Actuarial Standard of Practice No. 49

Medicaid Managed Care Capitation Rate Development and Certification

STANDARD OF PRACTICE

TRANSMITTAL MEMORANDUM

March 2015

TO: Members of Actuarial Organizations Governed by the Standards of Practice of the Actuarial Standards Board and Other Persons Interested in Medicaid Managed Care Capitation Rates and their Certification

FROM: Actuarial Standards Board (ASB)

SUBJ: Actuarial Standard of Practice (ASOP) No. 49

This document contains the final version of ASOP No. 49, Medicaid Managed Care Capitation Rate Development and Certification.

Background

This ASOP was developed to establish guidance for actuaries preparing, reviewing, or giving advice on capitation rates for Medicaid programs, including those certified in accordance with 42 CFR 438.6(c). Since the federal regulations took effect, actuaries have used various methods to prepare the capitation rates. This ASOP incorporates the appropriate aspects of these methods to establish guidance and considerations in the rate development process.

Exposure Draft

In December 2013, the ASB approved the exposure draft with a comment deadline of May 15, 2014. Twenty-six comment letters were received and considered in making changes that are reflected in this final ASOP. For a summary of issues contained in these comment letters, please see appendix 2.

The significant changes made to the final standard in response to the comment letters are as follows:

1. Section 1.2 was edited to clarify situations when this ASOP applies.

2. Language was added to section 3.1 to require the actuary to have knowledge of and understand the requirements of 42 CFR 438.6(c).

3. Section 3.2.2 was modified to add a reference to ASOP No. 12, Risk Classification, and to clarify that capitation rates may vary by Medicaid eligibility groups.

4. In section 3.2.12(a)(1) was changed from “should” to “may.”

The ASB voted in March 2015 to adopt this standard.

Task Force on Medicaid Rate Setting and Certification

Robert M. Damler, Chairperson

                      Sabrina Gibson                                                   Martin E. Staehlin

                      Michael E. Nordstrom                                         Kathleen A. Tottle

                      David Ogden                                                       Christopher Truffer

                      Michelle Raleigh                                                  Ross A. Winkelman

                      F. Kevin Russell

Health Committee of the ASB

Nancy F. Nelson, Chairperson

                      Robert M. Damler                                                Darrell Knapp

                      Annette James                                                    Rick Lassow

                      Shannon Keller                                                    Donna Novak

Actuarial Standards Board

Patricia E. Matson, Chairperson

                      Christopher S. Carlson                                        Barbara L. Snyder

                      Maryellen J. Coggins                                           Frank Todisco

                      Beth E. Fitzgerald                                                Ross A. Winkelman

                      Thomas D. Levy

The Actuarial Standards Board (ASB) sets standards for appropriate actuarial practice in the United States through the development and promulgation of Actuarial Standards of Practice (ASOPs).These ASOPs describe the procedures an actuary should follow when performing actuarial services and identify what the actuary should disclose when communicating the results of those services.

Section 1. Purpose, Scope, Cross References, and Effective Date

1.1 Purpose

This actuarial standard of practice (ASOP) provides guidance to actuaries when performing professional services related to Medicaid (Title XIX) and Children’s Health Insurance Program (CHIP or Title XXI) managed care capitation rates, including a certification on behalf of a state to meet the requirements of 42 CFR 438.6(c).

1.2 Scope

This standard applies to actuaries performing professional services related to Medicaid managed care capitation rates including, but not limited to, the following:

a. certification on behalf of a state to meet the requirements of 42 CFR 438.6(c);

b. capitation rate bid or rate acceptance; and

c. department of insurance capitation rate filing.

This standard also applies to actuaries performing professional services related to managed care capitation rates for CHIP. Throughout this standard the term “Medicaid” also refers to CHIP.

If the actuary departs from the guidance set forth in this standard in order to comply with applicable law (statutes, regulations, and other legally binding authority) or for any other reason the actuary deems appropriate, the actuary should refer to section 4.

1.3 Cross References

When this standard refers to the provisions of other documents, the reference includes the referenced documents as they may be amended or restated in the future, and any successor to them, by whatever name called. If any amended or restated document differs materially from the originally referenced document, the actuary should consider the guidance in this standard to the extent it is applicable and appropriate.

1.4 Effective Date

This standard is effective for actuarial communications issued on or after August 1, 2015.

Section 2. Definitions

The terms below are defined for use in this actuarial standard of practice.

2.1 Actuarially Sound/Actuarial Soundness

Medicaid capitation rates are “actuarially sound” if, for business for which the certification is being prepared and for the period covered by the certification, projected capitation rates and other revenue sources provide for all reasonable, appropriate, and attainable costs. For purposes of this definition, other revenue sources include, but are not limited to, expected reinsurance and governmental stop-loss cash flows, governmental risk adjustment cash flows, and investment income. For purposes of this definition, costs include, but are not limited to, expected health benefits, health benefit settlement expenses, administrative expenses, the cost of capital, and government-mandated assessments, fees, and taxes.

2.2 Base Data

The historical data set used by the actuary to develop the capitation rates. The data may be from Medicaid fee-for-service data, MCO data, or from a comparable population data source.

2.3 Capitation Rate

A monthly fee paid for each member assigned or each event (for example, maternity delivery) regardless of the number or actual cost of services provided under a system of reimbursement for MCOs. Capitation rates can vary by member based on demographics, location, covered services, or other characteristics. Capitation rates can be structured so that an MCOs is fully at risk, or so that an MCO shares the risk with other parties.

2.4 Disproportionate Share Hospital (DSH) Payments

Additional amounts paid to hospitals that serve a disproportionally large number of Medicaid or uninsured patients. These payments may be subject to a hospital-specific limit. An annual allotment to each state limits federal financial participation in these payments. These payments are subject to requirements set forth in Section 1923(i) of the Social Security Act.

2.5 Encounter Data

Information about an interaction between a provider of health care services and a member that is documented through the submission of a claim to an MCO, and shared between the MCO and the state Medicaid agency.

2.6 Enhanced or Additional Benefits

Benefits offered by MCOs to their Medicaid members that are above and beyond the benefits offered by the state Medicaid plan. Common examples are adult dental services, non-emergency transportation, and adult vision services.

2.7 Federally Qualified Health Center (FQHC)

An organization that (1) receives grants under Section 330 of the Public Health Service Act; (2) does not receive a grant under the Section 330 of the Public Health Service Act, but otherwise meets all requirements to receive such a grant; or (3) is an outpatient health clinic associated with tribal or Urban Indian Health Organizations (UIHO). The organization must have also applied for recognition, and been approved as a federally qualified health center for Medicare and Medicaid, as described in Sections 1861(aa)(3) and 1905(l)(2) of the Social Security Act. Payments to these organizations are subject to requirements set forth in Section 1902(bb) of the Social Security Act.

2.8 Intergovernmental Transfer (IGT)

A transfer of public funds between governmental entities (for example, county government to state government or state university hospital to state Medicaid agency).

2.9 Managed Care Organization (MCO)

The entity contracting with the state Medicaid agency to provide health care services for selected subsets of the Medicaid population.

2.10 Medical Education Payments

Payments for graduate medical education as part of the rate structure for inpatient hospital payments or as supplemental payments under 42 CFR 447.272. These payments may include direct graduate medical education (GME) or indirect medical education (IME) costs. These payments may be included as part of Medicaid managed care capitation rates or may be made directly to providers for managed care enrollees.

2.11 Minimum Medical Loss Ratio

A provision that requires the MCO to use no less than a stated portion of its earned premium for defined medical or care management expenditures.

2.12 Performance Incentive

A payment mechanism under which an MCO may receive funds in addition to the capitation rates for meeting targets specified in the contract between the state and the MCO.

2.13 Performance Withhold

An amount included in the capitation rates that is paid if the MCO meets certain state requirements that may be related to quality or operational metrics. The amount may be withheld or paid up front with the monthly capitation rate.

2.14 Rating Period

The time period for which managed care Medicaid capitation rates are being developed.

2.15 Risk Adjustment

The process by which relative risk factors are assigned to individuals or groups based on expected resource use and by which those factors are taken into consideration and applied.

2.16 Rural Health Clinic (RHC)

A clinic that meets certain requirements for providing primary care services in specific areas, as outlined in the Public Health Service Act and defined in Section 1905(l)(1) of the Social Security Act. Medicaid payment rates to RHCs may be specified in applicable law.

2.17 State Plan Services

The benefits provided to Medicaid beneficiaries who are eligible under a qualifying category of Medicaid assistance in a state.

Section 3. Analysis of Issues and Recommended Practices

3.1 Overview

An actuary may be developing, certifying, or reviewing Medicaid Managed Care capitation rates on behalf of a state Medicaid agency or an MCO. When certifying whether capitation rates meet the requirements of 42 CFR 438.6(c) or reviewing such a certification, the actuary must-have knowledge and understanding of those requirements.

Title 42 CFR 438.6(c) requires that capitation rates paid by the state to the MCOs be certified as actuarially sound. The soundness opinion applies to all contracted capitation rates. However, the actuary is not certifying that the underlying assumptions supporting the certification are appropriate for an individual MCO.

An actuary providing actuarial services for a contracting MCO may be required to develop and submit capitation rates to the state Medicaid agency for a rating period. While the federal regulation 42 CFR 438.6(c) does not extend to an MCO actuary, the MCO actuary may be required under the terms of a proposal or contract to submit an actuarial opinion for the capitation rates that may or may not indicate compliance with 42 CFR 438.6(c).

3.2 Medicaid Managed Care Capitation Rate Development Process and Considerations

The actuary should address the following when developing capitation rates.

3.2.1 Form of the Capitation Rates (Single Rate or Capitation Rate Ranges)

The capitation rate certification may apply to a single point estimate capitation rate or a range of capitation rates. If a range of capitation rates is prepared, the contracted rates with an MCO may be at either end of the range or a point within the range. The capitation rates may vary by MCO.

3.2.2 Structure of the Medicaid Managed Care Capitation Rates

Capitation rates are usually separately developed and paid in individual capitation rate cells based on characteristics that cause costs to differ materially. Examples of these characteristics include age, gender, qualifying event (for example, maternity delivery), geographic region, Medicaid eligibility group, eligibility for Medicare benefits, diagnosis or risk adjustment factors, and MCO differences. In determining the rating structure, the actuary should consider how well the structure aligns capitation revenue and MCO risk as well as the complexity of the rating structure. A certification of the capitation rates under 42 CFR 438.6(c) applies to each of the individual capitation rate cells. For further guidance, see ASOP No. 12, Risk Classification.

3.2.3 Rebasing and Updating of Rates

When developing capitation rates for subsequent rating periods, the actuary should either rebase the rates or update existing rates. Rebasing of rates generally refers to using base data from a more recent time period to develop capitation rates along with updating assumptions used to develop the rates. Updating of rates involves adjusting existing rates to reflect the impacts of any program, benefit, population, trend, or other changes between the rating period of the existing rates and the rating period of the updated rates.

The actuary should consider the following in making the determination whether to rebase rates or update existing rates: availability of updated data, likely materiality of rebasing, changes in the underlying population, quality of data since the last rebasing, and time elapsed since the last rebasing.

3.2.4 Base Data

The actuary should use base data (for example, population, benefits, provider market dynamics, geography) that is appropriate for the program for which capitation rates are being developed. The base data may span more than one year.

The actuary should use base data sources for utilization or unit cost that are relevant to the given Medicaid population and appropriate for the given use. Program-specific historical experience from the following sources are examples of MCO data that may meet these criteria:

a. financial reports;

b. summary encounter data reports;

c. encounter data with payment information;

d. encounter data without payment information;

e. sub-capitation payment information; and

f. provider settlement payment reports.

If the managed care program is new or if previously carved-out services are to be included in the rates, the actuary may need to use alternative data sources. Such alternative data sources typically include fee-for-service experience and experience from other states, although other sources may be appropriate. That experience may be available in several forms, including the following:

1. financial reports;

2. summary claims data reports;

3. raw claims data with payment information; and

4. state-specific provider settlement payment reports.

If the covered population is new, the actuary should identify data sources for similar populations and make appropriate adjustments.

3.2.5 Covered Services

When developing capitation rates under 42 CFR 438.6(c), the actuary should reflect covered services for Medicaid beneficiaries, as defined in the contract between the state and the MCOs, which may include cost effective services provided in lieu of state plan services.

When developing capitation rates for other purposes, the actuary should reflect the cost of all services, including enhanced or additional benefits, provided to Medicaid beneficiaries.

3.2.6 Special Payments

Payments in addition to the Medicaid fees may be made by states directly or through the MCOs to providers of Medicaid services. These payments are usually made to hospitals, but other provider types may also qualify for such payments. These payments are sometimes reciprocation for the provider paying a special tax or assessment fee.

The actuary should identify any special payments to providers (for example, supplemental payments or bonuses) and include these payments in development of the capitation rates in a manner that reflects the payment policy for these special payments in the rating period.

3.2.7 Base Data Period Adjustments

The actuary should consider base data period adjustments of the following three types:

a. Retroactive Period Adjustments—The retroactive period adjustments reflect changes that occurred during the base data period to standardize the data over the base data period.

b. Interim Period Adjustments—The interim period adjustments reflect changes that occurred between the base data period and the rating period.

c. Prospective Period Adjustments—The prospective period adjustments reflect changes that will occur in the rating period.

3.2.8 Other Base Data Adjustments

The actuary should consider other base data adjustments, which may include the following:

a. Missing Data Adjustment—Circumstances that may cause data to be missing include, but are not limited to, the following:

1. certain claims are not processed through the same system as the base data;

2. Medicaid fee-for-service data may not include all services or expenses to be covered by the capitation rate; or

3. Medicaid encounter data may not reflect services that are sub- capitated and not reported through the encounter data system.

b. Incomplete Data Adjustment—The incomplete data adjustment reflects claims that were in course of settlement, claims that were incurred but not reported, or amounts that are due for reinsurance or claim settlements.

c. Population Adjustment—The population adjustment modifies the base data to reflect differences between the population underlying the base period and the population expected to be covered during the rating period.

d. Funding or Service Carve-Out Adjustments—The funding or service carve-outs are not the financial responsibility of the MCO. Funding carve- outs may include graduate medical education payments, disproportionate share hospital payments, or provider taxes. Service carve-outs reflect services that will not be covered by the capitation rate.

e. Retroactive Eligibility Adjustments—Medicaid beneficiaries are often provided retroactive eligibility coverage for a period prior to submitting an application for Medicaid coverage. The retroactive eligibility adjustment reflects the exclusion of periods of retroactive eligibility, if any, that are not the responsibility of the MCO.

f. Program, Benefit, or Policy Adjustments—The program, benefit, or policy adjustments reflect differences in benefit or service delivery requirements between the base period and the rating period that impact the financial risk assumed by the MCO.

g. Data Smoothing Adjustments—The data smoothing adjustments address anomalies or distortions in the base data, such as large claims or limited enrolment.

3.2.9 Claim Cost Trends

The actuary should include appropriate adjustments for trend and may consider a number of elements in establishing trends in utilization, unit costs, or in total. Medicaid utilization trend rates may be particularly affected by changes in demographics and benefit levels, and by policy or program changes. Medicaid unit cost trends may be particularly affected by changes in state- mandated reimbursement schedules (if applicable), Medicaid fee-for-service fee schedules, and provider contracting performed by the MCOs. The trend assumption should not include adjustments captured elsewhere in the capitation rate development.

3.2.10 Managed Care Adjustments

The actuary may apply managed care adjustments based on the assumption that the program will move from the level of managed care underlying the base data to a different level of managed care during the rating period. The adjustments may be to utilization, unit cost, or both, and the impact of the adjustments may be either an increase or a decrease to the base data. If managed care adjustments are included, the changes reflected in the adjustments should be attainable in the rating period, in the actuary’s professional judgment.

The actuary should consider the following when reviewing the need for and developing the managed care adjustments:

a. state contractual and operational requirements, and relevant laws and regulations;

b. current characteristics of the provider markets; and

c. the maturity level of the managed Medicaid program.

3.2.11 Non-Claim Based Medical Expenditures

The actuary should consider Medicaid- specific payments that are not included in the base data or that are included in the base data but for which the historical costs do not represent future costs. The actuary should determine whether these amounts will be an expense to the MCOs, and if so, how the amounts should be reflected. These types of payments include, but are not limited to, the following:

a. disproportionate share hospital payments;

b. federally qualified health centers or rural health clinics supplemental settlement payments;

c. medical education payments;

d. intergovernmental transfers; and

e. pharmacy rebates anticipated to be collected by the MCO.

3.2.12 Non-Medical Expenses

The actuary should include amounts for appropriate non- medical expenses in the development of the capitation rates. The non-medical expenses may vary by MCO.

a. Administration—The   actuary   should   include   a   provision   for administrative expenses appropriate for the Medicaid managed care business in the state.

1. Determination of Administrative Expenses—In determining administrative expenses, the actuary may take into account relevant characteristics and functions of the MCOs and the Medicaid program, such as the following:

i. overall size of the MCO across all lines of business;

ii. age and length of time participating in Medicaid;

iii. organizational structure; and

iv.   demographic mix of enrollees.

2. Types   of   Administrative   Expenses— Appropriate   types   of administrative expenses include, but are not limited to, the following:

i. marketing;

ii. claims-processing;

iii. medical management costs including those required to achieve savings from fee-for-service or prior periods assumed in the medical cost targets; and

iv. general corporate overhead.

b. Underwriting Gain—The actuary should include a provision for underwriting gain, which is typically expressed as a percentage of the premium rate, to provide for the cost of capital and a margin for risk or contingency. The underwriting gain provision provides compensation for the risks assumed by the MCO. These risks may include insurance, investment, inflation, and regulatory risks, as well as risks associated with social, economic, and legal environments. The actuary should consider the effect of any risk sharing arrangements discussed in section 3.2.14, and performance withholds and incentives discussed in section 3.2.15.

The methods used to develop the underwriting gain provision of the capitation rate should be appropriate to the level of capital required and the type and level of risk borne by the MCO. The actuary may reflect investment income in establishing the underwriting gain component of the capitation rate, although an explicit adjustment is not required. Elements of investment income that the actuary may reflect include investment income from insurance operations and investment income on capital and underlying cash flow patterns.

An actuary working on behalf of an MCO may determine that a negative underwriting gain is appropriate for that plan’s circumstances. In this case, the negative underwriting gain should be disclosed in the actuarial communication.

c. Income Taxes—The actuary should consider the effect of expected income taxes on the underwriting gains and investment income retained by the MCO.

d. Taxes, Assessments, and Fees—The actuary should include an adjustment for any taxes, assessments, or fees that the MCOs are required to payout of the capitation rates. If the tax, assessment, or fee is not deductible as an expense for corporate tax purposes, the actuary should apply an adjustment to reflect the costs of the tax. Taxes, assessments, and fees may differ among the MCOs in the program. The actuary preparing a certification under 42 CFR 438.6(c) should consider the need to adjust capitation rates for each MCO to reflect each MCO’s expected expenses for these items.

3.2.13 Risk Adjustment

An actuary working on behalf of the state should determine whether to adjust capitation payments to different MCOs by using a risk adjustment methodology. Considerations in making this determination include program enrollment procedures that may affect differences in risk across MCOs or among the populations used to develop the rates and to which the rates will be applied, data availability and quality, timing, and other practical considerations including cost. ASOP No. 45, The Use of Health Status Based Risk Adjustment Methodologies, provides further guidance. Risk-adjusted rates that may be developed from actuarially sound base rates and application of an appropriate risk adjustment method are considered actuarially sound, even if the resulting rates fall outside of the unadjusted rate ranges or vary from the single point rates.

The actuary, whether working on behalf of the state or an MCO, should understand and consider the potential impact of the risk adjustment methodology being used, if any, on the capitation rate.

3.2.14 Reinsurance, Risk Corridors, and Other Risk Sharing Arrangements

The actuary should consider the effect of any risk sharing arrangements between the MCO and the state Medicaid agency or the federal government.

The actuary should consider how payments related to risk sharing arrangements have been reported in the base period data, how these payments are to be estimated in the future, and how these payments will be reflected in the capitation rates.

3.2.15 Performance Withholds and Incentives

The actuary should consider how the existence of the withholds and incentives will affect the plan costs, including claims and administration costs. The capitation rates should reflect the value of the portion of the withholds for targets that the MCOs can reasonably achieve. The capitation rates should not reflect the value of incentives. The actuary should also consider any limitations to the amount of incentive payments or withholds specified in legislative regulations or guidance.

3.2.16 Minimum Medical Loss Ratios

The actuary should consider governmental and contractual minimum medical loss ratio requirements as well as the sharing of gains or losses. Such provisions may affect the underwriting gain provision component of the capitation rates.

3.2.17 State Initiatives

In setting capitation rates, the actuary should only include the impact of state initiatives that are supported by corresponding cost saving policies including, but not limited to, program changes or reimbursement changes.

3.2.18 Inaccurate or Incomplete Information Identified after Opinion or Rate Certification

If the actuary determines after the opinion or certification was issued that he or she used inaccurate or incomplete information, the actuary should notify the principal if, in the actuary’s professional judgment, the new information is material to the actuarial soundness of the rates and is not inherent in the assumptions already included in the rates.

3.3 Qualified Opinion on Actuarial Soundness

The actuary should provide a qualified opinion if, in the actuary’s judgment, the rates are not actuarially sound. Further, the opinion should be qualified if a negative underwriting gain is determined to be appropriate for a specific plan’s circumstance by an actuary working on behalf of an MCO.

3.4 Documentation

The actuary should document the methods, assumptions, procedures, and sources of the data used. The documentation should be in a form such that another actuary qualified in the same field could assess the reasonableness of the work. The actuary should consider documentation to address the Centers for Medicare & Medicaid Services’ regulations specific to Medicaid managed care capitation rate development and certification. For further guidance, see ASOP No. 23, Data Quality; ASOP No. 25, Credibility Procedures; and ASOP No. 41, Actuarial Communications.

Section 4. Communications and Disclosures

4.1 Communications

When issuing actuarial communications under this standard, the actuary should refer to ASOP No. 41.

4.2 Disclosures

The actuary should include the following, as applicable, in an actuarial communication:

a. as required by 42 CFR 438.6(c), a statement that capitation rates provided with a rate certification are considered “actuarially sound,” according to the following criteria:

1. the capitation rates “have been developed in accordance with generally accepted actuarial principles and practices”;

2. the capitation rates “are appropriate for the populations to be covered, and the services to be furnished under the contract”; and

3. the capitation rates “have been certified, as meeting the requirements of this paragraph [42 CFR 438.6(c)], by actuaries who meet the Qualification Standards established by the American Academy of Actuaries and follow the practice standards established by the Actuarial Standards Board.”

b. the definition of “actuarial soundness”;

c. disclosure of any items causing the opinion to be qualified such as the use of a negative underwriting gain by an actuary working on behalf of a Medicaid MCO;

d. the disclosure in ASOP No. 41, section 4.2, if any material assumption or method was prescribed by applicable law (statutes, regulations, and other legally binding authority);

e. the disclosure in ASOP No. 41, section 4.3., if the actuary states reliance on other sources and thereby disclaims responsibility for any material assumption or method selected by a party other than the actuary; and

f. the disclosure in ASOP No. 41, section 4.4, if, in the actuary’s professional judgment, the actuary has otherwise deviated materially from the guidance of this ASOP.

Appendix 1 – Background and Current Practices

Note: This appendix is provided for informational purposes only and is not part of the standard of practice.

Background

Medicaid is a program that pays for health care services for certain low-income persons in the United States and its Territories, as authorized by Title XIX of the Social Security Act. The federal and state governments cooperatively administer Medicaid. The Centers for Medicare & Medicaid Services (CMS) is the agency charged with administering Medicaid on behalf of the federal government. The federal government establishes certain requirements for Medicaid, and the states administer their own programs. The federal government and the states share the responsibility for funding Medicaid.

Medicaid programs were originally fee-for-service (FFS) programs in which the state paid the providers directly. In the 1980s, some states began to contract with managed care organizations (MCOs) to provide health care services for selected subsets of the Medicaid population. In some cases, states may need to obtain a CMS waiver in order to waive certain Medicaid regulations and contract with MCOs. In many states, the state or its contractor develops capitation rates that are offered to the MCOs, rather than the MCOs proposing rates to the state. Under this arrangement, typically the MCOs may accept the rates or decline to participate in the program, though some negotiation may be possible.

Beginning in August 2003,the capitation rates paid by the state to the MCOs must be certified as actuarially sound under 42 CFR 438.6(c). The actuary performing the rate certification process may be an employee of the state Medicaid agency or contracted as a consulting actuary. Normally, the certifying actuary will not have as specific knowledge of each MCO’s operations and experience as an actuary working on behalf of the MCO. The soundness certification applies to all contracted capitation rates. However, the actuary is not certifying that the capitation rates are appropriate for an individual MCO.

Since the federal regulations took effect, actuaries have used various methods to prepare the capitation rates. This ASOP has been developed to incorporate the appropriate aspects of these methods to establish guidance and considerations in the rate development process.

Current Practices

The current Medicaid capitation rate setting and certification methodology varies state by state, but actuaries across the country use many of the considerations outlined in the ASOP. Actuaries rely on the August 2005 practice note and traditional health care actuarial principles in the development of the actuarially sound capitation rates.

In many states, the capitation rates are developed independently by the state Medicaid agency and the certifying actuary. The capitation rates are often offered to the contracting MCO without negotiation, but the contracting MCOs and their actuaries may have the ability to review the capitation rate development and provide comment. Further, a state Medicaid agency may negotiate rates with each MCO based on a rate range or allow a competitive bid. Due to the unique nature of these contracting arrangements, the certifying actuary has a greater responsibility in the determination of the capitation rates (either the point estimates or capitation rate ranges), since the certifying actuary is not directly affiliated with the contracted MCO.

Actuaries rely on data and information provided by the state Medicaid agency, the contracted MCOs, and other publicly available information. Actuaries may publish a data book that outlines the baseline data, adjustments to the baseline data, actuarial assumptions, and the development of capitation rates. Public meetings may be held where the capitation rate development process is presented to the contracted MCOs. Following the public meetings, the MCOs may provide questions to the state Medicaid agency and the certifying actuary regarding the capitation rate development process and assumptions. The certifying actuary reviews the comments and adjusts the capitation rates, if appropriate.

The state Medicaid agency presents the actuarial rate certification and related documentation to CMS for review and approval. CMS may submit questions to the state Medicaid agency and the certifying actuary regarding the capitation rate development and the related contract with the MCOs. The certifying actuary will often provide written responses to CMS.

Additional Resources

The following resources may assist in furthering actuaries’ understanding of the capitation rate development process.

Appendix 2 – Comments on the Exposure Draft and Responses

The exposure draft of proposed ASOP, Medicaid Managed Care Capitation Rate Development and Certification, was issued in December 2013 with a comment deadline of May 15, 2014. Twenty-six comment letters were received, some of which were submitted on behalf of multiple commentators, such as by firms or committees. For purposes of this appendix, the term “commentator” may refer to more than one person associated with a particular comment letter. The Medicaid Task Force and the Health Committee of the Actuarial Standards Board carefully considered all comments received, and the Health Committee and ASB reviewed (and modified, where appropriate) the changes proposed by the Task Force.

Click here to view the Comments in their entirety.