Manatt on Health: Medicaid Edition

Manatt on Medicaid: CMS Finalizes Overhaul of Medicaid and CHIP Managed Care Rules

Authors: Patricia Boozang, Senior Managing Director | Alice Lam, Director

Editor's Note: This Manatt on Medicaid is the first in a series of updates focused on CMS's new Medicaid/CHIP managed care regulations. In the coming weeks, Manatt will be exploring key provisions of the regulations and highlighting their implications. Stay tuned!



On April 25, 2016, the Centers for Medicare and Medicaid Services (CMS) released its highly anticipated final rule to overhaul the regulatory framework governing Medicaid managed care and make conforming changes to the rules for the Children's Health Insurance Program (CHIP).1 In the 15 years since the last major revisions to these regulations, the managed care delivery model has expanded significantly: Today the majority of Medicaid beneficiaries receive at least some of their healthcare coverage through these arrangements, as opposed to the traditional fee-for-service (FFS) system. States have also expanded the reach of Medicaid managed care to cover high-needs beneficiaries and a broader range of services. Further, the Affordable Care Act (ACA) has allowed for Medicaid expansion, established Marketplaces, and placed a premium on coordination between Medicaid and other coverage programs to promote continuity of coverage and care.

In recognition of these significant shifts, CMS endeavors to modernize the regulations, leveraging state Medicaid managed care programs to drive delivery system reforms and quality improvement and aligning Medicaid managed care rules with those that apply to Medicare Advantage (MA) plans and qualified health plans (QHPs) substantially. CMS formally advanced these changes in a proposed rule in May 2015, drawing nearly 900 comments from stakeholders.2 Much of what was proposed remains; however, CMS did not finalize several proposals that generated significant concerns from states and plans.

Key Provisions

  • Network adequacy (§§ 438.68, .206, .207, 440.262, 457.1218, 457.1230). The final rule requires states to adopt time and distance standards to measure the adequacy of provider networks, at a minimum specifying time and distance standards for seven different provider types, including primary care, OB/GYN, behavioral health, specialist, hospital, pharmacy and pediatric dental. CMS declined to require specific standards or specific network adequacy enforcement strategies, such as secret shoppers.
  • Beneficiary support system (§§ 438.71, .816). Largely following the proposed rule, the final rule requires states to establish beneficiary support systems that provide services to beneficiaries both before and after enrollment in a managed care entity. Support services include choice counseling, assistance in understanding managed care, and targeted assistance with long-term services and supports (LTSS). Entities that provide choice counseling will be considered enrollment brokers and are subject to conflict of interest restrictions. CMS did not finalize a requirement that states conduct training to managed care entities and provider networks on community-based resources.
  • Information standards (§§ 438.10, 457.1207). The final regulations, largely following the proposed rule, require plans to provide enrollees with member handbooks and formulary information, and to produce provider directories that contain more detailed information. Following QHP rules, provider directory and formulary information must be available on plans' websites and in a machine-readable format, allowing organizations to download data and make comparisons across plans.
  • Grievance and appeals (pt. 438 subpt. F, § 457.1260). The final rule generally aligns Medicaid and CHIP grievance and appeals processes with those for Medicare Advantage and commercial coverage. Enrollees would only be required to exhaust one internal plan appeal before seeking review of an adverse benefit determination in a state fair hearing. The final rule also requires states to allow beneficiaries to receive services pending a final outcome; states will have the option to allow plans to recoup the costs of services if the outcome is adverse to the beneficiary. CMS does not finalize proposals removing the requirement that providers obtain an enrollee's written consent before filing an appeal on an enrollee's behalf and requiring plans to implement online appeals and grievance systems.
  • Enrollment Choice Period (§§ 438.54, 457.1210). CMS did not finalize a requirement that states enroll individuals into FFS coverage for 14 days prior to managed care enrollment. The final rule does require that states give beneficiaries opportunity to exercise an informed plan choice and be provided with the time and information to do so. The final rule standardizes guidelines and information requirements for enrolling beneficiaries into plans.
  • Marketing (§§ 438.104, 457.1224). The final rule clarifies 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 restrictions on the sale of private insurance.
  • Medical Loss Ratio (MLR) (§§ 438.4, .5, .8, .74, 457.1203). CMS requires that plans calculate and report a Medicaid MLR for purposes of rate setting, but allows states to determine whether to adopt a minimum MLR standard of 85 percent and whether to penalize plans for failing to satisfy the MLR minimum. CMS encourages states to require plans to return capitation amounts if they do not satisfy the minimum MLR, and requires states to take into account past and anticipated MLRs when establishing future plan capitation payment rates. States remain free to set higher MLR minimums.
  • Actuarial soundness (§§ 438.2, .4-.6). Consistent with the proposed rule, CMS establishes new standards and processes that states must follow in developing actuarially sound managed care capitation rates, including data requirements and standards for risk-sharing arrangements between plans and states, with a special focus on withhold arrangements that have become prevalent in recent years. CMS finalizes its proposal to restrict certifications of rate ranges.
  • Institutions of Mental Disease (IMDs) (§ 438.3(u)). The final rule permits managed care plans to receive a capitated payment on behalf of an enrollee even if that enrollee has a short-term stay in an IMD, despite a statutory prohibition on federal funds paying for care for patients of such institutions.
  • State-directed provider payments (§ 438.6(c)). Largely as proposed, CMS finalizes its longstanding policy prohibiting states from directing plans to make specific payments to providers, but permits states to direct plans to use particular methodologies that promote access, delivery system reform and quality initiatives. The final rule also includes new details on CMS's prohibition of pass-through payments through managed care. The final rule eliminates states' ability to use pass-through payments for physicians and nursing facilities by 2022 and phases out the payments for hospitals by 2027.
  • In lieu of services (§ 438.3(e)(2)). CMS codifies new regulatory text on "in lieu of" services. The final rule clarifies when and which services may be covered by a managed care plan "in lieu of" services set out in a State Medicaid Plan. States determine the alternative service or setting that is a medically appropriate and cost-effective substitute for the covered services under the State Medicaid Plan and then specify the approved in lieu of services in plan contracts. Plans may offer the approved in lieu of services at their own discretion but are prohibited from requiring enrollees to use alternative services or settings.
  • Prescription drug coverage (§ 438.3(s)). The final rule provides that to the extent that states contract with managed care plans to provide drug coverage, plans are subject to certain provisions of Section 1927 of the Social Security Act, which generally requires Medicaid to cover most drugs. However, it also indicates that states may allow plans to use their own formularies for some or all of the Section 1927-required drugs that they are responsible for covering under the contract. Drugs that are not on the formulary but that are the responsibility of the plan under the contract must be subject to a prior authorization process. The final rule clarifies that any drugs or drug classes excluded from the managed care contract must be covered by the state on an FFS basis, subject to restrictions that may be imposed under Section 1927. Consistent with the provisions of Section 1927, the final rule requires 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.
  • Quality of care (pt. 431 subpt. I, pt. 438 subpt. E, §§ 457.760, .1240, .1250). CMS did not finalize a proposal that would require plans to be accredited or that states implement a review and approval accreditation process. CMS also withdraws its proposal to require states to adopt a comprehensive quality strategy that would apply to FFS. The final rule maintains the requirement, as proposed, that states implement a managed care quality strategy for assessing and improving the quality of healthcare and services provided by managed care entities. The final rule requires states to adopt either a CMS-developed Medicaid managed care quality rating system or an alternative quality rating system that includes ratings that are substantially comparable to the CMS-developed quality rating system.
  • Program integrity (pt. 438 subpt. H, §§ 457.955, .1280, .1285). CMS incorporates significant updates to program integrity safeguards, many of which target vulnerabilities identified through Department of Health and Human Services Office of Inspector General audits and CMS program integrity reviews.


While in some instances CMS's changes codify requirements and practices already in place, they also introduce new federal guidance increasing state oversight responsibilities and plan obligations. Some of these changes are effective as soon as the rule itself is effective (60 days after publication of the final rule—July 5, 2016); others must be implemented for the plan year beginning in July 2017 or after in recognition of necessary changes to state and plan policies and operations and state-plan contracts.3 Understanding the true impact of these regulations will require a state-by-state evaluation of the Medicaid managed care environment, which stakeholders are just beginning to undertake.

1"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-F)," Published in the Federal Register on May 6, 2016.

280 FR 31097, "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),"

3Medicaid and CHIP Managed Care Final Rule: Implementation Dates.



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