Managed care has become the predominant approach for states to deliver healthcare services to Medicaid beneficiaries. Across the United States, state Medicaid programs are increasingly relying on managed care organizations (MCOs) to manage costs, improve care coordination, and enhance the overall quality of healthcare for their enrollees. This article delves into the multifaceted ways managed care is utilized within state Medicaid programs, exploring its prevalence, financial mechanisms, service delivery, and ongoing efforts to optimize its effectiveness.
1. Managed Care as the Core Delivery System for Medicaid Services
States operate their Medicaid programs under federal guidelines, granting them considerable flexibility in designing and administering these crucial healthcare safety nets. A key decision for each state is how to deliver and pay for healthcare services for Medicaid beneficiaries. The overwhelming trend is the adoption of managed care. Currently, nearly every state incorporates some form of managed care, whether it’s comprehensive risk-based MCOs or primary care case management (PCCM) programs. As of July 2023, a significant majority – 41 states, including the District of Columbia – have contracts with comprehensive, risk-based managed care plans. These plans are responsible for providing care to a substantial portion of their Medicaid populations. The recent implementation of capitated, comprehensive Medicaid managed care in Oklahoma in April 2024 further underscores this trend, demonstrating how states are continually moving towards managed care models.
States have historically turned to managed care for several key reasons. Primarily, it offers increased budget predictability. By paying MCOs a fixed per-member-per-month amount, states can better control and forecast their Medicaid expenditures. Additionally, managed care is intended to constrain overall Medicaid spending and improve both access to care and the value derived from healthcare services. While the shift to MCOs has largely achieved budget predictability, the evidence regarding its impact on access to care and costs remains somewhat inconclusive and subject to ongoing debate.
2. The Extent of Managed Care Penetration in Medicaid
The data clearly illustrates how deeply entrenched managed care has become in Medicaid. As of July 2021, the most recent national data available, an impressive 74% of all Medicaid beneficiaries, totaling 66 million individuals, received their healthcare through comprehensive risk-based MCOs. Furthermore, in 31 of the states utilizing MCOs, at least 75% of their Medicaid beneficiaries were enrolled in these plans. This widespread enrollment underscores how managed care is not just a marginal approach but the dominant system for delivering Medicaid benefits to the vast majority of enrollees.
It’s important to note that overall Medicaid enrollment experienced substantial growth during the COVID-19 public health emergency due to continuous enrollment provisions. This surge in overall enrollment naturally led to a parallel increase in MCO enrollment. Medicaid enrollment peaked in April 2023 at 94.5 million, a significant 32% jump from pre-pandemic levels. However, as the continuous enrollment provision unwinds, Medicaid enrollment has begun to decline. Despite this fluctuation, MCOs remain central to ensuring continued coverage and access to care for eligible individuals. States are actively leveraging managed care plans to help individuals maintain their Medicaid coverage during this unwinding period, demonstrating how MCOs are vital in navigating enrollment transitions.
3. Varied Enrollment Patterns Across Beneficiary Groups
While managed care is prevalent across Medicaid, how it’s applied varies across different beneficiary populations. Children and non-elderly adults are more likely to be enrolled in MCOs compared to adults aged 65 and older and individuals eligible for Medicaid due to disabilities. However, a significant trend is the increasing inclusion of beneficiaries with complex needs into managed care arrangements.
As of July 2022, a large majority of MCO states (36) reported covering 75% or more of all children through MCOs. Similarly, for adults newly eligible under the Affordable Care Act (ACA) Medicaid expansion, 32 out of 39 expansion states utilized MCOs, with most covering over 75% of this group through managed care. Coverage is also extensive for low-income adults in pre-ACA expansion groups. Although older adults and people with disabilities historically had lower MCO enrollment rates, states are progressively incorporating these populations into managed care models. This evolution reflects how states are adapting managed care to serve increasingly diverse and complex beneficiary needs.
4. Financial Significance of MCOs in Medicaid Spending
The financial scale of managed care in Medicaid is substantial, illustrating how it shapes the program’s fiscal landscape. In Fiscal Year 2022, payments to comprehensive risk-based MCOs constituted over half of all Medicaid spending. Out of the total Medicaid spending exceeding $804 billion, approximately 52% was directed towards MCOs. This proportion has remained relatively stable, indicating the consistent and significant financial role of managed care.
The share of Medicaid spending allocated to MCOs varies across states, reflecting differences in enrollment proportions, population health profiles, and the inclusion of high-need beneficiaries and long-term services within MCO contracts. However, in most MCO states, a considerable portion of Medicaid dollars – at least 40% in over three-quarters of these states – flows to managed care organizations. As states continue to expand managed care to encompass higher-need populations, expensive long-term services, and the growing ranks of ACA-newly eligible adults, the financial share directed to MCOs is likely to increase further, demonstrating how managed care is becoming an even more dominant element of Medicaid financing.
5. Capitation Rates and Risk Management Strategies
A fundamental aspect of how managed care operates financially is through capitation. States pay Medicaid MCOs a predetermined per-member-per-month payment (capitation rate) for the comprehensive suite of Medicaid services outlined in their contracts. Federal law mandates that these capitation rates must be actuarially sound. This means the rates are projected to cover all reasonable, appropriate, and attainable costs associated with the contract terms and the operation of the managed care plan.
Capitation differs significantly from fee-for-service (FFS) models. It provides upfront, fixed payments to plans, covering expected service utilization, administrative expenses, and profit margins. Plan rates are typically established for a 12-month period and undergo annual review and approval by the Centers for Medicare & Medicaid Services (CMS). To manage risk, incentivize performance, and ensure appropriate payment levels, states employ various mechanisms. These include risk-sharing arrangements, risk and acuity adjustments, medical loss ratios (MLRs), and incentive or withhold arrangements. These tools demonstrate how states actively manage the financial dynamics of their managed care programs.
The COVID-19 pandemic introduced a period of fiscal uncertainty. Initially, enrollment surged while utilization decreased. CMS provided states with flexibility to modify managed care contracts, leading to the implementation of COVID-19 related “risk corridors” in many states. These corridors allowed for the sharing of profits or losses between states and health plans, and often involved recoupment of funds by states. The unwinding of the continuous enrollment provision is now creating another phase of fiscal uncertainty for both states and plans.
6. Service Carve-Ins and Carve-Outs in MCO Contracts
While MCOs are designed to provide comprehensive services, states retain the authority to “carve out” specific services from MCO contracts. This means these carved-out services are delivered and paid for separately, often 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, a notable trend is the movement towards “carving in” these services, integrating them into MCO contracts to enhance care coordination and comprehensiveness. This decision of how to carve services in or out is a critical aspect of state managed care design.
Pharmacy benefits represent a significant area of carve-out consideration. While most states with MCO contracts report that pharmacy benefits are carved into managed care (meaning MCOs manage the pharmacy benefit), a number of states still carve them out. New York, as of April 1, 2023, became the latest state to implement a full pharmacy carve-out, demonstrating the ongoing evolution in how states structure their managed care service packages.
7. Market Concentration in the MCO Industry
The Medicaid MCO landscape is characterized by a degree of market concentration, revealing how a relatively small number of firms manage a significant portion of Medicaid managed care enrollment. As of July 2021, states contracted with a total of 287 Medicaid MCOs. These MCOs encompass a mix of private for-profit, private non-profit, and government-run plans. However, a substantial portion of the market is controlled by large parent firms.
Fifteen parent firms operated Medicaid MCOs in two or more states, accounting for 62% of total enrollment in 2021. Among these parent firms, six are publicly traded, for-profit entities, while nine are non-profit. Notably, just five firms – Centene, UnitedHealth Group, Anthem (now Elevance), Molina, and Aetna/CVS – collectively manage 50% of all Medicaid MCO enrollment. These are all major publicly traded companies, highlighting the significant role of large, national corporations in the Medicaid managed care market. While Medicaid enrollment has seen recent declines, these major firms have generally reported continued revenue growth in their Medicaid businesses, although the long-term revenue outlook remains subject to the unwinding’s effects.
8. Strengthening Access and Prior Authorization Standards
Ensuring adequate access to care within managed care is a critical focus, and recent regulatory changes illustrate how CMS is working to strengthen access standards and improve processes. In April 2024, CMS finalized new Managed Care rules aimed at bolstering access and enhancing state oversight. Historically, states had considerable latitude in defining network adequacy standards and monitoring MCO compliance.
The new rules introduce key provisions to improve access, including:
- National Maximum Wait Time Standards: Establishing maximum wait times for routine appointments (e.g., 15 business days for primary care and OB/GYN, 10 for outpatient mental health).
- Secret Shopper Surveys: Requiring states to conduct independent secret shopper surveys to verify wait time compliance and provider directory accuracy.
- Enrollee Experience Surveys: Mandating annual enrollee experience surveys for each plan to capture enrollee perspectives on access.
- Payment Rate Analysis: Requiring annual payment analyses comparing managed care provider rates to Medicare rates to assess potential access impacts.
- Remedy Plans: States must implement plans to address areas where MCOs need to improve access.
- Transparency Enhancements: Building upon existing reporting requirements to increase transparency through state websites and reports.
To support provider participation, many states already mandate minimum provider rates in MCO contracts, often linked to fee-for-service or Medicare rates. These “state directed payments” are further addressed in the new rules, which establish a payment rate ceiling at the average commercial rate for certain providers.
Furthermore, a January 2024 CMS rule focused on streamlining the prior authorization process, aiming to reduce wait times and improve transparency. Prior authorization issues are a significant concern in Medicaid managed care, with higher denial rates compared to Medicare Advantage. These new rules and ongoing monitoring efforts reflect how CMS and states are actively working to refine and strengthen access and administrative processes within Medicaid managed care.
9. Leveraging Financial Incentives for Quality Improvement
States are increasingly incorporating quality metrics into their managed care programs, demonstrating how they use financial levers to drive quality improvement. Over three-quarters of MCO states reported using financial incentives linked to quality measures as of July 2021. These incentives include performance bonuses or penalties, capitation withholds, and value-based state-directed payments. Common performance areas targeted by these incentives include behavioral health, chronic disease management, and perinatal/birth outcomes.
Despite the widespread use of financial incentives, transparency remains a challenge. Detailed plan-level performance data is often not publicly available, limiting the ability of beneficiaries and stakeholders to assess plan performance. In addition to financial methods, states also utilize non-financial strategies to incentivize quality, such as Quality Rating Systems (QRSs). CMS regulations now require states to adopt a QRS to enable performance comparisons across plans. The 2024 Managed Care final rule further establishes the CMS framework and requirements for QRSs, with public website availability mandated by 2028.
States are also promoting alternative payment models (APMs) within managed care contracts to move away from fee-for-service and incentivize value-based care. About half of MCO states have specific targets for MCOs to utilize APMs in provider payments. While evidence of positive impacts from these quality-focused initiatives is growing, results at the provider level remain somewhat mixed, indicating ongoing areas for refinement in how quality incentives are structured and implemented.
10. Addressing Social Determinants of Health and Health Equity
A significant and evolving area in Medicaid managed care is the focus on social determinants of health (SDOH) and health equity. States are increasingly looking to MCOs to develop and implement strategies to address SDOH and reduce health disparities. This reflects how states are broadening the scope of managed care beyond traditional healthcare services to address broader factors influencing health outcomes.
The current administration has prioritized health equity in Medicaid. CMS has released guidance on “in lieu of” services (ILOS) to address health-related social needs and reduce disparities. A Section 1115 waiver opportunity was also announced to expand state tools for addressing HRSN. CMS has further released a detailed HRSN Framework and Informational Bulletin to guide state efforts.
Most MCO states reported leveraging MCO contracts to promote at least one SDOH-related strategy in FY 2023. 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 address health disparities, with about one-quarter of MCO states having financial incentives tied to reducing racial/ethnic disparities. Beyond financial incentives, states are requiring MCOs to implement health equity training, reporting requirements, and Performance Improvement Projects (PIPs) focused on disparities reduction, demonstrating a comprehensive approach to how managed care can be a vehicle for advancing health equity.
Conclusion
Managed care is undeniably a central element of state Medicaid programs. States utilize managed care in a multitude of ways: as the primary service delivery model, a financial management tool through capitation, a framework for managing service scope via carve-ins/carve-outs, and increasingly, as a platform for advancing quality, access, and health equity. The ongoing evolution of Medicaid managed care, driven by regulatory changes, state innovations, and a growing focus on value-based care and population health, indicates that managed care will continue to be a critical strategy how states deliver healthcare to their most vulnerable populations.
