Under managed care programs, states pay doctors directly for medical services and fees.

Managed Care is a health care delivery system organized to manage cost, utilization, and quality. Medicaid managed care provides for the delivery of Medicaid health benefits and additional services through contracted arrangements between state Medicaid agencies and managed care organizations (MCOs) that accept a set per member per month (capitation) payment for these services.

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How are MCO providers paid?
What is the difference between MCO and Medicaid?
What is a managed care plan?
What is not an advantage of a managed care organization?

By contracting with various types of MCOs to deliver Medicaid program health care services to their beneficiaries, states can reduce Medicaid program costs and better manage utilization of health services. Improvement in health plan performance, health care quality, and outcomes are key objectives of Medicaid managed care.

Some states are implementing a range of initiatives to coordinate and integrate care beyond traditional managed care. These initiatives are focused on improving care for populations with chronic and complex conditions, aligning payment incentives with performance goals, and building in accountability for high quality care.

Persistent and growing disparities in the rates paid to health providers by Medicaid, Medicare, and commercial insurance are almost certain to be a key issue for the Biden administration in its efforts to strengthen access to care in Medicaid and in regulations it is slated to release in early 2023. Rates alone do not determine provider participation in Medicaid, but they are a key lever to ensuring access.1 Medicaid rates are generally well below Medicare rates, which are themselves well below commercial rates. In this post, we compare rates across the market and pose questions relating to access, equity, and costs that are suggested by the data.

In 2019, Medicaid fee-for-service (FFS) payments for physician services were nearly 30 percent below Medicare payment levels, with an even larger differential for primary care physician services. States’ Medicaid payment rates vary widely. Medicaid FFS physician rates for primary care were less than half the Medicare payment rate in Florida, Illinois, Pennsylvania, New York, Rhode Island, and Wisconsin, while Medicaid rates were at or above Medicare in just four states — Alaska, Delaware, Montana, and North Carolina.

Comparisons of hospital rates are more complicated. According to the Medicaid and CHIP Payment and Access Commission (MACPAC), FFS inpatient hospital base payments in Medicaid were 22 percent below comparable Medicare rates. To narrow or close this gap, many states make supplemental payments to some or all hospitals in their state. Accounting for these payments, Medicaid hospital inpatient payments are an average 6 percent above Medicare rates. However, not all states make supplemental payments, and even in states that make them, not all hospitals receive them. In addition, hospitals typically pay the nonfederal share of the cost of these payments through provider taxes or, in the case of public hospitals, intergovernmental transfers. This financing is permissible (subject to federal guardrails), but when hospitals assume these costs, the net value of the payment to the hospital is considerably less.

Comparing Medicaid to Medicare tells only part of the story; it is also useful to look at how Medicaid and Medicare rates stack up against commercial coverage. While no studies directly compare Medicaid to commercial rates, the Medicare to commercial rate comparison underscores how low Medicaid payment rates are relative to the broader market. The Congressional Budget Office found commercial physician rates were 30 percent higher than Medicare rates. For inpatient care, the Kaiser Family Foundation reported commercial rates are nearly 90 percent higher than Medicare.

These data raise important questions that the administration will need to consider as it devises new access standards for Medicaid and seeks to address health equity and rein in health care costs. In addition to examining whether Medicaid rates are too low and commercial insurance rates too high, the administration also should consider:

Are the payment differences as striking under managed care? Because Medicaid managed care payment rates are generally not made public, the studies cited use Medicaid fee-for-service rates. FFS rates, however, are often used as a basis for Medicaid managed care rates. Perhaps for this reason, MACPAC found that managed care does not necessarily improve access; states that rely on managed care in their Medicaid programs do not have higher rates of physicians accepting new Medicaid patients compared to FFS states. Greater transparency of managed care rates would be helpful for state and federal regulators as well as the public.
What do these differential rates tell us about health disparities? Black and Latinx individuals comprise a greater share of the Medicaid population and lower share of the commercial population, relative to their share of the general population. As such, they are covered disproportionately by the program that pays the lowest rates. As Tiffany Ford and Jamila Michener wrote in a recent publication, Medicaid reimbursement rates are a racial justice issue.
How do payment differentials affect access? MACPAC found that higher Medicaid payments are associated with higher rates of accepting new Medicaid patients, although more for some practitioners than others. At the same time, higher commercial payments generally encourage broader provider participation, but also can hurt access when higher costs are shifted onto consumers through premiums and cost sharing.
Do payment differentials influence who provides care? Do they result in a two- (or three-) tiered system of care? The evidence is limited but one study shows an unsurprising correlation between provider rates and the wages providers pay. While higher wages may not necessarily translate to better quality, lower wages can impair access, particularly in times of workforce shortages. Health providers that rely principally on Medicaid revenues face greater workforce recruitment challenges than those primarily serving commercial patients.2
What are the implications for safety-net providers? Relatively low Medicaid base payment levels put providers who primarily serve Medicaid and uninsured patients at a disadvantage, not only with respect to attracting and retaining a robust and qualified workforce, but also in terms of investing in innovative care models and making critical and ongoing capital investments that can strengthen quality.

Federal policymakers will need to consider these and other questions, as well as the overall impact of sharply disparate rates as they write new Medicaid access rules. Differential rates are the result of shifting away from rate regulation. With the notable exception of Maryland, rate regulation has largely disappeared from the health policy landscape. State budget decisions largely drive Medicaid rates; commercial rates are shaped mainly by the relative market power of health plans and providers and fueled by consolidation and the influence of private equity; and Medicare rates are set by a federal formula with inputs established through annual rulemaking. This fragmented approach has led to growing rate differentials and rising costs in the commercial sector, with little systemwide consideration of the implications for access, equity, or cost. Strengthened Medicaid access rules alone won’t solve the problem but can help move us in the right direction.

How are MCO providers paid?

States contract with managed care organizations (MCOs) to provide coverage for specific services to enrolled Medicaid beneficiaries. In return for covering those services, MCOs are paid a set monthly capitation payment.

What is the difference between MCO and Medicaid?

Medicaid MCOs (also referred to as “managed care plans”) provide comprehensive acute care and in some cases long-term services and supports to Medicaid beneficiaries. MCOs accept a set per member per month payment for these services and are at financial risk for the Medicaid services specified in their contracts.

What is a managed care plan?

Managed care plans are a type of health insurance. They have contracts with health care providers and medical facilities to provide care for members at reduced costs. These providers make up the plan's network. How much of your care the plan will pay for depends on the network's rules.

What is not an advantage of a managed care organization?

A system of managed care, whether it is in a free-market system or one that is centralized, will usually require referrals if a patient requires an advanced level of care to treat their condition. This disadvantage is especially true for those who must access a provider outside of their regular network.