Managed Medicaid: Opportunities and Challenges Ahead

Vol. 10 No. 4


Presently 47 states and the District of Columbia have some form of managed care in their Medicaid Program.1  The purpose of this article is to provide attorneys in the healthcare arena an understanding of Medicaid managed care and some of the key legal issues associated with it.   

Medicaid managed care has its origins in the 1970s when the federal government started permitting federal healthcare programs to use health maintenance organizations (“HMOs”).  Traditionally Medicaid was a fee-for-service program operated directly by the states, with a combination of state and federal funding.  The fee-for-service model began in the 1960s and was the model of choice until the early 1990s.  As costs began to escalate in the Medicaid programs and Medicaid became a larger part of state budgets, the states looked for ways to reduce costs.  One option was to turn to managed care.  Although states are the primary overseers of their Medicaid plans, states must adhere to federal requirements because at least half of the dollars in each state’s program comes from the federal government.2 Among the requirements at the federal level, Medicaid programs must operate on a statewide basis, the programs must provide specific amounts and types of coverage, and Medicaid recipients must be able to select from a wide variety of providers.3 The original idea behind the Medicaid program was to ensure that Medicaid recipients were receiving care that was similar to the care individuals received under private insurance, which at the time was primarily indemnity coverage.  Therefore, state Medicaid programs have historically been required to operate with a large network of providers that cover all specialties on a statewide basis.  This is known as “freedom of choice.”4

The Medicaid waiver program was so named because it allowed the Centers for Medicaid & Medicare services (“CMS”) to waive federal Medicaid mandates in order to permit states to try innovative approaches in providing Medicaid coverage.  The most common of these approaches has become the implementation of managed care.5  Historically, managed care is primarily implemented as either a “demonstration and waiver” program under Section 1115 of the Social Security Act (“SSA”) or a “waiver” provided under SSA § 1915(b).  The 1997 Balanced Budget Act amended SSA § 1932 (42 U.S.C. 1396u-2) which permits states to make enrollment in in managed care mandatory for eligible individuals without separate approval from CMS.6


States submitting Medicaid managed care waiver requests to CMS must do so under the requirements of 42 C.F.R. § 431.55.  CMS considers the following criteria in approving a waiver request:

  1. The cost effectiveness of the project;
  2. The effect of the project on the accessibility and quality of services;
  3. The anticipated impact of the project on the state’s Medicaid program; and
  4. Assurances that the restrictions on free choice of providers do not apply to family planning services.7

Many states seek waivers for small “carve-out” populations rather than enrolling their entire Medicaid population in managed care.  For example, a state may enroll its children covered under Medicaid in a dental program that is a managed care program.  In recent years, however, many states have moved large segments of their Medicaid population into full service managed care organizations (“MCOs”).

Even when a state elects to use mandatory Medicaid managed care enrollment under SSA § 1932 authority, the state still must provide certain “assurances” to CMS. For example, for a state to require participation in managed care, it must assure CMS that the MCOs meet the requirements of SSA § 1903(m).  These requirements include assurances around the adequacy and strength of the provider network.  Such requirements can provide leverage to certain specialty providers when negotiating participation with MCOs.

Several types of entities can serve as MCOs under a Medicaid waiver: HMOs, Medicare Advantage Plans, and HMO-like organizations that meet certain requirements under SSA § 1903(m)(1)(A). For the most part, HMOs which provide the bulk of the services to the Medicaid population are state licensed HMOs, and must, therefore, adhere to state HMO regulatory requirements.  Although a state regulates Medicaid HMOs, there are often exceptions made for certain regulatory requirements, such as cash reserve requirements and the enrollee appeals processes.  In most cases, the state Medicaid program can dictate requirements to the MCOs in many areas of operations.  These exceptions can be accomplished for specific entities through the contracting process, or more generally through state Medicaid regulations.  Therefore, in order to understand the full panoply of requirements imposed on a Medicaid MCO, it is necessary to examine numerous sources of law: federal statutory and regulatory requirements, CMS dictates passed down to the state through the waiver approval process, the state Medicaid agency’s contract with the MCO, state Medicaid regulations, and state insurance laws and regulations.  It is not uncommon for these oversight requirements to conflict.8 As a practical matter, most insurance regulators will defer to state Medicaid agencies with regard to the operation of Medicaid managed care plans because they do not offer services to the general population.  On the other hand, state Medicaid agencies often do not have the expertise to assess certain aspects of Medicaid managed care plans, such as financial capability and soundness.  It is not unusual for a state Medicaid agency to rely on the insurance departments to assess the financial capacity of the MCOs.  As a result, state Medicaid MCOs are often audited simultaneously by the Medicaid agency as well as their state’s insurance regulator.


A. Provider Enrollment Requirements

Providers trying to navigate the world of Medicaid managed care often face new and daunting challenges.  For example, providers who have historically functioned in an MCO’s commercial network will typically have to enroll in the state Medicaid plan first before they can become a provider in the Medicaid MCO’s network.  The provider requirements under the MCO enrollment process may also differ from the criteria for participation in the state Medicaid program.  Providers who are already enrolled in a state Medicaid plan, but are not part of an MCO network, will need to be credentialed and contract with the new MCO before they can continue to see their existing Medicaid patients. This can present challenges to the continuity of care if the provider does not become enrolled prior to commencement of the managed care contract.  While providers in traditional commercial networks may already be accustomed to the types of rules imposed by MCOs, traditional Medicaid providers who have historically practiced in a less cumbersome direct Medicaid environment are likely not as familiar with the requirements of managed care. Therefore, familiarity with the MCO provider handbook becomes essential for traditional Medicaid providers because the handbook is often incorporated as a part of the Medicaid contract with the MCO.

B. Provider Reimbursement Appeals

Providers often call on attorneys to handle disputes with Medicaid MCOs over payment or an authorization for service.  These disputes are typically subject to several layers of appeals.  Initially, the MCO will have an internal provider appeals process which is mandated by its contract.  Beyond these internal requirements the state Medicaid program typically allows providers to seek a further review through an independent hearing at the Medicaid agency.  It is not unusual for a provider to have to go through three or four levels of appeals over a decision of an MCO when one includes the Medicaid agency’s review.  While most states have external review for commercial insurance, availability of such review will be subject to the requirements of the individual state Medicaid program because states are not required to provide external review for managed care plans that have already received accreditation by independent entities.9

C.  Out-of-Network Issues

In emergency situations, all MCOs must ensure access to emergency services regardless of whether the provider is in or out of network.  Plans must use a “prudent layperson” standard for making the determination.10  Even in non-emergency cases, out-of-network providers must be reimbursed by a plan if the MCO does not have the capacity to provide the necessary services.11

D.  Prompt payment

Many states have prompt payment laws for HMOs and other insurers.12   Courts and state laws have taken differing views on whether such laws are applicable to MCOs. 

E.  Medical Necessity

The concept of “medical necessity” may impact providers in some state Medicaid programs. Some state Medicaid plans, however, do not have detailed definitions of “medically necessary services.”13 MCOs and HMOs in these states may thus develop a definition of “medically necessary” on their own (or in conjunction with a state program).14  This definition can have a meaningful impact on operations for MCOs and providers.   


The Patient Protection and Affordable Care Act (“PPACA”) originally required states to expand their Medicaid programs, but the Supreme Court found that requirement to be coercive of state power.15 As a result, states now have the option to expand their Medicaid programs but are not required to do so.16  Original Congressional Budget Office estimates indicated that Medicaid expansion would account for nearly half of all new coverage for the formerly uninsured.17 Although the most recent Medicaid enrollment figures for the states that have proceeded with expansion are not as high as expected,18 some estimates predict that the expansion will ultimately result in a 16.5 percent increase in MCO enrollment nationwide.19 With state budgets increasingly strained by a weary fee-for-service Medicaid model, MCOs with capitated rate structures are a logical alternative to the growth in medical costs.

In those states that have opted to expand their Medicaid programs under PPACA,20 state Medicaid administrators that make enrollment in MCOs mandatory for the newly eligible adult population will need to amend their existing managed care waiver authority, whether under section 1115(b), 1915(b), or 1932(a) of the Social Security Act.21 If enrollment in MCOs for newly eligible adults is merely voluntary in a state’s Medicaid expansion plan, the state need not amend its existing managed care waiver authority.22 

While the MCO growth may be generally attributable to PPACA’s expansion of Medicaid, the 2010 law also contained some specific changes to MCO operational dynamics.  Perhaps the most direct change is the increased rebate rates that drug manufacturers are now legally required to extend to Medicaid MCOs for prescription drugs used by MCO enrollees.23 Under section 2501(c) of PPACA, covered outpatient drugs dispensed to individuals enrolled in Medicaid MCOs are subject to the increased rebate rates to which state Medicaid programs are entitled.24 In order to realize the full extent of savings under the drug rebate mechanism, states must collect and report accurate utilization data from MCOs who are dispensing the drugs, so MCOs may see increased oversight from their state Medicaid authority to keep accurate records.25


Managed care in Medicaid is likely to continue to expand as Medicaid expands its coverage.  It offers opportunities as well as unique legal challenges to those who participate in such programs.  Federal regulation and oversight is likely to increase with the PPACA expansion of Medicaid.

*The author gratefully acknowledges the assistance of Associate Andrew Baird of Christian & Barton in the preparation of this article.

1See Managed Care,, (last visited Nov. 19, 2013).
2See Federal financial participation in State Assistance Expenditures; Federal Matching Shares for Medicaid, the Children’s Health Insurance Program, and Aid to Needy Aged, Blind, or Disabled Persons for October 1, 2013 through September 30, 2014, 77 Fed. Reg. 71420, 71422 (Nov. 30, 2012) (presenting a chart that indicates the percentage of federal Financial Participation in state assistance expenditures for fiscal year 2013).
345 U.S.C. 1396A.
442 U.S.C. 1396a(a)(23).
5While managed Medicaid programs would initially be established as part of an individual’s state plan under that state’s waiver authority either via 42 U.S.C. § 1915(b) or 42 U.S.C. § 1115, subsequent adjustments to the state’s managed care arrangement (and therefore, adjustments to the state plan) would be executed through amendments to the plan and would not require independent waiver authority.
6Balanced Budget Act of 1997,  Pub. L. No. 105-33, § 4701, 111 Stat. 251, 489 (1997).
7See 42 C.F.R. § 431.55(b)(2).

See, e.g., Meghan Toohey, Kathryn Haslanger & Alicia Fagan, Inside Medicaid Managed Care Contracts In New York City: An Analysis of Plan Contracts and Related Documents 24–26 (Medicaid Managed Care Project of the N.Y. Consortium for Health Services Research, Working Paper, Feb. 1999) (describing differing requirements for physician-Medicaid enrollee ratios in MCO contracts with New York and the state’s Medicaid Managed Care arrangement with CMS).

9See SSA § 1932(c)(2), 42 U.S.C. 1396u–2(c)(2) (2013).
1042 C.F.R. § 438.114.
1142 C.F.R. 438.206(B)(4).
12See, e.g., Texas Insurance Code § 843 (2013).
13Virginia is one state that does not explicitly define the term “medically necessary.”
14See, e.g., Medically Necessary Definitions, CIGNA, (last visited Dec. 10, 2013) (providing a definition of “medically necessary” for use within its own coverage decisions “[e]xcept where state law or regulation requires a different definition . . . .”).

See Nat’l Federation of Independent Business, et al. v. Sebelius, et al., 567 U.S. ___ (2012), Roberts, J. slip opinion at 51.


16See 42 U.S.C. § 1396d.
17Congressional Budget Office, Updated Estimates for the Insurance Coverage Provisions of the Affordable Care Act, (Mar. 2012), available at

See Robert Pear, Problems with Federal Health Portal Also Stymie Medicaid Enrollment, N.Y. Times, Nov. 12, 2013, at A16.

19Sara Wiley and Jim Hardy, The undefined law of the land: How  the deficit reductions and other factors can affect Medicaid Managed Care in 2013 and beyond, MPHA Webinar, Jan. 29, 2013,
20For a list of states and their respective actions on the optional Medicaid expansion, see Status of State Action on Medicaid Expansion Decision, as of November 22, 2013, Kaiser Family Foundation, (last visited Dec. 10, 2013).
21For the states that do not yet have a managed care waiver already in place, a waiver must first be obtained before using any form of managed care for Medicaid enrollees.
22Interview with Camille Dobson, Senior Policy Advisor, CMS, Center for Medicaid and State Operations (Nov. 18, 2013).
23See Patient Protection and Affordable Care Act § 2501(c) (codified at 42 U.S.C. §§ 1396b(m)(2)(A), 1396r-8 (2012)).
24See Medicaid Program; Covered Outpatient Drugs, Preamble, 77 Fed. Reg. 5318, 5319 (proposed Feb. 2, 2012) (explaining how the prescription drug rebates for MCOs will work). See also Social Security Act § 1903(i)(10)(A), 42 U.S.C. § 1396b(i)(10)(A) (detailing the rebate rates paid to states).
25States’ Collection of Rebates for Drugs Paid Through Medicaid Managed Care Organizations 1, Dep’t of Health & Human Serv’s, Office of the Inspector General (Sept. 2012),


  • Health eSource