The Case for Program Integrity in Medicaid Managed Care

Part Three: Does Your MCO Contract Encourage Program Integrity Efforts?

As we discussed in our previous post, Understanding the Link Between Program Integrity (PI) and Managed Care Contracts — and Why It Matters to States, contract language is an often overlooked but essential part of PI. In this installment, we look at why managed care organizations (MCOs) may not be pursuing PI to find fraud, waste, and abuse (FWA) and the implications this holds for capitation rate setting and improper payment recoveries.

The Lay of the Land

States engage MCOs to provide a series of benefits covered by a contract specifying reimbursement standards, provider oversight requirements, and state obligations. Ultimately, provider oversight is dictated by the contract, alongside state and federal regulations.

Even with strong contract language requiring MCOs to perform provider oversight activities, some form of provider-generated FWA will likely still have room to exist, and ongoing, comprehensive program integrity is key to detecting and preventing it. Conceptually, the expectation of many individuals is that MCOs should be performing PI and seeking to detect and prevent FWA. But what if MCO program integrity efforts are insufficient? What consequences could this have for capitation rates, improper payments (overpayments), and overpayment recovery?

Conflicting Incentives for PI

States and stakeholders expect proper stewardship of taxpayer money so that the majority of a Medicaid dollar invested by a state is spent on patient care instead of being wasted. Therefore, they expect MCOs to do their due diligence, perform PI oversight, enforce findings, and seek overpayment recovery.

Efficient utilization of state and federal Medicaid managed care funds is expected and contractually required. However, managed care plans often view PI activity as an administrative cost center that simultaneously reduces medical cost. Since MCOs are contractually obligated to maintain a minimum medical loss ratio (i.e. they must spend a minimum amount of every dollar on medical expenses), incurring non-medical costs on additional staff resources, technology, and recovery efforts ultimately reduces the medical expense and reduces incentives for MCOs to conduct thorough PI and FWA detection and prevention activities.

MCOs are also contractually obligated to maintain adequate provider networks. MCOs therefore must navigate oversight of providers, while concurrently ensuring their members have sufficient access to health care providers.

MCO size is also a factor in maintaining adequate networks. Often, smaller MCOs have less leverage to ensure providers will engage in and continue with PI activities – or leave the network and jeopardize the MCO’s network adequacy.

Defining the Solutions

It is imperative for states to ensure MCOs are properly incentivized to improve their oversight strategies within their programs. It also requires a reframing of the incentives to perform PI so that costs, and the capitation rates tied to them, are properly aligned to reduce waste and limit the occurrence of improper payments.

As professionals responsible for PI, our mission is to identify instances of FWA as they occur. To achieve this, we need powerful, easily accessible tools. Detecting and preventing FWA requires astute guidance to ensure accountability through strong contractual guardrails and ongoing monitoring, all of which comes from a strong partner with expertise in those capabilities.

The Problem: Incentives AGAINST Performing PI

It is becoming clear that MCOs may not be able or willing to carry out sufficient PI activities, primarily because of financial and structural disincentives to do so.

Capitation Rates and Improper Payments

The most common way states compensate MCOs for providing health benefits is through a risk-based, fixed, per-member per-month (PMPM) capitation payment, regardless of the services an individual member may actually receive. This PMPM capitation payment is, by law, an actuarially sound method that includes the total cost of medical services plus the cost to administer the benefits, which includes profit. Because capitation rates are meant to be actuarially sound, they are understood to correlate to the true or actual expected costs of delivering care to certain populations.

This PMPM capitation model should also include incentives to encourage MCOs to contain medical costs. But when FWA introduces false data into the rate setting paradigm, medical costs may be inaccurate, and rates may therefore be inflated. That means overpayments to providers become embedded in ongoing capitation rates, artificially increasing payments made to the MCOs and leading to higher rates in years ahead, creating an incentive against identifying FWA and recovering improper payments.

Therefore, when incorrect data are included in the rate setting process, from a legal standpoint, the capitation rates and Medicaid program expenditures become bloated. This inclusion of FWA in MCO medical expenses (e.g. the medical loss ratio [MLR]) ultimately affects medical benefit quality by eventually reducing the amount of money paid for legitimate health care services.

These arguments are more than just academic or theoretical. They are tangible, with substantial real-world consequences. The Centers for Medicare & Medicaid Services (CMS) reported in fiscal year 2024, the estimated rate of improper payments stood at 5.09 percent, totaling $31.1 billion. This represents a meaningful decrease from the 8.58 percent rate in 2023 that totaled $50 billion.

The same report indicates that most improper payments were caused by errors versus outright fraud – nearly 80 percent were attributable to insufficient documentation, typically where a state or provider missed an administrative step. Nevertheless, these sizeable overpayments still represent waste and reducing them remains critically important for proper stewardship of taxpayer dollars.

Recommendations

States deserve clear insight into what the MCOs are doing in their work to detect and prevent FWA, including MCO reporting of these activities. States should consider comparing FWA detection, prevention, and recovery dollars to total MCO capitation payments, then asking if those ratios make sense. Below are the actions we recommend to ensure states are doing their due diligence to protect against FWA.

Recommendation: Create Contractual Obligations. MCOs often treat contractual expectations like they are best practices…obligations that are great in theory but not required unless enforced. Therefore, Medicaid agencies should identify and establish minimum PI expectations to include in MCO contracts, then those charged with MCO oversight should monitor to make sure MCOs are meeting the requirements. We also suggest states establish clear lines of accountability between the MCOs and the state PI team. This can be done using contractual language that describes the relationships, responsibilities, and penalties for non-compliance.

Recommendation: Monitor investigations. States should look closely at their MCOs’ investigation process and documentation of findings. Pay attention to how they conduct the investigations. Notice the MCOs’ staffing and training practices. Did MCOs provide FWA detection training to internal staff? Have they increased or supplemented training? Is training general or specific to Medicaid? Evaluate the MCO’s case tracking reports and ask whether case volume is appropriate for volume of services. Verify whether MCOs conducted provider interviews; evaluate the effectiveness of MCO PI policies and procedures; and confirm MCOs are completing investigations, not just starting them and leaving them open to inconclusive ends.

Recommendation: Educate providers when appropriate. There may be scenarios in which states and MCOs may benefit from provider outreach and education when discovering overpayments. Consider establishing clear guidance regarding the appropriate scenarios for provider education and when overpayment reporting and recovery should be applied.

Our next installment is a continuation of issues raised here. In that post, titled The Medical Loss Ratio at the Intersection of Program Integrity and Fraud, Waste and Abuse, the team delves into how the MLR and its structure can work against PI and create reasons for MCOs to avoid pursuing FWA.

How Myers and Stauffer Can Help

Contract Review and Compliance Oversight

Established in 1977, Myers and Stauffer is a nationally based consulting and certified public accounting firm. For nearly 50 years, we have worked exclusively with local, state, and federal government health and human-services agencies to help them accomplish their most critical goals for the nation’s most fragile people.

Our Benefit/Program Integrity 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. In fact, we currently work with numerous local and state governments, as well as CMS, to provide audit, consulting, and monitoring efforts related to health plans. We are here to answer any questions and help with any health care and human services needs your agency may be encountering. Contact a member of our team today.