In order to receive federal funds for its managed care  program, a state is required to submit its rate-setting methodology and  rates to CMS for review and approval. The regulations do not   include standards for the type, amount, or age of the data that states mayuse in setting rates. Actuarial Principles and Practices for Medicaid Managed Care Rate Setting

CMS’s regulations require that actuarially sound rates be developed in  accordance with generally accepted actuarial principles and practices. CMS Has Been Inconsistent in Reviewing States’ Rate Setting for Compliance with the Actuarial Soundness Requirements

In the six CMS regional offices we reviewed, we found inconsistencies in  CMS’s review of state’s rate setting, including significant gaps in the  agency’s oversight of two states’ compliance with the actuarial soundness  requirements. These reports did not include actuarial certifications, and  Tennessee officials confirmed that the state’s rates had not been certified  by an actuary, which is a regulatory requirement. As a result, according  to CMS officials, Tennessee received, and is continuing to receive,  approximately $5 billion a year in federal funds for rates that we  determined had not been certified by an actuary or assessed by CMS for  compliance with the requirements. Variation in Practices among CMS Regional Offices Contributed to Inconsistent Oversight

Variation in a number of regional office practices contributed to the  inconsistency in CMS’s oversight of states’ rate setting. Regional offices  varied in the extent to which they tracked state compliance with the  requirements, the extent to which they withheld federal funds, their  criteria for doing full and partial reviews of rate setting, and what they  considered to be sufficient evidence for meeting the requirements. As a result of our review, CMS took a number of steps that may address  some of the variation in regional office practices. CMS’s Limited Efforts Do Not Ensure the Quality of the Data Used to Set Rates

CMS’s efforts to ensure the quality of the data used to set rates were  generally limited to requiring assurances from states and health plans,  which did not provide the agency with sufficient information to ensure  data quality. In our interviews with regional office officials, we found that, when  reviewing states’ descriptions of the data used for rate setting, CMS  officials focused primarily on ensuring the appropriateness of the data  used by states to set rates rather than their reliability. With limited information on the quality of data used to set rates, CMS  cannot ensure that states’ managed care rates are appropriate and risks  misspending billions of federal and state dollars. States have information on the quality of data used for rate setting— information that CMS could obtain. During the course of our work, CMS took steps to  address some of the variation in regional office practices that contributed  to inconsistencies in overseeing state compliance, such as requiring  regional office officials to use the checklist in reviewing all states’ rate- setting submissions. As a result of the weaknesses in CMS’s oversight, billions of dollars in  federal funds were paid to one state for rates that were not certified by an  actuary, and billions more may be at risk of being paid to other states for  rates that are not in compliance with the actuarial soundness requirements  or are based on inappropriate and unreliable data. CMS  could, among other things, require states to provide CMS with a  description of the actions taken to ensure the quality of the data used in  setting rates and the results of those actions; consider relevant audits and  studies of data quality done by others when reviewing rate setting; and  conduct or require periodic audits or studies of the data states use to set  rates. HHS agreed with our two recommendations related to improving the  consistency of CMS’s oversight, namely that CMS implement a mechanism  for tracking state compliance with the actuarial soundness requirements  and clarify guidance for CMS officials on conducting rate-setting reviews. HHS also agreed with our recommendation that CMS make use of  information on data quality in overseeing states’ rate setting. Appendix II: Methodology for Selecting States to Contact

To describe state views of the Centers for Medicare & Medicaid Services’s  (CMS) oversight of state compliance with the Medicaid managed care  actuarial soundness requirements and state efforts to ensure the quality of  the data used to set rates, we selected 11 of the 34 states with  comprehensive Medicaid managed care programs and interviewed officials  from those states’ programs.
Why GAO Did This Study

Medicaid managed care rates are required to be actuarially sound. A state is required to submit its rate-setting methodology, including a description of the data used, to the Department of Health and Human Services' (HHS) Centers for Medicare & Medicaid Services (CMS) for approval. The Children's Health Insurance Program Reauthorization Act of 2009 required GAO to examine the extent to which states' rates are actuarially sound. GAO assessed CMS oversight of states' compliance with the actuarial soundness requirements and efforts to ensure the quality of data used to set rates. GAO reviewed documents, including rate-setting review files, from 6 of CMS's 10 regional offices. The selected offices oversaw 26 of the 34 states with comprehensive managed care programs; the states' programs varied in size and accounted for over 85 percent of managed care enrollment. GAO interviewed CMS officials and Medicaid officials from 11 states that were chosen based in part on variation in program size and geography.

What GAO Found

CMS has been inconsistent in reviewing states' rate setting for compliance with the Medicaid managed care actuarial soundness requirements, which specify that rates must be developed in accordance with actuarial principles, appropriate for the population and services, and certified by actuaries. Variation in CMS regional office practices contributed to this inconsistency in oversight. For example, GAO found significant gaps in CMS's oversight of two states. 1) First, the agency had not reviewed Tennessee's rate setting for multiple years and only determined that the state was not in compliance with the requirements through the course of GAO's work. According to CMS officials, Tennessee received approximately $5 billion a year in federal funds for rates that GAO determined had not been certified by an actuary, which is a regulatory requirement. 2) Second, CMS had not completed a full review of Nebraska's rate setting since the actuarial soundness requirements became effective, and therefore may have provided federal funds for rates that were not in compliance with all of the requirements. Variation in a number of CMS regional office practices contributed to these gaps and other inconsistencies in the agency's oversight of states' rate setting. For example, regional offices varied in the extent to which they tracked state compliance with the actuarial soundness requirements, their interpretations of how extensive a review of a state's rate setting was needed, and their determinations regarding sufficient evidence for meeting the actuarial soundness requirements. As a result of our review, CMS took a number of steps that may address some of the variation that contributed to inconsistent oversight, such as requiring regional office officials to use a detailed checklist when reviewing states' rate setting. However, additional steps are necessary to prevent further gaps in oversight and additional federal funds from being paid for rates that are not in compliance with the actuarial soundness requirements. CMS's efforts to ensure the quality of the data used to set rates were generally limited to requiring assurances from states and health plans--efforts that did not provide the agency with enough information to ensure the quality of the data used. CMS's regulations do not include standards for the type, amount, or age of the data used to set rates, and states are not required to report to CMS on the quality of the data. When reviewing states' descriptions of the data used to set rates, CMS officials focused primarily on the appropriateness of the data rather than their reliability. With limited information on data quality, CMS cannot ensure that states' managed care rates are appropriate, which places billions of federal and state dollars at risk for misspending. States and other sources have information on the quality of data used for rate setting--information that CMS could obtain. In addition, CMS could conduct or require periodic audits of data used to set rates; CMS is required to conduct such audits for the Medicare managed care program.

What GAO Recommends

GAO recommends that CMS implement a mechanism to track state compliance with the requirements, clarify guidance on rate-setting reviews, and make use of information on data quality in overseeing states' rate setting. HHS agreed with our recommendations and described initiatives underway that are aimed at improving CMS's oversight.