Medicaid Final Rule Aligns the Program with MA and Exchange Regulations

The Centers for Medicare & Medicaid Services (CMS) issued the final Medicaid “mega-rule,” a huge regulation that makes changes to every part of the current managed care rules. Although the final rule makes some tweaks based on the comments received from the industry, it largely adopts the proposals released last May. The new changes will be phased in over the course of three years, with some provisions going into effect starting July 1, 2017.

The new regulation, in essence, brings Medicaid managed care into the 21st century. Many of the new changes align the Medicaid program with Medicare Advantage (MA) and Exchange regulations currently in place. The rule encourages efficient, realistic use of limited resources, creating more incentives to improve clinical outcomes, reduce cost, and improve benefit coverage. Below is a synopsis of the major changes in the final regulation:

Medical Loss Ratio (MLR)

The final rule directs states to comply with a federal MLR standard of a minimum 85%, with a one-year reporting year. The new MLR requirement begins with contracts starting on or after July 1, 2017. This does not prevent states from setting loss ratios higher than 85%, however. Several states already impose MLR standard on plans, and many plans are already in compliance or close to an 85% MLR, so the impact of this new regulation is uncertain. Time will tell if the imposed 85% MLR will be effective as a way to standardize the varying state rules.   CMS estimates the federal government would collect from $7 to $9 billion over a span of two year from plans failing to meet the ratio.

While the calculation details largely align with MA, CMS did make some slight variations in order to account for program differences between Medicaid/Children’s Health Insurance Program (CHIP) and MA. The proposed rule also originally suggested fraud prevention activities would be included in the MLR calculation, however, decided since MA and the private insurance industry have yet to adopt this, the new regulation would read that Medicaid will adopt fraud prevention activities when the private market does.

In addition to the development of the MLR, CMS is requiring more transparency and fairness between health plans and States in the rate setting process — this will mean a closer look into how health plans and States are utilizing government funds.

Quality Rating System (QRS)

CMS plans to develop a Medicaid and CHIP QRS, similar to the one currently being implemented in the Exchanges. The new system will align with Exchange indicators but will retain flexibility to use different measures in order to reflect the differences in populations served by Medicaid/CHIP. CMS will expand on the methodology it plans to use in a forthcoming proposed regulation and expects to implement the QRS over the next five years. Overall, the major quality provisions of the rule all work to increase plan transparency of quality information, making it more available to the consumers and to facilitate identification of high risk members with special health care needs.  States will also have the option of waiving out of the federal QRS and establishing their own, as long as it is substantially similar.

Quality Incentives

CMS also included several avenues in which states can now develop quality incentive systems in order to move forward with delivery reform and the movement toward value-based care, similar to the MA and Exchange spaces. States can now enter contractual agreements with plans in which plans agree to work on delivery system reform and performance improvement activities. This will be especially helpful in managing members in need of long term services and support and/or have special health care needs. States can also include value-based purchasing agreements that would tie provider reimbursement to performance on quality measures. Finally, states can develop other incentive and penalty arrangements to reward plans meeting quality or performance.


CMS is updating the marketing standards in order to provide more beneficiary protections due to both the creation of Qualified Health Plans (QHPs) and the changes in managed care delivery systems in the past decade. For example, the new regulation updates rules on the use of mail, email, and websites. The final rule also requires plans to regularly update provider directories and drug formularies and make these readily available. The final rules also codify accessibility and anti-discrimination rules. The new rules greatly align with MA and the Exchange.

Appeals and Grievances

This is yet another area in which CMS streamlines the process with MA and the Exchange. The new regulation sets clear timelines, definitions, and guidelines for the appeals and grievances process and sets an expedited appeals process. Plans will need to ensure completion of the new required turnaround times for requests for external review; availability of case file medical records, and other documents used to conduct coverage determinations to the member; and documentation of notices and recordkeeping. Enrollees will now also be required to use the new internal process before utilizing state fair hearings.

Network Adequacy

Though CMS leaves network adequacy details up to the states, it does direct states to establish time and distance standards for primary and specialty care, behavioral health, OB/GYN, pediatric dental, hospital, pharmacy providers, and Managed Long Term Services and Supports (MLTSS). States will be required to certify the adequacy of the network at least annually or if there is a substantial change in the program design.

Actuarial Soundness and Rate Setting

CMS established and updated its rate setting procedures in order to bring clarity and ease to setting and reviewing Medicaid managed care payment rates. Currently, rates must simply be “actuarially sound.” The new regulation defines actuarially sound rates as “rates that are projected to provide for all reasonable, appropriate and attainable costs under the terms of the contract and for the time period and population covered under the contract.” CMS also set standards that capitation rates must meet and that CMS will apply in the review and approval of actuarially sound capitation rates.

Fraud Prevention

CMS also updates procedures to prevent, monitor, and identify fraud, including internal monitoring, audits, and mandatory reporting to CMS. The new rules include procedures for suspending providers when fraud has been alleged. The rule leaves some rulemaking to the states, however, states will need to submit a plan to CMS on how they intend to recover discovered fraud, waste, and abuse.

As previously noted, the final regulation makes changes to virtually every part of Medicaid Managed Care regulations and makes many more updates than we have gone into here. However, the big takeaway is many of these new regulations bring the Medicaid program up to date by borrowing from the successes and lessons learned from the MA and Exchange spaces. Plans would be well served to educate themselves on successful MA and Exchange plan compliance strategies and operations going forward in order to prepare themselves for the upcoming changes.


Let the team of experts at Gorman Health Group (GHG) help you prepare for the upcoming changes that could impact your organization. GHG’s risk adjustment experts can help analyze the financial impact, develop feasibility models to help with meeting the new MLR requirements, and provide guidance on streamlining operations. GHG’s Compliance Solutions can assist in the development and monitoring of these new contract requirements, and our clinical team can assist with reviewing and developing integrated care models to provide quality initiatives that are effective and efficiently managed to get optimal results.

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