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. 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. 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. 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. Federal spending for Medicaid managed care nationally increased significantly from federal fiscal years 2004 through 2014, representing over a third of total federal Medicaid spending in 2014. Total payments to MCOs and average per beneficiary payments showed considerable variation across selected states in state fiscal year 2014. Federal spending for Medicaid managed care increased significantly over the past decade—from $27 billion in fiscal year 2004 to $107 billion in fiscal year 2014—and represented a significantly larger portion of total federal Medicaid spending in 2014 than it did 10 years earlier. 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.) 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.

Summary: 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. 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.