The Case for Program Integrity in Medicaid Managed Care | Part Four The Medical Loss Ratio at the Intersection of Program Integrity and Fraud, Waste, and Abuse
Why managed care organizations are NOT incentivized to find fraud, waste, and abuse (FWA)
Key Takeaways
In our previous post, Does your MCO Contract Encourage Program Integrity efforts? our Benefit/Program Integrity team looked at why managed care organizations (MCOs) may not be incentivized to pursue program integrity (PI) to find FWA and the implications this holds for rate setting and improper payment recoveries. This time, our team discusses the medical loss ratio (MLR) and why its structure can have potentially far-reaching effects, when FWA is present, on capitation rates.
The Medical Loss Ratio
Federal Medicaid MLR requirements mandate that MCOs spend a minimum of 85 percent of capitation payments received to pay costs related to medical care, leaving the remaining 15 percent for administrative costs and profits. Some states require a rebate of capitation payment amounts when the contractually required ratio is not met, rebating the amount paid in excess of the minimum required MLR percentage.
To calculate the MLR, the incurred claims costs for direct claims paid to providers for enrollee covered services or supplies and costs for other allowable activities (such as certain activities designed to increase quality), are divided by the total capitation payments the MCOs receive net of federal, state, and local taxes and fees. Although certain PI cost is factored into the overall capitation rate allotted to MCOs, these activities are primarily considered administrative costs and are not currently included in the MLR numerator.
The majority of claim recoveries generated from PI activities are direct reductions to the MLR numerator. An exception exists for claim payments recovered through fraud reduction efforts which are allowed to be added back to the MLR numerator up to the amount of fraud reduction expense incurred by the MCO. Depending on the MCO’s MLR rebate requirements, recoupment of claim recoveries in excess of fraud prevention costs may ultimately result in a remittance of these recoveries to the state in the form of an MLR rebate, rather than the MCO retaining the benefits of its labor.
The labor costs of fraud prevention activities and fraud reduction activities in excess of claim recoveries becomes a reduction of potential profits, particularly when these costs exceed the amount allotted to these services in the administrative load of the capitation rate. The reductions in overall health care costs stemming from the results of PI efforts then lead to lower future costs expectations and ultimately lower future capitation rates. While the profit percentage may remain consistent within the capitation rate structure, the MCO’s total profit decreases in this scenario. Within the Medicaid MLR regulation fraud prevention activity expenditures will be included in the MLR numerator once the private market rule is revised to define what these activities encompass.
No Incentive to Pursue FWA
This disincentivizing payment structure could result in MCOs being reluctant to pursue PI more extensively beyond the state’s minimum contractual requirements, as it would not want to engage in recovery activities that could potentially reduce its MLR unless the MCO could retain these recoveries. In other words, MCOs view administrative functions, including the PI efforts identifying FWA, as a cost center that reduces potential profits. A profitable MCO aims to increase the size of the overall budget for health care and administrative costs reimbursed through capitation payments while minimizing non-reimbursed administrative costs. This is directly in conflict with the incentive to maintain the size of the budget allotted to health care.
While states or organizations may strive to comply with MLR requirements, a lack of oversight can allow issues to go unchecked. The U.S. Department of Health and Human Services – Office of Inspector General (HHS-OIG) reported that:
“…the Centers for Medicare & Medicaid Services (CMS) chose medical loss ratios (MLRs) as a policy tool to apply across the [managed care] program to ensure appropriate stewardship of managed care funds. States’ oversight of their plans’ annual MLR reporting is critical to improve fiscal transparency, monitor costs, and promote high-quality care in Medicaid managed care… States must set capitation rates so that plans would ‘reasonably achieve’ the Federal MLR standard of at least 85 percent.”
When the HHS-OIG conducted a survey of states, it found that while most states required the MLR submission, the survey also revealed:
“…that 49 percent of the 495 MLR reports reviewed were incomplete. These incomplete MLR reports were missing at least one of seven numeric data elements that are essential to the MLR calculation. This missing data occurred across four of the seven MLR report data elements-non claims costs; taxes and fees; member months; and quality improvement activity expenses. Two thirds of the incomplete MLR reports did not contain fields for plans to even enter amounts for at least one of these data elements.
The data element for non-claims costs, generally defined as plans’ expenses for administrative services, accounted for the majority of incomplete MLR reports. Missing data on non-claims costs may reduce transparency on managed care spending and limit States’ ability to ensure that plans are appropriately spending Medicaid dollars on the health of enrollees rather than excessive administrative expenses. Even when the data element for non-claims costs appeared in MLR reports, plans did not report this data in a consistent manner.”
So, the very structures designed to protect taxpayer dollars, can also create inherent incentives to avoid identifying and recovering funds associated with FWA. This will, over time, inflate costs driven by historical data, increasing capitated rates. Because uncontrolled FWA can introduce incorrect data into the rate-setting process, it becomes increasingly difficult to set accurate capitated rates. This leads to overpayments to MCOs consequently driving increased co-pays, premiums, and costs for individuals.
Recommendations
When developing monitoring plans for MCOs to ensure compliance with MLR standards, it is important to align agency goals with the interests of the MCOs. Encouraging MCOs to meet the minimum MLR percentages through effective oversight of their programs allows these plans to better forecast their operations to shareholders. To achieve these goals, Myers and Stauffer recommends incorporating the following:
Our next installment is another continuation of the issues raised here. In that post, entitled Encounter Data: The Connection to Capitation Rate Setting and Improper Payments, the team isolates encounter data and evaluates the details about how incorrect or incomplete data factor into the calculus of rate setting and what can be done to address those issues.
Related Posts in Our Series
Explore the full scope of Medicaid managed care and program integrity through our comprehensive series:
Final Part Twelve: Series Retrospective and Look Ahead
Part One: The Current Landscape and Industry Issues
Part Three: Does Your MCO Contract Encourage Program Integrity Efforts?
Supplementary Insight – OIG Identified Concerns with Managed Care Plans Fraud Referral Process
Part Five: Encounter Data and Problematic Data
Part Six: Encounter Data Recommendations
Part Seven: Encounter Data Case Study
Part Eight: Managed Care and Program Integrity Oversight of Subcontractors
Part Nine: Managed Care and Program Integrity Oversight of Subcontractors Case Study
Part Ten: Prior Authorization and Claims Denials – Influential Factors
Related Insights
Incomplete of MLR Reports
When the HHS-OIG conducted a survey of states, it found that while most states required the MLR submission, 49 percent of the 495 MLR reports reviewed were incomplete. These incomplete MLR reports were missing at least one of seven numeric data elements that are essential to the MLR calculation.
Contract Review and Compliance Oversight
Our Benefit/PI program area covers a range of services, disciplines, and areas of focus. Our teams can evaluate contracts for variations in language and requirements for different providers. We can also provide support for and assistance with health plan oversight and compliance, which takes direct aim at oversight of MCOs. We can help local, state and federal government health care leaders with the design, implementation, evaluation, and audit of their managed care delivery systems.
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Ryan Farrell, CFE
Principal
Email: rfarrell@mslc.com
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Member
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