Medicaid Managed Care: Trends in Federal Spending and State Oversight of Costs and Enrollment
Published: 2015-12-17T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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 risk-based 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.
section_title: What GAO Found
paragraphs: 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.
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 state-required 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.

section_title: Letter
paragraphs: 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. In 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  population beginning in January 2014. 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. In 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). Increased 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.
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 (MLR). 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. 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  selected states’ payment data for state fiscal year 2014. Specifically, we  reviewed data from CMS’s Quarterly Medicaid Statement of Expenditures  for the Medical Assistance Program, known as the CMS-64 form. We  reviewed these data for trends across states and over time, focusing on  the federal share of spending for comprehensive, risk-based managed  care. 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. (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  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.  For example, we determined whether the states’ methods  considered beneficiary factors, such as prior enrollment in a managed  care plan, in assigning beneficiaries. 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.
subsections: section_title: Background
paragraphs: 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.  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. (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 provide those services  separately, while other states include those services.
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).  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.
subsections: section_title: State Methods for Setting MCO Payment Rates
paragraphs: 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. 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.
section_title: Medical Loss Ratio Standards under PPACA and in Medicaid
paragraphs: 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. Furthermore, private insurers  operating in the individual and small group markets must meet an 80  percent MLR minimum. 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.  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. In general, the greater the share of beneficiaries’ premiums  spent on medical claims and quality initiatives, the higher the MLR. (See  fig. 2.)
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. 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. Likewise, MA organizations and Medicare Part D  sponsors must pay CMS a remittance if they do not meet the required  MLR minimum in a contract year. 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. States may also choose to establish  their own formula for calculating MLRs for contracted MCOs.
section_title: Auto Assignment in Medicaid Managed Care
paragraphs: 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  provider-beneficiary relationships and relationships with providers that  have traditionally served Medicaid beneficiaries. 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.
section_title: Federal Spending for Medicaid Managed Care Was Over $100 Billion in 2014, and Selected States’ Payments to Managed Care Organizations Varied Widely
paragraphs: 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.
subsections: section_title: Federal Spending for Medicaid Managed Care Represented 38 Percent of Total Federal Medicaid Spending in 2014
paragraphs: 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.  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. (See fig. 3.) A number of factors have likely  contributed to growth in federal expenditures, including states increasing  the proportion of their 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. 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. 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.
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. (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,  while in 3 states such expenditures represented 75 percent or more of  total federal Medicaid expenditures. (See fig. 4.)
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.)
section_title: Total and Average per Beneficiary Payments Varied Considerably across Selected States, with Differences in Covered Populations and Services Contributing to the Variation
paragraphs: 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.  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.)
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. (See table 2.)
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. 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  provided them separately. 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. 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. 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.
section_title: Over Half of Selected States Set Medical Loss Ratio Minimums Similar to Federal Standards for Other Coverage Types, with Some Variation in Calculation Methods
paragraphs: 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. 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. (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.
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.  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.
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.
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. 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.
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  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.
section_title: Selected States’ Auto Assignment Methods Primarily Focused on Beneficiary Factors, and Then Considered Plan Performance and Program Goals
paragraphs: 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  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. (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.
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.
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. 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  change plans monthly.  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.
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.
section_title: Agency Comments
paragraphs: 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  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.
section_title: Appendix I: Selected States’ Comprehensive Risk-Based Managed Care Programs
subsections: section_title: Enrollment as of July, 2013
paragraphs: 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.
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.
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.
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.
Comprehensive Health Care Program: Mandatory statewide program for  aged, disabled (children and adults), children, low-income adults, and foster  care children.
HealthChoices: Mandatory statewide program for aged, disabled (children  and adults), children, low-income adults, certain dual eligibles, and foster  care children.
TennCare: Mandatory statewide program for aged, disabled (children and  adults), children, low-income adults, certain dual eligibles, and foster care  children.
Apple Health: Mandatory statewide program for aged, disabled (children  and adults), children, and low-income adults.
section_title: Appendix II: Federal Expenditures on Managed Care as Percent of Total Medicaid Expenditures, Fiscal Years 2004 and 2014
subsections: section_title: Total Medicaid expenditures (millions) 3,237.5
section_title: Total Medicaid expenditures (millions) 2,103.0
section_title: Appendix III: Selected States’ Methods for Overseeing Quality in Medicaid Managed Care
paragraphs: 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.
subsections: section_title: Quality Performance Measures
paragraphs: 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  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 non- HEDIS measures, or their contracts allowed states to develop non- HEDIS 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 non- HEDIS 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 state- defined measures.
section_title: Sanctions for Not Meeting Required Targets on Quality Measures
paragraphs: 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  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.
section_title: Incentives for Performance on Quality Measures
paragraphs: 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.
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.
section_title: Accreditation Requirements
paragraphs: 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  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.
section_title: Other Quality Oversight Activities
paragraphs: 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. 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. 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.
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.
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.  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.
section_title: Appendix IV: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: 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.