringent” as private accreditation standards, enabling states to select between an outright accreditation requirement and a separate process that satisfies accreditation standards. States would be expected to develop and implement a Medicaid quality rating system that would reflect the type of system developed for Exchange plans, given what CMS views as the similarities between the populations. States also would be required to use a “robust public engagement process” and to consider relative clinical quality management, plan efficiency, affordability, and member experience.

In one of its most important moves, CMS proposes to extend the requirement for a quality improvement strategy to all state Medicaid programs as a general state plan administration requirement and apart from a state’s use of one or more forms of managed care. This requirement represents an outgrowth of earlier guidance on Quality Considerations in Medicaid and CHIP, which “explains how to incorporate a state’s managed care quality strategy into a lager, statewide comprehensive Medicaid quality strategy.”

The proposed rule would establish a detailed process for developing, evaluating, and revising such strategies in order to ensure the formulation of written strategies that are continually reviewed and updated. States’ strategies would be expected to consider the health of the Medicaid population, “quality of life issues,” and issues of health care use and service metrics, with specific targets and performance measurement requirements. Within their overall strategies, managed care quality would represent one component of the state’s approach to quality.

CMS expects that states will have a monitoring system for managed care, with monitoring in this context meaning oversight. The proposed rules would require monitoring to address specific aspects of managed care “at a minimum,” including administration and management, appeal and grievance systems, claims management, enrollee materials and customer services, finance and medical loss ratios, information systems and encounter reporting, marketing, medical management and utilization management, program integrity and provider network management, quality improvement, LTSS delivery, and “other items of the contract as appropriate.” States also would be required to provide an annual program assessment to CMS. Information standards governing data and reporting would be updated to “reflect current technology” and the use of electronic information exchange and beneficiary information such as notices, oral interpretation, and the use of auxiliary aids.

Finally, rules on the use of primary care case management, including coverage of emergency and post-stabilization services would be updated.

Final Thoughts

With its proposed rule, CMS has taken a major step toward recognizing the true significance of Medicaid managed care as part of the broader health care landscape. With 70 million beneficiaries and growing, Medicaid has become a dominant force in American health care, and within its bounds, managed care has become the dominant means by which health care is organized, delivered, and financed. Managed care has effectively become a foundational system driver for Medicaid generally, not only for populations eligible based on poverty but also for those whose eligibility is tied to advanced health care needs.

Given the importance of managed care performance to access, quality, efficiency, and ultimately population health, it is only fitting that the nation should move toward a regulatory framework capable of supporting such a role.

[1] The ACA creates an incentive for states to extend such coverage on an optional basis, but few states have taken advantage of this option.