Medicaid Managed Care:

CMS's Oversight of States' Rate Setting Needs Improvement

GAO-10-810: Published: Aug 4, 2010. Publicly Released: Aug 4, 2010.

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Medicaid managed care rates are required to be actuarially sound. A state is required to submit its rate-setting methodology, including a description of the data used, to the Department of Health and Human Services' (HHS) Centers for Medicare & Medicaid Services (CMS) for approval. The Children's Health Insurance Program Reauthorization Act of 2009 required GAO to examine the extent to which states' rates are actuarially sound. GAO assessed CMS oversight of states' compliance with the actuarial soundness requirements and efforts to ensure the quality of data used to set rates. GAO reviewed documents, including rate-setting review files, from 6 of CMS's 10 regional offices. The selected offices oversaw 26 of the 34 states with comprehensive managed care programs; the states' programs varied in size and accounted for over 85 percent of managed care enrollment. GAO interviewed CMS officials and Medicaid officials from 11 states that were chosen based in part on variation in program size and geography.

CMS has been inconsistent in reviewing states' rate setting for compliance with the Medicaid managed care actuarial soundness requirements, which specify that rates must be developed in accordance with actuarial principles, appropriate for the population and services, and certified by actuaries. Variation in CMS regional office practices contributed to this inconsistency in oversight. For example, GAO found significant gaps in CMS's oversight of two states. 1) First, the agency had not reviewed Tennessee's rate setting for multiple years and only determined that the state was not in compliance with the requirements through the course of GAO's work. According to CMS officials, Tennessee received approximately $5 billion a year in federal funds for rates that GAO determined had not been certified by an actuary, which is a regulatory requirement. 2) Second, CMS had not completed a full review of Nebraska's rate setting since the actuarial soundness requirements became effective, and therefore may have provided federal funds for rates that were not in compliance with all of the requirements. Variation in a number of CMS regional office practices contributed to these gaps and other inconsistencies in the agency's oversight of states' rate setting. For example, regional offices varied in the extent to which they tracked state compliance with the actuarial soundness requirements, their interpretations of how extensive a review of a state's rate setting was needed, and their determinations regarding sufficient evidence for meeting the actuarial soundness requirements. As a result of our review, CMS took a number of steps that may address some of the variation that contributed to inconsistent oversight, such as requiring regional office officials to use a detailed checklist when reviewing states' rate setting. However, additional steps are necessary to prevent further gaps in oversight and additional federal funds from being paid for rates that are not in compliance with the actuarial soundness requirements. CMS's efforts to ensure the quality of the data used to set rates were generally limited to requiring assurances from states and health plans--efforts that did not provide the agency with enough information to ensure the quality of the data used. CMS's regulations do not include standards for the type, amount, or age of the data used to set rates, and states are not required to report to CMS on the quality of the data. When reviewing states' descriptions of the data used to set rates, CMS officials focused primarily on the appropriateness of the data rather than their reliability. With limited information on data quality, CMS cannot ensure that states' managed care rates are appropriate, which places billions of federal and state dollars at risk for misspending. States and other sources have information on the quality of data used for rate setting--information that CMS could obtain. In addition, CMS could conduct or require periodic audits of data used to set rates; CMS is required to conduct such audits for the Medicare managed care program. GAO recommends that CMS implement a mechanism to track state compliance with the requirements, clarify guidance on rate-setting reviews, and make use of information on data quality in overseeing states' rate setting. HHS agreed with our recommendations and described initiatives underway that are aimed at improving CMS's oversight.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To improve oversight of states' Medicaid managed care rate setting, and to improve consistency in the oversight of states' compliance with the Medicaid managed care actuarial soundness requirements, the Administrator of CMS should implement a mechanism for tracking state compliance, including tracking the effective dates of approved rates.

    Agency Affected: Department of Health and Human Services: Centers for Medicare and Medicaid Services

    Status: Open

    Comments: In June 2011, CMS indicated that it had been working for the past six months on investigating the possibilities for creating an easily accessible database that will help them more closely monitor the status of rate-setting approvals. In January 2013, CMS told us they had implemented interim electronic tracking methods in each regional office. As of June 2013, CMS indicated that the agency had hired a contractor to develop the database to tracking the status of rate-setting reviews. CMS expects the database to be operational by October 1, 2013.

    Recommendation: To improve oversight of states' Medicaid managed care rate setting, and to improve consistency in the oversight of states' compliance with the Medicaid managed care actuarial soundness requirements, the Administrator of CMS should clarify guidance for CMS officials on conducting rate-setting reviews. Areas for clarification could include identifying what evidence is sufficient to demonstrate state compliance with the requirements, the conditions necessary for federal funds to be released, and how officials should document their reviews.

    Agency Affected: Department of Health and Human Services: Centers for Medicare and Medicaid Services

    Status: Open

    Comments: As of May 2012, CMS indicated that the agency was in the process of updating managed care program materials, including internal guidance for consistent interpretation and enforcement of regulatory requirements. Additionally, according to CMS officials, beginning in December 2011, the agency has conducted monthly training for agency staff responsible for Medicaid managed care. As of June 2013, CMS indicated that it was finalizing its managed care review guide for staff, which will include sections on financial oversight; CMS expects to conduct training on the revised guide by the end of September. In addition, CMS is working with a contractor to formalize updated rate-setting review guidance and tools; CMS expects these tools and policies to be finalized by the end of calendar year 2013.

    Recommendation: To improve oversight of states' Medicaid managed care rate setting, and to better ensure the quality of the data states use in setting Medicaid managed care rates, the Administrator of CMS should make use of information on data quality in overseeing states' rate setting. CMS could, among other things, require states to provide CMS with a description of the actions taken to ensure the quality of the data used in setting rates and the results of those actions; consider relevant audits and studies of data quality done by others when reviewing rate setting; and conduct or require periodic audits or studies of the data states use to set rates.

    Agency Affected: Department of Health and Human Services: Centers for Medicare and Medicaid Services

    Status: Open

    Comments: In June 2011, CMS indicated that it was in the process of investigating ways to incorporate information about data quality into its review and approval of Medicaid managed care rates. As of May 2012, CMS was still working on addressing this recommendation and indicated that information that may help CMS address data quality would be included in the agency's transformation of its Medicaid Statistical Information Statistics (MSIS). As of January 2013, CMS indicated that it had made changes to MSIS to improve the quality of encounter data, one of the types of data states use to set managed care rates. In June 2013, CMS indicated that it was providing technical assistance to states to improve the quality of state's managed care encounter data. CMS was also developing an encounter data validation manual for states. In addition, CMS was in the process of identifying the need for a variety of data audits and the type of resources needed for those audits. CMS expected to complete these activities by September 2013.

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