Manatt on Health: Medicaid Edition

CMS Proposes Overhaul of Medicaid and CHIP Managed Care Rules

Authors: Patricia Boozang, Senior Managing Director | Alice Lam, Senior Manager | Michael Kolber, Associate, Healthcare | Alex Dworkowitz, Associate, Healthcare


On May 26, 2015, the Centers for Medicare and Medicaid Services (CMS) released a notice of proposed rulemaking (NPRM) to overhaul the regulations governing Medicaid managed care and make conforming changes to the rules that govern the state Children’s Health Insurance Program (CHIP).1 The proposed rules represent a significant departure from the current Medicaid and CHIP managed care regulatory framework, which has been stable for over a decade, and could have a significant impact on states, health plans, providers, and other stakeholders. A key, overarching theme of the NPRM is CMS’s effort to substantially align Medicaid managed care rules with those that apply to Medicare Advantage (MA) plans and qualified health plans (QHPs) and to use managed care to drive delivery system reforms and quality improvement throughout the healthcare system. The NPRM also places special focus on long-term services and supports (LTSS), which are increasingly being delivered through managed care arrangements.

While CMS generally leaves program management and oversight discretion with states, in some cases increasing or clarifying existing flexibility, the proposed rules also significantly increase federal requirements with regard to minimum program and rate setting standards as well as state oversight responsibilities. CMS introduces new state obligations that all managed care states are likely to view as burdensome and costly—including enhanced requirements with regard to operational readiness reviews and ongoing oversight of managed care plans—and states will likely urge CMS to reduce federal requirements that add to state program costs. For other stakeholders, the rules represent a “mixed bag”—in some instances codifying requirements and practices already in place, especially in mature managed care markets, and in other instances imposing new regulatory requirements.

Key Provisions

Network adequacy (§§ 438.68, .206, .207, 440.262, 457.1218, 457.1230). The current Medicaid managed care rules largely leave it up to the states to set network adequacy standards, including time and distance standards to measure the adequacy of provider networks. CMS seeks comments as to whether it should set minimum federal network adequacy standards and require states to adopt certain network adequacy enforcement strategies, such as secret shopper efforts.

Beneficiary support system (§§ 438.71, .816). In one of its more significant changes, the proposed rule would require that states establish beneficiary support systems that provide services to beneficiaries both before and after enrollment in a managed care entity. Support services would include choice counseling, assistance in understanding managed care, and targeted assistance with LTSS. Entities that provide choice counseling will be considered enrollment brokers and are subject to conflict of interest restrictions. In addition, CMS proposes to provide federal funding for LTSS-specific beneficiary support system activities.

Information standards (§§ 438.10, 457.1207). CMS proposes that plans provide enrollees with member handbooks and formulary information, and that provider directories contain more detailed information than is called for under the current rules. Following QHP rules, the information would have to be available on plans’ websites and in a machine-readable format.

Grievance and appeals (pt. 438 subpt. F, § 457.1260). The NPRM would generally align Medicaid and CHIP grievance and appeals processes with those that exist for MA and commercial coverage. Enrollees would be required to exhaust one internal plan appeal before seeking review of an adverse benefit determination in a state fair hearing. The proposed rules would also require plans to provide, upon request and free of charge, the basis for an adverse coverage determination. CMS solicits comments on the extent to which online grievance and appeal submission and tracking systems are used today, and whether CMS should require their implementation.

Marketing (§§ 438.104, 457.1224). CMS proposes to clarify that Medicaid plans that also offer QHPs may market both Medicaid and QHPs at the same time to the same individuals without violating the Medicaid marketing restriction on the sale of private insurance. This promotes continuity of coverage when enrollees are no longer eligible for Medicaid and gives families the option of enrolling with the same health insurer, even if some family members are eligible for Medicaid and others are eligible for commercial coverage.

Plan choice (§§ 438.54, 457.1210). As a minimum requirement for mandatory managed care programs, the NPRM requires states to provide beneficiaries with at least 14 calendar days and appropriate informational notices to make a decision on plan enrollment; coverage must be provided through fee-for-service (FFS) until the beneficiary makes a choice, which could be before the end of the 14-day period. Voluntary managed care programs are also subject to the 14-day choice period requirement, but they may employ a “passive enrollment,” or opt-out, process in which states select a plan but the beneficiary has the option to decline the plan selection before enrollment. CMS invites comment on whether a longer enrollment choice period—such as 30 or 45 days—should be adopted.

Medical loss ratio (§§ 438.4, .5, .8, .74, 457.1203). CMS proposes that Medicaid and CHIP plans calculate and report medical loss ratios (MLRs) starting in 2017 using a methodology modeled after Medicare and commercial plan MLRs. CMS also proposes that states design managed rates to achieve a minimum MLR of 85 percent. However, the NPRM does not go as far as to require plans to return capitation amounts if they do not satisfy the minimum MLR and instead leaves the decision up to states.

Actuarial soundness (§§ 438.2, .4-.6). CMS proposes to significantly revise existing requirements related to actuarially sound Medicaid managed care capitation payments. In a significant departure from current practice, states may use ranges to negotiate with plans, but must ultimately certify actual payment rates to CMS. The NPRM provides new specificity with regard to how states should develop actuarially sound rates, and establishes new standards and processes, including data requirements and standards for risk-sharing arrangements between plans and states with a special focus on withhold arrangements that have become popular in recent years.

Institutions of mental disease (§ 438.3(u)). Despite a statutory prohibition on federal Medicaid funds paying for care for patients in institutions of mental disease (IMDs), CMS proposes to permit capitation payments to plans for enrollees who have a short-term stay—15 days or less—in an IMD. The IMD must be an inpatient hospital or a subacute facility providing crisis residential services. As discussed in the preamble, CMS recognizes a shortage of short-term psychiatric facilities available to Medicaid beneficiaries, and the proposal is consistent with its long-standing policy that MCOs can provide services “in lieu of” services authorized in the state Medicaid plan under certain circumstances.

Quality of care (pt. 431 subpt. I, pt. 438 subpt. E, §§ 457.760, .1240, .1250). CMS proposes that states adopt a Medicaid managed care quality rating system modeled on the system for QHPs. The NPRM would also require plan accreditation in order to contract with a state. Consistent with the QHP approach, states could contract with a plan if it received accreditation by one of the CMS-recognized private accrediting entities, or review the plans on their own if applying standards at least as stringent as those used by the private accrediting entities. Finally, CMS proposes to mandate that states adopt a comprehensive quality strategy to promote quality in both their FFS and managed care systems.

Program integrity (pt. 438 subpt. H, §§ 457.955, .1280, .1285). CMS incorporates significant updates to program integrity safeguards, many of which are targeted at vulnerabilities identified through Department of Health and Human Services Office of Inspector General audits and CMS program integrity reviews. CMS proposes to expand and strengthen current requirements on plans’ submission and certification of data, fraud and abuse detection programs, and prohibited affiliations. Noting the lack of consistency between managed care and FFS provider screening and enrollment in state Medicaid programs, CMS proposes to require that states screen and enroll all Medicaid providers. Finally, CMS proposes to authorize plans that retain their recoveries of overpayments to providers who are excluded from Medicaid participation due to fraud, waste or abuse.

State-directed provider payments (§ 438.6(c)). CMS proposes to generally maintain its long-standing policy to prohibit states from directing plans to make provider payments, but allows states to direct plan use of particular payment methodologies to promote delivery system reform and quality initiatives and set minimum payment levels for providers of particular services. Specifically, under the proposed rule, states may prescribe that plans use state-specified value-based purchasing methodologies when contracting with providers or require plans to align payment methods with multipayer payment initiatives, such as patient-centered medical homes, health information exchange, and prevention efforts. The state could also require plans to use payments to incentivize providers to participate in particular initiatives and adopt a minimum fee schedule or a uniform increase for providers of a particular service under the contract.

Prescription drug coverage (§ 438.3(s)). While state managed care contracts may permit plans to have formularies that do not cover all drugs that the state is required to cover under Section 1927 of the Social Security Act, CMS proposes to require that states cover, through FFS, any Section 1927 covered outpatient drugs or classes of drugs that are excluded from the managed care contract. (Section 1927 generally requires Medicaid programs to cover all “covered outpatient drugs” that are sold by a manufacturer that has signed a Medicaid rebate agreement.) CMS describes this proposal as a “clarification,” but it may represent a change from the status quo, under which it appears it would have been possible for a managed care contract to exclude some drugs, even if there was no alternative mechanism for the state to cover the excluded drugs. The proposed rule would also require managed care plans providing drug coverage to respond to prior authorization requests within 24 hours and to provide a 72-hour emergency supply of drugs that require prior authorization.


The last significant revisions to the Medicaid managed care regulations were published in 2002, and in the years since, the Medicaid program has changed dramatically. Chief among these changes is the expansion of the Medicaid managed care delivery model: today the majority of Medicaid beneficiaries receive at least some of their healthcare coverage via managed care arrangements. The lengthy proposed rule reflects a new era of CMS oversight in the large and growing Medicaid and CHIP managed care programs. If finalized, the rule would substantially align Medicaid managed care rules with those that apply to MA plans and QHPs and increase obligations of states, plans and other stakeholders with respect to managed care program administration. Stakeholders have the opportunity to comment on the proposed rule before 5 p.m. ET on July 27, 2015.


180 Fed. Reg. 31,097, “Medicaid and Children’s Health Insurance Program (CHIP) Programs; Medicaid Managed Care, CHIP Delivered in Managed Care, Medicaid and CHIP Comprehensive Quality Strategies, and Revisions Related to Third Party Liability (CMS-2390-P),”



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