Medicaid Managed Care Organizations and Providers Caught in Crossfire as States Cut Medicaid Budgets

Medicaid MCOs typically receive a per capita payment from the state Medicaid agency, i.e., a per member, per month fee for each individual covered by the MCO’s Medicaid program. By contrast, MCOs often contract to pay their network providers for Medicaid covered services based on rates for services provided, using a percentage of billed charges or Medicaid fee tables. The MCO’s profit is based on the difference between the aggregate payment received from Medicaid and the total amount paid to providers, and this is generally seen as an acceptable trade for the MCO’s ability to cut administrative costs and negotiate rates with their Medicaid providers, many of whom also participate in the MCO’s private-pay programs.

What happens, however, when a budget crisis forces the state to cut funding for Medicaid services, and thus reduce the per capita payment to its Medicaid MCOs? The contract between the state and the MCO may prohibit midterm reductions, but as a practical matter, if the funding is not there the MCO must accept lower payments or opt out of the Medicaid program, which may not be a viable option. So, the MCO often accepts the reduced per capita payment from the state and then seeks to reduce reimbursement rates to its providers. Is this legal? Fair? Unfortunately, the answer is often unclear, and this scenario can throw the state Medicaid agency, MCOs, and providers into a complex debate which involves considerations of economics, politics, and law that are not easily reconciled.