DEPARTMENT OF HEALTH AND HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, MD 21244-1850 
CMCS Informational Bulletin 
DATE:  July 31, 2017 
FROM:  Brian Neale, Director 
Center for Medicaid and CHIP Services 
SUBJECT:   Medical Loss Ratio (MLR) Credibility Adjustments 
The Centers for Medicare & Medicaid Services (CMS) Medicaid managed care final rule1 
adopted standards for the calculation and reporting of a medical loss ratio (MLR) applicable to 
Medicaid and CHIP managed care contracts, including contracts with managed care 
organizations (MCOs), prepaid inpatient health plans (PIHPs), and prepaid ambulatory health 
plans (PAHPs).  In Medicaid managed care contracts that start on or after July 1, 2017, states 
must include requirements for managed care plans to calculate and report an MLR and related 
underlying data as described in 42 CFR 438.8(k).  CHIP also adopts the Medicaid requirements 
for calculating and reporting MLRs in 42 CFR 438.8 for CHIP managed care contracts at 42 
CFR 457.1203(c) through (f); however, the CHIP requirements go into effect for CHIP managed 
care contracts as of the state fiscal year beginning on or after July 1, 2018.  Medicaid and CHIP 
managed care plans2 must submit an MLR report to the state in a timeframe and manner 
determined by the state, which must be within 12 months of the end of the MLR reporting year.3 
Included in the MLR standards is a credibility adjustment, described in 42 CFR 438.8(h).  The 
regulations require CMS to publish the credibility adjustment annually, based on the 
methodology in 438.8(h)(4).  The purpose of this Information Bulletin is to publish the 
credibility adjustment for rating periods beginning July 1, 2017 or later. 
Overview of Credibility Adjustments 
As discussed in the Medicaid and CHIP managed care proposed4 and final rules, a managed care 
plans actual MLR is dependent on the accuracy of the actuarys assumptions (for example, the 
characteristics and health status of the enrollees, the intensity and frequency with which its 
1 Medicaid and Childrens Health Insurance Program (CHIP) Programs; Medicaid Managed Care, CHIP Delivered in Managed 
Care, and Revisions Related to Third Party Liability; Final Rule, 81 Fed. Reg. 27498 (May 6, 2016); available at: 
https://www.federalregister.gov/documents/2016/05/06/2016-09581/medicaid-and-childrens-health-insurance-program-chip-
programs-medicaid-managed-care-chip-delivered. 
2 For CHIP managed care plans only, 42 CFR 457.1203(e) requires that the description of the reports received from MCOs, 
PIHPs, and PAHPs under 42 CFR 438.8(k) will be submitted independently, and not with the actuarial certification. 
3 This is different than the requirement that capitation rates must be developed in such a way that the MCO, PIHP, or PAHP 
would reasonably achieve an MLR of at least 85 percent as described in 438.4(b)(9). That provision is applicable for managed 
care contract rating periods that begin on or after July 1, 2019. Information from the MLR reports provided by managed care 
plans before states are required to set managed care capitation rates to meet targeted MLR thresholds will be useful for purposes 
of rate setting.
4 Medicaid and Childrens Health Insurance Program (CHIP) Programs; Medicaid Managed Care, CHIP Delivered in Managed 
Care, Medicaid and CHIP Comprehensive Quality Strategies, and Revisions Related to Third Party Liability; Notice of Proposed 
Rule Making, 80 Fed. Reg. 31098 (June 1, 2015); available at: https://www.federalregister.gov/documents/2015/06/01/2015-
12965/medicaid-and-childrens-health-insurance-program-chip-programs-medicaid-managed-care-chip-delivered.  CMCS Informational Bulletin  Page 2 
 
 
enrollees will use health care services, and unit cost).  All things being equal, it is more likely 
that the assumptions made by the actuary will be more accurate when a plan insures a larger 
number of enrollees rather than a smaller number.  Similarly, differences between the 
assumptions and actual experience will likely be smaller when a managed care plan covers more 
enrollees.  Even though the state or the managed care plan estimated in good faith that the 
combination of the capitation payments and claims would produce an MLR that meets a specific 
standard (for example, 85 percent), a smaller managed care plans reported MLR is more likely 
to vary, and vary more widely, around a targeted standard, due to the disproportionate effect 
random variations can have on smaller managed care plans.  Random variations are less likely to 
have such large effects on managed care plans with more enrollees. 
In alignment with MLR requirements for health plans operating in the private market and 
Medicare Advantage, the Medicaid and CHIP managed care rule provides a credibility 
adjustment to account for the potential variation in smaller managed care plans.  As defined in 42 
CFR 438.8(b), the credibility adjustment is used to account for random statistical variation 
related to the number of enrollees in a managed care plan.  The credibility adjustment categorizes 
managed care plans into three groups: 
  Fully-credible: Managed care plans with sufficient claims experience, measured in 
terms of member months, to calculate an MLR with a minimal chance that the 
difference between the actual and target MLR is not statistically significant.  In other 
words, for managed care plans in this group, it is highly likely that the difference 
between the actual and target MLR is statistically significant and not due to random 
variation.  Such managed care plans will not receive a credibility adjustment for their 
MLRs. 
  Partially-credible: Managed care plans with sufficient claims experience, measured in 
terms of member months, to calculate an MLR with a reasonable chance that the 
difference between the actual and target medical loss ratios is statistically significant.  In 
other words, for managed care plans in this group, it is somewhat likely that the 
difference between the actual and target MLR is statistically significant but such 
difference could, at least in part, be due to random variation.  Such managed care plans 
will receive a partial credibility adjustment to their calculated MLRs.  
  Non-credible: Managed care plans with insufficient claims experience, measured in 
terms of member months, to calculate a reliable MLR.  Such plans will not be measured 
against the MLR standard; managed care plans in this group are presumed to meet or 
exceed the target MLR standard.  
Methodology 
The CMS Office of the Actuary (OACT) calculated: 
  The minimum number of member months for a managed care plans MLR to be fully 
credible; 
  The maximum number of member months for a managed care plans MLR to be non-
credible; and  
  The number of member months for several partial credibility adjustment factors.   CMCS Informational Bulletin  Page 3 
 
 
These credibility adjustment factors were developed for two types of Medicaid and CHIP 
managed care plans that may operate in each state: 1) all managed care plans that provide health 
care services, except managed care plans that only provide long-term services and supports 
(referenced as Standard Plans); and 2) managed care plans that only provide long-term 
services and supports.  The credibility adjustment factors for both types of plans are shown in 
Table 1 below.  The majority of plans will use the Standard Plans credibility adjustment 
factors, including MCOs that cover long-term services and supports in addition to other services.  
The only exception will be plans that cover only long-term services and supports and no other 
services; such plans will use the LTSS Only Plans credibility adjustment factors.  
Table 1: 
Credibility Adjustment for Medicaid and CHIP Managed Care Plans with Rating Periods 
Beginning July 1, 2017 or Later 
 
 
Standard Plans  Standard Plans  LTSS Only Plans  LTSS Only Plans 
Member Months in  Credibility  Member Months in  Credibility 
MLR reporting year  Adjustment  MLR reporting  Adjustment 
year 
<5,400  Non-credible  <630  Non-credible 
5,400  8.4%  630  8.4% 
12,000  5.7%  1,000  6.7% 
24,000  4.0%  2,000  4.7% 
48,000  2.9%  4,000  3.4% 
96,000  2.0%  8,000  2.4% 
192,000  1.5%  16,000  1.7% 
380,000  1.0%  32,000  1.2% 
>380,000  Fully credible  45,000  1.0% 
    >45,000  Fully credible 
 
The following steps describe the methodology that each managed care plan, separately for each 
state, shall follow to determine the applicable MLR credibility adjustment factor. 
 
1.  The managed care plan shall calculate the number of member months for the MLR reporting 
year.  This shall equal the number of member months calculated and reported pursuant to 
438.8(k)(1)(xiii). 
 
2.  Determine which set of credibility adjustment factors in Table 1 should be used  the 
Standard Plans or the LTSS Only Plans.  If the managed care plan only provides long-
term services and supports (LTSS), then use the LTSS Only Plans credibility adjustment 
factors.  Otherwise, the Standard table must be used. 
 
3.  Using the correct credibility adjustment factors, determine where the plans enrollment in 
terms of member months falls in Table 1. 
  CMCS Informational Bulletin  Page 4 
 
 
a.  If the number of member months is less than the number of member months corresponding 
to Non-credible in Table 1, no adjustment to the MLR calculation shall be made, and the 
MLR calculation shall be determined not credible.  (Reminder: Such plans will not be 
measured against the MLR standard; managed care plans in this group are presumed to 
meet or exceed the target MLR standard.) 
 
b.  If the number of member months is more than the number of member months 
corresponding to Fully credible in Table 1, no adjustment to the MLR calculation shall 
be made, and the MLR calculation shall be determined fully credible.  The MLR reported 
may be compared to the MLR standard. 
 
c.  If the number of member months is between the number of member months corresponding 
to Non-credible or Fully credible in Table 1, the managed care plan shall calculate a 
partial credibility adjustment.  The partial credibility adjustment shall be calculated as 
follows: 
 
Where: 
MM is the number of member-months for a specific managed care plan.  This is 
the number of member months calculated in step 1. 
 
 is the number of member months where MM is rounded down to the nearest 
Annual Member Months number in Table 1. 
  MMMMaa
 is the number of member months where MM is rounded up to the nearest 
Annual Member Months number in Table 1. 
  MMMMbb
 and   are the credibility adjustment factors found in the applicable table 
for   and  , respectively. 
  CCCCaa CCCCbb
RoundMM thMMe aacredibMMiliMMtybb adjustment factor to the nearest tenth.  This credibility 
adjustment factor shall be added to the plans calculated MLR. 
 
Examples 
 
Example 1: 
In State A, a managed care plan only provides long-term services and supports, and has 
calculated an MLR of 81.1 percent prior to any credibility adjustment.  The plan has 1,475 
member months in the MLR reporting year in State A. 
 
The credibility adjustment is calculated as follows for this managed care plan in State A: 
 
The LTSS Only Plans factors in Table 1 show the credibility adjustment for a plan with 1,000 
member months is 6.7 percent and the credibility adjustment for a plan with 2,000 member 
months is 4.7 percent.  The credibility adjustment is calculated as follows: 
  CMCS Informational Bulletin  Page 5 
 
 
 
 
The final MLR including the credibility adjustment is 81.1% + 5.8% = 86.9%. 
 
Example 2: 
In State B, a managed care plan provides behavioral health services only and has a calculated 
MLR of 81.1 percent prior to any credibility adjustment.  The managed care plan has 100,000 
member months in the MLR reporting year in State B. 
 
The credibility adjustment is calculated as follows for this managed care plan in State B: 
 
The Standard Plans factors in Table 1 show the credibility adjustment for a plan with 96,000 
member months is 2.0 percent and the credibility adjustment for a plan with 192,000 member 
months is 1.5 percent.  The credibility adjustment is calculated as follows: 
   
 
 
The final MLR including the credibility adjustment is 81.1% + 2.0% = 83.1%. 
 
Example 3: 
In State C, a managed care plan provides comprehensive services (for example, acute care and 
long term services and supports) and has a calculated MLR of 81.1 percent prior to any 
credibility adjustment.  The managed care plan has 400,000 member months in the MLR 
reporting year in State C. 
 
The credibility adjustment is calculated as follows for this managed care plan in State C: 
 
The Standard Plans factors in Table 1 show the plans MLR is determined to be fully credible, 
because 400,000 > 380,000.  No credibility adjustment is added to the MLR. 
 
The final MLR is 81.1%. 
 
Example 4: 
In State D, a managed care plan provides targeted case management services, and has a 
calculated MLR of 81.1 percent prior to any credibility adjustment.  The plan has 400 member 
months in the MLR reporting year in State D. 
 
The credibility adjustment is calculated as follows for this managed care plan in State D: 
 
The Standard Plans factors in Table 1 show the plans MLR is determined to be non-credible, 
because 400 < 5,400.  This plan will not be measured against the MLR standard; it is presumed 
to meet or exceed the MLR calculation standard in the regulation. 
 
Technical Assistance  CMCS Informational Bulletin  Page 6 
 
 
If you have questions or would like to request technical assistance related to credibility 
adjustments with respect to the MLR standards applicable to Medicaid and CHIP managed care 
contracts, please send an email to ManagedCareRule@cms.hhs.gov.  We look forward to 
continuing our partnership to deliver on our shared goals of providing high quality, sustainable 
health care to those who need it most.