Medicaid and CHIP Risk-Based Managed Care in 20 States. Experiences Over the Past Decade and Lessons for the Future.. Evolution of Federal Medicaid Risk-Based Managed Care Policy


Risk-based Medicaid managed care has been used by some states since the 1970s and has become more common over time. Through the late 1990s, it was necessary for states that wanted to enroll Medicaid beneficiaries in risk-based managed care to obtain a waiver from the federal requirement that those beneficiaries have a "freedom of choice" of providers (when enrollment was mandated) and—if their managed care programs were limited to certain geographic areas, as most were at first—from the requirements for "statewideness." These waivers are called 1915b waivers. Another waiver authority, the 1115 waiver, allows a state to reform its Medicaid program in a more extensive way. The 1115 demonstration waivers also were often used to expand Medicaid risk-based managed care programs in the 1990s.

Generally states began their risk-based managed care programs by covering children and parents without disabilities, and states limited the programs to urban and suburban areas. Often states began with voluntary enrollment and transitioned some or all populations to mandatory enrollment in risk-based managed care over time.

Because of policymakers’ high interest in how risk-based managed care affects Medicaid enrollees’ health care outcomes and program costs, in the late 1990s numerous evaluation studies examined Medicaid managed care programs. The evaluations showed mixed findings concerning Medicaid managed care across a variety of states (Coughlin & Long, 2000; Kirby, Machlin, & Cohen, 2003; Brown, Wooldridge, Hoag, & Moreno 2001; Coughlin & Long, 2004).

An increased interest in cost-containment led to an expansion of risk-based managed care in the late 1990s and into the 21st century. Several changes to federal law allowed for such expansions. In particular, the Balanced Budget Act (BBA) of 1997 made it possible for states to implement mandatory risk-based managed care programs without regularly obtaining a federal waiver.

Because concern remained about whether enrollment in risk-based managed care might negatively affect beneficiary access to and quality of care, the BBA required access and quality monitoring of managed care programs through several provisions. These include:

  • Each state must hold a service agreement with its managed care plans, in which the state specifies access requirements for provider networks, such as provider proximity to patients, the maximum time patients are expected to travel to see providers, how many providers of each type (e.g., Primary Care Providers [PCPs], specialists, hospitals) must be in the network, how providers should be credentialed, expectations about how soon appointments are available, or expected hours of operation.
  • States implementing mandatory Medicaid managed care must have an annual external independent quality review of each plan. BBA regulations promulgated in 2003 required states to contract with an External Quality Review Organization (EQRO). EQROs must be independent organizations experienced with the Medicaid program, managed care, quality assessment, and statistical analysis. The EQRO must validate aggregate quality monitoring data submitted by plans. EQROs may also take on various optional activities, such as validation of encounter data, administration or validation of consumer or provider surveys, and calculation of additional performance measures.
  • Generally, when risk-based Medicaid managed care is mandated, beneficiaries must be offered a choice of plans except in rural areas (called the "rural exception").

Another important managed care-related provision in the BBA is the requirement for all states to pay MCOs rates that are "actuarially sound." In particular, states are to develop rates in accordance with actuarial principles that are appropriate for the populations and services covered, and which have been certified by an actuary. The requirement for actuarially sound rates has been in federal statute since 1981, but it was not enforced strictly until the BBA regulations in 2002.

In addition to these BBA-related changes to Medicaid managed care, another source of increased managed care flexibility during the early 2000s was the Health Insurance Flexibility and Accountability (HIFA) waiver program that was introduced in 2001. HIFA originally used 1115 waiver authority to allow states to modify Medicaid benefits and cost-sharing. Savings from these modifications were then to be applied to expanding program coverage to new populations.

Increased flexibility to determine Medicaid benefit packages was later expanded to all states through the Deficit Reduction Act (DRA) of 2006, which succeeded the HIFA waiver program. The DRA allowed states to provide children and other groups with "benchmark" coverage instead of the traditional Medicaid benefit package. Benchmark benefits can be modeled after the Federal Employee Health Benefits Plan, health coverage for state employees, or the largest commercial Health Maintenance Organization (HMO) in the state. Between 2001 and 2008, more than half the states had changed their Medicaid programs through such programs (Coughlin & Zuckerman, 2008).

As a result of the many federal policy actions taken during late 1990s and early 2000s, Medicaid risk-based managed care programs expanded greatly. By 2009, 34 states and the District of Columbia had comprehensive risk-based Medicaid managed care programs, and about half of the nation’s Medicaid population received health care services through risk-based managed care (Medicaid and CHIP Payment and Access Commission [MACPAC], 2011).

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