MLR Alert

Medicaid Managed Care Medical Loss Ratio (MLR) Requirements Related to Third-Party Vendors

May 2019

Medicaid Disproportionate Share Hospital (DSH)

January 2019


The Centers for Medicare & Medicaid Services (CMS) issued a CMCS Informational Bulletin (CIB) on May 15, 2019 regarding additional clarification and specific examples of the regulatory requirements for determining the amounts to include as incurred claims in the MLR, particularly when a Medicaid or Children’s Health Insurance Program (CHIP) managed care plan (health plan) utilizes a third-party vendor in a subcontracted arrangement. The concern being health plans are not accurately reporting pharmacy benefit spread pricing on the MLRs.

Relevant Rule Background and Court Decisions

CMS released its final rule associated with Medicaid and CHIP managed care services on April 25, 2016. The health plans are required to spend at least 85 percent, federal minimum, of premium dollars on medical care. In order to bring consistency and standardization across all health insurance markets and to promote fiscal stewardship, administrative efficiency, and comparability across states and markets, the CMS final managed care rule requires that an MLR for health plans be calculated, reported, and used in the development of actuarially sound rates.

Impact on Medicaid MLR

The CIB highlights and clarifies the provisions in 42 Code of Federal Regulations (CFR), outlined below, to assist in determination of amounts to include and exclude from incurred claims, particularly when a health plan uses a third-party vendor in a subcontracted arrangement. When a health plan subcontracts with a third-party vendor to administer, and potentially provide, a portion of Medicaid covered services to enrollees, the subcontractor must report to the health plan all of the underlying data needed to report the health plan’s MLR.


42 CFR 438.8(e)(2)(ii)(B)

Prescription drug rebates received and accrued must be deducted from incurred claims.

CMS interprets this regulation to require any time a health plan receives something of value for the provision of a Medicaid covered outpatient drug (e.g., manufacturer rebates, incentive payments, direct or indirect remuneration, goods in kind, etc.), regardless from whom the item of value is received (e.g., pharmaceutical manufacturer, wholesaler, retail pharmacy, etc.), the value of that rebate must be deducted from the amount of incurred claims used for calculating and reporting the MLR.

CMS also interprets this requirement to apply equally regardless of whether the prescription drug rebate is received directly by the health plan or indirectly by a subcontractor administering the covered outpatient drug benefit on behalf of the health plan. This clarification is to ensure the MLR calculation does not include artificially inflated totals for incurred claims because a subcontractor has been used by the health plan.


42 CFR 438.8(e)(2)(v)(A)

Incurred claims must exclude non-claims costs, which include the following:

(1) Amounts paid to third-party vendors for secondary network savings.

(2) Amounts paid to third-party vendors for network development, administrative fees, claims processing, and utilization management.

(3) Amounts paid, including amounts paid to a provider, for professional or administrative services that do not represent compensation or reimbursement for state plan services or services meeting the definition for in-lieu-of services in 42 CFR 438.3(e) and provided to an enrollee.

(4) Fines and penalties assessed by regulatory authorities.


42 CFR 438.8(k)(3)

Managed care plans must require any third-party vendor providing claims adjudication activities to provide all underlying data associated with MLR reporting to the managed care plan to calculate and validate the accuracy of MLR reporting.


42 CFR 438.230(c)(1)

If a managed care plan delegates any of its activities or obligations under its contract with the State to a subcontractor, then:

(1) The delegated activities or obligations, and related reporting responsibilities, must be specified in a contract or written agreement.

(2) The subcontractor must agree to perform the delegated activities and reporting responsibilities specified in compliance with the managed care plan’s contract obligations.

(3) The contract or written arrangement must either provide for revocation of the delegation of activities or obligations, or specify other remedies in instances where the State or the managed care plan determine that the subcontractor has not performed satisfactorily.

For More Information

For contracts with rating periods beginning on or after July 1, 2017, the state must ensure the managed care organization, Prepaid Inpatient Health Plan (PIHP), and Prepaid Ambulatory Health Plan (PAHP) calculate and report an MLR in accordance with the final rule [§ 438.8(a)]. A periodic audit of the MLR reports is required. The state must periodically, but no less frequently than once every three years, conduct, or contract for an independent audit of the accuracy, truthfulness and completeness of the encounter and financial data submitted by, or on behalf of, each health plan [§ 438.602(e)]. Myers and Stauffer LC has experience performing MLR examinations for state Medicaid agencies and CMS, and recommends that states conduct these annually.

The conclusion of the first periodic timeframe is quickly approaching in 2020 to satisfy the independent audit requirement. Engaging an independent certified public accounting firm like Myers and Stauffer will achieve this requirement and provide the best value to the state. Myers and Stauffer’s knowledge and experience can help ensure states comply with the Medicaid managed care final rule MLR requirements. We offer a number of services to assist with the MLR requirements, including:

  • Reviewing the MLR submissions to ensure proper reporting of revenues, clinical expenses, health care quality, and health information technology expenses.
  • Verification of proper spread pricing calculations.
  • Performing impact calculations when the MLR falls below regulatory or contractual thresholds.
  • Designing MLR reporting templates and instructions.
  • Data validation.
  • MLR contract language reviews.
  • Administrative expense testing.

Example reports can be found at: