Actuarially-Sound Rate-Setting for Managed Care under Medicaid Capped Allotment Systems

Congress Must Protect Enforcement and Oversight of Actuarially-Sound Rate-Setting for Managed Care under Medicaid Capped Allotment Systems


Federal law and regulation require that state Medicaid programs must use actuarially-based standards when setting rates for managed care organizations participating in the programs.  These standards – known as “actuarial soundness” – require state-calculated Medicaid plan premium rates to provide for all reasonable, appropriate, and attainable costs, including health benefits, health benefit settlement expenses, marketing and administrative expenses, any state-mandated assessments and taxes, and the cost of capital.

Under the Balanced Budget Act of 1997, the Republican-controlled Congress enacted policies that significantly liberalized the state’s ability to use managed care organizations in Medicaid without applying for 1115 waivers.  As part of that liberalization, Congress passed a provision to require that states implement actuarial-soundness to ensure that states did not attempt to pay plans at rates that did not allow them to deliver covered benefits  This is important because, if rates are not actuarially-sound, plans that are contractually obligated to provide benefits to enrollees must do so at rates that that would force them to dangerously limit access to benefits, curtail provider reimbursements, cost-shift administrative costs and be unpaid for other state-mandated requirements.

Far from being a “plan-only” issue, failure to pay actuarially-sound rates has a direct impact on reimbursement rates paid to a plan’s network of providers that deliver benefits to enrollees.  In such a scenario, providers either accept inadequate payments – a common critique among policy-makers who are concerned about Medicaid access – or drop out of the network altogether.  Without a robust provider network, enrollees will have difficulties accessing their Medicaid benefits and plans cannot meet minimum access requirements.  If enough providers drop out of networks, it is impossible for health plans to deliver benefits – leading to a “death spiral” in a Medicaid managed care program that could force plans to withdraw from participation altogether.

Inadequate rates put plans in a no-win situation by either forcing them to scrimp on benefits or underpay network providers, which could destabilize the network and limit access to benefits.  That is why actuarial soundness is a critical lynchpin for the successful use of managed care organizations in Medicaid.

The Issue

For decades, policy-makers have debated changing the way in which the Medicaid program operates by moving from the current Federal matching rate system (FMAP), wherein each state is reimbursed by the federal government for a certain percentage of the cost of its Medicaid program, to one where all states receive a fixed Federal allotment (either through the form of a “block grant” or a “per-capita allotment”) and are given greater flexibility to manage the program in return.  Most recently, such an approach was used in the House-passed American Health Care Act (H.R. 1628) and is currently being considered in the Senate as legislation is being drafted to address the Affordable Care Act.

At issue is the concern that states, under an inadequately funded federal allotment, may be pressured to cut Medicaid spending to benefits, plans, and providers.  To the extent that Medicaid programs are managed and benefits are delivered mostly through managed care organizations, cuts in Medicaid spending means – by definition – cuts in managed care payment rates.

Simultaneously, there is also a concern about giving states waivers from certain federal program requirements, including those related to actuarial-soundness.  It is important to note that nothing in Section 1115 of the Social Security Act – the part of the law that allows for comprehensive waivers of Medicaid program rules – would prevent a state from waiving federal protections for actuarially-sound rate setting, found in Section 1903(m)(2)(A)(iii) of the SSA.  In fact, in a letter dated March 17, 2017 the State of Florida signaled its intention to request a waiver of CMS oversight of state rate-setting practices, suggesting that the State intends to limit payments to plans despite statutory and regulatory requirements to the contrary.  This is a dangerous precedent and a harbinger of waiver requests to come if the principle of actuarial-soundness is not reaffirmed.

In a 2012 white paper on actuarial soundness, the American Action Forum[1] concludes “Medicaid managed care has the potential to significantly improve access to health care and health outcomes for the Medicaid population. It may also have the potential to reduce program costs. However, these goals can be achieved only if payment rates are set at appropriate, actuarially sound, and sustainable levels. Policymakers are understandably concerned that high payment rates might result in above-market profits for health insurers who participate in Medicaid MCO programs, although current Medical Loss Ratio requirements prevent that from happening. However, an excessive desire to cut rates and limit profit may be counterproductive, as it may reduce quality and access and drive health insurers out of the MCO business.”

ACAP Recommendation

As part of any Medicaid reform proposal that loosens requirements on state Medicaid programs AND caps or limits the federal Medicaid allotment to the states, Congress must simultaneously reaffirm the requirements of actuarially-sound rate setting in two important ways.

First, Congress must modify Section 1115 of the Medicaid statute to require CMS to reject any 1115 waiver proposal that would waive Section 1903(m)(2)(A)(iii) of the Social Security Act[2] and related regulations regarding actuarially-sound rate-setting.

Second, Congress should strengthen Medicaid rate-setting processes by (1) providing sufficient funding to CMS functions intended to provide technical assistant to help states and to oversee state rate-setting processes and outcomes and (2) reinforce the importance of an open rate-setting process by allowing rate calculations and methodologies to be publicly-available to plans, providers, and enrollees.


[1]Actuarial Soundness of Medicaid Managed Care,” American Action Forum, October 19, 2012.

[2] Section 1903(m)(2)(A)(iii) of the Social Security Act