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Maximize Value June 09, 2015

CMS Proposed Rules for Managed Medicaid: A.K.A. Hello, Red Tape

Global Head, Health Services, Oliver Wyman
Partner, Health and Life Sciences, Oliver Wyman
Partner, Health and Life Sciences, Oliver Wyman

Medicaid enrollment across the United States currently encompasses ~50M individuals, of which ~40M are enrolled in some form of Managed Medicaid. The covered population is expected to continue to grow, driven by factors such as Medicaid expansion, population growth, and economic challenges in select States. As expected, this growing population is placing significant pressure on State coffers.

For the first time in over a decade, the federal administration is weighing in. The Centers for Medicare & Medicaid Services (CMS) proposed last month a new set of rules for Managed Medicaid with the intent to alleviate some of the coverage and access challenges that face the States and their Medicaid populations, as well as align Managed Medicaid to Medicare Advantage and market standards. Oliver Wyman’s Government Programs team of Jim Fields, Martin Graf, and Parie Garg offer the following analysis of the proposed rules:

The proposed rules, which CMS will be accepting comments on through the end of July, could have a significant impact on each of the categories it is intended to cover and affect all stakeholders that have major roles to play in the Medicaid space. Since Medicaid is largely a procurement business – with States purchasing services from Managed Care Organizations (MCOs) – these rules are anticipated to have an impact on the State requirements for procurement. Health plans will need to be thoughtful about how these regulations will impact both current contracts, as well as those that are due for renegotiation. Our observations below are from the perspective of the participating health plans:

Reimbursement/Rate Setting

  • Medical Loss Ratio (MLR) floor, a.k.a. Goodbye profits Per the proposed rules, Managed Medicaid plans will need to adhere to an MLR floor of 85% commencing in 2017. This could make providing care to specialized populations more challenging as achieving profitability in Medicaid requires attention to the whole person, including needs that go beyond traditional medical expenses. MCOs will need to carefully consider what is classified as medical cost vs. administrative cost going forward.
  • Actuarial soundness provisions, a.k.a. Goodbye irrational State pricing These provisions were proposed as part of the new rules to ensure that rates are developed in a transparent and consistent manner across Medicaid managed care programs. Actuarial soundness should promote the setting of appropriate rates across states and avoid unplanned fluctuations from year to year and state to state.
  • Receipt of capitated payments for individuals spending less than 15 days in an Institution for Mental Disease (IMD), a.k.a. Removing a barrier to care for the mentally ill Receiving capitated payments for these individuals could present a lucrative opportunity and will also create greater access to care and lower burdens and hassles for beneficiaries with mental illness. However, MCOs will need to ensure they can manage individuals suffering from substance abuse and psychiatric disorders appropriately.

Coverage and Member Management

  • Managed care enrollment, a.k.a. Choose your plan within 14 days The rules propose that states must provide 14 days of FFS coverage to enable individuals to make a choice regarding their MCO coverage. The rules also have a few more changes, such as limiting individuals’ ability to disenroll without cause after 90 days of enrollment, which will help plans manage their enrollee populations better. However, this rule will also require substantial information sharing with enrollees, which could place an administrative burden on plans.
  • Integration of Long Term Services and Supports (LTSS), a.k.a. Important but hardThe proposed rules provide further integration of LTSS. Network adequacy will likely pose a challenge to MCOs (see below, under Network). Yet, since the LTSS population is one of the most costly, better management and integration of LTSS could be an upside.
  • Continuity of care, a.k.a. Coordination is good, but large process and administrative burdens are bad…this seems like both The proposed rules aim to align the Medicaid managed care framework with other public and private programs to improve coordination and continuity of care. From a population management perspective, more care coordination is better. However, meeting state-decreed standards could pose a substantial administrative burden.
These new regulations could become particularly onerous and make caring for specialized populations impractical, which would be an unfortunate reversal of recent progress. – Oliver Wyman’s Government Programs team


  • Network adequacy, a.k.a. Lowering access barriers New rules will require states to establish network adequacy rules with time and distance standards for select providers including hospitals and primary care physicians. Given the limited number of providers that accept Medicaid patients, meeting the network adequacy standards will likely be challenging and could result in higher bargaining power for select providers.
  • Setting of State monitoring standards, a.k.a. More hoops for provider participationPer the proposed rules’ new provider monitoring standards, states must enroll and monitor all MCO network providers that are not currently enrolled with the state. While monitoring and screening of providers will be helpful in reducing fraud and abuse, this will likely further narrow an already thin provider network.


  • Support of value-based care and performance improvement initiatives, a.k.a. “We are the Borg. Your biological and technological distinctiveness will be added to our own. Resistance is futile.” In an effort to encourage states to incentivize and retain certain types of providers to participate in the delivery of care to Medicaid beneficiaries, the proposed rules will now allow states to require MCO adoption of value-based purchasing models for provider reimbursement. The rule may advantage providers and MCOs that are further along in their value-based care agenda.
  • Quality initiatives, a.k.a. Stars for Medicaid The new rules aim to strengthen quality measurement and improvement efforts by focusing on transparency, alignment with other systems of care, and consumer and stakeholder engagement. It is well documented that achieving high star ratings for the dually eligible populations is very difficult given their specialized care needs and socioeconomic challenges. The system will need to be designed with Medicaid in mind. The administrative burden of such ratings can be substantial.

Administrative Services

  • Prevention of fraud & abuse, a.k.a. Preventing fraud is good; large process and administrative burdens are bad… this seems like both (that sounds familiar) The proposed rules aim to mitigate fraud and abuse through periodic independent audits of plan data, periodic screenings of providers, and public transparency of the results of the audits and other data checks. While this rule would indeed provide MCOs with greater ability to manage fraud and abuse, the administrative burden of maintaining compliance and reporting data will likely be significant.
  • Drug utilization and rebate reporting, a.k.a. Ensuring States get their cut The proposed rules would require reporting of drug utilization data to enable States to collect related rebates. Initiatives that put money back in state coffers is a good thing for plans; however, the administrative burden of drug utilization reporting will be substantial. The rules also place drug utilization reviews under the purview of MCOs. While this is the right thing to do, administrative expenses of running the program and reporting data may impact the MLR floor.
  • CMS disallowance, a.k.a. Line item rejection of Federal Financial Participation (FFP) The rules enable differential receipt of FFP based on compliance with pre-determined standards. Not only will this enable CMS to offer guidance on a much more granular level, it will likely increase the administrative burden on health plans due to the compliance expectations.
  • Appeals and grievances, a.k.a. A clear grievance process is good; large process and administrative burdens are bad…we’re sensing a theme here The proposed rules would implement modified appeals and grievances processes to align more closely with Medicare, and to align the Children’s Health Insurance Program more closely with the Medicaid grievance and appeals process. This change also creates a substantial administrative burden.

Although the rules are rooted in good intentions, the administrative burden that these changes would place on plans is not insignificant. When considered in light of the MLR floor, these new regulations could become particularly onerous and make caring for specialized populations impractical, which would be an unfortunate reversal of recent progress. Plans will need to carefully manage the additional administrative costs that arise as a result of these changes to ensure they are able to both meet the MLR requirements – and maintain financial success.

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