Medicaid Managed Care: Improved Oversight Needed of Payment Rates for Long-Term Services and Supports
Published: 2017-01-09T00:00:00

Fast Facts:
Medicaid provides long-term care to states' most vulnerable populations, such as the elderly or disabled. On average, community-based care costs less than at a nursing facility or other institution—and many people prefer it.
States are increasingly paying for long-term care through managed care programs, paying based on set, monthly rates. How states structure these rates—aligning incentives to minimize cost and maximize service—is critical to enhancing community-based care.
On the federal side, we recommended better oversight of the data used to set payment rates, as well as the rates' effect on care and other outcomes.

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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 .
section_title: What GAO Recommends
paragraphs: 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.

section_title: Letter
paragraphs: 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. 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. Increasing the availability of community- based 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.
States are increasingly providing long-term services and supports through  managed care—referred to as managed long-term services and supports  (MLTSS)—with over 500,000 beneficiaries. 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. 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. 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. States are also required to set actuarially sound  rates; that is, rates that have been certified by an actuary as being  appropriate and adequate. In May 2016, CMS issued new rules for  Medicaid managed care that could affect how states set rates for MLTSS programs and how CMS oversees such programs. 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  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. 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  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. 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.
subsections: section_title: Background
paragraphs: 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,  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. In fiscal year 2014, Medicaid spent an estimated  $22.5 billion on MLTSS.
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  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).
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. 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. 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.
subsections: section_title: Federal Approval of MLTSS Programs
paragraphs: 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  are section 1115 demonstrations and section 1915(b) waivers. 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. 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. 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.
section_title: Development and Approval of MLTSS Payment Structures
paragraphs: 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. (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.
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.
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.
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. 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.
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. 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.
section_title: Most Selected States Set Incentives for Community-Based Care, but Did Not Link Payment to Performance on MLTSS Goals
paragraphs: 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 community- based care.
subsections: section_title: Five of Six Selected States Set Financial Incentives for Providing Community-Based Care
paragraphs: 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. 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  experience and the state’s expectations about the MCO’s capacity, and  the assumptions could include making no increase.
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. 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 community- based providers, potentially lowering their costs compared to the rate  received for community-based care. 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 community- based 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  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. 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.
section_title: Most Selected States Did Not Link Payments to Performance on MLTSS Goals
paragraphs: 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. 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 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. 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. In particular, three of our  selected states issued no financial penalties or sanctions in 2015 for any  reason.
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.
section_title: CMS’s Oversight of MLTSS Payment Structures Is Limited
paragraphs: 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  requirements will sufficiently address issues with the appropriateness and  reliability of the data used by states to set MLTSS rates.
subsections: section_title: CMS Does Little to Monitor State Progress toward MLTSS Program Goals, and the Effectiveness of CMS’s Planned Efforts Is Unclear
paragraphs: 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 community- based 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. For the three remaining  states, CMS did not require reporting on progress toward goals to  increase the use of community-based care. 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. The  report must address MLTSS in covering these areas, but CMS did not  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. 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 community- based care versus institutional care.
Standardized performance information from states with section  1115 demonstrations. According to CMS officials, the agency plans  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. 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. 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.
section_title: CMS Has Established New Rate-Setting Requirements, but Risks Remain Regarding the Use of Appropriate and Reliable Data
paragraphs: 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  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.
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. 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.
subsections: section_title: Appropriateness of Data
paragraphs: 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  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. 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. 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.
section_title: Reliability of Data
paragraphs: 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. The OIG also found that 11 states did not  report required encounter data for all of their MCOs or other managed  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.
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).  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  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.
section_title: Conclusions
paragraphs: 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  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.
section_title: Recommendations
paragraphs: To improve oversight of states’ payment structures for MLTSS, we  recommend that the Administrator of CMS take the following three  actions:  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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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.
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section_title: Appendix I: Characteristics of States’ MLTSS Programs Selected for Our Review
paragraphs: 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. 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.
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.)
section_title: Appendix II: Comments from the Department of Health and Human Services
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: 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.