Medicaid Managed Care Plans Coming Under Scrutiny

In April 2022, Louisiana Attorney General Jeff Landry filed a lawsuit against UnitedHealthcare of Louisiana and OptumRx, a pharmacy benefit manager (PBM) subsidiary of United’s parent company, UnitedHealth Group. In the suit, Landry accused UnitedHealthcare of inflating the amounts it pays OptumRx for drugs to help United increase what it counts as medical losses in Louisiana’s Medicaid program.

In a 57-page lawsuit, Landry said he was seeking to recover “billions of dollars in inflated prescription drug prices.” By inflating what it pays for drugs, the insurer could skirt federal oversight regulations designed to ensure that managed care plans spend at least 85% of state and federal Medicaid funds for patient care and services under the medical loss ratio (MLR) rules, Landry wrote in the lawsuit filed April 13. A spokesperson for UnitedHealth Group said company officials believe the lawsuit is without merit and the company will defend itself, according to published reports.

Landry’s investigation is not unusual. Over the past four years, officials in at least 13 states have investigated how managed care plans run their Medicaid programs, including Arkansas, Illinois, Kansas, Mississippi, New Mexico, Ohio, Oklahoma and the District of Columbia. Many of those investigations are concerned with how health insurers serving Medicaid members contract with PBMs.

In late April, California’s Department of Health Care Services said it was investigating Centene Corporation, the nation’s largest managed Medicaid contractor. Under the state’s contract with Centene, California paid the company $6.8 billion last year to manage its Medicaid program and provide care for its 2.14 million California beneficiaries. A Centene spokesperson said, “We have not reached a settlement with the state of California on this issue, and we respect the deep and critically important relationships we have with our state partners.”

To date, Centene has disclosed that it set aside $246.4 million to settle allegations of fraud in four states: Arkansas, Mississippi, Ohio and Kansas. In addition, three states—Georgia, South Carolina and Indiana—also are investigating the insurer over its now-defunct Envolve Pharmacy Solutions, a PBM, according to reports. In response, the Centene spokesperson said, “The no-fault agreements we have with other states reflect the significance we place on addressing their concerns and our ongoing commitment to making the delivery of healthcare local, simple and transparent. Importantly, this allows us to continue our relentless focus on delivering high-quality outcomes to our members.”

One of the earliest investigations of Medicaid managed care insurers’ relationships with PBMs came in 2018 when reporting in The Columbus Dispatch newspaper prompted the Ohio legislature to investigate CVS Caremark, the PBM division of CVS Health. That investigation resulted in Ohio’s Medicaid program ordering five health insurers to end contracts they had with PBMs.

State-by-state trend

It would have been impractical for Ohio to end its contracts with health plans. Simply put, state officials needed those companies to manage the care of more than 3 million state Medicaid beneficiaries, among the costliest members of any health system.

Allan Baumgarten

Since the late 1980s, 40 states and the District of Columbia have contracted with comprehensive managed care programs. They have done so for a variety of reasons, says Allan Baumgarten, a health policy analyst, consultant and expert in Medicaid contracting. One reason: “States want to be able to predict how much they will spend on their Medicaid programs,” he explains.

State Medicaid directors also wanted managed care companies to establish networks, negotiate with providers, oversee referrals to specialists, and control utilization, Baumgarten adds. Seeing these advantages, Medicaid officials in Minnesota and other states began contracting with managed care organizations, he says.

State officials also wanted to limit the use of emergency rooms by enrolling beneficiaries in primary care homes. Managed care plans already had networks in most markets and statewide contracts to serve employers, explains Baumgarten. “It happened on a state-by-state basis.” After Minnesota, Wisconsin was an early adopter of Medicaid managed care, in part because there was a strong emphasis among the state’s employers to contract with these plans for their workers, he says. Also, Wisconsin had large hospital systems that started their own health plans, particularly in Madison, the Green Bay area and in Marshfield where the Marshfield Clinic Health System was started.

“State officials reasoned that managed care was containing costs for employers (and) we should embrace managed care as a solution for the state as an employer,” Baumgarten says. “After moving large numbers of state employees into managed care plans, the state did the same for its Medicaid population.”

According to the Kaiser Family Foundation (KFF), 40 states and the District of Columbia have what the foundation experts call comprehensive risk-based managed care programs through plans that use capitated per member per month payment for each adult and child under care. Under capitation, managed care plans assume the financial risk for providing healthcare services to all members.

Andy Schneider

Some of the states also use primary care case management (PCCM) and other programs that are not capitated to manage healthcare costs for Medicaid members, says Andy Schneider, a researcher at the Georgetown University McCourt School of Public Policy and a former senior advisor at CMS, where he focused on Medicaid program integrity. In addition to providing comprehensive acute care, some Medicaid plans also provide long-term services in exchange for a capitated payment for each member.

Among the 10 states that do not have comprehensive managed care programs, KFF reported that four have no Medicaid managed care contracts (Alaska, Connecticut, Vermont and Wyoming) and six have PCCM and other similar programs (Alabama, Idaho, Maine, Montana, Oklahoma and South Dakota).

Some states carve out services such as behavioral health, pharmacy benefits, dental care and long-term care from their managed care contracts and pay fee for service for those services, KFF noted. However, more states were beginning to include these services in managed care organization (MCO) contracts, including 35 states that had pharmacy benefits in managed care agreements as of July 2021. There is some movement toward splitting off pharmacy benefit management. Three states (California, New York and Ohio) will carve out pharmacy benefits from their MCO contracts starting this year or later, KFF reported.

States have moved to Medicaid managed care partly because the number of people in the U.S. covered by Medicaid has grown. Added together, state Medicaid plans are the nation’s largest health insurer. In 2020, state and federal Medicaid programs and the Children’s Health Insurance Program (CHIP) provided coverage to nearly 1 in 5 Americans, KFF reported. During the first years of the COVID-19 pandemic, Medicaid enrollment grew to serve 82.3 million Americans, the organization noted.

Such big numbers mean that spending on Medicaid is the largest budget item in many states, says Katherine Hempstead, a senior policy adviser at the Robert Wood Johnson Foundation.

Big budget items call for management. As of July 2019, 53.7 million Medicaid members, accounting for more than two-thirds (69%) of all Medicaid beneficiaries, were covered under risk-based contracts requiring MCOs to provide comprehensive care, KFF noted.

One problem that states encounter when contracting with managed care plans is that many of them are subsidiaries of large, publicly traded, for profit companies that need to serve not only their members but also their shareholders, Schneider says. Five of the health insurers that have Medicaid managed care contracts with states are among the 25 largest public companies in the U.S, according to the Fortune 500 rankings. As of July 2019, those five companies and a sixth, Molina Healthcare, controlled just over half of the enrollment in Medicaid managed care plans, according to a KFF tally. In 2019, the insurer with the largest Medicaid managed care market share was Centene, with 15%, followed by Anthem, with 11%. These were followed by UnitedHealth Group, with 9%; Wellcare, with 7%; Molina, with 5%; and CVS Health (which owns Aetna), with 3%, KFF reported. In January 2020, Centene acquired Wellcare.

Given Schneider’s background in Medicaid program integrity, it seemed obvious to ask if those health insurers and PBMs have found ways to boost profits by using their MLR calculations to their advantage.

“That’s a good question,” Schneider says. He would not comment, however, on whether managed care plans have abused the MLR program but did note that insurers and their subsidiaries have ways of doing so. By acquiring PBMs, physician groups, and other healthcare provider organizations, such as home health companies, health insurers can report payments to those organizations as healthcare spending for beneficiaries.

In the Louisiana lawsuit against UnitedHealthcare and OptumRx, the state charged that payments to OptumRx were used to boost expenses when, the lawsuit alleges, those payments to United’s subsidiary PBM helped to increase the profit for both the PBM and the parent company.

Making such payments to a subsidiary could benefit Medicaid managed care plans because under the MLR rules in many states, these plans cannot spend more than 15% of revenue on administrative costs and profits, Schneider says. “By paying themselves for delivering services to enrollees, MCOs can make money on their provider operations and, at the same time, help themselves hit the 85% MLR target,” he explains. A managed care plan that does not spend 85% on care and other related expenses would need to rebate any excess to the state.

The MLR rules are different for plans sold in the individual market under the Affordable Care Act because any spending below the required percentage would go back to health plan members, he adds.

Calculating medical losses

Each MCO is required to file an annual MLR report that must show the MLR calculations and specific data behind those numbers, Schneider says. In the calculations, the amounts paid for medical care are considered losses and any remaining premium revenue can be spent on administrative costs or retained as profit, or for nonprofit insurers, retained as a surplus, he adds.

Investors prefer that publicly traded companies have low MLRs. Thus, if administrative costs are kept in check, more premium revenue can be paid to shareholders, he explains.

For Medicaid managed care plans, the MLR numerator must show funds paid for covered services, for improving quality and for fraud prevention. The denominator is the amount received in capitation payments minus any funds paid in taxes or for licensing, regulatory fees or assessments.

“They can’t manipulate what they get in capitation revenue or what they pay in taxes and fees, and they usually don’t spend much on fraud prevention,” Schneider says. “Quality improvement and payments to providers are really where they put their money.”

Once they tally all payments to providers and for quality improvement and fraud prevention, managed care plans have no other options to increase expenses. “If you’re a large, publicly traded health company with lots of resources, you can buy your own providers, meaning physician groups or pharmacy benefit managers,” he suggests. “Then you can pay them more.”

Baumgarten agrees, saying, “Profits and administrative expenses can be a way of moving money to owned or affiliated companies.”

What’s unknown is whether UnitedHealthcare of Louisiana paid OptumRx more than it would have paid a PBM that was not a subsidiary, Schneider says. “I don’t know what happened in the Louisiana case, but you can certainly see how the incentives are aligned,” he adds.

An independent audit from an accounting firm in Atlanta showed that in 2019, UnitedHealthcare of Louisiana had an MLR of 93%. This percentage exceeds the CMS minimum requirement of 85%, the auditors reported.

Increased reporting

Jenna Libersky

One way that states can ensure that managed care plans are delivering high-quality, coordinated and comprehensive care to Medicaid beneficiaries is to require these plans to report more data on their operations to the states and CMS, says Jenna Libersky, a principal researcher for Mathematica, a health policy research firm that analyzes the performance of Medicaid and CHIP.

Increased scrutiny is coming from state and federal regulators later this year when CMS implements new data-reporting and monitoring tools for managed care plans that contract with state Medicaid programs, Libersky says.

In a memo in June 2021, the federal Center for Medicaid and CHIP Services (a division of CMS) issued a bulletin explaining the requirements Medicaid managed care plans must follow to comply with the 2016 Medicaid and CHIP Managed Care final rule. CMS published that rule on April 25, 2016, to align the regulations that govern the Medicaid and CHIP programs with those that control other U.S. health insurance programs.

The rule also was designed to improve how states purchase managed care for beneficiaries and to introduce new consumer protections for members, Libersky says. Most of the data CMS wants from states are not new because managed care plans and the states have already been collecting that information. But now they will be required to report that data to CMS, allowing the states to improve compliance with managed care standards and requirements, she adds.

“It’s a big deal,” Libersky says of the new tools the states and federal regulators will use to monitor and oversee managed care programs for Medicaid and CHIP.

Starting at the end of this year, health insurers that have contracts with states ending on June 30, 2022, will need to file the first of what CMS calls the “Managed Care Program Annual Report.” Plans with contracts that end on Aug. 31, 2022, will need to file their oversight and management reports by the end of February 2023. All plans will need to file their reports by the end of September 2023, CMS said.

The data in these reports will allow state and federal regulators to know much more about how each MCO operates on a variety of performance measures. These include enrollment, MLRs, quality improvement efforts and network adequacy, among other data, Libersky notes.

Given the problems that state Medicaid programs have uncovered about how managed care plans and their subsidiaries operate, increased reporting requirements for managed care insurers is a positive development, Schneider says. “Under the 2016 rules, states aren’t required to set a minimum MLR, but if they do, it can’t be lower than 85%,” he explains. “Also, even if they set a minimum MLR, they don’t have to collect a remittance if the MCO doesn’t hit that percentage.” Regardless of whether a state sets or enforces a minimum MLR, all states must assume an 85% MLR when setting capitation rates, and each MCO must file an annual MLR report according to federal regulations, he adds.

Libersky explains further, saying, “The expectation is that the states will be better able to see how insurers are spending their premium income but also that states may be able to recoup some money if the managed care plans are not meeting those ratios.”

CMS will also be collecting information on network adequacy and access to care, she says.

Need for coordinated care

Donald Berwick

Former CMS Administrator Donald Berwick, M.D., M.P.P., agrees that any focus on improving care is good for Medicaid beneficiaries. After all, Medicaid members need some of the most intense and costly healthcare services that the delivery system can provide, notes Berwick, a lecturer in the Department of Health Care Policy at Harvard Medical School.

“They’re a highly vulnerable population that often have complex healthcare needs and require many different medical and social services,” he says. “Therefore, it makes a lot of sense to offer Medicaid beneficiaries the advantages of truly coordinated care that managed care organizations provide.”

Outside of MCOs, the healthcare systems are complex and fragmented, which may not serve the nation’s Medicaid members well, he adds. “There’s some logic to contracting with managed care companies,” he notes, citing Kaiser Permanente, Group Health Cooperative of Puget Sound and HealthPartners in Minneapolis as examples of well-run MCOs.

“The problem is once you open the door to the intermediation of health plans, you create opportunities for gaming the system,” he says. “That said, you can’t throw up your hands and say we shouldn’t be helping to manage the care of these patients. That would be wrong because Medicaid members need the help that coordinated care systems provide.”