GAO report: Medicaid rate setting may not be "actuarially sound"

The Centers for Medicare & Medicaid Services (CMS) is failing to ensure that rates paid to managed care organizations serving Medicaid clients aren't too high or too low, according to an August 2010 report from the U.S. Government Accountability Office (GAO).

Managed care organizations are serving an increasing number of Medicaid beneficiaries and are paid on a predetermined, per-person basis, with the rates set by the states. Federal law requires that the rates are "actuarially sound." This means that the rates are not too high or too low and reflect the costs, populations served, and services covered by the contract with the state.

Rates that are too low can mean problems with access. This is occurring in some states, especially in light of provider rate cuts made recently, according to the report, Medicaid Managed Care: CMS's Oversight of States' Rate Setting Needs Improvement.

The report's findings weren't surprising, says Margaret A. Murray, chief executive officer of the Association for Community Affiliated Plans (ACAP) in Washington, DC, which represents nonprofit Medicaid managed care health plans.

"We have been concerned about this for quite some time," she says. "We had encouraged the Senate Finance Committee to look at this issue, and that's partly why they put it into the [Children's Health Insurance Program Reauthorization Act of 2009]."

ACAP wants CMS to more clearly define how it measures "actuarial soundness" and require states to be more transparent in how they determine rates. "States will say, 'Here are the rates, take them or leave them,'" says Ms. Murray. "We would like to know what trending factors were used. What is the justification for them?"

Ms. Murray suggests that an administrative channel should be established for health plans to raise concerns with CMS about the actuarial soundness of rates set by a state.

ACAP also would like to see CMS send a letter informing state Medicaid directors that states must share trend assumptions and baseline data with health plans. They also want to see some type of administrative remedy in place, so health plans could go to the central office at CMS — if they don't agree with the rates — and adjudicate whether the rates are adequate.

"Right now it's a 'Take it or leave it' situation. Many of the for-profit plans say, 'Leave it,'" says Ms. Murray. "Some of the plans were told they would get a 0% rate increase for pharmacy without any justification for how the actuaries came up with that."

She adds that it is especially important for plans to have the resources they need to provide care to an estimated 18 million individuals expected to come onto the Medicaid program in 2014. "Based on experiences with the CHIP program, about 70% ended up in managed care. This is a similar population and benefit package," notes Ms. Murray.

If a plan is only in one state with one customer, they may be forced to accept rates that are too low. "They can do this for a year or two if they have the reserves," says Ms. Murray. "But by giving them no choice, the states are undermining the Medicaid managed care plans."

Contact Ms. Murray at (202) 204-7509 or