Examining the extent of data available for policy planning and oversight of Medicaid managed care insurers

1. INTRODUCTION

The private insurance plans that administer coverage for the majority of Medicaid beneficiaries may undergo enhanced financial reporting as recent federal rules begin to be enforced. Under the new rules, insurers must report on their Medicaid expenditures, demonstrating how much they allocate to medical care versus overhead and profits. This commentary examines the financial data that insurers are now required to submit, how it advances on existing data, and whether the new reporting requirement will fulfill federal regulators' goals of ensuring good fiscal stewardship of Medicaid dollars.

Until the new regulations are enforced, Medicaid managed care remains the only major health insurance market that lacks nationally representative data on the share of insurer revenues allocated to medical care versus overhead and profits. Under the ACA, plans in the private markets, Medicare Advantage, and Medicare Part D must spend at least 85% of premium revenues on health care (80% for small and nongroup plans). By the same token, any amount over 15% retained for overhead and profits must be rebated back to consumers. By contrast, Medicaid managed care is not subject to these federal requirements, and only half of managed care states impose their own. As a result, the National Health Expenditure Accounts, which reports to the Organization for Economic Development and other international bodies, estimates an administrative rate in Medicaid managed care that is similar to the private market, on which we have better data. ^{1 (pp. 26–27)} By contrast, the Congressional Research Service, part of the federal legislative branch, conducts their analyses by considering all managed care spending to be medical. ² , ^{3 (p. 5)} Thus, we lack consensus on the quantity of medical expenditures in this aspect of our health care economy.

2. SIGNIFICANCE AND AIMS OF NEW REGULATION

Federal regulators explain that the new reporting requirements were established in line with their aim to promote “responsible fiscal stewardship” of Medicaid funds, much of which flows through private insurers. Nationwide, just over half of the $725 billion spent on Medicaid went to private insurers in 2021. ⁴ A majority of Medicaid beneficiaries (70%) get their coverage from a private insurer. ⁵ Moreover, for those beneficiaries whose care they administer, insurers are responsible for every aspect of care, including financing and authorizing each encounter with the medical system. Insurers determine which providers are in‐network, how much to pay providers for a service, and whether the service is needed or wasteful under their protocols for managing utilization. States simply pay a premium, or capitated rate, for each beneficiary, out of which the insurer then pays providers for services and retains the rest for salaries, other overhead and profits.

While the capitation model incentivizes efficiencies, it also creates the conditions for an insurer to act outside of the interests of Medicaid beneficiaries. The insurer's financial standing depends on its ability to keep medical spending down. In order to retain enough to cover their own operational costs of administering the plan benefits, as well as shareholder profits to reward investors, insurers must use their administrative tools of care delivery in such a way that efficiently manages beneficiaries' care. In a well‐regulated market, individual insurers should not be able to take the financial incentive of capitated payments too far, that is, by suppressing health care access and thus over‐allocating spending toward their own overhead and profits.

3. NEW REPORTING REQUIREMENT

Correspondingly, the new regulation requires insurers report a Medical Loss Ratio (MLR), ⁶ which CMS describes as a tool for “demonstrating that adequate amounts under the capitation payments are spent on services for enrollees.” ^{7 (p. 27521)} Under the rule, plans starting on or after January 1, 2017, are required to report the MLR to the state, and the state must combine all Medicaid insurers' MLRs into an annual report submitted to CMS. States must additionally collect and monitor some of the underlying data components forming the ratio, which they are not required to report to CMS.

The content of the reporting requirement is summarized in Figure 1. Amounts marked by an * are reported to states. The insurer reports to the state the amount of Medicaid revenues received, and the amount spent on medical care. They must differentiate their medical spending between claims paid to providers and spending on quality‐improvement activities like insurer‐employed nurse navigators. Both expenses are considered medical expenses, and both form the medical spending numerator of the medical loss ratio. Non‐medical expenses, like administrative personnel salaries and claims processing, are not itemized under the reporting requirement, except for the taxes and regulatory fees that are deducted from revenues to form the MLR denominator. By the same token, profits, whether paid out or retained as surplus, are not itemized. Ultimately, CMS only requires states to report the MLR percentage and the two halves of the fraction‐ total medical expenses and after‐tax premium income, noted in Figure 1 by the ± symbol.

FIGURE 1.

Elements of medicaid managed care reporting on allocation of insurer revenues. Figure 1 summarizes content of new reporting requirements for Medicaid Managed Care insurers. Elements noted with ± must be reported by the insurer to the state and additionally included in the state's report to CMS. Elements noted with * must be reported by insurers to the state and can optionally be included in state reports to CMS.

4. REGULATORY CHALLENGES

One significant challenge for plans that must report their medical‐loss data as well as for regulators seeking to use the data is ambiguity in the definitions of medical spending. While claims payments are relatively straightforward, the ambiguity arises primarily in defining “quality improvement” activities that can be considered medical. The task of identifying and assisting high‐need enrollees to coordinate their care is considered a quality improvement activity and falls under medical spending, even if the task is carried out by a non‐clinical insurance employee. However, managing the utilization of high‐need enrollees for the purpose of reducing costs is considered an administrative activity. To illustrate the potential overlap, consider the title of the data entry element on the reporting template: “Quality Improvement, not Reported as Administrative Cost Containment.”

A second challenge for regulators has been enforcement of the new reporting requirement. The regulation imposed new responsibilities on state Medicaid agencies for overseeing and collecting plan financial data and for then reporting a portion of what they collect to CMS. The regulation has technically been in effect since January 2017, but states and the federal government are still developing their capacity to enforce it. An investigation by the Office of the Inspector General (OIG) found that most states have begun to collect reports but approximately half were incomplete. ⁸ A strong majority of those were incomplete because the state had failed to collect the data that distinguish between claims and quality‐improvement activities. The OIG report identifies plans receiving over $500 million in premium revenues from the state but reporting $0 in non‐claims medical expenditures, implying all health care‐related spending was paid directly to providers. Federal regulators confirmed that the most likely explanation was misattribution.

Our own informal investigation corroborated the result. With technical assistance from the Network for Public Health Law, we submitted 20 Freedom of Information Act requests over the course of a year and a half, with several requiring re‐submissions and negotiations. Out of 20 requests, 12 were denied or ignored and eight provided what data they had, but all were at best incomplete. The outcome underscores the difficulty for researchers in addition to state and federal regulators to utilize these data for policy evaluation, unless substantial progress is made on enforcement and accessibility.

5. ADVANCEMENT ON EXISTING DATA

Despite these challenges, the new regulation represents substantial advancement on previously existing data sources of Medicaid spending. Prior to this regulation, there were two primary sources of data on Medicaid spending, but each has limitations. One is submitted by state Medicaid agencies to the federal government in order to receive federal reimbursements. States enumerate and submit a form titled CMS‐64 that details program spending across several areas. The federal government reimburses most states at a higher rate for medical spending than for administration, with bonuses for activities like family planning or technology upgrades, and thus requires states to itemize these expenditures and several others. The major drawback to these data is that all managed care spending is listed as a single, considerably large, line item (at least half of most states' Medicaid spending), ⁴ without distinguishing how insurers use those funds. Moreover, the full line item is considered medical spending, and thus reimbursed at the higher rate, which incentivizes states to contract out their delivery systems.

The second source of data is submitted by insurers to state insurance commissioners in order to demonstrate financial solvency. State governments oversee the “business of insurance,” including issuing licensure and monitoring for solvency, which these data support. ⁹ The reports cover inflows (premiums, investment income); outlays (claims, administrative losses, taxes and fees); the levels of capital on their balance sheets; and firm characteristics like parent company and profit status. The drawback to these data is their level of aggregation. Each insurer files one report per state, much of it summed across all markets they serve, including Medicaid, but also Medicare Advantage and private markets. While medical and pharmaceutical claims payments are disaggregated by market, these are often summed across Medicaid beneficiary populations and sometimes summed across all states in which the insurer operates. A handful of state commissioners require supplemental health filings with state‐specific data by market or beneficiary population, but most use the more basic requirements of the National Association of Insurance Commissioners. Despite the drawbacks, these data are useful for bigger picture evaluations. One study estimates that nationwide, Medicaid managed care plans realized profits of $71 per member month on average in 2020. ¹⁰ Another uses data from states with greater specificity and finds that plan quality ratings are modestly but significantly correlated with medical spending, and negatively correlated with being publicly traded. ¹¹

6. WILL THIS PROGRESS MEET REGULATORS' AIMS?

Even once states are fully compliant with the new reporting rules, the data generated may not be enough to meet federal regulators' aim. CMS explains that “MLR calculation and reporting results in responsible fiscal stewardship” because it ensures that states have “sufficient information to understand how the capitation payments made for enrollees in managed care programs are expended.” ^{7 (p. 2521)} However, there will be instances in which the MLR reporting does not provide a full picture of programmatic activities. Reaching full compliance with the MLR reporting requirement means that plans report the top line numbers comprising the medical loss ratio. Yet audits in private markets, where MLR reporting has been required for several years, have found insurers manipulating these elements to meet regulatory thresholds. Some instances were egregious, like designating marketing or lobbying as a medical expense. ¹² But others turned on vagaries in category definitions and might not be uncovered in routine third‐party financial audits. For example, while recruiting qualified providers is considered an administrative expense, bonuses to high‐performing providers are considered quality improvement, and thus medical. CMS found that some insurers devised provider payments that were automatically triggered by an unfavorable medical‐loss ratio. Rather than pay consumers a rebate, as required in private markets when the MLR falls below 85%, the insurer would pay that amount to providers as an incentive to stay in‐network. CMS argued that a quality incentive needs an associated clinical metric and rebate‐triggered bonuses cannot be medical. ⁷ This practice would not be made apparent in the reporting required under the new regulation. States would simply see the dollar amount reported as quality spending but not have insight into the underlying expenditures or activities.

Future regulation could make further progress toward the aim by requiring more comprehensive itemization of plan spending. This could be accomplished by altering the federal rule at 42 CFR 438.8(k) to add to the list of required reporting elements the amounts spent in each of the sub‐categories listed in Figure 1. This could additionally be accompanied by a requirement to report numeric descriptions of the associated operational activity, including numbers of prescriptions filled and numbers of encounters by care setting alongside the amounts spent for each activity. Two states offer examples of how these additional data elements can be required of insurers and can be used to serve regulators' interests. New York state requires to our knowledge the most comprehensive expenditure and operational reporting from its Medicaid insurers, requiring itemized sub‐category expenditures alongside quantities of care provided. A recent analysis of these data shows how the state's current contracting policies implicitly encourage long‐term‐care plans to institutionalize their highest‐cost enrollees to get them disenrolled, forcing many of the plans more oriented to community‐based care out of the market. ¹³ The insight can help to make progress on one of the sector's primary goals, ¹⁴ and emerged from the combination of itemized expenditure and operational data. Secondly, advocates in Illinois from an organization called the Better Government Association obtained data via courtroom litigation, which they used to highlight, among other issues, Medicaid insurers that contract with their own parent companies to perform plan activities, blurring the lines between overhead, profits, and medical expenditures. ¹⁵ State regulators concerned about the endpoints of Medicaid dollars may want expenditure reporting data that specifies profits among other non‐medical expenditure categories.

Finally, states might benefit from reporting requirements aimed more specifically at developing the evidence base for Medicaid plan contracting. This could be achieved by requiring that the reporting described above be disaggregated by beneficiary population and service type in a manner that aligns with the units over which states enter managed care contracts. States have little policy or academic consensus to use as guidance on the mix of populations and services best supported by insurer contracting. ¹⁶ , ¹⁷ Many states first started, three or more decades ago, with their healthiest and least medically complex beneficiaries and added populations with disabilities or long‐term care needs to these contracts thereafter. But other states took the opposite approach. ¹⁸ In the years since, states have continued to search for the right mix. Since 2017, approximately, 10 states have carved in some portion of behavioral health care, and as of fiscal year 2022, three states are in the process of carving out prescription coverage (NY, CA, and OH). ¹⁹ At several points in time, a service or population was being carved out of one state's contract and carved back into another's. Consistent population‐based data on the medical and non‐medical expenditures and operations of each of these contracting units would enable evaluation of the alternative approaches over time.

7. CONCLUSION

A new regulation now in effect requires Medicaid insurers to report their medical loss ratio to state regulators. Insurers must specify the amounts spent on claims payments and on quality improvement activities, which comprise the ratio's medical expense numerator, and the taxes, fees, and revenues that comprise its after‐tax‐income denominator. The requirement to report these four data elements represents substantive progress for oversight of Medicaid managed care and will bring the program's financial reporting in line with Medicare Advantage for the first time. Nevertheless, federal regulators, whose aim is to ensure responsible fiscal stewardship of Medicaid dollars, may still need deeper audits and potentially stricter oversight regulations in the future. Similarly, state policy planners may seek to further develop the evidence base for plan contracting decisions in ways that go beyond the data generated by the new financial reporting. Future regulations could address these shortfalls by requiring itemized expenditure reporting disaggregated by beneficiary population and service type.

FUNDING INFORMATION

No funding to report.

Zewde N, Edwards R, Gordon K. Examining the extent of data available for policy planning and oversight of Medicaid managed care insurers. Health Serv Res. 2023;58(2):242‐246. doi: 10.1111/1475-6773.14121