Managed care has become the predominant approach for states to deliver healthcare services to Medicaid beneficiaries. Recent data from 2021 indicates that a significant majority, 74% of Medicaid enrollees, are enrolled in comprehensive managed care organizations (MCOs). The Centers for Medicare and Medicaid Services (CMS) emphasizes the critical role of MCOs in ensuring eligible individuals access and maintain their Medicaid coverage, particularly during periods of significant transitions like the unwinding of continuous enrollment provisions enacted during the pandemic. Despite the widespread adoption of managed care, the specific implementation and scope vary considerably across states. Each state determines which populations and services are included within managed care arrangements. Furthermore, while states set requirements for Medicaid managed care plans, these plans retain flexibility in areas such as provider payment rates and the provision of supplemental benefits. The Biden Administration’s finalized regulations in April 2024, concerning Medicaid Managed Care Access, Finance, and Quality, aim to enhance standards for timely access to care and strengthen state oversight and enforcement. This article explores ten key themes regarding the utilization of comprehensive, risk-based managed care within the Medicaid program, providing a detailed understanding of how managed care is managed and implemented in state Medicaid programs.
1. Capitated Managed Care: The Dominant Service Delivery Model in State Medicaid
States possess the authority to design and administer their Medicaid programs, operating within a framework of federal guidelines. A core aspect of this administration involves deciding how to deliver and finance healthcare for Medicaid beneficiaries. Across the nation, nearly every state incorporates some form of managed care into its Medicaid system. This primarily takes the form of comprehensive risk-based managed care, but also includes primary care case management (PCCM) programs.1,2 As of July 2023, a significant majority of states, 41 including the District of Columbia, have contracts with comprehensive, risk-based managed care plans. These plans are responsible for delivering care to a portion, or in many cases the majority, of their Medicaid beneficiaries (Figure 1). Notably, Oklahoma further expanded the reach of managed care by implementing capitated, comprehensive Medicaid managed care for most children and adults starting April 1, 2024.
Medicaid MCOs offer a broad spectrum of acute care services and, in some instances, extend to long-term services and supports for Medicaid beneficiaries. These organizations operate under a capitated payment model, receiving a predetermined per-member-per-month payment for the services they are contracted to provide. States have historically turned to managed care models with the aim of enhancing budget predictability, controlling Medicaid expenditure growth, and simultaneously improving both access to and the value of healthcare services for beneficiaries. While the transition to MCOs has largely achieved the goal of increased budget predictability for states, the evidence regarding the impact of managed care on access to care and overall costs presents a more complex and somewhat ambiguous picture.3,4,5
2. Vast Majority of Medicaid Beneficiaries are Enrolled in MCOs
The prevalence of managed care in Medicaid is underscored by the fact that nearly three-quarters, specifically 74%, of all Medicaid beneficiaries receive their healthcare through comprehensive risk-based MCOs. As of July 2021, this translated to 66 million Medicaid enrollees being cared for under risk-based MCO arrangements. A significant proportion of states utilizing MCOs, numbering thirty-one, reported that at least 75% of their Medicaid beneficiaries were enrolled in these plans (Figure 2). This high enrollment rate highlights the central role of managed care in state Medicaid programs.
It is important to note that while 2021 data represents the most current national figures available, Medicaid enrollment experienced substantial growth during the COVID-19 public health emergency. During this period, states were prevented from disenrolling individuals, leading to a corresponding increase in MCO enrollment. At the peak of overall Medicaid enrollment in April 2023, coinciding with the beginning of the “unwinding” of continuous enrollment, the program reached 94.5 million enrollees. This represented a significant increase of 23 million, or 32%, compared to pre-pandemic levels. However, as of December 2023, Medicaid enrollment has decreased by over 9% across states, translating to a reduction of over 9 million individuals. Despite these enrollment fluctuations, CMS continues to emphasize the vital function of managed care plans in supporting Medicaid-eligible individuals in accessing and retaining their coverage, especially during the unwinding process. States have access to numerous strategies to minimize coverage terminations due to paperwork or procedural issues. These include temporary waivers that allow states to leverage MCOs to update enrollee contact information, enable MCOs to assist enrollees in completing renewal forms, and extend automatic re-enrollment periods into MCO plans from the standard 60 days up to 120 days.
3. MCO Enrollment Trends Across Different Beneficiary Groups
While children and adults are more commonly enrolled in MCOs, compared to adults aged 65 and over and individuals eligible due to disability, there is a discernible trend towards states increasingly incorporating beneficiaries with complex healthcare needs into managed care models. As of July 2022, 36 states utilizing MCOs reported that 75% or more of all children within their Medicaid programs were enrolled in MCOs (Figure 3). Among the 39 states that had implemented the ACA Medicaid expansion as of July 2022, a significant 32 states were using MCOs to provide coverage to newly eligible adults. Most of these states also covered over 75% of this population segment through MCOs. Furthermore, 35 states with MCOs reported covering 75% or more of low-income adults in pre-ACA expansion groups, such as parents and pregnant women, through managed care arrangements.
In contrast, fewer states with MCOs reported coverage of 75% or more for adults aged 65 and older and individuals eligible through disability. Although these groups are still less likely to be enrolled in MCOs compared to children and younger adults, there is a clear long-term trend of states progressively including adults aged 65 and over and individuals with disabilities within their MCO systems. This shift reflects a broader evolution in how states are leveraging managed care to serve diverse populations with varying healthcare needs.
4. MCO Payments Constitute a Significant Portion of Medicaid Spending
The financial scale of managed care within Medicaid is substantial. In Fiscal Year 2022, total state and federal spending on Medicaid services exceeded $804 billion. A significant portion of this expenditure, approximately 52% of total Medicaid spending, was directed towards payments to comprehensive risk-based MCOs (Figure 4). This percentage remained consistent with the previous fiscal year, indicating a stable and substantial allocation of Medicaid funds to managed care.
The proportion of Medicaid spending allocated to MCOs varies across states. However, in over three-quarters of states with MCOs, at least 40% of total Medicaid dollars were channeled into payments to these organizations (Figure 5). This state-to-state variation is influenced by multiple factors, including the percentage of the state’s Medicaid population enrolled in MCOs, the overall health profile of the Medicaid population, decisions regarding the inclusion or exclusion of high-risk/high-cost beneficiaries (such as individuals with disabilities and dual-eligible beneficiaries) in MCO enrollment, and whether long-term services and supports are integrated into MCO contracts. As states continue to expand Medicaid managed care to encompass higher-need, higher-cost beneficiaries, incorporate expensive long-term services and supports, and include adults newly eligible for Medicaid under the ACA, the share of Medicaid funding directed towards MCOs is likely to continue its upward trend.
5. Actuarially Sound Capitation Rates and Risk Mitigation Strategies
Each year, states are responsible for developing MCO capitation rates. These rates, which are the per-member-per-month payments to MCOs, must adhere to the principle of actuarial soundness and may incorporate various risk mitigation strategies. Federal law mandates that payments to Medicaid MCOs must be actuarially sound. Actuarial soundness is defined as rates that are “projected to provide for all reasonable, appropriate, and attainable costs that are required under the terms of the contract and for the operation of the managed care plan for the time period and the population covered under the terms of the contract.” Unlike the fee-for-service (FFS) model, capitation provides plans with fixed, upfront payments intended to cover the anticipated utilization of covered services, administrative expenses, and profit margins. Plan rates are typically established for a 12-month rating period and are subject to annual review and approval by CMS.
States can utilize a range of mechanisms to adjust for plan risk, incentivize plan performance, and ensure that payments are neither excessively high nor inadequately low. These mechanisms include risk sharing arrangements, risk and acuity adjustments, medical loss ratios (MLRs, representing the proportion of total capitation payments an MCO spends on clinical services and quality improvement), and incentive and withhold arrangements.
During the COVID-19 pandemic, as enrollment surged, utilization patterns shifted, and other cost and acuity changes emerged, CMS provided flexibility allowing states to modify managed care contracts. Many states implemented COVID-19 related “risk corridors,” which involved states and health plans sharing profits or losses, facilitating the recoupment of funds. Nearly two-thirds of states with MCOs reported implementing a pandemic-related MCO risk corridor at some point since March 2020 (as of July 2023). Of these states, over three-quarters (18 out of 23) indicated that recoupments for payments made in 2020, 2021, and/or 2022 had already occurred or were anticipated (Figure 6). Analysis of National Association of Insurance Commissioners (NAIC) data for the Medicaid managed care market revealed that average loss ratios in 2021 (aggregated across plans) remained lower by three percentage points compared to 2019, suggesting increased profitability. Currently, both states and plans face a new period of heightened fiscal uncertainty stemming from the unwinding of continuous enrollment.
6. Service Carve-Ins and Carve-Outs in MCO Contracts
While MCOs are designed to provide comprehensive services to beneficiaries, states retain the authority to carve specific services out of MCO contracts. These carved-out services are then typically managed through fee-for-service systems or limited benefit plans. Common services that states frequently carve out include behavioral health, pharmacy, dental care, and long-term services and supports (LTSS). However, there has been a notable trend across states towards carving these services into MCO contracts, aiming for more integrated care delivery. While the majority of states that contract with MCOs report that the pharmacy benefit is carved in to managed care (32 out of 41), a significant minority of eight states still carve out pharmacy benefits from MCO contracts as of July 2023 (Figure 7). Notably, New York carved the pharmacy benefit out of managed care on April 1, 2023, becoming the most recent state to implement a full pharmacy carve-out. These decisions regarding service carve-ins and carve-outs are strategic choices states make to tailor their managed care programs to specific needs and priorities.
7. Dominance of Large Firms in the MCO Market
The Medicaid MCO landscape is characterized by a mix of plan types, including private for-profit, private non-profit, and government-operated plans. As of July 2021, states contracted with a total of 287 Medicaid MCOs. However, a relatively small number of large firms exert significant influence in this market. As of July 2021, 15 parent firms operated Medicaid MCOs in two or more states. These parent firms accounted for a substantial 62% of total MCO enrollment in 2021 (Figure 8). Among these 15 parent firms, six are publicly traded, for-profit entities, while the remaining nine are non-profit organizations. Remarkably, just five firms – Centene, UnitedHealth Group, Anthem (now Elevance), Molina, and Aetna/CVS – collectively account for 50% of all Medicaid MCO enrollment (Figure 8). All five of these dominant firms are publicly traded companies and are ranked within the Fortune 500, with four even reaching the top 100.
While Medicaid enrollment has seen a decline across these five parent firms since the start of the unwinding, the financial performance of these firms in the Medicaid sector remains robust. The three firms that publicly report Medicaid-specific revenue information (UnitedHealth, Molina, and Centene) all reported year-over-year growth in Medicaid revenue for 2023 compared to 2022 (18%, 6%, and 3% respectively). However, the long-term revenue outlook for these firms at the conclusion of the unwinding period remains uncertain.
8. New CMS Rules Aim to Enhance Access Standards and Prior Authorization Processes
In a significant move to strengthen consumer protections and improve the quality of care within Medicaid managed care, CMS finalized new Managed Care rules in April 2024. These rules are specifically designed to bolster access standards and enhance state monitoring and enforcement capabilities. Historically, states have been granted considerable latitude in defining network adequacy standards and in determining the methods for monitoring and ensuring MCO compliance with these standards and broader access requirements. Key provisions within the new rule focused on improving access include:
- National Maximum Wait Time Standards: Establishment of national maximum wait time standards for “routine” appointments. These include a 15-business-day standard for primary care and OB/GYN services, and a 10-business-day standard for outpatient mental health and substance use disorder services. States are also mandated to establish a wait time standard for an additional state-selected service (effective in 2027).
- Secret Shopper Surveys: Requirement for states to conduct independent secret shopper surveys to validate compliance with wait time standards and to verify the accuracy of provider directories (effective in 2028).
- Enrollee Experience Surveys: Mandate for states to conduct annual enrollee experience surveys for each managed care plan to ensure monitoring systems effectively capture the beneficiary perspective (effective in 2027).
- Payment Rate Analysis: Requirement for states to submit an annual payment analysis comparing certain managed care provider rates to Medicare rates. This aims to provide insights into how payment rates may influence access to care (effective in 2026).
- Remedy Plans: Mandate for states to implement remedy plans to address any areas where managed care plans need to make improvements to enhance access.
- Enhanced Transparency: Provisions to support greater transparency, building upon existing reporting requirements (e.g., Managed Care Annual Program Report and Network Adequacy Assurances Report) and establishing new state website requirements to improve public access to information.
To further ensure adequate provider participation in Medicaid managed care networks, many states currently mandate minimum provider rates in their contracts with MCOs. These minimum rates are often linked to fee-for-service rates, Medicare rates, or other established fee schedules (Figure 9). States contracting with managed care plans may also implement uniform dollar or percentage increase payment requirements, most commonly for hospitals. These payment arrangements are referred to as “state directed payments.” The April 2024 final rules introduce several policy changes related to state directed payments, including setting a payment rate ceiling at the average commercial rate for specific providers, such as hospitals, nursing facilities, and professional services provided at academic medical centers.
In January 2024, CMS also finalized a rule specifically focused on improving the prior authorization process. This rule aims to reduce approval wait times and enhance transparency. A 2023 KFF survey on consumer experiences with health insurance revealed that approximately one in five Medicaid enrollees reported experiencing issues with prior authorization. This rate is higher than for most other types of insurance. Furthermore, nearly a quarter of these enrollees indicated that their health worsened due to prior authorization or other insurance-related problems. A July 2023 OIG report found that Medicaid MCOs had an overall prior authorization denial rate of 12.5%. This is more than double the denial rate observed in Medicare Advantage (Figure 10), raising significant concerns about prior authorization and access to care within Medicaid managed care. OIG recommendations to CMS include strengthening state monitoring of denial practices. Recent MACPAC analysis of denials and appeals in Medicaid managed care led to the inclusion of seven recommendations in the March 2024 Report to Congress focused on improving the appeals process and enhancing monitoring and oversight of MCOs.
9. Financial Incentives Linked to Quality Measures
States are increasingly using financial incentives as a key mechanism to drive quality improvement within Medicaid managed care. These incentives are linked to performance on specific quality measures and can take various forms, including performance bonuses, penalties, capitation withholds, or value-based state-directed payments. Over three-quarters of states with MCOs reported utilizing at least one financial incentive to promote quality of care as of July 2021 (Figure 11). The performance areas most frequently targeted by these financial incentives in MCO states include behavioral health, chronic disease management, and perinatal/birth outcomes. Despite the widespread activity in this area, detailed performance information at the plan level is often not publicly available from state Medicaid agencies. This lack of transparency limits the ability of Medicaid beneficiaries and other stakeholders to effectively assess plan performance on critical indicators related to access, quality, and other key aspects of care.
In addition to financial incentives, states may employ other non-financial methods to incentivize managed care plan performance. One such method is the use of Quality Rating Systems (QRSs), which enable both states and beneficiaries to compare performance across different plans. In 2016, CMS regulations for the first time mandated that all states contracting with managed care plans adopt either a CMS-developed quality rating system or a state-developed QRS approved by CMS. The 2024 Managed Care final rule further refines the CMS framework and state requirements for QRSs, including mandatory measures for quality ratings. While CMS is implementing QRS requirements in phases, states are required to make their QRS websites publicly accessible by the end of 2028.
As part of managed care plan contract requirements, state Medicaid programs are also increasingly focused on the adoption of alternative payment models (APMs) to reimburse providers and incentivize quality. Alternative payment models (APMs) represent a shift away from traditional FFS/volume-driven provider payments. APMs exist on a continuum, ranging from arrangements with limited or no provider financial risk, such as pay-for-performance (P4P) models, to arrangements that place providers at greater financial risk, like shared savings/risk arrangements or global capitation payments. As of July 2021, approximately half of states with MCOs included a specific target in their MCO contracts for the percentage of provider payments or plan members that MCOs must cover through APMs.
While evidence suggests some positive impacts from state use of financial incentives to engage managed care plans in quality improvement and outcome enhancement, the results at the provider level are more varied and less conclusive.6,7,[8](#footnote-619805-8 “New York State Department of Health, “2021 Quality Incentive Report,” Albany, NY: New York State Department of Health, 2021, https://www.health.ny.gov/health_care/managed_care/reports/quality_incentive_2021.pdf“)
10. Addressing Social Determinants of Health and Health Disparities Through MCOs
States are increasingly leveraging Medicaid MCOs to develop and implement strategies aimed at identifying and addressing social determinants of health and reducing health disparities. The current Administration has explicitly identified advancing health equity as a key priority for the Medicaid program. This commitment is reflected throughout the 2024 Managed Care final rule. In January 2023, CMS released guidance on the utilization of “in lieu of” services (ILOS) within Medicaid to mitigate health disparities and address unmet health-related social needs (HRSN). This guidance was subsequently codified in the April 2024 Managed Care rule. In December 2022, CMS announced a Section 1115 demonstration waiver opportunity to expand the tools available to states for addressing HRSN. In November 2023, CMS further released a detailed Medicaid and CHIP HRSN Framework accompanied by an Informational Bulletin (CIB).
The majority of states with MCOs reported leveraging Medicaid MCO contracts to promote at least one strategy aimed at addressing social determinants of health in FY 2023 (Figure 12). More than half of these states reported requiring MCOs to screen enrollees for behavioral health needs, provide referrals to social services, screen enrollees for broader social needs, and establish partnerships with community-based organizations (CBOs). In comparison, fewer states reported mandating MCO community reinvestment, which involves directing plans to reinvest a portion of their revenue or profits back into the communities they serve.
States are also employing an array of financial incentives to improve quality, including linking performance bonuses or penalties, capitation withholds, or value-based state-directed payments to quality measures. Approximately one-quarter of states with MCOs reported having at least one MCO financial incentive specifically tied to reducing racial/ethnic disparities in place in FY 2023. Beyond financial incentives, states are using managed care contracts in various other ways to promote health equity and reduce disparities (Figure 13). In FY 2023, similar numbers of states (over one-third) reported requiring MCOs to provide staff training on health equity and/or implicit bias and to meet specific health equity reporting requirements. States may also mandate MCO participation in Performance Improvement Projects (PIPs) specifically focused on addressing health disparities. In FY 2023, states reported a range of state-mandated PIP focus areas with an emphasis on reducing disparities, including those related to maternal and child health, chronic diseases, and substance use disorder (SUD).
