Managed care has become the primary method through which states provide healthcare services to Medicaid recipients. Recent data from 2021 reveals that a significant 74% of Medicaid beneficiaries are enrolled in comprehensive managed care organizations (MCOs). This trend underscores the increasing reliance on managed care models within the Medicaid system. The Centers for Medicare and Medicaid Services (CMS) emphasizes the crucial role of MCOs, particularly in assisting individuals eligible for Medicaid to access and maintain their coverage, especially during periods of significant policy shifts like the unwinding of continuous enrollment provisions enacted during the pandemic.
While managed care dominates Medicaid service delivery, the specifics of implementation vary considerably from state to state. States retain the autonomy to decide which populations and services are incorporated into managed care arrangements. Furthermore, while state regulations for Medicaid managed care plans are in place, these plans possess some flexibility, notably in setting provider payment rates and offering supplementary benefits beyond state mandates. The Biden Administration’s finalized regulations in April 2024, focusing on Medicaid Managed Care Access, Finance, and Quality, aim to reinforce standards for timely access to care and enhance state oversight and enforcement. This article will delve into ten key themes concerning the utilization of comprehensive, risk-based managed care within the Medicaid program.
1. Capitated Managed Care: The Prevailing Model for Medicaid Service Delivery
States possess the authority to design and manage their Medicaid programs within a federal framework. This includes determining the methods of healthcare delivery and payment for Medicaid beneficiaries. Nearly all states have integrated some form of managed care, encompassing both comprehensive risk-based managed care and primary care case management (PCCM) programs. As of July 2023, 41 states, including the District of Columbia, have contracts with comprehensive, risk-based managed care plans to deliver care to a portion of their Medicaid population (Figure 1). Notably, Oklahoma further expanded this trend by implementing capitated, comprehensive Medicaid managed care for the majority of children and adults starting April 1, 2024.
Medicaid MCOs are responsible for delivering comprehensive acute care and, in some instances, long-term services and supports to Medicaid beneficiaries. They receive a fixed per-member-per-month payment for these services. States have historically adopted managed care models to enhance budget predictability, control Medicaid expenditure, and improve both access to care and overall value. While the transition to MCOs has indeed improved budget predictability for states, the evidence regarding its impact on access to care and costs presents a mixed and somewhat limited picture.
Figure 1: State-level data showing the percentage of Medicaid enrollees in managed care as of July 2023. This visual aid enhances understanding of the geographic distribution of managed care penetration.
2. Medicaid Managed Care Enrollment Statistics: Nearly Three-Quarters of Beneficiaries in MCOs
As of July 2021, approximately 74% of all Medicaid beneficiaries, equating to 66 million individuals, were receiving their healthcare through comprehensive risk-based MCOs. A significant portion of these states, specifically thirty-one MCO states, reported that at least 75% of their Medicaid beneficiaries were enrolled in MCOs (Figure 2). This high enrollment rate highlights the widespread adoption of managed care as the standard model for Medicaid.
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. This growth was largely due to the prohibition on states disenrolling individuals, which consequently led to an increase in MCO enrollment. At the onset of the “unwinding” period in April 2023, overall Medicaid enrollment peaked at 94.5 million, marking a 32% increase from pre-pandemic levels. However, by December 2023, Medicaid enrollment had decreased by over 9% across states, representing a reduction of more than 9 million people. Despite these fluctuations, CMS continues to advocate for the role of managed care plans in ensuring eligible individuals can effectively use and maintain their Medicaid coverage. States are employing various strategies to mitigate coverage loss during this unwinding period, including leveraging MCOs to update enrollee contact information and streamline the re-enrollment process.
Figure 2: Visual representation of the percentage of Medicaid beneficiaries enrolled in Managed Care Organizations across different states as of July 2021, illustrating the prevalence of MCO enrollment nationwide.
3. Managed Care Enrollment by Demographics: Children and Adults Lead, but Complex Needs Populations Are Increasingly Included
Data from July 2022 indicates that children and adults are more likely to be enrolled in MCOs compared to adults aged 65 and over and individuals eligible due to disability. Specifically, 36 MCO states reported enrolling 75% or more of all children through MCOs (Figure 3). In states that expanded Medicaid under the Affordable Care Act (ACA), 32 out of 39 utilized MCOs for newly eligible adults, with most covering over 75% of this group through managed care. Similarly, 35 MCO states reported MCO coverage for 75% or more of low-income adults in pre-ACA expansion groups.
Although adults aged 65+ and people with disabilities are less likely to be enrolled in MCOs compared to younger demographics, there is a discernible trend of states increasingly incorporating beneficiaries with complex needs into managed care models over time. This shift reflects a broader move towards integrating comprehensive care management for diverse populations within Medicaid.
Figure 3: A comparative analysis of managed care penetration rates across different eligibility groups as of July 2022, highlighting variations in enrollment based on demographics.
4. Financial Landscape of Medicaid Managed Care: Over Half of Medicaid Spending Directed to MCOs
In fiscal year 2022, total state and federal spending on Medicaid services surpassed $804 billion. Of this substantial amount, payments to comprehensive risk-based MCOs accounted for approximately 52% of total Medicaid spending (Figure 4), maintaining a consistent level from the previous fiscal year. This significant allocation of funds underscores the financial importance of managed care within the Medicaid system.
The proportion of Medicaid spending directed towards MCOs varies across states. However, in over three-quarters of MCO states, at least 40% of total Medicaid funds were allocated to MCO payments (Figure 5). This state-to-state variation is influenced by several factors, including the percentage of the state’s Medicaid population enrolled in MCOs, the health profiles of these populations, the inclusion or exclusion of high-risk/high-cost beneficiaries in MCO enrollment, and whether long-term services and supports are included in MCO contracts. As states continue to expand Medicaid managed care to encompass higher-need, higher-cost beneficiaries, long-term care services, and adults newly eligible under the ACA, the share of Medicaid spending channeled to MCOs is likely to increase further.
Figure 4: Illustrates the share of total Medicaid expenditure directed towards Managed Care Organizations in Fiscal Year 2022, emphasizing the financial scale of managed care in Medicaid.
Figure 5: State-level variation in Medicaid spending on MCOs in FY 2022, showing the distribution of financial allocation to managed care across different states.
5. Actuarial Soundness and Risk Mitigation: Setting MCO Capitation Rates
States establish annual MCO capitation rates that must adhere to actuarial soundness principles and often incorporate risk mitigation strategies. Medicaid managed care organizations are paid a set per member per month fee for the Medicaid services outlined in their contracts. Federal law mandates that these payments to Medicaid MCOs must be actuarially sound. This means capitation rates are projected to cover all reasonable, appropriate, and attainable costs required under the contract terms, including operational costs for the managed care plan and the population served. Unlike fee-for-service (FFS) models, capitation provides plans with fixed upfront payments for anticipated service utilization, administrative expenses, and profit margins.
These plan rates are typically set for a 12-month period and require annual review and approval by CMS. States employ various mechanisms to adjust plan risk, incentivize performance, and ensure payment accuracy. These mechanisms include risk-sharing arrangements, risk and acuity adjustments, medical loss ratios (MLRs), and incentive and withhold arrangements. The fluctuating healthcare landscape, especially during events like the pandemic, necessitates adaptive financial strategies to maintain stability and fairness in managed care payment structures.
Figure 6: Depicts the prevalence of state implementation of pandemic-related MCO risk corridors, illustrating a financial strategy used during the public health crisis to manage risk and payments.
6. Service Carve-Ins and Carve-Outs: State Decisions in MCO Contracts
While MCOs generally offer comprehensive services to beneficiaries, states have the option to carve specific services out of MCO contracts, directing them to fee-for-service systems or limited benefit plans. Common services that are frequently carved out include behavioral health, pharmacy, dental, and long-term services and supports (LTSS). However, there is a notable trend across states towards carving these services into MCO contracts to enhance integrated care delivery.
Although a majority of states contracting with MCOs report that the pharmacy benefit is carved into managed care (32 out of 41), a significant minority of eight states still carve out pharmacy benefits as of July 2023 (Figure 7). The decision to carve in or carve out services reflects state-specific priorities and strategies in managing their Medicaid programs and tailoring service delivery models to meet the unique needs of their populations.
Figure 7: Shows state-level decisions regarding pharmacy benefit carve-outs in managed care, highlighting the variations in how states integrate or separate pharmacy services within MCO contracts.
7. Market Concentration: Five Major Firms Dominate MCO Enrollment
As of July 2021, states contracted with a total of 287 Medicaid MCOs. These MCOs encompass a mix of private for-profit, private non-profit, and government-operated plans. A significant trend in the Medicaid managed care market is the concentration of enrollment among a few major firms. Fifteen parent firms operated Medicaid MCOs in two or more states, accounting for 62% of total enrollment in 2021 (Figure 8). Among these parent firms, six are publicly traded, for-profit entities, while the remaining nine are non-profit organizations.
Notably, 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 are publicly traded companies, with high rankings in the Fortune 500 list. Despite recent enrollment declines across these firms due to the unwinding of continuous enrollment, Medicaid-specific revenue for UnitedHealth, Molina, and Centene showed year-over-year growth in 2023. This market concentration and the financial performance of these major players have significant implications for competition, innovation, and the overall landscape of Medicaid managed care.
Figure 8: Illustrates Medicaid MCO enrollment distribution by parent firm as of July 2021, highlighting the market concentration among a few major players and their share of total enrollment.
8. Enhancing Access and Prior Authorization: CMS Rules for 2024
In 2024, CMS finalized rules aimed at strengthening access standards and improving the prior authorization process within Medicaid managed care. Historically, states have had considerable flexibility in defining network adequacy standards and in monitoring MCO compliance. The new rules introduce key provisions to enhance access, including:
- National maximum wait time standards for routine appointments: 15 business days for primary care and OB/GYN services, and 10 business days for outpatient mental health and substance use disorder services.
- Mandatory independent secret shopper surveys by states to validate compliance with wait time standards and provider directory accuracy.
- Annual enrollee experience surveys for each managed care plan to ensure monitoring systems capture the patient perspective.
- Annual payment analysis comparing managed care provider rates to Medicare rates to assess the impact of payment rates on access.
- Requirement for states to implement remedy plans to address areas needing improvement in access.
- Enhanced transparency through expanded reporting requirements and new state website requirements.
These rules also address state-directed payments and aim to ensure fair provider compensation. Furthermore, a January 2024 CMS rule focuses on improving the prior authorization process by reducing wait times and enhancing transparency. Concerns about prior authorization in Medicaid managed care are underscored by data showing higher denial rates in Medicaid MCOs compared to Medicare Advantage plans. These regulatory changes reflect a concerted effort to improve beneficiary access to timely and appropriate care within the managed care framework.
Figure 9: Shows state requirements for minimum provider rates in MCO contracts, demonstrating state-level efforts to ensure adequate provider compensation and participation in managed care networks.
Figure 10: A comparison of prior authorization denial rates between Medicaid MCOs and Medicare Advantage plans, highlighting the higher denial rates in Medicaid managed care and the need for process improvements.
9. Quality Incentives: Financial Mechanisms to Improve Care
States are increasingly utilizing financial incentives linked to quality measures to enhance the performance of Medicaid managed care programs. These incentives include performance bonuses, penalties, capitation withholds, and value-based state-directed payments. Over three-quarters of MCO states reported using at least one financial incentive to promote quality of care as of July 2021 (Figure 11). Frequently targeted performance areas include behavioral health, chronic disease management, and perinatal/birth outcomes.
In addition to financial incentives, states are also employing non-financial methods such as Quality Rating Systems (QRSs) to incentivize plan performance and provide beneficiaries with comparative information across plans. The 2024 Managed Care final rule establishes a CMS framework and state requirements for QRS, including mandatory quality measures. States are also focusing on alternative payment models (APMs) within managed care contracts to shift away from fee-for-service models and incentivize value and quality in provider payments. While evidence of positive impacts from these incentives is growing, results at the provider level are still mixed, indicating ongoing efforts to refine and optimize these approaches.
Figure 11: Illustrates state utilization of financial incentives to promote quality of care within MCOs, reflecting the widespread adoption of performance-based payment strategies in Medicaid managed care.
10. Addressing Social Determinants of Health and Health Disparities: A Key Focus for States and MCOs
States are increasingly leveraging Medicaid MCO contracts to develop strategies that address social determinants of health (SDOH) and reduce health disparities. Advancing health equity is a priority for the Medicaid program, as emphasized in the 2024 Managed Care final rule. CMS has released guidance and waiver opportunities to support state efforts in addressing health-related social needs (HRSN) through Medicaid.
Most MCO states reported using Medicaid MCO contracts to promote at least one SDOH-related strategy in FY 2023 (Figure 12). Common strategies include requiring MCOs to screen enrollees for behavioral health and social needs, provide referrals to social services, and partner with community-based organizations (CBOs). Additionally, states are using financial and non-financial mechanisms to reduce health disparities, such as financial incentives tied to reducing racial/ethnic disparities, MCO staff training on health equity, and Performance Improvement Projects (PIPs) focused on disparities (Figure 13). These initiatives demonstrate a growing recognition of the importance of addressing social and economic factors to improve health outcomes and achieve health equity within Medicaid managed care.
Figure 12: Depicts state strategies to address social determinants of health through MCO contracts, showcasing the diverse approaches states are taking to integrate social needs into managed care.
Figure 13: Illustrates state strategies to reduce health disparities through MCO contracts, highlighting the various methods states employ to promote health equity in managed care.
Conclusion
Managed care is firmly established as the dominant model for delivering Medicaid services, with a significant majority of beneficiaries enrolled in these programs. States are continually refining their managed care strategies to address evolving healthcare needs, enhance access, improve quality, and promote health equity. The focus on actuarial soundness, quality incentives, and addressing social determinants of health demonstrates a multifaceted approach to optimizing Medicaid managed care. As regulations and market dynamics evolve, ongoing monitoring and adaptation will be crucial to ensure that managed care effectively serves Medicaid beneficiaries and achieves program goals.
