Proposals to change federal funding for state Medicaid programs from an
uncapped matching percentage to block grants or per capita caps have generated significant national attention.
As a result, many Medicaid managed care stakeholders are
questioning whether there may also be changes in the actuarial
soundness requirements for capitation rates paid to managed
care organizations participating in these programs. Capitation
expenditures for comprehensive Medicaid managed care
programs exceeded $200 billion in fiscal year 2015.1 Regardless
of any statutory or regulatory changes associated with federal
funding, actuarially sound capitation rates will remain critical
to the long-term viability of Medicaid managed care programs.
There are several plausible scenarios
for how actuarial soundness
requirements may change under
block grants or per capita caps.
The scenario often pondered by Medicaid managed care
stakeholders is one where capitation rates no longer have
any formal requirement to be actuarially sound, as defined
in 42 CFR §438.4(a) and the Actuarial Standard of Practice
(ASOP) #49. State Medicaid agencies would have freedom to
propose capitation rates without documentation requirements
and with potential for reductions attributable to state budget
constraints. Health plans would then negotiate with the
agencies in an attempt to arrive at mutually agreeable rates.
The hope is that the negotiation mechanism and states’
desire for stable programs would be sufficient to consistently
contract at rates that support an efficient and sustainable
program. Such negotiations often occur in programs currently,
but contracted rates are still subject to actuarial
This scenario may or may not include the involvement of
actuaries in capitation rate development. States may continue
to enlist actuaries to project future benefit and non-benefit
costs to inform the starting point for negotiations with health
plans. Any capitation work actuaries do perform would still be
subject to actuarial soundness requirements under ASOP #49
regardless of the existence of state or federal requirements.
States and health plans would simply have the ability to
contract at rates that are not actuarially sound.
However, changes in federal funding mechanisms do not
necessarily imply changes to federal requirements for how
managed care capitation rates are developed, though the oftaccompanying
notion of increased state flexibility in program
operation raises this possibility. For example, it is possible
to require actuarially sound payments to health plans while
drawing down federal block grant or per capita cap funding
streams. This paper briefly explores the following scenarios:
- Federal actuarial soundness requirements are unchanged.
- Federal actuarial soundness requirements are eliminated, but
states add soundness requirements.
- No actuarial soundness requirements remain in effect, but
many states continue to incorporate them.
Continuation of federal actuarial
soundness requirements under revised
federal funding is a plausible scenario.
Actuarial soundness requirements are a well-established
component of Medicaid managed care programs, having been
in effect since June 2003. Even a full repeal of the Patient
Protection and Affordable Care Act (ACA) and the 2016
Medicaid managed care regulations2 would have only a modest
effect on how actuarial soundness is applied in Medicaid
managed care programs.
The Medicaid managed care actuarial soundness requirements
were implemented through the Balanced Budget Act of 1997
and became effective in June 2003. Prior to that date, capitation rates were required to be below a fee-for-service equivalent
Upper Payment Limit (UPL) for the covered population. In
the early 2000s, there were several programs that had served
the entirety of certain populations under managed care for
several years, which limited the value of the UPL requirement
because comparable, non-managed care data was quite old
or obsolete. The implementation of the actuarial soundness
criteria established a more standardized rate methodology
along with accountability for the development of capitation
rate certifications and documentation.
The existence of actuarial soundness requirements since that
time has served Medicaid managed care programs well. The
number of such programs and individuals served through them
have significantly grown since that time, while in most cases
maintaining program sustainability.
Actuarially sound capitation rates have been critical to the
growth and success of managed care programs nationwide.
Legislators and policy experts will carefully consider potential
negative consequences before eliminating this requirement.
Some states may establish their own
requirements if federal requirements
States have vested interests in the fiscal stability of health plans
serving their citizens. Medicaid health plans already need to
meet solvency requirements established by the appropriate
state regulating agencies. A critical component of meeting
those requirements is the establishment of actuarially sound
If the federal actuarial soundness requirement is removed, state
legislators and regulators may get involved to ensure appropriate
health plan funding levels are maintained. This process would
likely require changes in state legislation because capitation rates
are negotiated between Medicaid agencies and health plans. For
other lines of business, state regulators review rates that are
developed by the health plans themselves.
Many states may continue to develop
actuarially sound capitation rates
even in the absence of any soundness
There is significant value in developing capitation rates that
are actuarially sound, and this is well-recognized across a wide
range of Medicaid managed care stakeholders. There are even
programs, such as stand-alone Children’s Health Insurance
Program (CHIP) arrangements, that have not historically been
required to have capitation rates certified as actuarially sound
and that have nonetheless utilized actuaries to develop sound
rates. In this scenario, Medicaid managed care programs would
retain the benefit of actuarially sound rates while significantly
reducing the oversight and documentation requirements
formalized in the 2016 regulations.
Actuarial soundness principles target rate levels that provide
for all reasonable, appropriate, and attainable costs. This is
critical to promoting both the efficiency and sustainability of
Medicaid managed care programs. Most Medicaid programs
involve billions of dollars in revenue annually, and even very
small percentage changes can equate to tens of millions of
dollars. Using a sound actuarial rate methodology minimizes
the risk of significant mismatches, either high or low, between
capitation rates and health plan liabilities.
Finally, actuarially sound rates serve as a valuable, unbiased
estimation of program costs. Medicaid agencies and health
plans face significant pressures to contract at lower or higher
rates, respectively. Actuarial soundness requirements reduce
the risk of health plan overpayment or underpayment simply
because one side has better leverage or negotiation skills.
Changes in federal Medicaid funding may or may
not result in changes to federal actuarial soundness
requirements for Medicaid managed care capitation
rates. Regardless of the outcome, there are invaluable
benefits to continuing to utilize sound principles in
capitation rate development.