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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. We provided a draft of this product to HHS for comment. In its written comments, reproduced in appendix II, HHS concurred with our three recommendations and indicated steps HHS would consider taking in response. In response to our first recommendation to require all states to collect and report on progress toward achieving MLTSS program goals, HHS said it intends to release guidance clarifying the format of the annual reports on states’ managed care programs so that it includes the results of the states’ review of performance measures on quality of life, rebalancing, and community integration activities, among other things. In response to our second recommendation to establish criteria for what situations would warrant exceptions to the federal standards that the data used to set rates be no older than the three most recent and complete years, HHS said it will consider whether additional clarifying guidance is needed. In response to our third recommendation to provide states with guidance that includes minimum standards for encounter data validation procedures, HHS said it will work toward developing additional guidance on standards as it relates to encounter data validation procedures. HHS also provided technical comments, which we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretary of Health and Human Services, and the Administrator of the Centers for Medicare & Medicaid Services. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or yocomc@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. 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.) 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.

Summary: 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. 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 . 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.