Managed care has become the predominant strategy for delivering healthcare services to beneficiaries enrolled in government programs, particularly Medicaid. Recent data underscores this trend, revealing that a significant majority of Medicaid recipients are now part of managed care organizations (MCOs). This article delves into the current utilization of the managed care model in government programs, focusing primarily on Medicaid and exploring the key aspects, trends, and implications of this widespread approach.
1. Managed Care Dominance in Medicaid: A National Overview
Capitated managed care stands as the leading method employed by states to provide services to Medicaid enrollees. Within the framework of federal regulations, each state designs and manages its own Medicaid program. A fundamental decision for each state is how to organize the delivery and financing of healthcare for Medicaid beneficiaries. The overwhelming majority of states have integrated some form of managed care into their Medicaid systems, encompassing both comprehensive risk-based MCOs and primary care case management (PCCM) programs. As of July 2023, a substantial 41 states, including the District of Columbia, have contracts with comprehensive, risk-based managed care plans to administer care for at least a segment of their Medicaid population. Notably, Oklahoma further expanded the reach of managed care by launching a capitated, comprehensive Medicaid managed care system for the majority of children and adults in April 2024.
Medicaid MCOs are responsible for delivering comprehensive acute care and, in some instances, long-term services and supports to Medicaid beneficiaries. In return, they receive a fixed per-member, per-month payment for these services. Historically, states have turned to managed care models with the goals of enhancing budget predictability, controlling Medicaid expenditure growth, and improving both access to care and the overall value of services. While the shift to MCOs has largely achieved greater budget predictability for states, the evidence concerning the impact of managed care on access to care and costs remains somewhat inconclusive and varied.
2. Widespread Enrollment: Three in Four Medicaid Beneficiaries in MCOs
Approximately 74% of all Medicaid beneficiaries are currently receiving their healthcare through comprehensive risk-based MCOs. As of July 2021, this translates to 66 million Medicaid enrollees being served by risk-based MCOs. An impressive 31 MCO states have integrated managed care so extensively that at least 75% of their Medicaid beneficiaries are enrolled in MCOs.
It’s important to note that while 2021 data represents the most recent national figures, Medicaid enrollment experienced significant growth during the COVID-19 public health emergency. During this period, states were prevented from disenrolling individuals, leading to a corresponding increase in MCO enrollment. At the onset of the “unwinding” period in April 2023, overall Medicaid enrollment peaked at 94.5 million, marking a substantial 32% increase compared to pre-pandemic levels. However, by December 2023, Medicaid enrollment had decreased by over 9% across states, representing a reduction of more than 9 million people. Despite these shifts, the Centers for Medicare and Medicaid Services (CMS) continues to emphasize the vital role managed care plans can play in ensuring eligible individuals can access and maintain their Medicaid coverage. Numerous strategies are available to states to minimize coverage losses due to procedural issues, including temporary waivers that enable states to update enrollee contact information through MCOs, allow MCOs to assist enrollees with renewal form completion, and extend automatic re-enrollment periods into MCO plans.
3. Enrollment Trends by Population: Expanding Managed Care to Complex Needs
Children and adults are more likely to be enrolled in MCOs compared to adults aged 65 and older and individuals eligible due to disability. However, a notable trend is the increasing inclusion of beneficiaries with complex healthcare needs within managed care models. As of July 2022, 36 MCO states reported covering 75% or more of all children through MCOs. Among the 39 states that had expanded Medicaid under the Affordable Care Act (ACA) by July 2022, 32 were utilizing MCOs to cover newly eligible adults, with the majority covering over 75% of this population group through MCOs. Furthermore, 35 MCO states reported MCO coverage for 75% or more of low-income adults in pre-ACA expansion categories. While enrollment rates for adults aged 65+ and individuals with disabilities remain lower, states are progressively incorporating these populations into MCOs over time.
4. Financial Landscape: MCOs Account for Over Half of Medicaid Spending
In Fiscal Year 2022, total state and federal spending on Medicaid services exceeded $804 billion. Payments directed to MCOs constituted approximately 52% of this total Medicaid expenditure, a figure consistent with the preceding fiscal year. The proportion of Medicaid spending allocated to MCOs varies across states, but in over three-quarters of MCO states, at least 40% of total Medicaid funds are channeled towards payments to MCOs. This state-to-state variation is influenced by factors such as the percentage of the state’s Medicaid population enrolled in MCOs, the overall health profile of the Medicaid population, the inclusion or exclusion of high-risk/high-cost beneficiaries in MCO enrollment, and whether long-term services and supports are integrated into MCO contracts. As states expand Medicaid managed care to encompass higher-need, higher-cost beneficiaries, comprehensive long-term services and supports, and adults newly eligible under the ACA, the share of Medicaid funding directed to MCOs is likely to continue its upward trajectory.
5. Capitation Rates and Risk Mitigation: Actuarial Soundness and State Strategies
States compensate Medicaid managed care organizations through capitation rates, a set per-member, per-month payment for the Medicaid services outlined in their contracts. Federal law mandates that these payments to Medicaid MCOs must be actuarially sound. Actuarial soundness implies that “the capitation rates are projected to provide for all reasonable, appropriate, and attainable costs that are required under the terms of the contract and for the operation of the managed care plan for the time period and the population covered under the terms of the contract.” Unlike fee-for-service (FFS) models, capitation provides upfront, fixed payments to plans to cover anticipated service utilization, administrative expenses, and profit margins. Plan rates are typically established for a 12-month period and undergo annual review and approval by CMS. States employ various mechanisms to adjust for plan risk, incentivize performance, and ensure payment accuracy. These strategies include risk-sharing arrangements, risk and acuity adjustments, medical loss ratios (MLRs), and incentive and withhold arrangements.
The COVID-19 pandemic brought about significant shifts in healthcare utilization and costs. In response to pandemic-related enrollment increases, utilization decreases, and other emerging cost changes in 2020, CMS granted states flexibility to modify managed care contracts. Many states implemented COVID-19 related “risk corridors,” allowing for the sharing of profits or losses between states and health plans and enabling the recoupment of funds. Nearly two-thirds of MCO states reported implementing a pandemic-related MCO risk corridor at some point since March 2020. Analysis of data from the National Association of Insurance Commissioners (NAIC) for the Medicaid managed care market reveals that average loss ratios in 2021 remained lower than in 2019, suggesting increased profitability for plans. Currently, both states and plans are navigating a new period of fiscal uncertainty due to the unwinding of the continuous enrollment provision.
6. Service Carve-Ins and Carve-Outs: State Decisions and Evolving Trends
While MCOs are designed to provide comprehensive services to beneficiaries, states retain the authority to carve specific services out of MCO contracts. These carved-out services are then typically managed through fee-for-service systems or limited benefit plans. Commonly carved-out services include behavioral health, pharmacy, dental care, and long-term services and supports (LTSS). However, there is a growing trend across states to “carve-in” these services into MCO contracts, integrating them within the managed care framework. While the majority of states with MCO contracts report that the pharmacy benefit is carved into managed care, a number of states still maintain pharmacy benefit carve-outs. Notably, New York recently implemented a full pharmacy carve-out in April 2023, becoming the latest state to separate pharmacy benefits from managed care.
7. Market Concentration: Five Firms Account for Half of MCO Enrollment
As of July 2021, states contracted with a total of 287 Medicaid MCOs. These MCOs represent a diverse mix of private for-profit, private non-profit, and government-operated plans. Fifteen parent firms operated Medicaid MCOs in two or more states, collectively accounting for 62% of total enrollment in 2021. Among these 15 parent firms, six are publicly traded, for-profit entities, while the remaining nine are non-profit organizations. A significant concentration of market share exists, with five firms – Centene, UnitedHealth Group, Anthem (now Elevance), Molina, and Aetna/CVS – responsible for 50% of all Medicaid MCO enrollment. These five firms are all publicly traded companies and hold prominent positions in the Fortune 500 rankings. Despite a recent decline in Medicaid enrollment across these five parent firms since the start of the unwinding period, the three firms that publicly report Medicaid-specific revenue data (UnitedHealth, Molina, and Centene) all reported year-over-year growth in Medicaid revenue in 2023. However, the long-term revenue outlook remains uncertain as the unwinding process continues.
8. Strengthening Access and Prior Authorization: CMS Final Rules for 2024
In April 2024, CMS finalized new Managed Care rules designed to strengthen access standards and enhance state monitoring and enforcement capabilities. Historically, states have had considerable flexibility in defining network adequacy standards and in overseeing MCO compliance. Key access-related provisions in the new rule include the establishment of national maximum wait time standards for routine appointments, mandates for states to conduct secret shopper surveys to validate wait time standards and provider directory accuracy, requirements for annual enrollee experience surveys, and annual payment analyses comparing managed care provider rates to Medicare rates. These measures aim to improve timely access to care and ensure states effectively monitor and address access issues within managed care plans.
To support provider participation, many states currently mandate minimum provider rates in their MCO contracts, often linked to fee-for-service rates or other established fee schedules. States may also implement uniform payment increase requirements. These payment arrangements are known as “state-directed payments.” The April 2024 final rules introduce changes to state-directed payment policies, including setting a payment rate ceiling at the average commercial rate for certain providers. In January 2024, CMS also finalized a rule focused on improving the prior authorization process, aiming to reduce wait times and enhance transparency. Concerns regarding prior authorization in Medicaid managed care have been raised due to higher denial rates compared to Medicare Advantage plans. Recent analyses and reports have highlighted the need for strengthened state monitoring of denials and improvements to the appeals process.
9. Quality and Value-Based Care: Financial Incentives and Quality Rating Systems
States are increasingly incorporating quality metrics into the ongoing evaluation of their Medicaid programs, often linking financial incentives to quality performance. These incentives can include performance bonuses or penalties, capitation withholds, or value-based state-directed payments tied to specific quality measures. The majority of MCO states utilize at least one financial incentive to promote quality of care. Common performance areas targeted by these incentives include behavioral health, chronic disease management, and perinatal/birth outcomes. However, transparency remains a challenge, as detailed plan-level performance information is not consistently made publicly available by state Medicaid agencies.
In addition to financial incentives, states are also employing non-financial methods to incentivize managed care plan performance, such as Quality Rating Systems (QRSs). QRSs enable states and beneficiaries to compare plan performance across various metrics. CMS regulations now require all states contracting with managed care plans to adopt a QRS. The 2024 Managed Care final rule establishes the CMS framework and state requirements for QRS implementation. States are also focusing on the use of alternative payment models (APMs) within managed care contracts to move away from fee-for-service models and incentivize quality. APMs range from arrangements with limited provider financial risk to those with greater risk-sharing and global capitation payments. While evidence suggests some positive impacts from state financial incentives on managed care plan engagement in quality improvement, results at the provider level are more mixed.
10. Addressing Social Determinants of Health and Health Equity: A Growing Priority
States are increasingly leveraging Medicaid MCO contracts to implement strategies that address social determinants of health (SDOH) and reduce health disparities. Advancing health equity is a key priority for the Medicaid program under the current administration, reflected in the 2024 Managed Care final rule. CMS has released guidance on the use of “in lieu of” services (ILOS) in Medicaid to address health-related social needs (HRSN). Furthermore, CMS has announced a Section 1115 demonstration waiver opportunity to expand state tools for addressing HRSN and has released a detailed HRSN Framework for Medicaid and CHIP programs.
Most MCO states reported incorporating at least one SDOH-related strategy into their Medicaid MCO contracts. Common strategies include requiring MCOs to screen enrollees for behavioral health and social needs, provide referrals to social services, and partner with community-based organizations (CBOs). States are also utilizing financial incentives to reduce racial and ethnic health disparities and are requiring MCOs to implement health equity training and reporting requirements. Performance Improvement Projects (PIPs) focused on health disparities are also increasingly mandated by states, targeting areas such as maternal and child health, chronic diseases, and substance use disorder.
Conclusion
Managed care has firmly established itself as the dominant model for delivering healthcare within government programs, particularly Medicaid. This comprehensive approach, characterized by capitated payments and a focus on managed networks, is utilized across the majority of states and encompasses a significant portion of Medicaid beneficiaries and spending. Ongoing developments, such as the recent CMS final rules, reflect a continued effort to refine and improve managed care within government programs, emphasizing enhanced access to care, quality improvement, and a growing focus on addressing social determinants of health and health equity. As government healthcare programs evolve, managed care is likely to remain a central strategy for achieving cost-effectiveness, improved health outcomes, and equitable access for vulnerable populations.
