MEDICAID 

MANAGED CARE

Improved Oversight 

Needed of Payment 

Rates for Long-Term 

Services and 

Supports

Report to Congressional Requesters

January 2017

GAO-17-145

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-17-145, a report to 

congressional requesters

January 2017

MEDICAID MANAGED CARE

Improved Oversight Needed of Payment Rates 

for Long-Term Services and Supports

What GAO Found

Out of six states with Medicaid managed long-term services and supports 

(MLTSS) programs that GAO selected for review, five set clear financial 

incentives in their payment rates for managed care organizations (MCO) to 

provide care in the community versus in an institution. However, most of the 

selected states did not opt to link payments or penalties to MCO performance on 

MLTSS goals. These goals, which include enhancing the provision of 

community-based care, are developed by states and the Centers for Medicare & 

Medicaid Services (CMS), the agency in the Department of Health and Human 

Services (HHS) responsible for overseeing Medicaid.

GAO found that CMS’s oversight of state payment structures was limited. CMS 

expects states’ MLTSS programs to enhance the provision of community-based 

care. However, GAO found CMS does not consistently require states to report on 

whether the payment structures—including payment rates, incentive payments, 

and penalties—are achieving MLTSS goals. For example, CMS required three of 

the selected states to report on the provision of community-based care, but did 

not require any such reporting from the other three states. According to federal 

internal control standards, federal agencies should use quality information to 

achieve agency objectives. Without requiring information on states’ progress 

toward MLTSS goals, CMS will continue to pay billions of dollars to states 

without knowing if states have sufficient incentives for community-based care.

In addition, GAO identified risks with CMS’s oversight of the data used to set 

MLTSS rates, specifically the appropriateness and reliability of those data. Under

federal regulations, MLTSS rates must be appropriate and adequate. To the 

extent that states use data that are not appropriate and reliable to set rates, the 

resulting rates could be too low, which could provide an incentive for MCOs to 

reduce care, or too high, which results in more federal spending than necessary.

• Appropriateness concerns: GAO found issues with the appropriateness of 

data used by two of the selected states. For example, one state used data 

from 2010 and 2011 to set rates for 2015. Beginning in July 2017, CMS will 

require rates to be based on the three most recent and complete years of 

data. Although CMS will allow exceptions, it has not specified criteria for what 

situations would warrant exceptions. Without specifying criteria, CMS’s 

requirements may not sufficiently minimize the number of states using data 

of questionable appropriateness to set MLTSS rates.

• Reliability concerns: GAO and the HHS Office of Inspector General 

previously found evidence of reliability issues with managed care encounter 

data, which are the primary record of managed care services and a key 

source of data used to set MLTSS rates. In addition, GAO’s review of state

documentation indicated variation in selected states’ procedures for 

validating the reliability of their encounter data, specifically the completeness 

and accuracy of the data. Beginning in July 2017, CMS will require states to 

validate encounter data, but CMS has not issued guidance with minimum 

standards for state procedures. Without minimum standards for state 

validation efforts, it is unclear that CMS’s efforts will sufficiently minimize the 

risk of encounter data being incomplete or inaccurate.

View GAO-17-145. For more information, 

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

or yocomc@gao.gov.

Why GAO Did This Study

The provision of long-term services 

and supports in Medicaid is a 

significant challenge, because of the 

vulnerability and service needs of 

beneficiaries, as well as the high cost

of care. An increasing number of states 

have MLTSS programs, which can be

used to expand community-based care 

and lower costs. However, whether 

these programs are an effective 

strategy depends, in part, on the 

design of the payment structures.

GAO was asked to review states’ 

MLTSS payment structures and CMS’s

oversight. This report examines (1) 

how selected states structured their

financial incentives, and (2) CMS 

policies and procedures for overseeing 

states’ payment structures.

GAO reviewed relevant federal 

regulations, guidance, and internal 

control standards. For six states 

selected for variation in location and 

experience (AZ, DE, FL, KS, MN, and 

TX), GAO reviewed the contracts and 

rate certifications most recently 

approved by CMS, the terms and 

conditions set by CMS for the 

programs, and other payment 

documentation. GAO also interviewed 

CMS officials and Medicaid officials 

from the selected states.

What GAO Recommends

GAO recommends CMS (1) require all 

states to report on progress toward 

achieving MLTSS program goals, (2) 

establish criteria for what situations 

would warrant exceptions to federal 

standards for data used to set rates, 

and (3) provide guidance with 

minimum standards for validating 

encounter data. HHS concurred with 

GAO’s recommendations.
Page i GAO-17-145 Medicaid Managed Long-Term Services and Supports

Letter 1

Background 4

Most Selected States Set Incentives for Community-Based Care, 

but Did Not Link Payment to Performance on MLTSS Goals 14

CMS’s Oversight of MLTSS Payment Structures Is Limited 19

Conclusions 27

Recommendations 28

Agency Comments and Our Evaluation 29

Appendix I Characteristics of States’ MLTSS Programs Selected for Our Review 31

Appendix II Comments from the Department of Health and Human Services 34

Appendix III GAO Contact and Staff Acknowledgments 37

Tables

Table 1: Beneficiaries in Managed Long-Term Services and 

Supports Programs Receiving Community-Based Care in 

Selected States, 2013 and 2015 17

Table 2: Performance Measures and Financial Penalties in States’ 

Managed Long-Term Services and Supports (MLTSS) 

Programs, 2015 19

Table 3: New Requirements Related to Data Used to Set 

Managed Care Rates, Centers for Medicare & Medicaid 

Services (CMS) 23

Table 4: Cost and Enrollment of Managed Long-Term Services 

and Supports (MLTSS) Programs for Selected States, 

2015 32

Table 5: Summary of Characteristics of Managed Long-Term 

Services and Supports (MLTSS) Programs in Selected 

States, 2015 33

Figures

Figure 1: States with Current or Planned Managed Long-Term 

Services and Supports (MLTSS) Programs, October 

2016 6

Contents
Page ii GAO-17-145 Medicaid Managed Long-Term Services and Supports

Figure 2: Managed Care Organizations’ (MCO) Role in 

Developing Service Plans in Managed Long-Term 

Services and Supports (MLTSS) Programs 8

Figure 3: Illustration of Financial Incentives in a Blended Rate for 

a Managed Care Organization (MCO) to Provide 

Community-Based Care 11

Figure 4: Process for State Development and Centers for 

Medicare & Medicaid Services (CMS) Approval of Rates 13

Abbreviations

CMS Centers for Medicare & Medicaid Services

EQR external quality review

FFS fee-for-service

HHS Department of Health and Human Services

MCO managed care organization

MLTSS managed long-term services and supports

OIG Office of Inspector General

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Page 1 GAO-17-145 Medicaid Managed Long-Term Services and Supports

441 G St. N.W.

Washington, DC 20548

January 9, 2017

The Honorable Charles E. Grassley

United States Senate

The Honorable Orrin G. Hatch

United States Senate

The Honorable Ron Wyden

United States Senate

In Medicaid, long-term services and supports—which represent about a 

third of program spending—are designed to promote beneficiaries’ ability 

to live or work in the setting of their choice, which can be in the 

community or in an institution, such as a nursing facility.1 For many 

beneficiaries, receiving care in the community is preferable, and services 

such as personal care services and adult day care may allow them to 

continue living in their homes.2 Increasing the availability of communitybased care is also important to states’ ability to comply with the Supreme 

Court’s 1999 decision in Olmstead v. L.C. in which the Court held that 

unjustified institutionalization of a person based on disability violates Title 

II of the Americans with Disabilities Act.3

States are increasingly providing long-term services and supports through 

managed care—referred to as managed long-term services and supports 

 1

Medicaid is a joint federal-state program that finances health insurance coverage for 

certain categories of low-income people or persons with disabilities. Federal and state 

Medicaid spending under managed care and fee-for-service for long-term services and 

supports totaled over $150 billion in fiscal year 2014. See Truven Health Analytics, 

Medicaid Expenditures for Long-Term Services and Supports (LTSS) in FY 2014: 

Managed LTSS Reached 15 Percent of LTSS Spending (Truven Health Analytics, 2016).

2

Personal care services assist beneficiaries with activities of daily living, such as bathing, 

dressing, and toileting. Adult day care refers to a variety of services and activities provided 

in a group setting within the community.

3

Olmstead v. L.C., 527 U.S. 581 (1999). In particular, the Court held that states must 

provide community-based care for persons with disabilities who are otherwise entitled to 

institutional services when such services are appropriate, the individual does not oppose 

such treatment, and the community-based care can be reasonably accommodated, taking 

into account the resources available to a state and the needs of others with disabilities.

Letter
Page 2 GAO-17-145 Medicaid Managed Long-Term Services and Supports

(MLTSS)—with over 500,000 beneficiaries.4 In MLTSS, managed care 

organizations (MCO) are responsible for providing a specific set of 

Medicaid-covered services to beneficiaries in return for a set payment per 

beneficiary per month, referred to as a capitated rate.5 MLTSS can be a 

strategy for states to expand the provision of community-based care, 

which means increasing the proportion of beneficiaries that receive care 

in the community versus an institution, and to deliver more integrated 

services, potentially at a lower cost.6 At the same time, the use of 

managed care assumes that the provision of appropriate services can be 

achieved in a cost-effective manner for a population that is among the 

most vulnerable and has particularly high health care needs. Beneficiaries 

who receive MLTSS are limited in their ability to care for themselves due 

to physical, developmental, or intellectual disabilities or conditions.

How states design their payment structures, including the structure for 

rates, incentive payments, and penalties, affects whether states will 

achieve program goals. MLTSS goals, including the goal to expand the 

provision of community-based services, are determined by the states and 

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

in the Department of Health and Human Services (HHS) responsible for 

overseeing the Medicaid program. CMS guidance sets expectations for 

states seeking approval of their MLTSS programs. In particular, CMS 

expects states to design their rates to enhance the provision of 

community-based care.7 States are also required to set actuarially sound 

rates; that is, rates that have been certified by an actuary as being 

appropriate and adequate.8 In May 2016, CMS issued new rules for 

Medicaid managed care that could affect how states set rates for MLTSS 

 4

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.

5

For the remainder of the report, when we refer to rates, we are referring to capitated 

rates.

6

States are required to cover institutional care as part of Medicaid, but coverage of most 

community-based care is optional.

7

See Centers for Medicare & Medicaid Services, Center for Medicaid & CHIP Services, 

Guidance to States using 1115 Demonstrations or 1915(b) Waivers for Managed Long 

Term Services and Supports Programs (2013).

8

Rates are to be appropriate for the populations and services covered, and rates are to be 

adequate for MCOs to meet requirements for ensuring availability and timely access to 

services, adequate networks, and coordination and continuity of care. See 42 C.F.R. §§ 

438.4, 438.206, 438.207, 438.208 (2016).
Page 3 GAO-17-145 Medicaid Managed Long-Term Services and Supports

programs and how CMS oversees such programs.9 Rates that are too low 

can raise concerns about quality and access, while rates that are too high 

may mean that scarce Medicaid resources are diverted away from 

providing services to beneficiaries.

To better understand Medicaid MLTSS programs, you asked us to 

provide information about states’ payment structures and other financial 

incentives, and CMS oversight of states’ payment structures. In this 

report, we examine

1. how selected states structured the financial incentives in their MLTSS 

programs, and

2. CMS’s policies and procedures for overseeing states’ payment 

structures for MLTSS programs.

To examine how states structured the financial incentives in their MLTSS 

programs, we reviewed selected states’ documentation of their payment 

structures—particularly information on their rate structures and other 

payments or penalties linked to performance—and relevant federal 

regulations and guidance. Given variation in states’ MLTSS programs, we 

selected six states that provided a range in experience with MLTSS and 

were geographically diverse. We selected three states with over 5 years 

of experience with MLTSS—Arizona, Minnesota, and Texas—and three 

states with less than 5 years of experience—Delaware, Florida, and 

Kansas. Together, our selected states represented over 20 percent of 

MLTSS enrollment nationally as of July 2014, which is most recent 

national data available. (See app. I for more information on our selected 

states.) For our selected states, we reviewed the contracts between the 

states and their MCOs that were most recently approved as of December 

2015; these contracts generally covered all or part of 2015.10 We also 

reviewed the most recently approved rate certifications submitted to CMS 

by our selected states as of December 2015; these certifications, which 

describe the rate structures, covered all or part of 2015. To supplement 

our review, we interviewed Medicaid officials from our selected states 

about the design of their rate structures and their other financial 

incentives, and we requested information from the states on financial 

 9

Medicaid and Children’s Health Insurance Program (CHIP) Programs; Medicaid 

Managed Care, CHIP Delivered in Managed Care, and Revisions Related to Third Party 

Liability, 81 Fed. Reg. 27498 (May 6, 2016).

10CMS reviews and approves states’ contracts with MCOs, as well as rate certifications, 

for all managed care programs, including MLTSS programs.
Page 4 GAO-17-145 Medicaid Managed Long-Term Services and Supports

penalties and methods for monitoring the effects of their payment 

structures. We also interviewed stakeholder groups, including the 

American Academy of Actuaries, about factors affecting financial 

incentives set by states.

To examine CMS’s policies and procedures for overseeing states’ 

payment structures, we reviewed relevant federal regulations and 

guidance. Specifically, we reviewed regulations governing managed care 

programs, rate setting guidance—referred to as rate guides—issued 

annually by CMS to states, and guidance on CMS’s expectations for 

MLTSS programs. We also reviewed documentation from CMS’s reviews 

of the rate certifications from our selected states, including questions 

raised by CMS during those reviews. Lastly, we reviewed the terms and 

conditions set by CMS and approved waiver applications for the MLTSS 

programs in our selected states, particularly provisions that related to 

reporting on progress toward program goals, such as enhancing the 

provision of community-based care. We assessed CMS’s policies and 

procedures against actuarial soundness requirements in Medicaid 

managed care regulations and federal internal control standards.11 To 

supplement our review, we interviewed CMS officials about the 

regulations and guidance, their process for reviewing states’ rate 

certifications, and how their reviews align with their overall oversight of 

MLTSS programs.

We conducted this performance audit from August 2015 to January 2017 

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.

An increasing number of states have chosen to offer MLTSS programs. 

As of October 2016, 21 states had MLTSS programs and 8 additional 

states had plans to implement MLTSS programs. (See fig. 1.) The most 

recent enrollment data available at the time of our study, from July 2014, 

 11See 42 C.F.R. § 438.4 (2016) for actuarial soundness requirements. Also see GAO, 

Standards for Internal Control in the Federal Government, GAO-14-704G (Washington, 

D.C.: Sept. 10, 2014); and Standards for Internal Control in the Federal Government, 

GAO/AIMD-00-21.3.1 (Washington, D.C.: Nov. 1, 1999).

Background
Page 5 GAO-17-145 Medicaid Managed Long-Term Services and Supports

showed that MLTSS programs in 17 states collectively served at least 

500,000 beneficiaries, and 5 of those states served over 50,000 

beneficiaries each.12 In fiscal year 2014, Medicaid spent an estimated 

$22.5 billion on MLTSS.13

 12See Centers for Medicare & Medicaid Services and Mathematica Policy Research, 

Medicaid Managed Care Enrollment and Program Characteristics, 2014 (2016). CMS 

estimated that the number of total beneficiaries, as of July 2014, was between 500,000 

and 1,680,000.

13See Truven Health Analytics, Medicaid Expenditures for Long-Term Services and 

Supports (LTSS) in FY 2014. Due to challenges with collecting MLTSS data, Truven 

Health Analytics reported that this is a conservative estimate of overall MLTSS 

expenditures.
Page 6 GAO-17-145 Medicaid Managed Long-Term Services and Supports

Figure 1: States with Current or Planned Managed Long-Term Services and Supports (MLTSS) Programs, October 2016

The characteristics of states’ MLTSS programs vary due to the flexibility, 

within federal parameters, that Medicaid allows states in establishing their 

programs.

• Flexibility in determining the included populations. In their 

MLTSS programs, states may include older adults, individuals with 

physical disabilities, and individuals with intellectual or developmental 
Page 7 GAO-17-145 Medicaid Managed Long-Term Services and Supports

disabilities. States may limit some of these populations to adults or 

may include both children and adults.

• Flexibility in determining whether enrollment will be mandatory 

or voluntary. Generally, states with mandatory enrollment can 

require beneficiaries to be in the MLTSS program, whereas states 

with voluntary enrollment offer beneficiaries a choice between the 

MLTSS program and receiving similar services through fee-for-service 

(FFS).14

• Flexibility in the services included and the extent to which 

MLTSS is part of a comprehensive managed care program. States 

can cover a variety of services, including community-based care and 

institutional care.15 In addition, some states choose to have MLTSS 

as part of a broader, comprehensive managed care program that also 

includes physical and behavioral health, while others have MLTSS as 

a separate managed care program.

To be eligible for MLTSS, beneficiaries must meet income and asset 

requirements, and also meet state-established criteria on the level of care 

needed, such as needing an institutional level of care.16 Once a person is 

determined eligible by the state Medicaid agency, they can be enrolled in 

an MCO. The MCO then develops a service plan, which includes 

determining the types and amount of services expected to be needed by 

the beneficiary. (See fig. 2.) For example, for a beneficiary receiving care 

in the home, the MCO determines if personal care services are needed 

and, if so, the amount of services, such as the number of hours, needed 

per week.

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

beneficiary.

15For example, community-based care could include personal care services to assist 

beneficiaries with activities of daily living, such as bathing, dressing, and toileting; adult 

day care services and activities provided in a group setting within the community; certain 

home modifications that allow the beneficiary to remain in the home; and non-medical 

transportation. Institutional care could include care in nursing facilities and in intermediate 

care facilities for individuals with intellectual disabilities.

16To determine who meets criteria on level of care, states may use functional criteria (e.g., 

the extent to which a person needs assistance with activities of daily living), clinical 

criteria, or a combination of the two. Eligibility requirements also apply for long-term 

services and supports provided under FFS.
Page 8 GAO-17-145 Medicaid Managed Long-Term Services and Supports

Figure 2: Managed Care Organizations’ (MCO) Role in Developing Service Plans in Managed Long-Term Services and 

Supports (MLTSS) Programs

States are required to seek CMS approval for their MLTSS programs, 

including their payment structures, which they can implement through 

several different authorities. Among the most commonly used authorities 

Federal Approval of 

MLTSS Programs
Page 9 GAO-17-145 Medicaid Managed Long-Term Services and Supports

are section 1115 demonstrations and section 1915(b) waivers.17 In CMS’s 

2013 guidance on its expectations for states’ MLTSS programs using 

either of those two authorities, the guidance noted that states’ programs 

should enhance the provision of community-based care.18 In addition, the 

guidance noted that, consistent with the intent of the Americans with 

Disabilities Act and the Olmstead decision, rate structures must 

encourage the delivery of community-based care, and other payments 

and penalties linked to performance must also support MLTSS program 

goals. Other program goals could include provision of supports to aid 

beneficiaries in achieving competitive employment, provision of services 

in the most integrated setting, and consumer satisfaction.

Before approving an MLTSS program under one of these authorities, 

CMS engages with states to shape the structure of the program, including 

alignment with CMS’s 2013 guidance.19 For example, a state generally 

goes through a design phase during which the state engages in 

discussions with CMS. The state then submits a formal application to 

CMS, and the subsequent federal review process may include 

negotiations, including on the design of the payment structures. States 

with approved MLTSS programs are subject to reporting requirements, 

which could include financial reporting and quarterly and annual reports 

that provide CMS with information on the state’s progress, but the exact 

reporting requirements may vary by state. For example, CMS may require 

some states to report on the number of beneficiaries served, expenditure 

data, information on grievances and appeals, or other requirements 

specific to the state.

 17Section 1115 of the Social Security Act authorizes the Secretary of Health and Human 

Services to waive certain federal Medicaid requirements and allow costs that would not 

otherwise be eligible for federal matching funds for experimental, pilot, or demonstration 

projects that, in the Secretary’s judgment, are likely to assist in promoting Medicaid 

objectives. Section 1915(b) provides states with the flexibility to modify their delivery 

systems by allowing CMS to waive statutory requirements for comparability, 

statewideness, and freedom of choice. States that use section 1915(b) waivers to 

implement MLTSS programs may also have a concurrent, separate authority such as 

section 1915(c) waivers. Specifically, states use section 1915(b) waivers to mandate 

enrollment in managed care and use section 1915(c) waivers to target eligibility and 

provide certain community-based care in their MLTSS programs.

18See Centers for Medicare & Medicaid Services, Center for Medicaid & CHIP Services, 

Guidance to States using 1115 Demonstrations or 1915(b) Waivers.

19CMS incorporated aspects of this guidance in its Medicaid managed care final rule, 

which was issued in May 2016.
Page 10 GAO-17-145 Medicaid Managed Long-Term Services and Supports

States take various approaches to designing their MLTSS payment 

structures—the structure of rates and of incentive payments and 

penalties—which can influence the financial incentives being set for 

MCOs. For the rate structures, for example, some states choose to set 

one rate for beneficiaries in the community and a different rate for 

beneficiaries in institutions. Other states may choose to set a single rate 

regardless of the beneficiary’s setting of care, which is known as a 

blended rate. States that use a blended rate intend for it to set a financial 

incentive for MCOs to provide community-based care, because of the 

generally lower cost of such care.20 (See fig. 3.) In addition, states can 

also set incentives for MCOs’ performance by linking it to certain 

payments or penalties. For example, states can make a portion of 

payments conditional on achieving specified benchmarks. States can also 

impose financial penalties on MCOs for not fulfilling requirements in the 

contract, which may include requirements that relate to the quality of and 

access to care.

 20In its guidance, CMS described the blended rate as one way for states to set financial 

incentives for community-based care. See Department of Health and Human Services, 

Centers for Medicare & Medicaid Services, 2016 Medicaid Managed Care Rate 

Development Guide (Baltimore, Md.: September 2015); and Centers for Medicare & 

Medicaid Services, Center for Medicaid & CHIP Services, Guidance to States using 1115 

Demonstrations or 1915(b) Waivers.

Development and 

Approval of MLTSS 

Payment Structures
Page 11 GAO-17-145 Medicaid Managed Long-Term Services and Supports

Figure 3: Illustration of Financial Incentives in a Blended Rate for a Managed Care 

Organization (MCO) to Provide Community-Based Care

a

To determine the amount of the blended rate, a state calculates a weighted average of the costs of 

community-based care and institutional care. In this illustration, which reflects reasonable 

assumptions and costs in an MLTSS program, the blended rate is based on the state’s assumption 

that 40 percent of beneficiaries would receive care in the community at an average monthly cost of 

$1,000, and the other 60 percent would receive care in an institution at an average monthly cost of 

$5,000. A state may also incorporate other costs and services, such as case management, into the 

rate paid to an MCO, but these costs and services are not shown.
Page 12 GAO-17-145 Medicaid Managed Long-Term Services and Supports

By law, states must develop and get CMS approval of rates that are 

actuarially sound. Actuarially sound rates are projected as providing for all 

reasonable, appropriate, and attainable costs required of the MCO to 

fulfill the terms of its contract with the state, and must be developed in 

accordance with requirements for CMS’s review and approval of rates.21

• In order to project costs, states rely on various data, such as data on 

demographic, health, and functional factors; the setting of care; and 

the scope of benefits. The sources and extent of these data, referred 

to as base data, vary by state. States require MCOs to provide 

encounter data (which are the primary record of services provided to 

beneficiaries in managed care), and states may also use financial 

data from the MCOs and claims data from the Medicaid FFS 

population.22

• States and their actuaries project costs and set rates based on these 

data with adjustments and assumptions to account for missing, 

incomplete, or anomalous data; the extent to which covered 

populations and services are reflected in the data; changes in benefits 

and policies; and trends in utilization and prices of services.

• When setting or amending rates, states must submit an actuarial rate 

certification that explains how the rates were developed.23 CMS 

expects the rate certification to provide sufficient detail, 

documentation, and transparency to enable another actuary to assess 

the reasonableness of the methodology and the assumptions 

supporting the development of the final rate. CMS reviews the rate 

certification for compliance with agency requirements, including the 

rate guide for that year. CMS may ask questions of the state until 

CMS can assess that the data, assumptions, and rate development 

were reasonable and meet generally accepted actuarial principles and 

practices, at which point CMS approves the rates for the state to pay 

to the MCOs.

The different steps of the process undertaken by states to develop rates, 

and by CMS to approve rates, are illustrated in figure 4.

 21See 42 C.F.R. § 438.4 (2016).

22States are required to electronically submit encounter data to CMS quarterly.

23States submit a single rate or a rate range for each given population. Some states use 

rate ranges to allow further negotiation with each MCO for a rate within that range.
Page 13 GAO-17-145 Medicaid Managed Long-Term Services and Supports

Figure 4: Process for State Development and Centers for Medicare & Medicaid Services (CMS) Approval of Rates

CMS has made several changes to its review process in recent years. 

Beginning in January 2015, CMS added its Office of the Actuary as a 

reviewer of all rate certifications from states. In addition, CMS has made 

changes to its annually issued rate setting guidance, or rate guide, which 

is guidance issued to states on information that must be included in rate 

certifications. Specifically, the rate guide issued in 2015 for rates starting 

on or after January 2016 included a new section with additional 

considerations for setting MLTSS rates.24 In May 2016, CMS issued a 

final rule that was the first major change to Medicaid managed care 

regulations since 2002, including the requirements around rate setting. 

The rate-setting requirements, such as CMS’s revised definition of 

actuarial soundness, became effective in July 2016, although certain 

provisions, such as those related to improving data reliability, apply on or 

after July 2017 or July 2018.

 24See Department of Health and Human Services, Centers for Medicare & Medicaid 

Services, 2016 Medicaid Managed Care Rate Development Guide.
Page 14 GAO-17-145 Medicaid Managed Long-Term Services and Supports

Five of our six selected states set financial incentives in their rate 

structures for providing community-based care, which is a CMS 

expectation for MLTSS programs. However, we also found that most of 

the six states did not opt to link payments to MCO performance on 

MLTSS program goals, such as enhancing the provision of communitybased care.

Five of our six selected states set clear financial incentives in their rate 

structures for MCOs to provide community-based care. Specifically, for all 

or part of 2015, four of the states—Arizona, Delaware, Florida, and 

Kansas—used blended rates, where the state pays MCOs the same rate 

per beneficiary regardless of the setting of care. Blended rates are 

intended to set an incentive for community-based care, which generally 

has lower costs. The fifth state—Minnesota—used a modified version of a 

blended rate.25 The four states with blended rates made different 

assumptions about the percentage of beneficiaries in community-based 

care when setting rates. These assumptions affected the strength of the 

financial incentive for community-based care. For example, for its rates 

ending in 2015, Florida assumed each MCO’s percentage of beneficiaries 

receiving community-based care was 2 percentage points higher than the 

MCO’s actual distribution in the previous year. Thus, Florida’s rate was 

slightly lower than if the state used the MCO’s actual distribution. The 

aggregate effect of that lower rate can be significant. For example, for 

one MCO with approximately 5,500 enrollees in Florida, we calculated 

that the difference of 2 percentage points in calculating the blended rate 

would result in approximately $475,000 less per month. The other three 

states with blended rates did not use a fixed percentage increase in 

setting the assumptions for the blended rates. For example, Arizona 

officials said they tailored their assumptions to each MCO’s past 

 25In its rates for calendar year 2015, Minnesota paid a “nursing facility add-on” for 

beneficiaries in the community to address the potential that the beneficiaries might need to 

move to an institution. MCOs then covered the higher cost of any institutional care out of 

the wider pool of payments, setting a financial incentive for community-based care.

Most Selected States 

Set Incentives for 

Community-Based 

Care, but Did Not 

Link Payment to 

Performance on 

MLTSS Goals

Five of Six Selected 

States Set Financial 

Incentives for Providing 

Community-Based Care
Page 15 GAO-17-145 Medicaid Managed Long-Term Services and Supports

experience and the state’s expectations about the MCO’s capacity, and 

the assumptions could include making no increase.26

For our sixth selected state—Texas—it was unclear if the rate structure 

set a financial incentive for community-based care. The state paid MCOs 

higher rates for beneficiaries receiving institutional care than for 

beneficiaries receiving community-based care.27 The higher institutional 

rates could set an incentive for MCOs to move higher-cost beneficiaries 

from the community to an institution. Texas officials said that MCOs’ 

greater ability to control community-based utilization and payments to 

providers gave them a financial incentive for community-based care. For 

example, whereas Texas MCOs must pay nursing facilities a specified 

rate, the MCOs may be able to negotiate lower rates with communitybased providers, potentially lowering their costs compared to the rate 

received for community-based care.28 CMS required the state to regularly 

report to CMS on the proportion of beneficiaries in community-based care 

to show whether or not there are changes in the proportion of such 

beneficiaries.

The selected states varied in their methods to account for the costs of 

beneficiaries with particularly high costs. These methods may have 

enhanced or reduced the incentives in the rate structure for communitybased care.

• Beneficiaries with high-cost institutional care. In two of our 

selected states, the state (and not the MCOs) was responsible for 

covering certain costs of these beneficiaries. For example, Kansas 

excluded from MCO responsibility the cost for beneficiaries with 

intellectual or developmental disabilities in one of the state’s public 

institutions. Minnesota excluded from MCO responsibility the cost of 

 26Members of the American Academy of Actuaries said states must consider the capacity 

of community-based settings when setting the percentage of beneficiaries assumed to be 

receiving community-based care.

27The higher institutional rates reflect the higher average cost of institutional care 

compared with community-based care. All rates were certified as actuarially sound.

28The payment rates set by MCOs to community-based providers, such as home care 

workers, could have an impact on access to services. CMS issued an informational 

bulletin in August 2016 that encouraged states to be mindful of the relationship between 

access to care and wages for the Medicaid home care workforce. See Department of 

Health and Human Services, Centers for Medicare & Medicaid Services, Suggested 

Approaches for Strengthening and Stabilizing the Medicaid Home Care Workforce, Center 

for Medicaid & CHIP Services Informational Bulletin (Baltimore, Md.: Aug. 3, 2016).
Page 16 GAO-17-145 Medicaid Managed Long-Term Services and Supports

institutional care after 180 days. Instead, the states covered those 

costs through FFS, which could weaken the incentive for MCOs to 

manage those beneficiaries’ care in such a way that keeps them from 

reaching those points.

• Beneficiaries with high-cost community-based care. Three of our 

selected states differed in how to cover certain costs of these 

beneficiaries. For example, Florida reimbursed MCOs for a 

percentage of costs of beneficiaries whose cost of community-based 

care exceeded the cost of equivalent institutional care.29 Minnesota 

paid higher rates for beneficiaries who needed more assistance with 

activities of daily living and who were receiving community-based 

care. These provisions could counter incentives for MCOs to shift 

beneficiaries with a high cost of community-based care to institutions. 

Conversely, for example, Arizona required that if a beneficiary was 

projected to receive community-based care that exceeded the cost of 

equivalent institutional care, the beneficiary had to agree to move to 

institutional care or personally cover the additional costs of the 

community-based care. This could weaken the incentive for MCOs to 

manage care in such a way to reduce costs for beneficiaries at risk of 

hitting the cost ceiling, because those beneficiaries’ costs are likely 

exceeding the rate paid to the MCO.

Data from four of our selected states—all of which had rate structures that 

set incentives for community-based care—indicated that the proportion of 

beneficiaries receiving such care increased between 2013 and 2015. As 

shown in table 1, state-reported data indicate that the percentage of 

community-based beneficiaries in Arizona, Delaware, Kansas, and 

Minnesota increased between 0.3 and 5.9 percentage points from 2013 to 

2015. The two states with smaller increases included both an established 

program (Arizona, increase of 1.2 percentage points) and a newer 

program (Kansas, increase of 0.3 percentage points). The remaining two 

of our six selected states, Florida and Texas, had increases in the 

number of beneficiaries in community-based care, but, because of 

significant changes to their programs between 2013 and 2015, there were 

not comparable data to assess the difference in the percentage of 

beneficiaries receiving community-based care.

 29Florida withheld a certain percentage of the capitated payments to create a pool of 

funds, from which the reimbursements were drawn. Florida officials told us they created 

this pool of funds and reimbursements, because the beneficiaries with high-cost 

community-based care were disproportionately enrolled in certain MCOs.
Page 17 GAO-17-145 Medicaid Managed Long-Term Services and Supports

Table 1: Beneficiaries in Managed Long-Term Services and Supports Programs 

Receiving Community-Based Care in Selected States, 2013 and 2015

State

2013 

(percent) 2015 (percent)

Difference from 2013 to 2015 

(percentage points)

Arizona 86.3 87.5 1.2

Delaware 46.4 52.4 5.9

Florida a 50.3 a

Kansas 70.3 70.6 0.3

Minnesota 64.4 66.9 2.5

Texas a 55.1 a

Source: GAO analysis of state-reported data. | GAO-17-145

Note: Data for Arizona, Delaware, Florida, and Kansas are as of December of each year. Data for 

Minnesota represent full-year equivalents based on reported member months for each calendar year, 

and data for Texas are average monthly enrollment for the calendar year.

a

Comparable data were not available for Florida and Texas for 2013; therefore, we could not assess 

the difference in the percentage of beneficiaries receiving community-based care between 2013 and 

2015.

Most of our six selected states did not opt to link payments to MCOs’ 

performance on MLTSS program goals, such as enhancing the provision 

of community-based care and aiding beneficiaries in achieving 

employment. In the contracts we reviewed, only one of our selected 

states (Kansas) linked payments to measures of outcomes on its MLTSS 

program goals. These measures included the rate of employment for 

certain beneficiaries receiving community-based care and the number of 

days of institutional care. In 2015, the state made 2 percent of the MCOs’ 

payments—$57.9 million for the three MCOs—conditional on the MCOs’ 

performance on these and other measures, but, as of June 2016, the 

state had not yet determined the amounts to be returned to the MCOs 

based on their performance in that year. The remaining five selected 

states had no links between payments and MCOs’ performance to 

measures of outcomes on MLTSS program goals. Instead, they mostly 

linked payments to measures of the outcomes or quality of care for 

beneficiaries’ physical and behavioral health, but not the outcomes of the 

long-term services and supports provided.30 Officials from one state told 

us that they do not link payment to performance on MLTSS goals, 

because standardized measures for long-term services and supports are 

 30Two states, Florida and Minnesota, also had measures related to MLTSS processes, 

such as the MCOs’ documentation of their assessments of beneficiaries’ needs, but no 

measures linked to MCO performance on the outcomes of the long-term services and 

supports provided.

Most Selected States Did 

Not Link Payments to 

Performance on MLTSS 

Goals
Page 18 GAO-17-145 Medicaid Managed Long-Term Services and Supports

not available. In addition, federally led efforts to develop outcome 

measures for long-term services and supports are in the early stages.

In addition, most of our selected states had limited links between financial 

penalties and MCOs’ performance. Although the contracts in all six of our 

selected states required MCOs to report on performance measures 

specific to MLTSS, among other areas, only Delaware’s, Florida’s, and 

Texas’ contracts specified the amount of financial penalties, such as 

sanctions or damages, for MCOs that did not meet those performance 

measures. (See table 2.) For example, Florida could assess damages of 

$500 per beneficiary dissatisfied with care management if the MCO failed 

to achieve a satisfaction rate of 90 percent or higher.31 As another 

example, Texas could assess damages of up to $500 per beneficiary per 

day for late, inaccurate, or incomplete documentation of the MCOs’ 

assessments of beneficiaries’ needs. Data reported by our selected 

states indicated that the frequency of states issuing financial penalties 

varied, and when done were relatively small.32 In particular, three of our 

selected states issued no financial penalties or sanctions in 2015 for any 

reason.

 31This performance measure was based on beneficiary survey results. It was included in 

Florida’s contracts effective through June 2015, but not in contracts effective July 2015 

and after.

32With 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.
Page 19 GAO-17-145 Medicaid Managed Long-Term Services and Supports

Table 2: Performance Measures and Financial Penalties in States’ Managed Long-Term Services and Supports (MLTSS) 

Programs, 2015

Contractual language on penalties, 

such as sanctions

Number of 

penalties

Total amount of 

penalties 

(dollars)

Average 

amount of 

penalty 

State (dollars)

MLTSS 

performance 

measures

Specified ability 

to impose 

sanctions for 

failure to meet 

measures

Specified 

amount of 

sanctions for 

failure to meet 

measures

Arizona Yes Yes No 16 588,370 36,773

Delaware Yes Yes Yes 0 0 Not applicable

Florida Yes Yes Yes 41 222,039 5,416

Kansas Yes Yes No 0 0 Not applicable

Minnesota Yes No, but general 

ability to impose 

sanctions

No 0 0 Not applicable

Texas Yes Yes Yes 214 1,830,934a 8,556

Source: GAO analysis of state contracts and state-reported data. | GAO-17-145

Note: Penalties reported may not all be related to the performance measures. Delaware, Kansas, 

Minnesota, and Texas reported amounts for calendar year 2015; Arizona reported amounts by 

contract year ending in 2015; and Florida reported amounts for fiscal year 2015.

a

Of this amount, $13,174 was not exclusive to Texas’ MLTSS program.

Our selected states also had different practices to monitor performance, 

particularly MCO decisions for beneficiaries’ service plans that detail the 

level and type of care to be provided. For example, officials from two 

states told us that they review and approve changes proposed by MCOs 

for beneficiaries’ service plans, such as reductions, suspensions, or 

terminations of services; and officials from four states told us that they 

required MCOs to submit data to the state on changes in the service 

plans. In addition, officials from five states told us they conduct audits or 

other types of reviews of the service plans. However, depending on the 

state, these reviews may use a sample of records or be targeted to a 

certain subset of beneficiaries. Officials in some states also told us that 

they track trends in grievances and appeals to assess beneficiaries’ 

satisfaction with MCO performance.

We found weaknesses in CMS’s oversight of states’ payment structures. 

First, CMS has not consistently required states to report on progress 

toward MLTSS program goals, such as enhancing the provision of 

community-based care, and therefore cannot assess the effectiveness of 

states’ payment structures. Second, it is unclear whether new CMS 

CMS’s Oversight of 

MLTSS Payment 

Structures Is Limited
Page 20 GAO-17-145 Medicaid Managed Long-Term Services and Supports

requirements will sufficiently address issues with the appropriateness and 

reliability of the data used by states to set MLTSS rates.

CMS has not consistently required states to report data on whether their 

MLTSS payment structures are achieving MLTSS program goals, such as 

enhancing the provision of community-based care. For three of our 

selected states—Texas, Arizona, and Delaware—CMS required reporting 

on the provision of community-based care. For example, CMS required 

Texas to report regularly on the proportion of beneficiaries in communitybased care as a way of monitoring whether the state’s program set 

sufficient incentives for community-based care, since the state’s rates 

were not clearly structured to encourage such care. CMS required 

Arizona to annually report on placements and activities for expanding 

community-based care. CMS required Delaware to assess rebalancing, 

i.e., the proportional shift from institutional to community-based care, as 

part of a long-term evaluation of the program.33 For the three remaining 

states, CMS did not require reporting on progress toward goals to 

increase the use of community-based care.34 Discussions with CMS 

officials confirmed that the agency has not consistently required states to 

report on progress toward MLTSS program goals.

Provisions in CMS’s new managed care rule could provide an opportunity 

for more regular and standardized MLTSS data from states. The final rule 

requires states to submit annual reports on their managed care programs, 

including their MLTSS programs. The reports have to cover at least nine 

topic areas, such as the availability and accessibility of covered services 

and the evaluation of MCO performance on quality measures.35 The 

report must address MLTSS in covering these areas, but CMS did not 

 33The state is required to submit a draft of the evaluation report to CMS within 120 days 

after the end of its section 1115 demonstration period.

34Kansas, though not required during program approval, is measuring and reporting on 

improved integration of care through increased employment among beneficiaries in 

community-based care, the design of which was approved by CMS.

35See 42 C.F.R. § 438.66(e)(2) (2016). Other areas that states must cover in the annual 

report include financial performance of MCOs; encounter data reporting; modifications to, 

and implementation of, benefits covered under contracts with the state; grievances and 

appeals; an evaluation of MCO performance on quality measures; results of any sanctions 

or corrective action plans imposed on a contracted MCO; activities and performance of the 

beneficiary support system; and any other factors in the delivery of MLTSS not otherwise 

addressed.

CMS Does Little to 

Monitor State Progress 

toward MLTSS Program 

Goals, and the 

Effectiveness of CMS’s 

Planned Efforts Is Unclear
Page 21 GAO-17-145 Medicaid Managed Long-Term Services and Supports

require separate reporting of information related to MLTSS, unless there 

are factors in the delivery of MLTSS not addressed in the other areas. 

The deadline for the first report is contingent on CMS issuing guidance on 

the format and content of the reports. CMS officials said that they did not 

anticipate that this guidance would direct states to include additional 

MLTSS information, such as progress toward program goals. CMS 

officials told us that they do not plan to do so because the requirements 

should allow for state flexibility in reporting since these programs vary 

among states. However, CMS could require reporting while still allowing 

flexibility. For example, CMS could leverage performance measurement 

information that it is requiring all states to identify for MCOs providing 

MLTSS. Specifically, beginning in 2017, states must identify performance 

measures for MCOs on quality of life, rebalancing, and community 

integration activities, among other things.36 States must require MCOs to 

measure and report on performance annually and submit the underlying 

data that would allow the state to assess performance on the measures. 

CMS officials told us that standardized MLTSS quality measures remain 

in the early stages of development; despite this, CMS could use 

preliminary information from states to inform potential concerns with 

program design within and across states.

CMS has two additional efforts that may provide it with new information 

from some states, but the information would be limited in scope and 

reliability, as shown below:

• Expenditure data broken out by setting of care. CMS officials told 

us that, beginning in April 2016, they began requiring states to break 

out managed care expenditures by setting of care in quarterly 

expenditure reports. This will allow CMS to calculate the proportion of 

MLTSS expenditures on community-based care versus institutional 

care, which could serve as a proxy for assessing whether MLTSS 

programs are affecting the proportion of beneficiaries in each setting 

of care. CMS officials said that data limitations exist if using the data 

on a state-by-state basis, in part, because states are not required to 

certify the accuracy of the specific break out amounts of communitybased care versus institutional care.

• Standardized performance information from states with section 

1115 demonstrations. According to CMS officials, the agency plans 

 36See 42 C.F.R. § 438.330 (2016). States must require this comprehensive quality 

assessment and performance improvement program in all MCO contracts beginning on or 

after July 1, 2017.
Page 22 GAO-17-145 Medicaid Managed Long-Term Services and Supports

to have states implementing MLTSS programs using section 1115 

demonstrations report on certain standardized outcome measures, 

which as of November 2015, would include 12 of the 21 states with 

MLTSS programs. While some states are reporting some outcome 

information, CMS officials told us the agency wants to standardize the 

content and format of reporting requirements and data obtained.37 As 

of September 2016, CMS officials said that they have not yet 

determined the measures that might be included in this effort or 

whether reporting will be mandatory or voluntary for states, and that 

CMS did not have target timeframes for beginning to collect the 

information.

According to federal internal control standards, federal agencies should 

use quality information to achieve their objectives.38 Without consistently 

requiring information on state progress toward MLTSS goals, CMS will 

continue to approve programs and pay billions of dollars to states without 

knowing whether the payment structures are providing sufficient 

incentives for MCOs to provide community-based care.

CMS has established several new rate-setting requirements for states 

related to the data used to set rates, including MLTSS rates. (See table 

3.) These requirements focus on the appropriateness and reliability of the 

data states use in rate setting, which are critical to whether the rates are 

reasonable and adequate. In its annual rate development guide for 2016, 

CMS increased the information it required states to provide during rate 

review on the quality of the data used to set rates. CMS required states to 

describe the steps taken by their actuary and others to validate the data 

used to set rates. CMS specified that the information submitted needed to 

address the completeness, accuracy, and consistency of the data. CMS 

also specified that the state’s actuary include their assessment of the 

quality of the data. In addition, under the final rule, the agency will begin 

to require states to meet additional standards for the appropriateness of 

the data used to set rates beginning in July 2017. The rule requires that 

states use base data that are no older than the three most recent and 

complete years prior to the rate year. These new regulations also require 

 37In addition, CMS has executed a contract for an evaluation of all section 1115 

demonstration programs. The evaluation will also include MLTSS programs, including 

those operated under other program authorities. CMS officials told us they expect the 

interim report to be delivered in 2017.

38See GAO-14-704G and GAO/AIMD-00-21.3.1.

CMS Has Established 

New Rate-Setting 

Requirements, but Risks 

Remain Regarding the 

Use of Appropriate and 

Reliable Data
Page 23 GAO-17-145 Medicaid Managed Long-Term Services and Supports

states to validate encounter data, which are the primary record of 

managed care services and a key source of data for setting managed 

care rates, and periodically audit those data, as well as financial data, 

which states also may use in rate setting.39

Table 3: New Requirements Related to Data Used to Set Managed Care Rates, Centers for Medicare & Medicaid Services 

(CMS)

Source

Requirement Year applicable

2016 rate 

guidea Final ruleb

1. States must include a description of the steps taken by the actuary or others—including 

the state, managed care organizations (MCO), or other contractors—to validate the 

completeness, accuracy, and consistency of the data.

 2016

2. States must provide a summary of the actuary’s assessment of data.  2016

3. If encounter data are not used in rate development, states provide explanation as to 

why.

 2016

4. States must use the most appropriate data to set rates, with the base data being no 

older than from the three most recent and complete years prior to the rating period, 

unless granted an exception by CMS. If granted an exception, states must develop a 

corrective action plan to come into compliance within 2 years.

 2017

5. States must audit the accuracy, truthfulness, and completeness of the encounter and 

financial data submitted by MCOs at least once every 3 years.

 2017

6. States must validate encounter data submitted by MCOs to the state to ensure that it is 

a complete and accurate representation of the services provided to beneficiaries.

 2017

7. CMS will assess a state’s submission of encounter data to determine if it complies with 

criteria for accuracy and completeness.

 2018

Legend:  = Source of requirement.

Source: GAO analysis of CMS guidance and regulations. | GAO-17-145

Note: Encounter data are the primary record of services provided to beneficiaries in managed care.

a

Department of Health and Human Services, Centers for Medicare & Medicaid Services, 2016 

Medicaid Managed Care Rate Development Guide (Baltimore, Md.: September 2015). The guide 

pertains to rates on or after January 1, 2016.

 39For contracts beginning on or after July 5, 2016, the regulations also require states to 

submit all MCO contracts, including their rates, to CMS for approval no fewer than 90 days 

prior to the effective date of the contract, in order to provide CMS sufficient time to review 

rates before the beginning of the rate year. Some state officials had reported significant 

delays in CMS’s approval of rates for 2015. As a result, at least two states were paying 

rates unapproved by CMS, though certified by the states’ actuary. CMS officials attributed 

the 2015 delays to delays in receiving rate certifications from the states, delays in 

receiving responses from states to questions, and issues or errors found in rates during 

the review process. Delays were compounded, in part, by new review procedures, 

including having the CMS Office of the Actuary review the actuarial certifications, and 

CMS officials said that timeliness had improved for rates for 2016.
Page 24 GAO-17-145 Medicaid Managed Long-Term Services and Supports

b

See 81 Fed. Reg. 27498 (May 6, 2016). Requirements 4, 5, and 6 apply to the rating period for 

contracts starting on or after July 1, 2017. Requirement 7 applies to contracts starting on or after July 

1, 2018.

It is unclear, however, whether CMS’s implementation of the new 

requirements will sufficiently minimize the risk of states using 

inappropriate and unreliable data to set MLTSS rates. Under federal 

regulations, in order to be actuarially sound, rates must be, among other 

things, appropriate for the population to be covered and services to be 

provided under a state’s contract with an MCO, and adequate for the 

MCO to meet requirements to ensure timely access to services, adequate 

networks, and coordination and continuity of care.40 To the extent that 

states are using data that are not appropriate or reliable, the data may not 

be a good predictor of expected costs, which could result in rates that are 

too high or too low. Rates that are too high have implications for MCOs 

receiving more federal funding to care for beneficiaries than is necessary. 

Rates that are too low may create incentives for MCOs to reduce the level 

of care provided, affect the ability to attract providers, and affect the 

stability of the market. We found evidence of concerns with the 

appropriateness of data that states used to set rates and the reliability of 

such data.

In the rate certifications we reviewed and our interviews with state 

officials, we found evidence of concerns with the appropriateness of data 

used to set rates in two of our selected states:

• State did not use recent data to set rates. CMS approved rates for 

calendar year 2015 for one of our selected states, Delaware, which 

were developed using FFS data from 2010 and 2011. When reviewing 

the state’s rate methodology, CMS questioned why the state did not 

use more recent data or a different type of data. The state explained 

that credible data from a more recent time period were not available at 

the time that the state developed its rates for calendar year 2015. 

Delaware’s MLTSS program—established in 2012—was relatively 

new. In contrast, the other five states included 2013 or 2012 

encounter data, as well as previous years of data in a couple of 

cases, to set their rates for all or part of 2015.

• State did not rebase rates when newer data were available.

Officials in Arizona, a state with an MLTSS program that has been in 

place for over 20 years, told us that the state used the same years of 

 40See 42 C.F.R. §§ 438.4, 438.206, 438.207, 438.208 (2016).

Appropriateness of Data
Page 25 GAO-17-145 Medicaid Managed Long-Term Services and Supports

base data to set the rates paid to MCOs within the 5-year contract 

period. Thus, by the fifth year, the base data used to set the rates 

would be over 5 years old.41 CMS officials told us that they were 

aware of Arizona’s policy and that it was a concern that this state was 

not rebasing—using updated data to set rates—more frequently. They 

also said that they are aware of other states that rebase their rates 

infrequently, which officials attributed to the states lacking more 

recent, sufficiently reliable data for rate setting.

CMS has not determined the extent to which it will allow these two 

examples to continue under the new requirement that the data used to set 

rates be no older than the three most recent and complete years. Under 

the new rule, a state that cannot fulfill this requirement would need to 

request from CMS an exception from the new data requirement. CMS 

officials told us that there can be circumstances where it is acceptable for 

states to use older data to set rates, such as during the first few years of 

implementing MLTSS programs and when the state has limited managed 

care experience. Similarly, CMS officials told us there may be instances 

in which a state would not rebase every year and states are not required 

to rebase annually. As of July 2016, CMS officials told us that they had 

not determined what situations would warrant exceptions from the new 

data requirements and did not know if they would issue guidance on the 

requirement.42 Without specifying its criteria for what situations would 

warrant exceptions, CMS may not be able to sufficiently minimize the 

number of states using data of questionable appropriateness to set rates.

We also found evidence of reliability issues with encounter data and of 

variation in state validation procedures.

• We and the HHS Office of Inspector General (OIG) have found 

evidence of reliability concerns with state encounter data. For 

example, in 2015, the OIG reported that 8 of 38 states reviewed did 

not report any encounter data for part of fiscal year 2011 to CMS by 

the required deadline.43 The OIG also found that 11 states did not 

report required encounter data for all of their MCOs or other managed 

 41Arizona officials told us they expect rebasing to occur more frequently going forward.

42CMS officials said they had not prioritized such guidance, because they had not 

received many questions on the requirement.

43See Department of Health and Human Services, Office of Inspector General, Not All 

States Reported Medicaid Managed Care Encounter Data as Required, OEI-07-13-00120 

(Washington, D.C.: July 2015).

Reliability of Data
Page 26 GAO-17-145 Medicaid Managed Long-Term Services and Supports

care entities, indicating a lack of completeness. Similarly, in 2015, we 

reported reliability issues with the encounter data, from calendar year 

2010, reported by 6 states.44

• Rate setting documents indicated variation in data validation efforts 

among our selected states. In the rate certifications we reviewed, one 

of our selected states (Arizona) described steps taken by the state 

Medicaid agency to validate the data used to set rates. Specifically, 

the rate certification for Arizona stated that the state Medicaid agency 

used encounter data validation studies, which included reviewing and 

auditing the data for accuracy, timeliness, and completeness, and 

compared the data to MCO financial statements. In the other five 

states, the rate certifications did not describe any validation 

procedures taken by the state Medicaid agency, which, under the 

actuarial standards of practice, is responsible for the accuracy and 

completeness of the data as the supplier of the data. Instead, the rate 

certifications described other steps taken by the actuary to check 

other aspects of the data, including reasonableness and consistency. 

In three of these states, the rate certifications also described steps 

taken by the actuary to compare the encounter data to other data 

sources.

While the new rule requires states to validate the completeness and 

accuracy of encounter data, CMS has not issued guidance with minimum 

standards for state data validation procedures and does not plan to do so. 

CMS officials noted that they had previously issued information to states 

on validation procedures, including a toolkit for states to use when 

establishing their encounter data systems and a data validation protocol 

that could be used as part of required external quality reviews (EQR).45

CMS issued the encounter data toolkit, in part, because the agency 

recognized the importance of encounter data for setting rates, and that 

encounter data are only useful to the extent that they are complete and 

accurate. In the toolkit, CMS suggested that states need to check the 

 44One threshold we used to determine whether the data were unreliable was if fewer than 

30 percent of beneficiaries used at least one service; this threshold was established by 

Mathematica for evaluating the completeness and usability of the data we analyzed. We 

also found that encounter data for 11 states were not available at the time of we began 

our review. See GAO, Medicaid: Service Utilization Patterns for Beneficiaries in Managed 

Care, GAO-15-481 (Washington, D.C.: May 29, 2015).

45See Mathematica Policy Research, Encounter Data Toolkit (Washington, D.C.: Nov. 30, 

2013); and Department of Health and Human Services, Centers for Medicare & Medicaid 

Services, EQR Protocol 4: Validation of Encounter Data Reported by the MCO

(September 2012).
Page 27 GAO-17-145 Medicaid Managed Long-Term Services and Supports

data by conducting front-end edits of the data, as well as validating data 

through reports and setting benchmarks. Similarly, the EQR protocol on 

validating encounter data included detailed steps for a state to determine 

the validity—completeness and accuracy—of encounter data reported by 

MCOs. This protocol, however, is optional, and it is unclear whether it is 

being used by states.

Further, CMS may not receive complete information from states on their 

validation efforts, and, therefore, would not be able to assess whether 

state efforts are sufficient. CMS has required states to submit a 

description of validation efforts for 2016 rates, and its guidance indicates 

that this should include steps taken by the actuary and others, including 

the state, MCOs, and external quality reviewers. However, CMS officials 

said that they expect that the information provided will likely focus on the 

work performed by the actuary, and may not include information on steps 

the state performed to validate the data submitted by MCOs. The new 

rule states that CMS will assess state encounter data submissions to 

ensure that the data meet criteria for accuracy and completeness, which 

may be another means for identifying certain weaknesses in states’ 

validation efforts.

States’ validation procedures are a critical check of the reliability of data 

for, among other purposes, setting rates. CMS has required states to set 

certain standards for enrollee encounter data in the states’ contracts with 

their MCOs. However, required state validation checks are needed to 

ensure that these are consistently implemented by MCOs. Without 

minimum standards for such state validation efforts, it is unclear that 

those efforts will be sufficient to minimize the risk of encounter data being 

incomplete or inaccurate.

Using managed care to deliver long-term services and supports offers 

state Medicaid programs an important strategy that can encourage and 

enhance the provision of community-based care. Both states and CMS 

have the goal of enhancing the provision of community-based care, which 

many beneficiaries may prefer, and which can result in savings for states 

and the federal government. Achieving these goals depends, in part, on 

states establishing payment structures that align financial incentives for 

MCOs with those goals, and setting rates that are adequate and 

appropriate. CMS plays an important role in overseeing states’ payment 

structures, both by monitoring whether states’ payment structures are 

achieving Medicaid program goals, including enhancing the provision of 

Conclusions
Page 28 GAO-17-145 Medicaid Managed Long-Term Services and Supports

community-based care, and assessing whether states’ rates comply with 

actuarial soundness requirements.

CMS’s new requirements under the May 2016 rule have created an 

opportunity for enhanced federal visibility over the effectiveness of 

MLTSS programs, which serve some of the most vulnerable Medicaid 

beneficiaries. For example, the requirements for annual reports on states’ 

managed care programs and for states to identify MLTSS measures and 

require MCOs to report on them, if connected during implementation, 

could provide CMS with timely information on progress toward program 

goals within a given state and nationally. Federal oversight is critical given 

our findings that states were often not linking payment to MCO 

performance on MLTSS goals. Without requiring all states to report on 

progress toward program goals, CMS will continue to pay billions of 

dollars for state programs without knowing whether they provide sufficient 

financial incentives for providing community-based care, which has 

implications both for beneficiaries and on federal costs.

CMS has taken a number of important steps to improve state rate-setting 

practices, including rates for MLTSS programs. Requirements under the 

new 2016 managed care rule, particularly the new data standards and 

validation requirements for encounter data, have the potential to better 

ensure that states are using appropriate and reliable data to set the rates 

paid to MCOs. However, CMS has not established criteria for what 

situations would warrant exceptions to the data standards, and has no 

plans to do so. Without clear criteria, states may continue to seek 

approval for rates that are based on data of questionable 

appropriateness, as was the case in Arizona and Delaware. With regard 

to encounter data validation requirements, CMS does not plan to issue 

any guidance or require minimum standards for state procedures, despite 

a history of data reliability concerns and lack of state compliance with 

reporting requirements. Without strong data, states and the federal 

government risk paying rates that are too low, which could result in quality 

and access concerns for beneficiaries, or rates that are too high, which 

diverts limited Medicaid dollars to MCO profit and away from needed 

care.

To improve oversight of states’ payment structures for MLTSS, we 

recommend that the Administrator of CMS take the following three 

actions:

Recommendations
Page 29 GAO-17-145 Medicaid Managed Long-Term Services and Supports

1. Require all states to collect and report on progress toward achieving 

MLTSS program goals, such as whether the program enhances the 

provision of community-based care.

2. Establish criteria for what situations would warrant exceptions to the 

federal standards that the data used to set rates be no older than the 

three most recent and complete years.

3. Provide states with guidance that includes minimum standards for 

encounter data validation procedures.

We provided a draft of this product to HHS for comment. In its written 

comments, reproduced in appendix II, HHS concurred with our three 

recommendations and indicated steps HHS would consider taking in 

response. In response to our first recommendation to require all states to 

collect and report on progress toward achieving MLTSS program goals, 

HHS said it intends to release guidance clarifying the format of the annual 

reports on states’ managed care programs so that it includes the results 

of the states’ review of performance measures on quality of life, 

rebalancing, and community integration activities, among other things. In 

response to our second recommendation to establish criteria for what 

situations would warrant exceptions to the federal standards that the data 

used to set rates be no older than the three most recent and complete 

years, HHS said it will consider whether additional clarifying guidance is 

needed. In response to our third recommendation to provide states with 

guidance that includes minimum standards for encounter data validation 

procedures, HHS said it will work toward developing additional guidance 

on standards as it relates to encounter data validation procedures. HHS 

also provided technical comments, which we incorporated as appropriate.

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 appropriate 

congressional committees, the Secretary of Health and Human Services, 

and the Administrator of the Centers for Medicare & Medicaid Services. In 

addition, the report will be available at no charge on the GAO website at 

http://www.gao.gov.

Agency Comments 

and Our Evaluation
Page 30 GAO-17-145 Medicaid Managed Long-Term Services and Supports

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

me at (202) 512-7114 or yocomc@gao.gov. Contact points for our Offices 

of Congressional Relations and Public Affairs may be found on the last 

page of this report. GAO staff who made major contributions to this report 

are listed in appendix III.

Carolyn L. Yocom

Director, Health Care
Appendix I: Characteristics of States’ MLTSS 

Programs Selected for Our Review

Page 31 GAO-17-145 Medicaid Managed Long-Term Services and Supports

Our six selected states (Arizona, Delaware, Florida, Kansas, Minnesota, 

and Texas) have managed long-term services and supports (MLTSS) 

programs that varied in terms of cost and enrollment. In 2015, total 

capitated payments to managed care organizations (MCO) for MLTSS 

reported by the six states ranged from $438.9 million for Delaware to $3.7 

billion for Florida. (See table 4.) The number of beneficiaries reported by 

each state also varied, ranging from 6,340 in Delaware to almost 98,000 

in Texas.1 In all of the selected states, these beneficiaries included 

seniors and adults with physical disabilities. In some of the selected 

states, these beneficiaries also included adults with intellectual and 

developmental disabilities and children with disabilities. The number of 

beneficiaries in some programs has changed in recent years. Specifically, 

between 2013 and 2015, two states—Florida and Texas—increased the 

number of beneficiaries by nearly 90 percent and over 145 percent, 

respectively, due to expansions in the scope of their MLTSS programs. 

Florida’s program became statewide in 2014, while Texas’ program 

expanded to rural areas in 2014 and began including beneficiaries 

receiving institutional care in its program in 2015.

 1

To be eligible for MLTSS, beneficiaries must meet income and asset requirements, and 

also meet state-established criteria on the level of care needed, such as needing an 

institutional level of care.

Appendix I: Characteristics of States’ MLTSS 

Programs Selected for Our Review
Appendix I: Characteristics of States’ MLTSS 

Programs Selected for Our Review

Page 32 GAO-17-145 Medicaid Managed Long-Term Services and Supports

Table 4: Cost and Enrollment of Managed Long-Term Services and Supports (MLTSS) Programs for Selected States, 2015

State

Total capitated 

payments to 

managed care 

organizations for 

beneficiaries 

receiving MLTSS 

(dollars in 

millions)

Number of 

beneficiaries 

receiving 

MLTSS

Types of beneficiaries receiving MLTSS

Example of differences in 

SeniorsAdults with physical disabilitiesAdults with 

services 

intellectual and developmental disabilitiesChildren with

disabilities

Arizona 1,570.3 55,475     Limit on cost of communitybased care

Delaware 438.9 6,340    Exclusion of dental services

Florida 3,681.1 90,841    

(age 18-20)

Exclusion of physical health 

services, such as acute care

Kansas 1,272.6 33,255     Exclusion of public institutional 

care for people with intellectual 

and developmental disabilities

Minnesota 636.0 33,185  

(over age 65)



(over age 65)

Exclusion of institutional care 

after 180 days

Texas 3,591.0 97,914    Inclusion of physical health 

services such as acute care (but 

not MLTSS) for adults with 

intellectual and developmental 

disabilities

Legend:  = Included in program.

Source: GAO analysis of state-reported data. | GAO-17-145

Note: Data on payments are for calendar year 2015 for all states except for Arizona, which uses the 

federal fiscal year for one program and the state fiscal year for its other program. Data on 

beneficiaries for Arizona, Delaware, Florida, and Kansas are as of December 2015. Data on 

beneficiaries for Minnesota represent full-year equivalents based on member months for calendar 

year 2015. Data on beneficiaries for Texas represent average monthly enrollment for calendar year 

2015.

The MLTSS programs in our selected states also varied across a number 

of other characteristics, such as age, number of MCOs participating, and 

length of contract period. (See table 5.)
Appendix I: Characteristics of States’ MLTSS 

Programs Selected for Our Review

Page 33 GAO-17-145 Medicaid Managed Long-Term Services and Supports

Table 5: Summary of Characteristics of Managed Long-Term Services and Supports (MLTSS) Programs in Selected States, 

2015

State Program start year

Current program 

authority

Number of managed 

care organizations 

(MCO) under contract Contract period

Arizona 1989 Section 1115 

demonstration

Three MCOs

One state agency

5 years with MCOs

1 year with state agency

Delaware 2012 Section 1115 

demonstration

Two MCOs 3 years plus two option years

Florida 2013a Section 1915(b)/(c) waiver Six MCOs 5 years

Kansas 2013 Section 1115 

demonstration with section 

1915(c) waivers

Three MCOs 3 years plus two option years

Minnesota 1997 and 2005 (two 

programs)

Section 1915(a)/(c) and 

section 1915(b)/(c) 

waivers

Seven MCOs 1 year

Texas 1998 Section 1115 

demonstration

Five MCOs 3 years plus five option years

Source: GAO analysis of Centers for Medicare & Medicaid Services (CMS) program approvals and state contracts. | GAO-17-145

a

Florida previously had a smaller MLTSS program that ran from 1998 to 2014.
Appendix II: Comments from the Department 

of Health and Human Services

Page 34 GAO-17-145 Medicaid Managed Long-Term Services and Supports

Appendix II: Comments from the Department 

of Health and Human Services
Appendix II: Comments from the Department 

of Health and Human Services

Page 35 GAO-17-145 Medicaid Managed Long-Term Services and Supports
Appendix II: Comments from the Department 

of Health and Human Services

Page 36 GAO-17-145 Medicaid Managed Long-Term Services and Supports
Appendix III: GAO Contact and Staff 

Acknowledgments

Page 37 GAO-17-145 Medicaid Managed Long-Term Services and Supports

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

In addition to the contact named above, Susan Barnidge (Assistant 

Director), Corissa Kiyan-Fukumoto (Analyst-in-Charge), and Jessica L. 

Preston made key contributions to this report. Also contributing were 

Emei Li, Drew Long, Vikki Porter, and Jennifer Whitworth.

Appendix III: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(100284)
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