AIS Health Daily- October 2, 2020

States are under financial pressure from the COVID-19 Pandemic, resulting job dislocation, and economic slowdown.  State Medicaid plans are reporting increases in populations, driving costs. In an effort to reduce costs, states are turning to ways to cut spending to Medicaid managed care organizations.  Catalyst weighs in about the impact to the plans and the Medicaid program in AIS.

States’ Moves to Claw Back Funds Raise Medicaid MCOs’ Ire

October 2, 2020

As state budgets continue to be squeezed by the COVID-19 pandemic and related economic downturn — and as health insurers report large profits due to low utilization of routine health care services — state officials are perhaps understandably eyeing Medicaid managed care organizations as sources of extra funding. But at least one health insurer isn’t happy about a tactic states are using, with CMS’s blessing, to claw back money from MCOs.

The issue in question is the use of risk corridors in MCO contracts, according to Kamran Hashim, vice president of policy and planning at Molina Healthcare, Inc. In a Sept. 16 virtual session during the America’s Health Insurance Plans (AHIP) National Conference on Medicare, Medicaid & Dual Eligibles, Hashim explained that risk corridors typically are used when there isn’t enough data to make an accurate estimate of future medical utilization or costs. To solve that, risk corridors limit an MCO’s medical expenditures to a certain range — so if actual costs come in below that, they return the difference to the state, and if the MCO’s costs are above the cap, the state absorbs the excess.

“That is a great tool to use when you have prospective uncertainty — when you can’t predict the future,” Hashim said. “Unfortunately, what we’ve been seeing in some states is that these are being applied retroactively when the results are pretty much already known. For instance, we know in 2020 health care costs came in lower than projected, and so imposing risk corridors in that sort of environment is basically tantamount to implementing a rate cut in disguise.”

CMS, however, encouraged such a strategy in a May 14 guidance, which detailed how states can temporarily adjust provider payment methodologies and capitation rates under their MCO contracts to respond to the public health emergency. “In addition to the options described in this guidance, CMS will consider, where appropriate, state requests to retroactively amend or implement risk mitigation strategies only for the purposes of responding to the COVID-19 pandemic,” it stated.

While a notice of proposed rulemaking published in November 2018 would have prohibited states from implementing retroactive risk mitigation strategies, that proposal was never finalized, CMS pointed out. Plus, the agency said it “recognizes that these are unique and unanticipated circumstances under which approving retroactive risk mitigation strategies may be appropriate when other methods for making retroactive adjustments to capitation rates may be extraordinarily difficult for states to implement at this time.”

Such risk mitigation strategies, CMS said, “could include a 2-sided risk corridor on all medical costs,” and the agency provided an example that relies on a managed care plan’s medical loss ratio (MLR) reporting and “includes a required MLR remittance.”

States Will Closely Monitor MLRs

In a report published Sept. 28 regarding the pandemic’s impact on Medicaid managed care, credit rating firm A.M. Best suggested that CMS’s risk corridors guidance could put pressure on MCOs.

“Given the plans’ typically thin margins, Medicaid managed care plans tend not to have very low MLRs. The deferral of care due to COVID-19 resulted in a decline in the MLR for the second quarter 2020, but if the loss ratio remains lower for the remainder of the year, states may seek to share in the savings,” the report said.

If Hashim’s comments are any indication, at least some states are already taking such actions.

“What we are seeing states do is use a number of ways in which risk corridors are structured and sort of stretching them to maximize the recoupments that they can generate through these vehicles,” he said during the AHIP session.

For example, “actual medical cost suppression really only happened from March through June, yet we have risk corridors that are being applied way beyond those periods — sometimes six to nine months before COVID actually became a reality in the country,” Hashim said.

Additionally, when states are defining medical costs, oftentimes they will exclude quality improvement expenses, “which is a double hit for managed care organizations that had already invested in these activities; [they] will now receive no credit for them and won’t get to share in any of the financial gains generated through them,” he said.

Finally, some states are setting very narrow risk corridors ranges, “so the slightest deviation outside of them as a result of medical cost suppression pretty much puts managed care organizations in a position where they have to rebate dollars back to the state,” Hashim added.

Other Firms May Speak Up

Jeff Myers, senior vice president of reimbursement strategy and market access at Catalyst Health Care Consulting, tells AIS Health that what Hashim described is not unexpected.

“I was not surprised by the comments from Molina, and I suspect that going into Q3 and Q4 — particularly now that the 2021 contracts are generally solidified — that you’re going to hear more from Medicaid plans” about states’ strategies to claw back money, says Myers, the former president and CEO of Medicaid Health Plans of America.

Because of those state actions, large MCOs might end up having to reduce their target revenue in the third quarter, Myers says, although he adds, “I’m suspecting, frankly, that a lot of them will cover it because of the large increase in the Medicaid population in those states as a result of the economic situation.” In addition, “I know a lot of plans have moved additional money into their reserves” in order to reduce their excess profits, “so they’re doing everything they can to reduce that financial overhang.”

Regarding Hashim’s argument that risk corridors are being used inappropriately by states, Myers acknowledges that “from a plan perspective, yeah — they do not want you to retrospectively use the [risk] corridors and go back for the money.”

CMS Might Not Intervene

However, he points out that CMS already reviews MCO contracts for actuarial soundness. If the agency notices something that violates that requirement in 2021 contracts, it could intervene, “but it would have to be pretty egregious, and it seems unlikely to me that CMS would intervene in that [way] knowing that the states are under pretty serious financial pressure,” Myers says.

Jerry Vitti, founder and CEO of Healthcare Financial, Inc., a firm that connects low-income, elderly and disabled populations with public benefit programs, says it’s understandable that states are looking for ways to balance their budgets, and Medicaid plans are a natural target. “But cutting reimbursement rates and employing retroactive clawback measures are not the way to go,” he tells AIS Health. “Not only are they unjust, they will hinder plans’ long-term ability to care for those most in need.”

In a Sept. 10 Health Affairs blog post, health policy experts suggested that having states add risk corridors to their MCO contracts may actually be the best-case scenario for insurers.

“Usually this would require the consent of both parties, but MCOs would be likely to agree,” wrote Katherine Hempstead, a senior adviser to the executive vice president of the Robert Wood Johnson Foundation, and Allan Baumgarten, a Minneapolis-based independent analyst of state health care markets. “Compared to a rate reduction, MCOs would probably prefer a risk corridor, which would require them to repay a portion of capitation payments if claims and utilization fall below a specified level.”

Ohio Slashes Medicaid Rates

One state that opted for a rate reduction is Ohio, Hempstead and Baumgarten noted. That state recently unveiled $210 million worth of Medicaid cuts, and “almost all of that will come from reduced MCO capitation rates, reflecting reduced utilization of services over the last three months.”

Stephanie Williams, the vice president of Medicaid actuarial services at Centene Corp., said during the same AHIP session when Hashim spoke that while more data will be available about how COVID-19 is affecting health care costs in 2021, there still won’t be enough information to take any strategy other than trying to mitigate risk.

“It’s going to be very interesting, as I think some individuals are going to want to take some of that data and make inferences from it and try to adjust rates into the future,” Williams said. “I think that it’s a little bit concerning, and it will be interesting to see how this plays out over the next couple of years.”

Contact Myers and Vitti via Joe Reblando at, view the Health Affairs post at and the CMS guidance at

by Leslie Small