Accessible Version

MEDICAID MANAGED 

CARE

Trends in Federal 

Spending and State 

Oversight of Costs and 

Enrollment

Report to Congressional Requesters

December 2015

GAO-16-77

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-16-77, a report to 

congressional requesters

December 2015

MEDICAID MANAGED CARE

Trends in Federal Spending and State Oversight of 

Costs and Enrollment

Why GAO Did This Study

The importance of managed care in 

Medicaid—under which states contract 

with MCOs to provide a specific set of 

services—has increased as states 

expand eligibility for Medicaid under 

PPACA and increasingly move 

populations with complex health needs 

into managed care. States have 

flexibility within broad federal 

parameters to design and implement 

their Medicaid programs, and therefore 

play a critical role in overseeing 

managed care. GAO was asked to 

examine managed care expenditures 

and provide information on certain 

components of state oversight of 

Medicaid managed care. 

In this report, GAO analyzes (1) federal 

expenditures for Medicaid managed 

care and the range in selected states’ 

payments made to MCOs; (2) selected 

states’ MLR standards and how they 

compare with federal standards for 

other sources of health coverage; and 

(3) selected states’ methods for 

automatically assigning Medicaid 

beneficiaries to MCO plans. GAO 

analyzed federal data on Medicaid 

expenditures for comprehensive riskbased managed care. GAO selected 

eight states because they used 

managed care for some portion of their 

Medicaid population and were 

geographically diverse. For these 

states, GAO reviewed state payment 

data and documentation, including 

contracts with MCOs, and interviewed 

state officials. GAO also reviewed 

federal laws to describe MLR 

minimums in Medicare and the private 

insurance market.

The Department of Health and Human 

Services had no comments on this 

report.

What GAO Found

Federal spending for Medicaid managed care increased significantly from fiscal 

year 2004 through fiscal year 2014 (from $27 billion to $107 billion), and 

represented 38 percent of total federal Medicaid spending in fiscal year 2014. 

Consistent with this national trend, managed care as a proportion of total federal 

Medicaid spending was higher in seven of eight selected states in fiscal year 

2014 compared with fiscal year 2004. 

Federal Expenditures for Medicaid Managed Care as a Percentage of Federal Medicaid 

Expenditures, in Eight States, Fiscal Years 2004 and 2014

Total and average per beneficiary payments by states to managed care 

organizations (MCOs) varied considerably across the eight selected states in 

state fiscal year 2014. For example, total payments ranged from $1.3 billion in 

one state to $18.2 billion in another, and average payments per beneficiary 

ranged from about $2,800 to about $5,200.

While not required by federal policy to do so, five of the eight selected states 

required MCOs to annually meet minimum medical loss ratio (MLR) 

percentages—standards that ensure a certain proportion of payments are for 

medical care and, in effect, limit the amount that can be used for administrative 

cost and profit. These state minimums generally ranged from 83 to 85 percent, 

similar to the 85 percent minimums established in the Patient Protection and 

Affordable Care Act (PPACA) for other sources of health coverage. All MCOs in 

the five states had MLRs in state fiscal year 2014 that were above the staterequired minimums. 

GAO also found that all eight selected states focused on beneficiary factors, such 

as assigning a beneficiary to the same managed care plan in which a family 

member is enrolled, when the state selects a plan for the beneficiary in the 

absence of the beneficiary choosing a plan—referred to as auto assignment. 

States also considered plan performance, for example, on quality measures and 

program goals, such as achieving a certain distribution of enrollment across 

plans. Auto assignments of beneficiaries ranged from 23 to 61 percent of 

managed care enrollees across the seven selected states that tracked such data.

View GAO-16-77. For more information, 

contact Carolyn L. Yocom at (202) 512-7114 

or yocomc@gao.gov.
Letter 1

Page i GAO-16-77 Medicaid Managed Care

Background 6

Federal Spending for Medicaid Managed Care Was Over $100 

Billion in 2014, and Selected States’ Payments to Managed 

Care Organizations Varied Widely 13

Over Half of Selected States Set Medical Loss Ratio Minimums 

Similar to Federal Standards for Other Coverage Types, with 

Some Variation in Calculation Methods 21

Selected States’ Auto Assignment Methods Primarily Focused on 

Beneficiary Factors, and Then Considered Plan Performance 

and Program Goals 26

Agency Comments 31

Appendix I: Selected States’ Comprehensive Risk-Based Managed Care Programs 33

Appendix II: Federal Expenditures on Managed Care as Percent of Total Medicaid Expenditures, Fiscal Years 

2004 and 2014 34

Appendix III: Selected States’ Methods for Overseeing Quality in Medicaid Managed Care 36

Appendix IV: GAO Contacts and Staff Acknowledgments 42

GAO Contacts 42

Staff Acknowledgments 42

Appendix V: Accessible Data 43

Data Tables 43

Tables

Table 1: Capitation Payments to Medicaid Managed Care 

Organizations (MCOs) in Selected States, State Fiscal 

Year 2014 18

Table 2: Average Per Beneficiary Payments to Medicaid Managed 

Care Organizations (MCOs) in Selected States, State

Fiscal Year 2014 19

Table 3: State Required Medicaid Medical Loss Ratio (MLR) 

Minimums in Selected States in Calendar Year 2014 

Compared With Federal Minimums for Other Coverage 

Types22

Contents
Table 4: Reported Medical Loss Ratios (MLR) in Selected States, 

Calendar or State Fiscal Year 2014 24

Table 5: Methods for Overseeing Quality of Care Provided by 

Medicaid Managed Care Organizations (MCOs) in 

Selected States 36

Data Table for Figure 3: Federal Comprehensive Risk-Based 

Medicaid Managed Care Expenditures, Total and as a 

Percentage of Overall Federal Medicaid Expenditures, 

Fiscal Years 2004-2014 43

Data Table for Highlights and Figure 5: Federal Expenditures for 

Comprehensive Risk-Based Medicaid Managed Care as a 

Percentage of Total Federal Medicaid Expenditures in 

Eight Selected States, Fiscal Years 2004 and 2014 43

Figures

Page ii GAO-16-77 Medicaid Managed Care

Figure 1: Comprehensive Risk-Based Managed Care Penetration 

in Medicaid by State, as of July 1, 2013 8

Figure 2: PPACA Medical Loss Ratio (MLR) Formula for Private 

Insurers 11

Figure 3: Federal Comprehensive Risk-Based Medicaid Managed 

Care Expenditures, Total and as a Percentage of Overall 

Federal Medicaid Expenditures, Fiscal Years 2004-2014 15

Figure 4: Federal Expenditures for Comprehensive Risk-Based 

Managed Care as a Percentage of Total Federal 

Medicaid Expenditures, Fiscal Year 2014 16

Figure 5: Federal Expenditures for Comprehensive Risk-Based 

Medicaid Managed Care as a Percentage of Total 

Federal Medicaid Expenditures in Eight Selected States, 

Fiscal Years 2004 and 2014 17

Figure 6: Illustration of a State Medicaid Managed Care Auto 

Assignment Method that Considers Beneficiary Factors, 

Plan Performance, and Program Goals 29

Abbreviations 

CMS Centers for Medicare & Medicaid Services

FFS fee for service

FPL federal poverty level

HEDIS Healthcare Effectiveness Data and Information Set

LTSS long-term services and supports

MA Medicare Advantage

MCO managed care organization

MLR medical loss ratio
NCQA National Committee on Quality Assurance

PPACA Patient Protection and Affordable Care Act

Page iii GAO-16-77 Medicaid Managed Care

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Page 1 GAO-16-77 Medicaid Managed Care

441 G St. N.W.

Washington, DC 20548

December 17, 2015

The Honorable Ron Wyden

Ranking Member

Committee on Finance

United States Senate

The Honorable Frank Pallone Jr.

Ranking Member 

Committee on Energy and Commerce

House of Representatives

The importance of managed care in Medicaid—a federal-state health 

financing program for low-income and medically needy individuals—has 

increased over the past decade. Under the managed care delivery model, 

states typically contract with managed care organizations (MCOs) to 

provide a specific set of Medicaid-covered services to beneficiaries and 

pay them a set amount per beneficiary per month—referred to as 

capitation payments—to provide those services.1In Medicaid, as in other 

types of health coverage, managed care is designed to ensure the provision of 

appropriate health care services in a cost-effective manner. 

As of July 2013, the most recent enrollment data available, about 55 

percent of total Medicaid enrollment was in managed care, a percentage 

that has likely grown since then. Under the Patient Protection and 

Affordable Care Act (PPACA), states may opt to expand eligibility for 

Medicaid to individuals at or below 138 percent of the federal poverty 

level (FPL), with additional federal funding available for this expansion 

 

1

States may have different types of managed care arrangements in Medicaid. In this report, where 

we refer to Medicaid managed care, we are referring to comprehensive, risk-based managed care, 

the most common type of managed care arrangement.

Letter
population beginning in January 2014.

Page 2 GAO-16-77 Medicaid Managed Care

2 Many of the people newly eligible 

under a Medicaid expansion were expected to be enrolled in managed 

care. As of May 2015, 29 states had exercised the option to expand 

Medicaid eligibility.3In addition, states are increasingly moving new 

populations of Medicaid beneficiaries into managed care, including 

individuals with disabilities and those with complex health care needs who 

require long-term services and supports (LTSS).4Increased spending for 

managed care will accompany this potential growth in managed care enrollment, 

making effective federal and state oversight of this large and complex 

component of the Medicaid program even more critical.5 

States have flexibility within broad federal parameters to design and implement 

their Medicaid programs and therefore play a critical role in overseeing 

Medicaid managed care. Under federal Medicaid policy, states can 

require MCOs to meet standards—similar to those established by PPACA 

for Medicare and health insurance plans offered in the private market—to 

govern the proportion of capitated payments that MCOs must spend on 

medical care and other services, referred to as a medical loss ratio 

 

2

Pub. L. No. 111-148, §§ 2001, 10201(c), 124 Stat. 119, 271, 918 (2010), as amended by the 

Health Care and Education Reconciliation Act (HCERA), Pub. L. No. 111-152, § 1201, 124 Stat. 

1029, 1051 (2010). For purposes of this report, references to PPACA include the amendments 

made by HCERA. Under PPACA, states may expand Medicaid eligibility under their state 

Medicaid plans to nonpregnant, nonelderly adults who are not eligible for Medicare and 

whose income does not exceed 133 percent of the FPL. PPACA also provides for a 5 

percent disregard when calculating income for determining Medicaid eligibility, which 

effectively increases this income level to 138 percent of the FPL. The FPL for a family of 

four in the 48 contiguous states and the District of Columbia in 2015 was $24,250; 138 

percent of this amount would be $33,465. 

3

For the purposes of this report, we consider the District of Columbia a state.

4LTSS include many types of health and health-related services, including both institutionally 

based services, such as nursing home care, and home and community based services, 

such as home health and adult day care. LTSS are for individuals of all ages who have 

limited ability to care for themselves because of physical, cognitive, or mental disabilities 

or conditions.

5The Medicaid program is on GAO’s high risk list, in part because of concerns about managed care 

payment oversight and the need for better data. See GAO, HIGH RISK SERIES: An Update, GAO15-290 (Washington, D.C.: Feb. 11, 2015). For additional issues related to Medicaid 

managed care oversight, see GAO, Medicaid: Key Issues Facing the Program, GAO-15-

677 (Washington, D.C.: July 30, 2015). 
(MLR).

Page 3 GAO-16-77 Medicaid Managed Care

6 States may also establish enrollment procedures for managed care, 

including procedures for the automatic assignment of beneficiaries to managed 

care plans when the beneficiary does not choose a plan for themselves, 

and have some discretion in setting the methods for doing so. In June 

2015, the Centers for Medicare & Medicaid Services (CMS)—the agency 

within the Department of Health and Human Services responsible for 

overseeing Medicaid—issued a proposed rule to modernize the 

regulations governing Medicaid managed care, thereby making the first 

major changes to these regulations since 2002.7 The proposed rule includes 

provisions to align standards for Medicaid managed care with those for 

other sources of coverage, improve accountability for the rates paid to 

MCOs, ensure beneficiary protections, and promote quality care. For 

example, it includes provisions related to MLRs and state methods for 

automatically assigning beneficiaries. While certain new standards may 

represent a change for some states, other states may have already 

adopted similar standards in managing their programs.

To better understand the costs and oversight of Medicaid managed care, 

you asked that we provide information on spending, state MLR 

requirements, and certain state enrollment policies for Medicaid managed 

care. In this report, we provide information on 

1. federal expenditures for Medicaid managed care and the range in 

selected states’ payments made to MCOs;

2. selected states’ MLR standards and how they compare with federal 

standards for other sources of coverage; and 

3. selected states’ methods for automatically assigning Medicaid 

beneficiaries to a managed care plan.

To examine federal expenditures for Medicaid managed care services 

and the range in selected states’ payments to MCOs, we analyzed federal 

Medicaid expenditure data for federal fiscal years 2004 through 2014 and 

 

6Medicare is the federal health insurance program that covers seniors aged 65 and older, and 

certain disabled persons and persons with end-stage renal disease. Medicare Parts A and B are 

known as Medicare fee-for-service. Medicare beneficiaries have the option of obtaining 

coverage for Medicare services from private health plans that participate in Medicare 

Advantage—Medicare’s managed care program—also known as Part C. Medicare 

beneficiaries may purchase coverage for outpatient prescription drugs under Part D. 

7

80 Fed. Reg. 31098 (June 1, 2015).
selected states’ payment data for state fiscal year 2014.

Page 4 GAO-16-77 Medicaid Managed Care

8 Specifically, we 

reviewed data from CMS’s Quarterly Medicaid Statement of Expenditures for the 

Medical Assistance Program, known as the CMS-64 form.9 We reviewed these 

data for trends across states and over time, focusing on the federal share of 

spending for comprehensive, risk-based managed care.10 In addition, we 

reviewed state data on state payments to MCOs in state fiscal year 2014 for eight

selected states. We selected states that used managed care to deliver care to at 

least a portion of their Medicaid beneficiaries and were geographically 

diverse. Our selection also included states that required MCOs to meet 

MLR standards and states that did not. The selected states were Arizona, 

California, Florida, Louisiana, Michigan, Pennsylvania, Tennessee, and 

Washington.11 (See appendix I for more information on our selected states.) To 

understand the range in state payments, which comprised both the federal and 

state shares of Medicaid expenditures, we reviewed relevant documentation for 

each of the states, including, where available, the most recent set of 

capitation rates approved by CMS, and CMS summaries of state reported 

information on characteristics of their managed care programs. To 

supplement this review, we analyzed CMS data on managed care 

enrollment as of July 2013, and interviewed Medicaid officials from the 

eight selected states. To assess the reliability of the federal expenditure 

data, we reviewed related documentation, including the form used to 

collect the data and its instructions, and performed manual and electronic 

tests for outliers or anomalies. We also interviewed knowledgeable 

officials at CMS about the data set and the form. To assess the reliability 

of the state payment data, we performed manual and electronic tests of 

the data to identify any outliers or anomalies, followed up with state 

officials as necessary, and incorporated any corrections we received. We 

 

8

In this report, unless otherwise noted, fiscal year refers to the federal fiscal year.

9

State Medicaid agencies submit expenditure information to CMS on a quarterly basis by means of 

the CMS-64 form within the Medicaid Budget and Expenditure System. CMS collects 

managed care expenditures on specific lines of the CMS-64 form. 

10To analyze trends over time, expenditures were adjusted for inflation using the gross domestic 

product price index to 2014 dollars. Under comprehensive risk based managed care, MCOs 

cover all or most Medicaid-covered services for beneficiaries and are at financial risk if 

spending on benefits and administration exceeds capitation payments from the state, 

which provide a set amount of payment per beneficiary per month.

11With the exception of Michigan, the state fiscal year 2014 for the selected states runs from July 

2013 through June 2014. Michigan’s state fiscal year 2014 is from October 2013 through 

September 2014.
determined that the federal and state data were sufficiently reliable for the 

purposes of our analyses. 

To provide information on selected states’ MLR standards and how they 

compare with federal standards for other sources of coverage, we 

reviewed the most recently approved or reviewed state contracts with 

MCOs for our eight selected states, identifying information on any 

required MLR minimums and potential sanctions that could be used to 

enforce any minimums. Where available, we also reviewed state 

documentation of the methodology for calculating the MLR. To 

supplement our review, we interviewed Medicaid officials from each of the 

selected states about their MLR policies and the use of any sanctions. In 

addition, where available, we analyzed state data on MLRs by MCO, 

generally for state fiscal year 2014 or calendar year 2014. Finally, we 

reviewed federal law and regulations, and interviewed CMS officials about 

MLR standards for managed care plans in Medicare and the private 

insurance market. To assess the reliability of the state MLR data, we 

performed manual and electronic tests of the data to identify any outliers 

or anomalies, followed up with state officials as necessary, and 

incorporated any corrections we received. We determined that the data 

were sufficiently reliable for the purposes of our analyses.

To provide information on selected states’ methods for automatically 

assigning Medicaid beneficiaries to a managed care plan, we reviewed 

documentation of auto assignment methods and relevant portions of the 

state contracts with MCOs for our eight states, as applicable, to 

determine the types of factors states considered when assigning 

beneficiaries.

Page 5 GAO-16-77 Medicaid Managed Care

12

 For example, we determined whether the states’ methods 

considered beneficiary factors, such as prior enrollment in a managed care plan, 

 

12Six of our eight states had one auto assignment methodology, while the other two states, 

Arizona and Florida, had separate auto assignment methodologies for two groups of 

beneficiaries. Arizona had separate methodologies for acute care and long-term care 

beneficiaries, and Florida had separate auto assignment methodologies for its Managed 

Medical Assistance Standard and MediKids beneficiaries. Unless otherwise specified, 

references to Arizona and Florida refer to the acute or standard beneficiaries. 
in assigning beneficiaries.

Page 6 GAO-16-77 Medicaid Managed Care

13 We also interviewed state officials about their 

methods, including any planned changes to those methods. Finally, we 

collected and reviewed the rate of beneficiaries automatically assigned to 

plans from the seven states that tracked these rates, generally for fiscal 

year 2014, and information about how these rates were calculated.

We conducted this performance audit from March 2015 through 

December 2015 in accordance with generally accepted government 

auditing standards. Those standards require that we plan and perform the 

audit to obtain sufficient, appropriate evidence to provide a reasonable 

basis for our findings and conclusions based on our audit objectives. We 

believe that the evidence obtained provides a reasonable basis for our 

findings and conclusions based on our audit objectives.

As of December 2014, 39 states were using comprehensive, risk-based 

managed care in their Medicaid programs. States vary considerably in the 

extent to which they enroll beneficiaries in managed care versus 

delivering care through the more traditional fee-for-service (FFS) model.14

For example, as of July 2013—the most recent enrollment data available—rates 

of managed care enrollment among states using it ranged from 7 to 100 percent.15

(See fig. 1.) As is true with Medicaid FFS, states vary in terms of the populations 

and services included in their managed care programs. For example, 

some states carve out certain types of services from their managed care 

contracts, such as behavioral health care services or dental services, and 

 

13We defined beneficiary-related factors to include factors such as: (1) prior beneficiary 

relationship with a plan or provider, (2) current family plan or provider, or (3) enrollment in 

related plans, such as an affiliated long-term care plan. We considered a state to have 

beneficiary factors as part of its auto assignment methods if the factors were included in 

the auto assignment documentation or relevant section of the state managed care 

contract (typically the enrollment section). For example, Louisiana specifically included 

prior plan relationships and other beneficiary factors in its auto assignment 

documentation, while Michigan addressed beneficiary factors through contract enrollment 

policies.

14Under FFS, Medicaid pays providers for each service provided to a Medicaid beneficiary. 

15Between July 2013 and December 2014, the number of states using managed care increased from 

37 to 39.

Background
provide those services separately, while other states include those 

services.

Page 7 GAO-16-77 Medicaid Managed Care

16

 

16States may provide the services they carve out of their managed care contract to beneficiaries 

either through FFS or in another type of managed care program.
Figure 1: Comprehensive Risk-Based Managed Care Penetration in Medicaid by State, as of July 1, 2013

Page 8 GAO-16-77 Medicaid Managed Care

States have the flexibility within federal parameters to determine whether 

enrollment in managed care will be mandatory (required for beneficiaries) or 
voluntary (beneficiaries have a choice between managed care and 

FFS).

Page 9 GAO-16-77 Medicaid Managed Care

17

 Further, states may have mandatory enrollment for some populations, 

but voluntary enrollment for others, and can also transition populations between 

voluntary and mandatory enrollment over time.

Under contracts between states and MCOs, the state pays the MCO a set 

amount (or “rate”) per member (or beneficiary) per month to provide all 

covered services and, in turn, the MCO pays providers to deliver the 

services. In addition to covering medical services for beneficiaries, the 

payment rates are expected to cover an MCO’s administrative expenses 

and profit. Under such contracts, the MCO is at risk for any costs above 

the agreed upon rate. Rates must, by law, be actuarially sound, meaning 

that they must be appropriate for the populations to be covered and for 

the services furnished.18 Rates can vary by type of beneficiary to reflect 

estimated differences in utilization. For example, a state may have different 

rates for children, adults under age 65, and adults 65 years of age and 

older. Rates may also differ by geographic region within a state. 

While not applicable to MCOs operating in Medicaid, PPACA requires

that private insurers operating in the large group insurance market, as 

well as the organizations and sponsors offering coverage through the 

Medicare Advantage (MA) and Medicare Part D programs, meet or 

exceed an 85 percent MLR standard.19 Furthermore, private insurers 

operating in the individual and small group markets must meet an 80 

 

17The level of state discretion depends on the legal authority under which the state is operating the 

program.

18In general, states use actuarial accounting firms to certify their annual MCO payment rates. 

States use either previous Medicaid MCO encounter data or claims data from the Medicaid 

FFS population as data sources to develop the rates. States build a certain percentage for 

administrative expenses and profit into the rates. 

19Insurance offered by large employers is known as large group insurance. Federal law defines 

a large employer as having an average of 51 or more employees during the preceding 

calendar year; however, states may apply this definition based on an average of 101 or 

more employees. See 42 U.S.C. §§ 300gg-91(e), 18024(b).

MA is the private plan alternative to the traditional Medicare FFS program. CMS contracts 

with MA organizations to provide covered services to beneficiaries who enroll in one of 

their plans. Under Medicare Part D, prescription drug plan sponsors—including private 

health insurers—contract with CMS to provide a voluntary outpatient prescription drug 

benefit for Medicare beneficiaries.

State Methods for Setting 

MCO Payment Rates

Medical Loss Ratio 

Standards under PPACA 

and in Medicaid 
percent MLR minimum.

Page 10 GAO-16-77 Medicaid Managed Care

20 To comply with these standards, under PPACA, 

insurers, MA organizations, and Part D sponsors with a relatively small 

enrollment have some flexibility in accounting for the disproportionate 

effect of random claims variability (where actual claims experience varies 

significantly from what is expected) on their ability to meet the MLR 

standard. While all insurers may experience some random claims 

variability, the effect of these deviations is greater for insurers with a small 

customer base. 

PPACA mandated a specific MLR formula for private insurers, and CMS 

rules implementing MLRs in Medicare established a specific formula for 

MA organizations and Part D sponsors.21 For example, the MLR for private 

insurers expresses the percentage of premiums collected (less state and federal 

taxes, and licensing and regulatory fees) that insurers spend on their 

beneficiaries’ medical claims and quality improvement activities.22 In 

general, the greater the share of beneficiaries’ premiums spent on medical claims 

and quality initiatives, the higher the MLR. (See fig. 2.)

 

20Insurance purchased by individuals in a non-group setting is individual insurance. Insurance 

offered by small employers is known as small group insurance. Federal law defines a small 

employer as having an average of 1 to 50 employees during the preceding calendar year; 

however, states may apply this definition based on an average of 1 to 100 employees. 

See 42 U.S.C. §§ 300gg-91(e), 18024(b). 

21Private Insurers: Pub. L. No. 111-148, §§ 1001(5), 10101(f), 124 Stat. 136, 885 (codified at 42 

U.S.C. 300gg-18(b)(1)(A)), 45 C.F.R. §§ 158.101 et seq. (2014); MA organizations: 42 C.F.R. § 

422.2400 et seq. (2014); Part D sponsors: 42 C.F.R. § 423.2400 et seq. (2014).

22MA organizations and Medicare Part D plan sponsors must also account for direct benefits to 

beneficiaries in the form of reductions, if any, of Medicare Part B premiums. Specifically, the MLR 

for MA organizations and Part D plan sponsors is expressed as the percentage of total 

revenue (less state and federal taxes, and licensing and regulatory fees) that is spent on 

medical claims, quality improvement activities, and any direct benefits to beneficiaries in 

the form of reduced Medicare Part B premiums.
Figure 2: PPACA Medical Loss Ratio (MLR) Formula for Private Insurers

Page 11 GAO-16-77 Medicaid Managed Care

Note: This figure represents the formula used by private insurers required to meet the minimum MLR 

established under the Patient Protection and Affordable Care Act (PPACA). Medicare Advantage 

organizations and Medicare Part D plan sponsors, which are also subject to an MLR minimum under 

PPACA, must use a slightly different formula. 

MLR requirements established under PPACA include as expenses for 

quality improvement activities that are primarily designed to (1) improve 

health outcomes; (2) prevent hospital readmissions; (3) improve patient 

safety and reduce medical errors; or (4) implement, promote, and 

increase wellness and health activities. Insurers are also allowed to 

include certain other expenses, such as health information technology 

required to accomplish activities to improve healthcare quality.23 As such, 

insurers are able to include expenses for a variety of activities in the numerator of 

the MLR formula. Examples of such quality improvement activities include case 

management, care coordination, medication and care compliance 

initiatives, patient-centered education and counseling, activities to lower 

the risk of facility-acquired infections, and wellness assessments. 

Under these requirements, for each year that a private insurer does not 

meet the required MLR minimum, it must pay rebates to its 

policyholders.24 Likewise, MA organizations and Medicare Part D sponsors 

 

23See 45 C.F.R. §§ 158.150(b), 158.151 (2014). 

24In our previous work on the implementation of MLR requirements, we found that private insurers 

paid about $1.1 billion in total rebates to enrollees and policyholders who paid premiums in 2011, 

the first year that insurers were subject to the PPACA MLR requirements, and about $520 

million in rebates in 2012. See GAO, Private Health Insurance: Early Effects of Medical 

Loss Ratio Requirements and Rebates on Insurers and Enrollees, GAO-14-580

(Washington, D.C.: July 10, 2014).
must pay CMS a remittance if they do not meet the required MLR minimum in a 

contract year.

Page 12 GAO-16-77 Medicaid Managed Care

25 MA organizations and Medicare Part D plans are also 

subject to enrollment sanctions and contract termination after failing to 

meet the MLR requirement for three and five consecutive years, 

respectively.

States are not required under federal policy to have contracted MCOs 

meet a minimum MLR standard. However, states may choose to establish 

their own MLR standards governing the proportion of capitation payments 

MCOs may be required to spend to provide medical services to 

beneficiaries, thus, limiting the amount of payments allowed for MCO 

profit and administrative expenses.26 States may also choose to establish their 

own formula for calculating MLRs for contracted MCOs.

When automatically assigning a beneficiary to a Medicaid managed care plan 

offered by an MCO, states may offer beneficiaries a certain amount of 

time (the length of which is at the discretion of the state) to choose a plan 

at the time of enrollment. If the beneficiary does not choose the plan 

within that time frame, the state automatically assigns—or defaults—the 

beneficiary to a plan. Alternatively, in some cases, states can 

automatically assign beneficiaries to a plan at the time of enrollment, 

providing them no initial period during which to choose among plan 

offerings. The beneficiary is then given a certain number of days after the 

assignment is made to opt out and choose another plan if they do not 

want to be enrolled in the one into which they were assigned. 

Current Medicaid policy requires states to consider certain factors—with 

some factors taking priority—in designing auto assignment methods, but 

also allows states discretion to consider other factors. States using a 

default enrollment process must give priority to maintaining existing 

 

25The rebates for private plans and the remittances for MA organizations and Part D plans are 

determined by taking the difference between the applicable PPACA MLR standard and the 

insurer’s actual MLR and multiplying it by the insurer’s premiums, after federal and state 

taxes, and licensing or regulatory fees are removed. 

26Under CMS’s proposed rule, if the state requires MCOs to meet an MLR minimum, that 

minimum would have to be 85 percent or higher. In addition, CMS’s proposed rule would 

require states to ensure that MCOs calculate and report MLRs annually, and that the 

reported MLRs are taken into account in the rate setting process and rates would be set 

such that MCOs can reasonably achieve an MLR of at least 85 percent.

Auto Assignment in 

Medicaid Managed Care
provider-beneficiary relationships and relationships with providers that 

have traditionally served Medicaid beneficiaries.

Page 13 GAO-16-77 Medicaid Managed Care

27 If that is not possible, 

states must equitably distribute beneficiaries among participating plans. 

However, states may also consider other factors, such as a beneficiary’s 

geographic location or the enrollment preferences of their family 

members. 

Federal spending for Medicaid managed care nationally increased 

significantly from federal fiscal years 2004 through 2014, representing 

over a third of total federal Medicaid spending in 2014. Total payments to 

MCOs and average per beneficiary payments showed considerable 

variation across selected states in state fiscal year 2014. 

Federal spending for Medicaid managed care increased significantly over 

the past decade—from $27 billion in fiscal year 2004 to $107 billion in 

fiscal year 2014—and represented a significantly larger portion of total 

federal Medicaid spending in 2014 than it did 10 years earlier.28

Specifically, managed care expenditures grew as a proportion of overall federal 

Medicaid spending from 13 percent in fiscal year 2004 to 38 percent in 

fiscal year 2014.29 (See fig. 3.) A number of factors have likely contributed to 

growth in federal expenditures, including states increasing the proportion of their 

 

27See 42 C.F.R. § 438.50(f) (2014). An “existing provider-beneficiary relationship” is one in which 

the provider was the main source of Medicaid services for the beneficiary during the previous year.

28These numbers reflect federal expenditures for comprehensive, risk-based managed care reported 

by all states and the District of Columbia. Combined federal and state spending for managed care in 

fiscal year 2014 totaled $170 billion.

29For this analysis, expenditures were adjusted for inflation using the gross domestic 

product price index to 2014 dollars. The proportion of federal expenditures for managed 

care in fiscal year 2014 was slightly higher than the proportion of state expenditures for 

that purpose—38 percent and 34 percent, respectively. Expenditures for managed care in 

2014 represented 36 percent of total, combined federal and state Medicaid expenditures.

Federal Spending for 

Medicaid Managed 

Care Was Over $100 

Billion in 2014, and 

Selected States’ 

Payments to 

Managed Care 

Organizations Varied 

Widely

Federal Spending for 

Medicaid Managed Care 

Represented 38 Percent 

of Total Federal Medicaid 

Spending in 2014
population that they enroll in managed care. For example, in state fiscal 

year 2014, Florida expanded the populations for which managed care 

was mandatory, which increased enrollment from 1.4 million to just fewer 

than 3 million beneficiaries, according to state officials. There was also 

significant growth from fiscal years 2013 through 2014, which suggests 

that the Medicaid expansion to low-income adults—and the increased 

availability of federal funds beginning in January 2014—also contributed 

to growth.

Page 14 GAO-16-77 Medicaid Managed Care

30 CMS’s Office of the Actuary reported in 2015 that Medicaid 

expenditures for and enrollment in managed care has grown in recent years and 

projected accelerated growth over the next 10 years.31 The office attributed this 

acceleration to many states continuing to enroll those newly eligible due to 

the Medicaid expansion in managed care and the expanded use of 

managed care to cover the aged and disabled, and LTSS.

 

30The federal government matches state expenditures for Medicaid services on the basis of a 

statutory formula based, in part, on a state’s per capita income. Federal law specifies that 

this federal match may range from 50 to 83 percent. For states that expand Medicaid, the 

federal government will pay an enhanced match—100 percent of the cost of covering 

newly eligible enrollees—in 2014, 2015, and 2016, with the federal match gradually 

reduced to 90 percent by 2020. 

31See Department of Health and Human Services, Centers for Medicare & Medicaid Services, 

Office of the Actuary, 2014 Actuarial Report on the Financial Outlook for Medicaid

(Washington, D.C.: 2015).
Figure 3: Federal Comprehensive Risk-Based Medicaid Managed Care Expenditures, Total and as a Percentage of Overall 

Page 15 GAO-16-77 Medicaid Managed Care

Federal Medicaid Expenditures, Fiscal Years 2004-2014 

Note: For this analysis, expenditures were adjusted for inflation using the gross domestic product 

price index to 2014 dollars.

Federal expenditures for managed care varied widely by state—ranging 

from $5.8 million in North Dakota to $14.3 billion in California—in fiscal 

year 2014.32 (See appendix II for expenditures by state.) Also, in fiscal year 

2014, federal spending for managed care as a percentage of total federal 

Medicaid spending varied considerably across the 39 states with 

managed care. For example, in 11 states, expenditures for managed care 

represented less than 25 percent of total federal Medicaid expenditures, 

 

32Differences in the federal matching rate, which can range from 50 to 83 percent, may have 

contributed to this variation.
while in 3 states such expenditures represented 75 percent or more of 

total federal Medicaid expenditures. (See fig. 4.)

Figure 4: Federal Expenditures for Comprehensive Risk-Based Managed Care as a Percentage of Total Federal Medicaid 

Page 16 GAO-16-77 Medicaid Managed Care

Expenditures, Fiscal Year 2014

Consistent with the national trend, in seven of our eight selected states, 

the proportion of total federal Medicaid spending represented by 

managed care was significantly higher in fiscal year 2014 than in fiscal 

year 2004, with increases ranging from 17 to 59 percent. For one state—
Arizona—the proportion of managed care expenditures as a percentage 

of total Medicaid expenditures declined from 82 percent in 2004 to 69 

percent in 2014. However, state officials attributed the entire decline to a 

change in how behavioral health expenditures were reported by the state, 

with the 2004 data including behavioral health expenditures and 2014 not 

including them. (See fig. 5.)

Figure 5: Federal Expenditures for Comprehensive Risk-Based Medicaid Managed Care as a Percentage of Total Federal 

Page 17 GAO-16-77 Medicaid Managed Care

Medicaid Expenditures in Eight Selected States, Fiscal Years 2004 and 2014

Notes: For this analysis, expenditures were adjusted for inflation using the gross domestic product 

price index to 2014 dollars. Arizona officials told us that the state reported behavioral health service 

expenditures as part of comprehensive risk-based managed care in 2004, but did not include those 

expenditures in data reported for 2014.
Reflecting variation common in the Medicaid program, generally, state 

payments to MCOs varied considerably across and within states. In state 

fiscal year 2014, total capitated payments to MCOs in the eight selected 

states ranged from $1.3 billion in Louisiana to $18.2 billion in California.

Page 18 GAO-16-77 Medicaid Managed Care

33

Payments to individual MCOs ranged from $17.3 million to $3.1 billion across 

states and varied widely within some states, with at least one MCO receiving 

payments above $1 billion in six of the eight states. (See table 1.)

Table 1: Capitation Payments to Medicaid Managed Care Organizations (MCOs) in 

Selected States, State Fiscal Year 2014

Capitated payments by state to MCOs

Number of 

MCOs

Minimum 

(millions)

Maximum 

(millions)

Total

(billions)

Arizonaa9 $107.5 $1,344.1 $4.5

California 22 164.8 3,107.6 18.2

Floridab 38 0.01 774.7 4.5

Louisiana 3 401.6 467.8 1.3

Michigan 13 17.3 1,238.1 5.2

Pennsylvania 8 360.9 2,684.5 8.4

Tennessee 3 886.7 2,594.6 5.2

Washington 5 302.8 1,096.0 3.1

Source: GAO analysis of state reported data. | GAO-16-77

Note: In states with multiple comprehensive risk-based managed care programs or models, these 

data include payments to MCOs in all programs or models. 

aArizona’s numbers include data for one MCO that participated for only a portion of the state fiscal 

year.

bDuring state fiscal year 2014, Florida began phasing in mandatory enrollment in managed care 

statewide. Thus, the data do not reflect a full year of the expanded program, and some MCOs may 

have only participated in the program for a portion of the year.

The average annual amount of payment per beneficiary also varied 

significantly across the selected states. Specifically, average capitated 

payments per beneficiary ranged from $2,784 in California to $5,180 in 

Pennsylvania for state fiscal year 2014.34 (See table 2.) 

 

33Capitation payments include both the state and federal share of the cost, as applicable.

34These numbers reflect the average payment per full year equivalent, which represents 12 months 

of enrollment.

Total and Average per 

Beneficiary Payments 

Varied Considerably 

across Selected States, 

with Differences in 

Covered Populations and 

Services Contributing to 

the Variation
Table 2: Average Per Beneficiary Payments to Medicaid Managed Care Organizations (MCOs) in Selected States, State Fiscal Year 2014

Page 19 GAO-16-77 Medicaid Managed Care

Source: GAO analysis of state data and Centers for Medicare & Medicaid Services documentation. | GAO-16-77

aState enrollment of beneficiaries who qualify for long-term services and supports (LTSS) into 

managed care may be limited to certain counties.

bExamples of services excluded from capitation payments are not comprehensive; states may 

exclude additional services. Services may be excluded from the capitation rate for some populations, 

but not others.

A number of factors may have contributed to the variation in average per 

beneficiary cost.

· The populations the state enrolled in managed care: States varied 

in the populations they enrolled in managed care. For example, three 

of our selected states enrolled elderly or disabled beneficiaries 

qualifying for LTSS in their managed care programs, while the 

remaining five did not.35 In Arizona, the average annual payment per 

beneficiary for the population qualifying for LTSS was $37,700 compared to 

the average annual payment of $3,000 for all other populations. 

· The services included in the capitation rate: Some of our selected 

states carved certain types of services out of their programs and 

 

35CMS data indicated that 14 of the 37 states with managed care as of July 2013 enrolled 

individuals requiring LTSS.

Beneficiaries 

(full-year 

equivalents)

Total capitated 

payments to 

MCOs (billions)

Average 

payment per 

beneficiary

Populations enrolled 

included those 

qualifying for LTSSa

Examples of services excluded 

from capitationb

Arizona 1,206,517 $4.5 $3,766 Affirmative Behavioral health services and 

related prescription drugs

California 6,552,653 18.2 2,784 Affirmative Inpatient behavioral health and 

dental 

Florida 1,428,520 4.5 3,136 Negative Institutional long term care and 

inpatient behavioral health

Louisiana 423,071 1.3 3,092 Negative Behavioral health and dental 

Michigan 1,371,734 5.2 3,785 Negative Inpatient behavioral health and 

dental 

Pennsylvania 1,620,614 8.4 5,180 Negative Behavioral health 

Tennessee 1,174,378 5.2 4,403 Affirmative Pharmacy and pediatric dental

Washington 942,749 3.1 3,259 Negative Behavioral health and dental
provided them separately.

Page 20 GAO-16-77 Medicaid Managed Care

36 For example, Arizona provided behavioral 

health care through separate programs for certain populations. In 

contrast, Tennessee included those services in its program. 

· Geographic differences in costs and utilization of care: Our 

review of approved rates indicated that rates for similar populations 

could differ across states. Because rates reflect a state’s assumptions 

on utilization and cost for a given population and are generally 

developed using cost data from previous years, the variation across 

states likely reflects some geographic differences in costs and 

utilization. For example, payment rates for children under the age of 1 

ranged from $416 to $769 per beneficiary per month across four of 

our selected states that specified a rate for that age group.37 Similarly, 

in the four states with a separate rate for maternity care, rates ranged 

from about $4,960 in areas of one state to over $11,000 in certain 

areas of another state.38 Rates also ranged regionally within several states. 

For example, one state approved rates at the county level and its rates for

children under the age of 1 ranged from $416 to $551 per beneficiary 

per month. In past work, we found that service utilization in managed 

care varied by state and by population—including whether 

beneficiaries were enrolled for a full year or part of a year—and that 

MCO payments to providers for particular services can also vary 

considerably across states.39

 

36CMS data indicated that of the 37 states with managed care as of July 2013, 3 provided 

LTSS separately, 13 provided behavioral health services separately, 5 provided dental 

services separately, and 10 provided transportation services separately. 

37For the state with the lowest rate, rates were for calendar year 2013. For the state with 

the highest rate, the rates were for calendar year 2015. For the two remaining states, 

rates were for contract year and state fiscal year 2014, respectively.

38For the state with the lowest rate, rates were for the contract year beginning in February 

2015. For the state with the highest rate, the rates were for July through December of 

2014. For the two remaining states, rates were for contract year and state fiscal year 

2014, respectively.

39See GAO, Medicaid: Service Utilization Patterns for Beneficiaries in Managed Care, GAO-15-

481 (Washington, D.C.: May 29, 2015) and Medicaid Payment: Comparisons of Selected Services 

under Fee-for-Service, Managed Care, and Private Insurance, GAO-14-533 (Washington, 

D.C.: July 15, 2014).
Five of our eight selected states—Arizona, Florida, Louisiana, Michigan, 

and Washington— required MCOs to annually meet a minimum MLR 

percentage. The MLR minimums required in the five states generally 

ranged from 83 to 85 percent for most populations. The exception to this 

range was that Washington set a separate MLR minimum for its program 

covering beneficiaries who are blind or disabled at 88 percent.

Page 21 GAO-16-77 Medicaid Managed Care

40 The 

required minimums in the five states were similar to the 85 percent 

federal MLR minimum mandated by PPACA for private, large group 

insurers, MA organizations, and Part D sponsors.41 (See table 3.) 

The methodologies used to calculate the MLRs differed across the five 

states with required MLR minimums. These differences in methodology 

were most pronounced regarding whether the state counted MCO 

expenses for activities to improve health care quality as expenses that 

qualify toward meeting the state’s required minimum. Three of the five 

states specifically allowed MCOs to include activities to improve health 

care quality, as PPACA allows for private insurers, MA organizations, and 

Part D plan sponsors. The remaining two states either accounted for 

more limited quality activities—for example, Arizona allowed for the 

inclusion of case management for its LTSS population—or did not 

account for them at all. All else being equal, states that allow MCOs to 

include the costs of quality activities would expect to see higher MLRs. 

We also found differences in how states defined medical expenditures for 

inclusion in the MLR calculation. For example, Florida allowed MCOs to 

include funds provided to graduate medical education institutions to 

underwrite residency position costs and contributions to the state trust 

fund for the purpose of supporting Medicaid and indigent care in the 

numerator as medical expenses.

 

40While not an MLR minimum, Washington applies an MLR risk corridor of 86 to 92 percent to 

MCOs that is specific to the adult expansion population. This risk corridor represents the 

range of MLRs that the state ensures is maintained for the adult expansion population 

covered by MCOs. If an MCO has an MLR for this population that is below 86 percent it 

must refund a certain proportion of funds to the state. If it has an MLR that is above 92 

percent, the state will pay additional funds to the MCO up to a defined threshold. 

41As previously noted, under CMS’s proposed rule, if the state requires MCOs to meet an MLR 

minimum, that minimum would have to be 85 percent or higher. In addition, CMS’s 

proposed rule would require states to ensure that MCOs calculate and report MLRs 

annually, that the reported MLRs are taken into account in the rate setting process, and 

that rates would be set such that MCOs can reasonably achieve an MLR of at least 85 

percent.

Over Half of Selected 

States Set Medical Loss 

Ratio Minimums 

Similar to Federal 

Standards for Other 

Coverage Types, with 

Some Variation in 

Calculation Methods
Table 3: State Required Medicaid Medical Loss Ratio (MLR) Minimums in Selected 

Page 22 GAO-16-77 Medicaid Managed Care

States in Calendar Year 2014 Compared With Federal Minimums for Other Coverage 

Types 

State/Group

State MLR 

minimum 

Inclusion of 

quality activities 

in the MLR 

numerator

States with a 

required MLR 

minimum

Floridaa85% Yes

Louisiana 85% Yes

Washingtonb85% Yes

Arizona 85% Partialc

Michigan 83% No

Coverage 

types with 

required 

federal MLR 

minimum

Large group private 85% Yes

Small group private 80% Yes

Medicare—Medicare 

Advantage 

organizations and Part 

D plan sponsors

85% Yes

Source: GAO analysis of state documentation, statements by state officials, and federal law. | GAO-16-77

Note: State requirements are for managed care organizations (MCOs) providing comprehensive riskbased managed care. 

aFlorida’s required minimum is applicable to the acute care program. The state’s program for the 

population requiring long-term services and supports is not subject to an MLR minimum requirement. 

bWashington has two programs—Apple Health Family and Apple Health Blind/Disabled—that are 

subject to different MLR requirements. The table reflects the required MLR minimum for the Apple 

Health Family program. The MLR minimum for the Apple Health Blind/Disabled program is 88 

percent. The MLR minimum requirement in Washington represents the MLRs that MCOs must have 

in order to keep its profits and not share them with the state. If an MCO has an MLR between 83 and 

85 percent it would have to share profits with Washington. MCOs with MLRs below 83 percent would 

have to pay the state all of its profits that exceed 5 percent for the year. Washington refers to this as a 

gain-sharing model.

cArizona includes case management in the calculation of MLRs for MCOs that enroll its long-term 

services and supports beneficiary population. It does not include case management or any other 

quality activities in the calculation of MLRs for MCOs that enroll its acute care population.

Three of the remaining eight selected states—California, Pennsylvania, 

and Tennessee—did not require MCOs to meet MLR minimums, but did 

monitor MLRs. For example, Tennessee officials explained that the state 

has routine processes in place to monitor MLR performance. The state 

requires MCOs to submit annual MLR reports, and according to officials, 

will follow up with MCOs if it has concerns about reported MLRs. Officials 

from California told us the state uses MCO MLRs to observe trends for 

most populations in its managed care programs. The state Medicaid 
agency does not require MCOs to submit MLR-specific data, but does 

calculate MLRs for MCOs using their reported financial information.

Page 23 GAO-16-77 Medicaid Managed Care

42

Additionally, in 2014, for the adult expansion population only, California 

applied an MLR risk corridor of 85 to 95 percent to MCOs. While not an 

MLR minimum, this risk corridor represented the range of MLRs that the 

state maintains for the adult expansion population covered by MCOs.43

Data provided by the five selected states with required MLR minimums 

indicated that MLRs were above the required minimums for all MCOs in 

2014. Among the three selected states without required minimums, the 

average reported MLRs fell generally within the same range as the states 

with required minimums. (See table 4.) Furthermore, officials from the 

five states with required MLR minimums told us that their participating 

MCOs generally met the MLR minimums. A high percentage of MCOs 

meeting the MLR minimums may be expected; for example, we found in 

previous work that over three quarters of private insurers met or 

exceeded the PPACA MLR minimum requirement in 2011 and 2012.44

 

42In its proposed rule, CMS would require that MCOs annually submit a report to states containing 

pertinent information for calculating the MLR. These elements would be reconciled with the 

audited financial reports that CMS also proposes that plans submit to states annually. 

43If an MCO has an MLR for its expansion population that is below 85 percent it must pay the state 

the difference between 85 percent of total net capitation payments to the MCO and the actual 

allowed medical expenses incurred for that region. If an MCO has an MLR for its adult 

expansion population that is above 95 percent, then the state will pay the MCO the 

difference between the MCO’s allowed medical expenses and 95 percent of net capitation 

payments received for that region. Pennsylvania is planning to implement a similar MLR 

risk corridor policy in 2015.

44GAO-14-580.
Table 4: Reported Medical Loss Ratios (MLR) in Selected States, Calendar or State Fiscal Year 2014 

Page 24 GAO-16-77 Medicaid Managed Care

State

State MLR 

minimum 

requirement

Weighted average 

of reported MLR 

Range of reported 

MLRs

Inclusion of quality 

activities in the MLR 

numerator

States with MLR 

minimum 

requirements

Floridaa85% 92% 87%-117% Yes

Louisiana 85% 92% 91%-93% Yes

Washingtonb85% 89% 86%-100% Yes

Arizona 85% 89% 87%-98% Partialc

Michigan 83% 87% 84%-93% No

States without 

MLR minimum 

requirements

California n/a 89% 74%-98% No

Pennsylvania n/a 91% 88%-97% No

Tennessee n/a 86% 85%-87% No

Source: GAO analysis of state data and documentation, and statements by state officials. | GAO-16-77

Notes: State requirements and reported MLRs are for managed care organizations (MCOs) providing 

comprehensive risk-based managed care. Reported MLRs are for state fiscal or calendar year 2014, 

and may not coincide with the state contract year. As such, they may not reflect the MLRs that were 

used to assess MCO compliance or to trigger a sanction if appropriate. Reported MLRs were for the 

following time periods: Louisiana’s and Washington’s were for calendar year 2014; California’s, 

Florida’s, Pennsylvania’s, and Tennessee’s were for state fiscal year 2014; Arizona’s were for 

contract year 2014; and Michigan’s were for the final quarter of state fiscal year 2014. According to 

Michigan officials, these quarterly MLRs are representative of state fiscal year 2014 MLRs. Weighted 

averages were developed using enrolled beneficiary months in state fiscal year 2014, with the 

exception of Florida where the averages were weighted based on expenditures.

aFlorida’s data reflects MLRs for 12 of the 38 MCOs contracting with the state in state fiscal year 

2014. During 2014, the state expanded its managed care program, and the state had not calculated 

MLRs for MCOs added to the program in that year.

bWashington has two programs—Apple Health Family and Apple Health Blind/Disabled—that are 

subject to different MLR requirements. The table reflects the required MLR minimum and the range 

of reported MLRs for the Apple Health Family program. The MLR minimum for the Apple Health 

Blind/Disabled program is 88 percent, and the reported MLRs ranged from 98 percent to 108 percent. 

The MLR minimum requirement in Washington represents the MLRs that MCOs must have in order to 

keep its profits and not share them with the state. If an MCO has an MLR between 83 and 85 percent 

it would have to share profits with Washington. MCOs with MLRs below 83 percent would have to 

pay the state all of its profits that exceed 5 percent for the year. Washington refers to this as a gainsharing model.

cArizona includes case management in the calculation of MLRs for MCOs that enroll its long-term 

services and supports beneficiary population. It does not include case management or any other 

quality activities in the calculation of MLRs for MCOs that enroll its acute care population. 

If MCOs do not meet the minimum MLR requirements, there are a range 

of sanctions that our selected states might impose, but officials from the 

five states with required minimums confirmed that they had employed 

sanctions related to MLR requirements rarely if at all in the last three 

contract or fiscal years. Potential sanctions outlined in MCO contracts 

included requiring MCOs to submit corrective action plans, restricting an 

MCO’s enrollment by freezing automatic assignment, or terminating an 

MCO from the managed care program. Two of the five states with MLR 
minimum requirements for Medicaid managed care—Louisiana and 

Washington—require MCOs to reimburse the state if the MLR minimum 

requirements are not met. Officials from Louisiana—which requires MCOs 

to pay a rebate—were not aware of any occasion where the state sought 

a rebate from an MCO.

Page 25 GAO-16-77 Medicaid Managed Care

45 Washington officials told us that one of its MCOs did 

not meet MLR minimums for the July 1, 2012, through December 31, 2013, 

contract, and as a result, was required to pay the state over $4 million. 

Information from two states indicated that they also monitor MCOs with 

MLRs that they consider to be high, because high MLRs could be an 

indication that rates are not adequate. Specifically, Florida indicated that 

the state will monitor the financial performance of MCOs with MLRs at or 

above 95 percent. In addition, although Tennessee does not have a 

required MLR minimum, officials indicated that they engage MCO 

representatives about MCO fiscal performance if MLRs are trending 

above 92 percent, as well as if they are trending below 85 percent. 

Officials told us the state also used the MLR as a measure to inform their 

rate setting process, which is done to determine whether the rates paid to 

MCOs are appropriate and sufficient.46

Interviews with state officials indicated that MLR standards are just one of 

several methods used by states in their effort to ensure that MCOs are using an 

appropriate amount of payments to provide medical care. Officials from seven 

of the eight states indicated that they also use the rate setting process, 

during which states review data on medical and administrative costs for 

prior years. In Tennessee, officials told us that the state surveys MCOs to 

obtain specific data regarding their administrative costs.

Officials from several states with MLR minimums questioned their 

effectiveness and stated that they may not be applicable to all populations 

and programs. For example, officials from one state with a required MLR 

minimum explained that if an MCO disproportionately covers an 

 

45The preamble to CMS’s proposed rule encourages, but would not require, states to use 

remittances as an incentive for MCOs to comply with a state MLR requirement if 

implemented.

46Under CMS’s proposed rule, rates must be set to allow MCOs to account for a reasonable amount 

of administrative costs. In the preamble, CMS explained that in addition to setting rates 

such that MCOs are allowed to reasonably achieve an MLR of at least 85 percent, states 

should set rates so that MLRs do not exceed a reasonable maximum threshold to account 

for reasonable administrative costs.
inherently high-expenditure population (such as patients with human 

immunodeficiency virus), it will be easier for it to meet the MLR minimum 

than another MCO that has an inherently less expensive patient mix 

(such as children). Furthermore, officials from two other states with 

required minimums told us that the potential subjectivity in classifying 

certain expenses may dilute the usefulness of the MLR. CMS officials told 

us that MLR minimums are one measure of assessing MCO performance 

and that MLRs should be interpreted in the larger context. Officials noted 

that if a state were to set a 90 percent minimum and an MCO reports an 

MLR of 80 percent, it could be that the rates were set too high and the 

state overpaid. It could also mean that the rates were set appropriately, 

but the MCO performed very efficiently.

The eight selected states varied in their methodologies for automatically 

assigning beneficiaries to plans offered by MCOs, but all of them first 

considered beneficiary factors, such as prior participation in a plan offered 

by a Medicaid MCO.

· Louisiana, for example, assessed four specific beneficiary factors to 

determine plan auto assignments; namely, whether the beneficiary 

had (1) family members who participated in a particular health plan; 

(2) a prior primary care provider who is participating in a Medicaid 

plan in the state; (3) prior claims history that could be used to identify 

a most frequently visited primary care provider; and (4) a Medicaid 

plan in which they were previously enrolled. 

· Tennessee’s auto assignment method also initially considered 

beneficiary factors, for example, by re-enrolling beneficiaries who had 

lost Medicaid eligibility in the plan in which they were previously 

enrolled. 

· Washington’s and Michigan’s processes prioritized automatically 

assigning beneficiaries to the same plan as family members. 

After considering beneficiary factors, four states—Arizona, California, 

Michigan, and Washington—also considered a variety of plan 

performance factors, such as performance on quality measures, in their 

auto assignment methodologies. Michigan and California assigned points 

to plans—that is, they gave preference to plans based on performance on 

multiple measures, such as the provision of well-child visits or 

comprehensive diabetes care. Michigan officials told us they change the 

performance measures considered on a quarterly basis to avoid a 

preference for plans that consistently do well in only a few measures. 

California also awarded points to account for plan improvement. 

Beginning in July 2014, Washington began considering plan performance 

Page 26 GAO-16-77 Medicaid Managed Care

Selected States’ Auto 

Assignment Methods 

Primarily Focused on 

Beneficiary Factors, 

and Then Considered 

Plan Performance 

and Program Goals
on the completion of beneficiaries’ initial health screens. According to 

state officials, including this measure in its auto assignment methods has 

been a useful tool in helping the state increase the initial health screening 

rate among beneficiaries. While not all of our selected states linked auto 

assignment to performance on quality measures, they all required MCOs 

to report on quality measures, including nationally recognized or other 

state-developed measures. Further, six of the eight selected states 

required MCOs to be accredited by the National Committee on Quality 

Assurance (NCQA) or other accrediting organization, a process that 

includes an independent review of the MCO and assessment of 

performance on quality. (See appendix III for more information on the 

selected states’ methods for overseeing MCO quality.) 

Three of these states also considered administrative, cost, or other plan 

performance factors in their auto assignment methodologies. For 

example, Michigan assigned points based on administrative measures, 

such as performance on claims processing. Arizona’s methodology 

factored capitation rates and scores on the plan’s contract proposal, with 

plans with the lowest awarded capitation rate and highest proposal score 

receiving an advantage in auto assignments. In addition to cost, 

California’s auto assignment method included plan performance on two 

safety net measures, with plans earning points based on how the plan 

compares to the other plan scores in their geographic region. 

All eight of our selected states considered overall program goals in their 

auto assignment methods.

Page 27 GAO-16-77 Medicaid Managed Care

47 (See figure 6 for an illustration of a state auto 

assignment method that considers beneficiary factors, plan performance, and 

overall program goals.) For example, states made auto assignment decisions

based on such goals as ensuring plan capacity to serve additional 

beneficiaries or managing enrollment distributions across plans in certain 

geographic markets. 

· Ensuring plan capacity: Florida, Michigan, and Washington 

considered plan capacity before auto assigning beneficiaries to plans. 

For example, beginning in July 2014, Washington plans that received 

auto assignments must demonstrate that they meet a certain capacity 

threshold to serve eligible beneficiaries in each of five critical provider 

types, including primary care and hospitals.

 

47Overall program goals were generally considered after plan performance factors in the four states 

that considered such factors.
· Managing distribution across plans: Pennsylvania divided 

beneficiaries equally among plans in a certain geographic area, while 

Louisiana generally did not assign beneficiaries to plans with greater

than or equal to 40 percent of total beneficiaries in the state. Arizona’s 

auto assignment methodology had provisions to redistribute auto 

assignments in certain geographic areas where plans have enrollment 

greater than or equal to 45 percent of the total beneficiaries. 

· Assisting plans entering the program or a new region: An Arizona 

official told us that the state may give preference during auto 

assignment to new plans entering the market in a particular region. 

Similarly, California’s methodology included specific provisions for 

new plans, crediting those plans with average performance until the 

plans could produce performance data.

Page 28 GAO-16-77 Medicaid Managed Care
Figure 6: Illustration of a State Medicaid Managed Care Auto Assignment Method that Considers Beneficiary Factors, Plan 

Page 29 GAO-16-77 Medicaid Managed Care

Performance, and Program Goals

Notes: This illustration assumes that the beneficiary has not selected a plan and the state first 

considers beneficiary factors. If none of the beneficiary factors apply, the methodology then focuses 

on plan performance and program goals. Not all states may consider all three factors or consider 

them in this order. 
The rate of beneficiaries automatically assigned to plans, referred to as 

the auto assignment rate, varied considerably among states. Selected 

states’ assignment rates ranged from 23 to 61 percent, with three states 

reporting rates of 30 percent or less and three other states reporting rates 

of 50 percent or more.

Page 30 GAO-16-77 Medicaid Managed Care

48 Rates may vary by population, geographic area, and 

the method the state used to calculate the rate.

· Population: One state, Arizona, tracked auto assignment rates for its 

LTSS population and reported a rate about 26 percent lower for this 

population than for all other populations. An Arizona official noted that 

there is very little auto assignment among beneficiaries using LTSS 

because they are typically more engaged in their care and have more 

outside assistance when initially choosing a plan.

· Geographic region: Two states also provided information related to 

how auto assignments can vary by geographic region. For example, 

the percentage of total auto assignments for a particular plan in 22 

Washington counties ranged from 10 percent to 98 percent. Florida 

officials also told us that rates vary by region, with Miami having a 

much lower auto assignment rate than other parts of the state. 

· Calculation method: Variation in auto assignment rates among 

states was likely due, in part, to states not having a common method 

for calculating the rates. For example, Pennsylvania, a state with a 

lower auto assignment rate, excluded eligible beneficiaries who did 

not make a plan selection, but were able to be assigned to the same 

plan as another active family member. In contrast, Louisiana, a state 

with a higher auto assignment rate, included such assignments in its 

calculation.

Differences in state enrollment policies, such as the length of time that 

beneficiaries have to choose a plan before auto assignment, may also 

contribute to the variation in auto assignment rates. Michigan, for 

example, reported giving beneficiaries 26 days to select a plan before 

being auto assigned by the state, while Washington, a state with a higher 

auto assignment rate, automatically assigned beneficiaries to a managed 

care plan at the time of enrollment, but gave beneficiaries the option to 

 

48Arizona, California, Florida, Louisiana, Michigan, Pennsylvania, and Washington reported that 

they tracked these rates, generally for state fiscal year 2014. Tennessee officials told us 

that the state does not track auto assignment rates, although they estimated that the auto 

assignment rate would be quite high.
change plans monthly.

Page 31 GAO-16-77 Medicaid Managed Care

49

 Other states may allow beneficiaries to select a plan 

at the time of enrollment before being auto assigned. For example, according to 

Louisiana officials, in February 2015, the state began requiring beneficiaries to 

choose a managed care plan at the time of enrollment, instead of giving 

beneficiaries 30 days to choose a plan, in an effort to phase out FFS 

claims processing by the state.50

Interviews with state officials indicated that states may adjust auto assignment 

methods. Specifically, officials from three states told us about future plans 

to change their auto assignment methods. For example, Arizona reviewed 

its auto assignment percentages at least annually, and indicated that the 

state may adjust its method to recognize plan performance on quality and 

administrative measures, such as those related to claims processing and 

grievances. Tennessee officials said the state plans to incorporate plan 

quality and cost performance into its auto assignment process.51

We provided a draft of this report to the Department of Health and Human 

Services for comment. The Department had no comments.

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to the Secretary of Health 

and Human Services and other interested parties. In addition, the report 

will be available at no charge on the GAO website at http://www.gao.gov.

If you or your staffs have any questions about this report, please contact 

Carolyn L. Yocom at (202) 512-7114 or yocomc@gao.gov. Contact points 

 

49Washington officials estimated that approximately 1 to 3 percent of beneficiaries switched 

plans. State officials told us that the state changed its policy in May 2015 to give its 

Medicaid beneficiaries time to choose a plan before being auto assigned to a stateselected managed care plan. Other states in our sample reported that beneficiaries could 

switch plans within a range of 30 to 90 days, depending on the state.

50While eligible beneficiaries are selecting a plan, they may be enrolled in FFS or managed care. 

Florida officials told us the state plans to phase out the time period where beneficiaries are 

covered by FFS. Beneficiaries would still have a chance to choose their plan, but the state 

would enroll them in plans more quickly. 

51CMS’s proposed rule would also make changes to state auto assignment methods, for 

example, by specifying additional factors that states may take into account when auto 

assigning.

Agency Comments
for our Offices of Congressional Relations and Public Affairs may be 

found on the last page of this report. GAO staff who made key 

contributions to this report are listed in appendix IV. 

Page 32 GAO-16-77 Medicaid Managed Care

Carolyn L. Yocom

Director, Health Care
Appendix I: Selected States’ Comprehensive 

Risk-Based Managed Care Programs

Page 33 GAO-16-77 Medicaid Managed Care

Source: GAO analysis of Centers for Medicare & Medicaid Services (CMS) data and documentation | GAO-16-77

Notes: Descriptions of state managed care programs are based on CMS information as of August 

2014 and October 2014. This information is compiled by CMS staff and updated throughout the year, 

according to CMS. Contract periods are for the state contract with managed care organizations that 

were most recently approved or reviewed by CMS generally as of March 2015.

aCalifornia has additional managed care programs, which represent expansions of these programs 

into additional counties.

Appendix I: Selected States’ Comprehensive 

Risk-Based Managed Care Programs 

Enrollment as 

of July, 2013 Contract period Description of managed care programs

Arizona 1,072,628 October 1, 2014 –

September 30, 

2015

Arizona Health Care Cost Containment System: Mandatory program for 

aged, disabled (children and adults), children, low-income adults, those 

dually eligible for Medicare and Medicaid (dual eligibles), and foster care 

children. 

Arizona Long Term Care System: Mandatory program for aged, disabled 

(children and adults), and dual eligibles, all of whom are in need of a 

nursing home level of care. 

Californiaa5,686,453 January 1, 2014 –

December 31, 

2016

Two-Plan model: Mandatory and voluntary program in select counties for 

disabled (children and adults), children, and foster care children.

Geographic Managed Care: mandatory and voluntary program in select 

counties for aged, disabled (children and adults), children, low-income 

adults, certain dual eligibles, and foster care children. 

County Organized Health Systems: Mandatory program in select counties 

for aged, disabled (children and adults), children, low-income adults, certain 

dual eligibles, foster care children, and American Indians/Alaskan Natives.

Florida 1,516,233 September 1, 

2012 – August 31, 

2015

Managed Medical Assistance: Mandatory and voluntary statewide program 

for aged, disabled (children and adults) children, low-income adults, dual 

eligibles, foster care children, and American Indians/Alaskan Natives. 

Louisiana 427,713 February 1, 2015 

– January 31, 

2018

Bayou Health: Mandatory statewide program for disabled (children and 

adults), children, parents, breast and cervical cancer program population 

(under 65), low-income adults, foster care children, pregnant women, and 

aged, blind and disabled adults. 

Michigan 1,290,847 October 1, 2013 –

September 30, 

2014

Comprehensive Health Care Program: Mandatory statewide program for 

aged, disabled (children and adults), children, low-income adults, and foster 

care children. 

Pennsylvania 1,621,687 July 1, 2013 –

June 30, 2014

HealthChoices: Mandatory statewide program for aged, disabled (children 

and adults), children, low-income adults, certain dual eligibles, and foster 

care children. 

Tennessee 3,030,664 January 1, 2014 –

December 31, 

2016

TennCare: Mandatory statewide program for aged, disabled (children and 

adults), children, low-income adults, certain dual eligibles, and foster care 

children. 

Washington 780,675 January 1, 2014 –

December 31, 

2014

Apple Health: Mandatory statewide program for aged, disabled (children 

and adults), children, and low-income adults.
Appendix II: Federal Expenditures on Managed 

Care as Percent of Total Medicaid 

Expenditures, Fiscal Years 2004 and 2014

Page 34 GAO-16-77 Medicaid Managed Care

2004 2014

Total Medicaid 

expenditures 

(millions)

Expenditures for 

managed care 

(millions)

Percent of 

Medicaid 

spending 

for 

managed 

care

Total Medicaid 

expenditures 

(millions)

Expenditures for 

managed care 

(millions)

Percent of 

Medicaid 

spending 

for 

managed 

care

Alabama 3,237.5 23.1 0.7 3,599.5 0.0 0.0

Alaska 711.9 0.0 0.0 832.1 0.0 0.0

Arizona 4,279.3 3,489.2 81.5 6,565.2 4,513.1 68.7

Arkansas 2,433.7 0.0 0.0 3,615.4 0.0 0.0

California 19,771.8 2,985.0 15.1 35,755.6 14,324.3 40.1

Colorado 1,690.5 228.7 13.5 3,334.8 66.6 2.0

Connecticut 2,477.2 417.8 16.9 3,878.7 0.0 0.0

Delaware 507.4 0.0 0.0 1,003.7 727.0 72.4

District of Columbia 1,016.6 233.6 23.0 1,720.8 605.4 35.2

Florida 9,552.4 1,095.9 11.5 12,151.3 4,632.4 38.1

Georgia 5,336.9 0.0 0.0 6,347.4 2,279.5 35.9

Hawaii 677.9 215.2 31.8 1,125.4 961.2 85.4

Idaho 838.2 0.0 0.0 1,137.3 0.0 0.0

Illinois 6,394.4 127.3 2.0 8,940.5 1,439.7 16.1

Indiana 3,859.8 358.7 9.3 6,144.6 1,274.5 20.7

Iowa 1,810.8 67.0 3.7 2,459.7 69.6 2.8

Kansas 1,371.5 70.6 5.2 1,562.4 1,382.6 88.5

Kentucky 3,613.5 398.4 11.0 5,934.8 3,960.1 66.7

Louisiana 4,427.3 0.0 0.0 4,408.4 981.4 22.3

Maine 1,689.7 0.1 0.0 1,470.7 0.0 0.0

Maryland 2,935.8 840.3 28.6 5,255.2 2,541.4 48.4

Massachusetts 5,579.1 1,006.8 18.1 7,321.5 2,508.5 34.3

Michigan 5,842.9 1,251.7 21.4 9,269.8 3,816.1 41.2

Minnesota 3,557.1 0.0 0.0 5,480.6 2,846.7 51.9

Mississippi 3,178.3 0.0 0.0 3,584.9 602.5 16.8

Missouri 4,721.2 735.1 15.6 5,545.2 675.9 12.2

Montana 620.7 0.0 0.0 729.2 12.3a1.7

Nebraska 1,088.7 48.9 4.5 979.1 261.7 26.7

Nevada 725.2 107.3 14.8 1,588.7 548.8 34.5

New Hampshire 727.5 0.0 0.0 678.1 122.9 18.1

New Jersey 5,042.0 654.8 13.0 7,099.4 3,534.2 49.8

Appendix II: Federal Expenditures on 

Managed Care as Percent of Total Medicaid 

Expenditures, Fiscal Years 2004 and 2014
Appendix II: Federal Expenditures on Managed 

Care as Percent of Total Medicaid 

Expenditures, Fiscal Years 2004 and 2014

Page 35 GAO-16-77 Medicaid Managed Care

2004 2014

Total Medicaid 

expenditures 

(millions)

Expenditures for 

managed care 

(millions)

Percent of 

Medicaid 

spending 

for 

managed 

care

Total Medicaid 

expenditures 

(millions)

Expenditures for 

managed care 

(millions)

Percent of 

Medicaid 

spending 

for 

managed 

care

New Mexico 2,103.0 940.0 44.7 3,139.9 2,463.0 78.4

New York 26,095.4 3,255.7 12.5 27,621.9 12,832.8 46.5

North Carolina 6,326.0 0.0 0.0 7,945.4 0.0 0.0

North Dakota 417.3 1.1 0.3 206.5 5.8 2.8

Ohio 8,655.6 699.9 8.1 13,067.9 6,523.3 49.9

Oklahomab2,243.8 153.9 6.9 3,037.7 29.5 1.0

Oregon 2,025.0 647.8 32.0 4,952.0 2,918.1 58.9

Pennsylvania 9,785.3 2,569.7 26.3 12,704.5 5,532.0 43.5

Rhode Island 1,172.5 195.6 16.7 1,409.8 771.4 54.7

South Carolina 3,388.2 58.5 1.7 3,770.7 1,565.3 41.5

South Dakota 483.0 0.0 0.0 454.9 0.0 0.0

Tennessee 5,741.5 460.8 8.0 6,064.0 4,054.1 66.9

Texas 12,254.9 1,396.9 11.4 18,790.1 8,068.0 42.9

Utah 1,119.3 148.7 13.3 1,458.8 595.4 40.8

Vermont 627.6 25.7 4.1 901.2 0.0 0.0

Virginia 2,462.8 556.0 22.6 3,843.1 1,314.5 34.2

Washington 3,317.4 603.0 18.2 6,433.9 3,291.8 51.2

West Virginia 1,833.5 132.6 7.2 2,453.9 429.3 17.5

Wisconsin 3,279.2 516.2 15.7 4,447.8 1,064.6 23.9

Wyoming 284.8 0.0 0.0 276.1 0.0 0.0

Source: GAO analysis of Centers for Medicare & Medicaid Services (CMS) data. | GAO-16-77

Notes: Expenditures for 2004 were adjusted using the gross domestic product price index to 2014 

dollars. Expenditures include only the federal share of spending and do not include the state share. 

Expenditures were for comprehensive risk-based managed care.

aMontana reported expenditures for managed care in 2014; however, CMS officials told us that the 

state did not operate a managed care program in that year and therefore reported expenditures were 

likely an error.

bOklahoma reported expenditures for managed care in both 2004 and 2014; however, CMS officials 

told us that the state did not operate a managed care program in either year and therefore reported 

expenditures were likely an error.
Appendix III: Selected States’ Methods for 

Overseeing Quality in Medicaid Managed Care

Our eight selected states (Arizona, California, Florida, Louisiana, 

Michigan, Pennsylvania, Tennessee, and Washington) varied in the 

methods used to oversee the quality of care provided by contracted 

managed care organizations (MCOs). See the table below and the 

discussion that follows for information on the types of quality measures, 

sanctions, incentives, and accreditation requirements states used and 

how those methods fit into each state’s broader quality framework.

Table 5: Methods for Overseeing Quality of Care Provided by Medicaid Managed Care Organizations (MCOs) in Selected 

Page 36 GAO-16-77 Medicaid Managed Care

States 

Required 

reporting 

of HEDIS 

measuresa

Required 

reporting 

on other 

measures

Sanctions 

tied to 

certain 

performance 

measures

Sanction types for performance 

on certain quality standards

Incentives for 

performance 

on certain 

measuresc

Accreditation 

required?d

Corrective Action 

Plans Financialb

Arizona Some Y Y Affirmative Affirmative Y No 

California All Y Y Affirmative Affirmative N No

Florida Some Y Y Affirmative Affirmative Y NCQA or 

Other 

Louisiana Some Y Y Affirmative Affirmative Y NCQA

Michigan All Y Y Affirmative Affirmative Y NCQA or 

Other

Pennsylvania All Y Y Affirmative Affirmative Y NCQA or 

Other

Tennessee All Y Y Affirmative Affirmative Y NCQA

Washington Some Y N N/A N/A N NCQA

Legend: HEDIS = Healthcare Effectiveness Data and Information Set; Y = yes; N = no; NCQA = National Committee on Quality Assurance; and N/A = 

not applicable.

Source: GAO analysis of state contracts with MCOs, state quality documentation, and interviews with state officials. | GAO-16-77.

Notes: The information presented reflects requirements outlined in the state contract with MCOs that 

was most recently approved or reviewed by CMS, generally, as of March 2015. Five states’ 

contracts—Arizona, California, Florida, Louisiana, and Tennessee—were effective as of August 2015. 

Pennsylvania’s contract ended at the end of June 2014 and Washington’s at the end of December 

2014. Michigan’s contract ended at the end of September 2014. 

aFor the states that required reporting on all HEDIS measures, we are referring to the measures that 

are relevant to Medicaid. These states may not require reporting on the subset of those requirements 

focused on dental care. 

bFinancial sanctions may be monetary penalties for failure to meet minimum performance targets or 

payment reductions for performance below the median. 

cIncentives could include bonuses or an increase in the number of beneficiaries who are 

automatically assigned to a plan offered by the MCO. 

dState required accreditation by NCQA or other accrediting bodies.

All eight selected states used a combination of Healthcare Effectiveness 

Data and Information Set (HEDIS) and non-HEDIS measures to assess 

quality performance of their participating MCOs. HEDIS is a tool used by 

Appendix III: Selected States’ Methods for 

Overseeing Quality in Medicaid Managed 

Care 

Quality Performance 

Measures
Appendix III: Selected States’ Methods for 

Overseeing Quality in Medicaid Managed Care

health plans to measure performance on various dimensions of care and 

service, including effectiveness of care, access and availability of care, 

experience of care, utilization and risk adjusted utilization, and relative 

resource use. In the 2015 HEDIS, 68 of the 83 measures are applicable 

to Medicaid.

· With regard to HEDIS measures, all selected states required their 

participating MCOs to report at least some HEDIS measures that are 

applicable to Medicaid. Four of the states required MCOs to report all 

of the Medicaid-applicable HEDIS measures. 

· All selected states either required MCOs to report on specific nonHEDIS measures, or their contracts allowed states to develop nonHEDIS measures that MCOs may have to report. The non-HEDIS 

measures states required varied. For example, Arizona listed two 

non-HEDIS measures related to flu shots for adults above the age of 

50, while Florida listed 10 non-HEDIS measures, including but not 

limited to, the provision of annual lipid profiles, the frequency of 

human immunodeficiency virus disease monitoring lab tests, and 

transportation timeliness. 

· Non-HEDIS measures may capture similar issues as the HEDIS 

measures, but in a slightly different manner. For example, there is an 

adult flu shot HEDIS measure applicable to Medicaid that captures the 

provision of flu shots for those aged 18 to 64. However, there is no 

adult flu shot measure applicable to Medicaid that is for ages 65 and 

older, and no way within the existing HEDIS measure to distinguish 

older adults. As such, to capture older adults, Arizona uses two nonHEDIS measures in their Medicaid managed care program: flu shots 

for adults aged 50-64, and flu shots for adults aged 65 and older. 

Other types of non-HEDIS measures that states are requiring MCOs 

to report include: Children’s Health Insurance Program 

Reauthorization Act child and adult core set measures; over- and 

under-utilization monitoring measures; Agency for Healthcare 

Research and Quality prevention quality indicators; and other statedefined measures.

All but one of our eight selected states set specific standards for 

performance on one or more quality measures that, if not met, could 

result in sanctions for MCOs. Sanctions could include requiring MCOs to 

take corrective actions, financial penalties, or both. 

· Six states—Arizona, California, Florida, Michigan, Pennsylvania, and 

Tennessee—specified in their contracts that there are minimum 

requirements for outcomes on performance measures that each MCO 

Page 37 GAO-16-77 Medicaid Managed Care

Sanctions for Not Meeting 

Required Targets on 

Quality Measures
Appendix III: Selected States’ Methods for 

Overseeing Quality in Medicaid Managed Care

was required to meet. These states specified that MCOs that do not 

meet the requirements may be subject to corrective action plans, 

financial sanctions, or other types of sanctions. 

· The final state that set standards for performance on quality 

measures, Louisiana, required MCOs to demonstrate improvement on 

performance measures and linked sanctions to failure to meet such 

improvement. 

· The remaining state, Washington, did not include any sanctions that 

were specifically imposed for failing to meet required performance 

measure outcomes, though the state could impose sanctions for 

failure to meet contract terms more generally.

With regard to imposing sanctions, generally, states describe a 

measured, hierarchical approach, starting first with corrective action plans 

and imposing more severe sanctions if the MCO does not come into 

compliance with the corrective action plan. Financial penalties may be 

imposed along with corrective action plans or as a more severe sanction 

after the corrective action plan. Financial penalties may be structured 

such that failure to meet a certain threshold percentage on a performance 

measure will require that the MCO pay a certain amount for each percent 

difference between the standard and the percentage it reported. For 

example, Tennessee set a 5 percent threshold for unanswered calls for 

its MCOs’ nurse triage and advice lines. The state will charge MCOs 

$25,000 for each full percentage point above 5 percent per month. Some 

states linked failure to meet certain standards on performance measures 

to intermediate sanctions as outlined in federal regulations. These 

sanctions allow for appointing temporary management of the MCO; 

freezing new enrollments, including auto enrollment; allowing 

beneficiaries to terminate enrollment; and suspending payment for 

beneficiaries enrolled after the effective date of the sanction.

Page 38 GAO-16-77 Medicaid Managed Care

1

While there was no consistent method of measuring quality across states, 

most of the selected states used financial incentives as rewards for 

MCOs meeting performance standards on certain quality measures. 

Specifically, six of the eight states established incentives for MCOs 

performing above a certain benchmark or for improving in performance on 

selected measures, as shown in the following examples.

 

1

42 C.F.R. § 438.702 (2014).

Incentives for 

Performance on Quality 

Measures
Appendix III: Selected States’ Methods for 

Overseeing Quality in Medicaid Managed Care

· Pennsylvania allocated incentive dollars to each of nine performance 

measures, and MCOs earn incentives by meeting benchmark 

performance and improvement targets. In addition, if the MCO 

performs above the 50th percentile benchmark on diabetes bundle 

measures the state will award a diabetes bundle performance payout. 

· Tennessee focused its incentives on performance improvement by 

offering a bonus payment to MCOs for each HEDIS measure for 

which it demonstrated significant improvement. 

· Two of the six states that offered incentives—Arizona and Florida—

specified that the incentives may be competitive. 

· Arizona assesses MCOs relative to minimum performance 

standards. A bonus is awarded to one or more MCOs for their 

performance on certain quality measures. 

· Florida’s managed care contract indicated that the state may 

decide to offer incentives to all high performing MCOs or to make 

the high performing MCOs compete for them. The state may also 

decide not to offer incentives to its MCOs each year. 

States offering incentives often financed them using capitation payment 

withholds where the state retains a relatively small percentage of the 

monthly or annual capitation payments (for example, 1 or 2 percent), and 

uses it later to reward MCOs that performed well on certain performance 

measures.

Page 39 GAO-16-77 Medicaid Managed Care

2

 

Six of the eight selected states required participating MCOs to be accredited by a 

nationally recognized organization that provides an independent assessment of 

the quality of care provided by the MCO. MCOs that are accredited by 

these organizations meet quality standards related to various aspects 

such as consumer protection, case management, and quality 

improvement activities. 

· The National Committee on Quality Assurance (NCQA) was the most 

commonly used accrediting organization in the selected states. All six 

states either named NCQA as a preferred accreditation body or only 

allowed NCQA accreditation. States also may have allowed MCOs to 

 

2Arizona’s, Louisiana’s, and Michigan’s contracts indicated that performance incentives may be 

financed by withholding a certain percentage of the capitation payment made to each 

MCO. Arizona and Louisiana withhold 1 and 2 percent of the monthly capitation payment, 

respectively, while Michigan withholds less than 1 percent annually. 

Accreditation Requirements
Appendix III: Selected States’ Methods for 

Overseeing Quality in Medicaid Managed Care

be accredited through another accrediting organization, such as 

URAC or the Accreditation Association for Ambulatory Health Care.

· In discussions with some states, one reason cited for requiring 

accreditation was that it facilitated the comparison of MCOs because 

of consistency of data requirements. 

· The two states that did not require accreditation explained that they 

were concerned about the financial burden on the MCOs associated 

with the accreditation process.

Page 40 GAO-16-77 Medicaid Managed Care

3

All of the selected states had a written quality strategy for Medicaid 

managed care that they submitted to the Centers for Medicare & 

Medicaid Services (CMS) per a federal requirement to do so.4 The state 

quality strategy must include a discussion of performance measures, 

performance improvement projects, and state quality oversight plans. 

States are required to submit a revised strategy to CMS whenever 

significant changes are made. 

CMS reviews states’ quality strategy documents as submitted and does 

not require them to be updated within a specified timeframe. CMS is 

proposing to change this; its proposed rule would require states to update 

their quality strategy documents at least once every 3 years.5 According to 

a CMS quality strategy tracking document, some states submit their quality 

strategy document to CMS annually, while others have not submitted 

them to CMS for 3 or more years. 

· Among our eight selected states, five had submitted updated versions 

of their quality strategy to CMS between 2012 and 2014, with three of 

these five states submitting to CMS annually. 

 

3However, officials from one state told us that accreditation expenses can be incorporated 

into the payment rates, and, as such, be a part of the costs that the state and federal 

government incur to fund the program.

4

42 C.F.R. § 438.202(e) (2014).

5Under the proposed rule, all states would need to update their quality strategies because 

CMS is also proposing that the quality strategy documents cover their entire Medicaid 

program, not just the managed care portions. As such, states that did not previously 

submit quality strategy documents because they did not offer managed care in their 

Medicaid programs would need to submit a quality strategy document for their overall 

Medicaid program to CMS. Furthermore, CMS has proposed to change the method 

through which the quality strategies are submitted. Instead of requiring states to send the 

agency the quality strategy, CMS is proposing that states make them available to the 

agency and the public via their Medicaid websites.

Other Quality Oversight 

Activities
Appendix III: Selected States’ Methods for 

Overseeing Quality in Medicaid Managed Care

· The remaining three selected states had not submitted an updated 

version of their quality strategies to CMS in the last 4 to 8 years, 

according to CMS’s tracking document.

Page 41 GAO-16-77 Medicaid Managed Care

6

Nationally, the tracking document indicates that 8 of the 39 states with 

comprehensive, risk-based managed care have not submitted updated 

quality strategy documents to CMS in the last 3 years. 

As required by federal law, all of our selected states completed an 

external quality review report in 2014.7 In an external quality review, an 

independent organization specializing in external quality reviews evaluates the 

quality, timeliness, and access to health care services provided by MCOs to their 

Medicaid beneficiaries. External quality review reports include discussions of 

MCO’s strengths, areas for improvement, and recommendations, as 

shown in the examples below. 

· An external quality review report for one of our selected states 

indicated that the strengths of the MCOs participating in the state’s 

managed care program were that they demonstrated high levels of 

compliance with contractual requirements and that they improved in 

their performance on quality measures from previous years. As an 

opportunity for improvement, this report also mentioned that MCOs 

could work to improve performance on certain HEDIS measures for 

which they were performing below the 50th percentile. 

· Another state’s external quality review report recommended MCOs 

identify barriers that affect access to care for children’s services after 

the performance measures assessment showed poor performance in 

well-child and dental visits. The report recommended increased 

transportation coordination and expanded office hours, as well as 

educational efforts to increase beneficiary awareness and 

understanding of available services.

 

6

If these states had not made significant changes to their strategies, then no updated copies 

would have been required. According to agency officials, two of these states submitted 

draft quality statement documents to CMS in 2014; however, they have yet to submit 

finalized versions.

7

42 U.S.C. § 1396u-2(c)(2); 42 C.F.R. § 438.350(a) (2014).
Appendix IV: GAO Contacts and Staff 

Acknowledgments

Carolyn L. Yocom, (202) 512-7114 or yocomc@gao.gov

In addition to the contacts named above, Susan Barnidge, Assistant 

Director; George Bogart; Shamonda Braithwaite; Laura Sutton Elsberg; 

Giselle Hicks; Drew Long; and Vikki Porter made key contributions to this 

report.

Page 42 GAO-16-77 Medicaid Managed Care

Appendix IV: GAO Contacts and Staff 

Acknowledgments

GAO Contacts

Staff 

Acknowledgments
Appendix V: Accessible Data

Page 43 GAO-16-77 Medicaid Managed Care

Data Table for Figure 3: Federal Comprehensive Risk-Based Medicaid Managed Care Expenditures, Total and as a Percentage 

of Overall Federal Medicaid Expenditures, Fiscal Years 2004-2014

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Expenditures 

(in billions)

26,936 27,742 29,984 34,317 38,423 50,928 58,948 62,092 64,784 75,850 107,269

Percent 13.21 13.61 15.32 17.07 18.42 19.71 21.16 22.76 26.7 30.01 37.8

Data Table for Highlights and Figure 5: Federal Expenditures for Comprehensive Risk-Based Medicaid Managed Care as a 

Percentage of Total Federal Medicaid Expenditures in Eight Selected States, Fiscal Years 2004 and 2014

Arizona California Florida Louisiana Michigan Pennsylvania Tennessee Washington National

2004 81.54 15.1 11.47 0 21.42 26.26 8.03 18.18 13.21

2014 68.74 40.06 38.12 22.26 41.17 43.54 66.86 51.16 37.8

Appendix V: Accessible Data

Data Tables

(291261)
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