Background
The Balanced Budget Act of 1997 expanded the ability of states to use managed care in their Medicaid programs. In doing so, Congress required that managed care organizations be reimbursed in a manner that is actuarially sound. In 2002, Centers for Medicare and Medicaid Services’ (CMS) regulations defined actuarially sound rates as those that are (1) developed in accordance with generally accepted actuarial principles and practices; (2) appropriate for the populations to be covered and the services to be furnished; and (3) certified as meeting applicable regulatory requirements by qualified actuaries.
Actuarial soundness is an important tool for retaining the viability of Medicaid managed care as a legitimate alternative to Medicaid fee-for-service delivery systems. Actuarial soundness ensures that health plans serving state Medicaid programs are adequately reimbursed based on the cost of health care expenditures and the populations served.
A number of factors can influence the development of Medicaid capitation rates. For example, , state budget pressures sometimes influence Medicaid agencies to develop capitation rates based on factors beyond the scope of the Medicaid program, such as the overall state budget. However, to be actuarially sound, rates must be determined independent of budget considerations. When states develop rates that are sound, plans are encouraged to participate in Medicaid, and it helps ensure plans are able to maintain adequate provider networks. Payment of actuarially sound rates also protects plan enrollees by ensuring that plans have adequate funding to deliver health care services and by reducing the likelihood plans will become insolvent, leave Medicaid, and disrupt enrollees’ continuity of care.
ACAP Position and Legislative Action
The Children’s Health Insurance Program Reauthorization Act of 2009 (CHIPRA) required the Government Accountability Office (GAO) to examine the extent to which state Medicaid managed care payment rates are actuarially sound. In its report issued in August 2010, the GAO found a lack of consistent enforcement of federal actuarial soundness requirements on the part of CMS’ Regional Offices.
ACAP agrees with the GAO’s recommendations to improve the actuarial soundness review process within CMS and urges CMS to quickly implement the actions outlined in the CMS response to the report. Additional actions such as increased use of the CMS Office of the Actuary to ensure an independent voice in the rate setting process and a workable appeal process for health plans to challenge rates would also positively contribute to this effort.
ACAP Documents Relating to Actuarial Soundness