Using Risk Corridors to Reduce State Payments to Medicaid Managed Care Organizations

During the current COVID-19 pandemic and budget downturn, many states are facing reduced revenues and increased expenses. Some are targeting Medicaid and their payments to Medicaid managed care organizations (MCOs) as a place for spending reductions. That may be done through reductions to capitation payment rates or it can be done by imposing a risk corridor, saying that MCO profits that exceed 1.5%, for example, will be returned to the Medicaid program. The threshold could also be tied to medical loss ratios. Under federal rules, the state’s contracts with MCOs must include a minimum medical loss ratio of at least 85%.

When Michigan implemented its Healthy Michigan expansion of Medicaid eligibility under the Affordable Care Act, it set rates higher for that population than for other adult beneficiaries. An analysis by its Milliman actuaries projected higher costs due to pent-up demand for care as well as some enhanced benefits, including adult dental care. To mitigate the risk that the state would overpay if the additional demand was not seen, the state added risk corridors to the contracts. After the first year of the program, Michigan did recover about $27 million from MCOs in excess profits from the program. Here is the Milliman report explaining the risk corridor method. Healthy Michigan Rate Certification