GenIC #37 (Revision) Managed Care Rate Setting Guidance

DEPARTMENT OF HEALTH & HUMAN SERVICES
Centers for Medicare & Medicaid Services
7500 Security Boulevard, Mail Stop S2-26-12
Baltimore, Maryland 21244-1850
Disabled and Elderly Health Programs Group

2018-2019 Medicaid Managed Care Rate Development Guide
For Rating Periods Starting between July 1, 2018 and June 30, 20191
May 2018
Introduction
The Centers for Medicare and Medicaid Services (CMS) is releasing the 2018-2019 Medicaid
Managed Care Rate Development Guide for use in setting rates for rating periods starting
between July 1, 2018 and June 30, 2019 for managed care programs subject to the actuarial
soundness requirements in 42 CFR §438.4.2 We acknowledge the ongoing work at CMS to
complete a comprehensive review of the managed care rules, consistent with the letter from the
Administrator on March 14, 2017 as well as the Informational Bulletin released on June 30,
2017, in order to prioritize beneficiary outcomes and more effective program
management. While CMS completes that review, the regulations currently in place continue to
govern the rate setting practices for Medicaid managed care plans which are outlined in this rate
guide. This rate development guide builds upon the Medicaid Managed Care Rate Development
Guide effective July 1, 2017 through June 30, 2018, and the experience of states and CMS in
completing rate certifications and reviews.

 According to the Paperwork Reduction Act of 1995, no persons are required to respond to a collection of
information unless it displays a valid OMB control number. The valid OMB control number for this information
collection is 0938-1148. The time required to complete the information collection is estimated to average 4 hours
per response, including the time to review instructions, search existing data resources, gather the data needed, and
complete and review the information collection. If you have comments concerning the accuracy of the time
estimate(s) or suggestions for improving this form, please write to: CMS, 7500 Security Boulevard, Attn: PRA
Reports Clearance Officer, Mail Stop C4-26-05, Baltimore, Maryland 21244-1850. 
2
The Medicaid and CHIP managed care final rule (CMS-2390-F) was published in the Federal Register on May 6,
2016 (available online at https://www.federalregister.gov/articles/2016/05/06/2016-09581/medicaid-and-childrenshealth-insurance-program-chip-programs-medicaid-managed-care-chip-delivered). Other than 42 C.F.R. §
438.4(b)(9), which CMS will enforce beginning with rating periods starting on or after July 1, 2019, regulations
related to rate setting at §§438.4, 438.5, 438.6 and 438.7 are applicable to the rating periods under contracts
beginning on or after July 1, 2018. In addition, States must be compliant with provisions that impact rate
development, including §§438.2, 438.3(c), 438.3(e), 438.14, and 438.608(d).
1

Page 1 of 31

This guide outlines federal standards for rate development and describes information required
from states and their actuaries as part of actuarial rate certifications required under 42 CFR
§438.7(a).3 The information outlined in this guide must be included within the rate certification
in adequate detail to allow CMS (or its actuaries) to determine compliance with the applicable
provisions of 42 CFR part 438, including that the data, assumptions, and methodologies used for
rate development are consistent with generally accepted actuarial principles and practices and
that the capitation rates are appropriate for the populations and services to be covered. CMS
strives to review states’ submissions of rate certification as efficiently as possible, and therefore,
this guide describes the required standards for rate development in accordance with 42 CFR
§438.5 and appropriate documentation for each submission in accordance with 42 CFR §438.7 to
facilitate our review. The failure to include appropriate documentation may result in additional
CMS questions and/or requests to obtain the information described in the guide as part of our
review.
Section 1903(m) of the Social Security Act and 42 CFR §438.4 require that capitation rates be
actuarially sound, meaning that the capitation rates are projected to provide for all reasonable,
appropriate, and attainable costs that are required under the terms of the contract and for the
operation of the managed care plan for the time period and the population covered under the
terms of the contract. Such capitation rates are developed in accordance with the relevant
requirements of 42 CFR §438.4(b); for the rating periods beginning on or after July 1, 2018, the
relevant requirements are paragraphs (b)(1), (b)(2), (b)(3), (b)(4), (b)(5), (b)(6), (b)(7), and
(b)(8). In applying the regulation standards, CMS will also use these three principles:


the capitation rates are reasonable and comply with all applicable laws (statutes and
regulations) for Medicaid managed care;



the rate development process complies with all applicable laws (statutes and regulations)
for the Medicaid program, including but not limited to eligibility, benefits, financing, any
applicable waiver or demonstration requirements, and program integrity; and



the documentation is sufficient to demonstrate that the rate development process meets the
requirements of 42 CFR part 438 and generally accepted actuarial principles and practices.

CMS has developed three sections for this guide. The first section applies to all Medicaid
managed care capitation rates. The second section outlines specific concepts that states and their
actuaries must consider when developing rates that include long-term services and supports
(LTSS). The third section focuses on issues specific to new adult group capitation rates.
Most of the information discussed in this guide is or should be already part of ongoing actuarial
work and program management in states. CMS provides the specific elements to be included in
3

CMS utilizes the term “rate certification” throughout this document to refer to the actuary’s certification of the
rates, along with the report from the actuary describing the development of the rates. Guidance on the requirements
and CMS’s expectations regarding the documentation included in this report are outlined in this guide.

Page 2 of 31

the rate certification to ensure consistency in the material that is submitted and transparency for
what is included in federal review. At this time, CMS does not prescribe a specific format for
supplying this information in the rate certification although it is expected that each of the
relevant sections below are discussed in sufficient detail in the rate certification.
Throughout this guide, CMS uses the term “rate certification” to mean both the letter (or
attestation) from the actuary that specifically certifies that the rates are actuarially sound and
meet the requirements of CMS regulation and any supporting documentation submitted with the
letter or attestation, including the actuarial report, other reports, letters, memorandums, other
communications, and other workbooks or data. In practice, most states have provided the
information requested in the guide in the supporting documentation and not directly in the letter
or attestation.
In accordance with 42 CFR §438.7(a), states must submit to CMS for review and approval, all
MCO, PIHP and PAHP rate certifications. CMS requests that states submit contract actions, rate
certification(s) and associated supporting documentation as distinct documents within one
submission rather than combining all materials into one electronic document. If multiple rate
certifications are associated with the same contract action(s), CMS requests that states describe
the supporting documentation that relates to each certification.

Section I. Medicaid Managed Care Rates
This section of the guidance is directed to all states setting Medicaid managed care rates that are
subject to the actuarial soundness requirements in 42 CFR §438.4(a), (b)(1), (b)(2), (b)(3), (b)(4),
(b)(5), (b)(6), (b)(7) and (b)(8). The rate development and documentation standards outlined
below are consistent with requirements in 42 CFR part 438 and relevant Actuarial Standards of
Practice (ASOP). Actuaries are required to follow all Actuarial Standards of Practice;
particularly relevant are ASOP 1 (Introductory Actuarial Standard of Practice); ASOP 5
(Incurred Health and Disability Claims); ASOP 12 (Risk Classification (for All Practice Areas));
ASOP 23 (Data Quality); ASOP 25 (Credibility Procedures); ASOP 41 (Actuarial
Communications); ASOP 45 (The Use of Health Status Based Risk Adjustment Methodologies);
and ASOP 49 (Medicaid Managed Care Capitation Rate Development and Certification). ASOP
49 is especially relevant because it focuses on the development of Medicaid managed care rates.
The new applicable requirements under 42 CFR §438.4 are consistent with ASOP 49.
1. General Information
A. Rate Development Standards

Page 3 of 31

i. Rate certifications must be done on a 12-month rating period.4 CMS will consider a
time period other than 12 months to address unusual circumstances. For example,
CMS would approve a time period other than 12 months for the following reasons:
(a) when the state is trying to align program rating periods, which may require a
rating period longer than one year (but less than two years); or
(b) when the state needs to make an amendment to the contract and the rates for an
already approved rating period need to be adjusted accordingly.
ii. In accordance with 42 CFR §438.4, 438.5, 438.6, and 438.7, an acceptable rate
certification submission, as supported by the assurances from the state, includes the
following items and information:
(a) a letter from the certifying actuary, who meets the requirements for an actuary in
42 CFR §438.2, who certifies that the final capitation rates meet the standards in
42 CFR §438.3(c), 438.3(e), 438.4 (excluding paragraph (b)(9)), 438.5, 438.6, and
438.7.
(b) the final and certified capitation rates for all rate cells in accordance with 42 CFR
§438.4(b)(4), and all regions (as applicable).5 Additionally, the contract must
specify the final capitation rate(s) in accordance with 42 CFR §438.3(c)(1)(i).
(c) brief descriptions of the following information (to show that the actuary
developing and/or certifying the rates has an appropriate understanding of the
program for which he or she is developing rates):
(i) a summary of the specific state Medicaid managed care programs covered by
the rate certification, including, but not limited to:
(A) the types and numbers of managed care plans included in the rate
development (e.g., type should include the program type, such as
managed care organizations, prepaid inpatient health plans, or prepaid
ambulatory health plans).
(B) a general description or list of the benefits that are required to be
provided by the managed care plan or plans (e.g., types of medical
services, behavioral health or mental health services, long-term care
services, etc.), particularly noting any benefits that are carved out of

4

Per 42 CFR §438.2, “rating period” means a period of 12 months selected by the state for which the actuarially
sound capitation rates are developed and documented in the rate certification.
5
Beginning with rate periods on or after July 1, 2018, actuaries must certify specific rates for each rate cell in
accordance with 42 CFR §438.4(b)(4) and 438.7(c), and it is no longer be permissible to certify rate ranges.
However, 42 CFR §438.7(c)(3) allows states to increase or decrease the capitation rate per rate cell up to 1.5 percent
without submitting a revised rate certification.

Page 4 of 31

the managed care program or that are new to the managed care
program in that rating period covered.
(C) the areas of the state covered by the managed care rates and
approximate length of time the managed care program has been in
operation.
(ii) the rating period covered by the rate certification.
(iii) the Medicaid population(s) covered through the managed care programs to
which the rate certification applies.
(iv) any eligibility or enrollment criteria that could have a significant influence on
the specific population to be covered within the managed care program (e.g.,
the definition of medically frail, or if enrollment in managed care plans is
voluntary or mandatory).
(v) a summary of the special contract provisions related to payment that, per 42
CFR §438.6, are included within rate development (e.g. risk-sharing
mechanisms, incentive arrangements, withhold arrangements, state-directed
delivery system reform and provider payment initiatives,6 pass-through
payments, and payments to MCOs and PIHPs for enrollees that are a patient in
an Institution of Mental Disease (IMD)).
(vi) if the state determines that a retroactive adjustment to the capitation rates is
necessary, these retroactive adjustments must be certified by an actuary in a
revised rate certification and submitted as a contract amendment in
accordance with 42 CFR §438.7(c)(2). The rate certification must:
(A) describe the rationale for the adjustment; and
(B) the data, assumptions and methodologies used to develop the
magnitude of the adjustment.
iii. Any proposed differences among capitation rates according to covered populations
must be based on valid rate development standards and not based on the rate of
federal financial participation associated with the covered populations.
iv. Payments from any rate cell must not cross-subsidize or be cross-subsidized by
payments from any other rate cell.

6

State direction of managed care plan expenditures under the contract (e.g., value-based purchasing arrangements,
multi-payer initiatives, quality/performance incentive programs, and all fee schedules) must meet the requirements
in 42 CFR 438.6(c) and receive prior approval before implementation. In order to ensure that States can have these
directed payment arrangements reviewed and approved prior to developing rates, CMS has a separate process for
submitting payment arrangements under 42 CR 438.6(c).

Page 5 of 31

v. The effective dates of changes to the Medicaid managed care program (including
eligibility, benefits, payment rate requirements, incentive programs, and program
initiatives) should be consistent with the assumptions used to develop the capitation
rates.
vi. As part of CMS’s determination of whether or not the rate certification submission
and supporting documentation adequately demonstrate that the rates were developed
using generally accepted actuarial practices and principles, CMS will consider
whether the submission demonstrates the following:
(a) all adjustments to the capitation rates, or to any portion of the capitation rates,
must reflect reasonable, appropriate, and attainable costs in the actuary’s
judgment and must be included in the rate certification.
(b) adjustments to the rates that are performed outside of the rate setting process
described in the rate certification are not considered actuarially sound under 42
CFR §438.4. Therefore, the rates will not be considered actuarially sound if
adjustments are made outside of the rate setting process described in the rate
certification.
(c) consistent with 42 CFR §438.7(c), the final contracted rates in each cell must
match the capitation rates in the rate certification. This is required in total and for
each and every rate cell.
vii. Rates must be certified for all time periods in which they are effective, and a
certification must be provided for rates for all time periods. Rates from a previous
rating period cannot be used for a future time period without an actuarial certification
of the rates for the new rating period.
viii.

Procedures for rate certifications for rate and contract amendments, include:

(a) CMS requires that the state submit a new rate certification when the rates change,
except for changes permitted in 42 CFR §438.7(c)(3).
(b) for contract amendments that do not affect the rates (except for changes permitted
in 42 CFR §438.7(c)(3)), CMS does not require a new rate certification from the
state. However, if the contract amendment revises the covered populations,
services furnished under the contract or other changes that could reasonably
change the rate development and rates, the state and its actuary must provide
supporting documentation indicating the rationale as to why the rates continue to
be actuarially sound in accordance with 42 CFR §438.4.
(c) there are several circumstances when CMS would not require a new rate
certification:

Page 6 of 31

(i) the state may increase or decrease capitation rate per rate cell up to 1.5 percent
range, in accordance with 42 CFR §438.7(c)(3).
(ii) a state applies risk scores to the capitation rates paid to the plans under a risk
adjustment methodology described in the rate certification for that rating
period and contract, in accordance with 42 CFR §438.7(b)(5)(iii).
(d) any time a rate changes for any reason other than application of an approved
payment term (e.g., risk adjustment methodology), which was included in the
initial managed care contract, the state must submit a contract amendment to
CMS, even if the rate change does not need a new rate certification.
B. Appropriate Documentation
i. States and their actuaries must document all the elements described within their rate
certifications to provide adequate detail that CMS is able to determine whether or not
the regulatory standards are met. In evaluating the rate certification, CMS will look to
the reasonableness of the information contained in the rate certification for the
purposes of rate development and may require additional information or
documentation as necessary to review and approve the rates. States and their actuaries
must ensure that the following elements are properly documented:
(a) data used, including citations to studies, research papers, other states’ analyses, or
similar secondary data sources.
(b) assumptions made, including any basis or justification for the assumption.
(c) methods for analyzing data and developing assumptions and adjustments.
ii. The rate certification must include an index that documents the page number or the
section number for the items described within this guidance. In cases where not all
sections of this guidance are relevant for a particular rate certification (i.e., an
amended certification that adds a new benefit for part of the year), inapplicable
sections of the guidance should be included and marked as “Not Applicable” in the
index.
iii. There are services, populations, or programs for which the state receives a different
federal medical assistance percentage (FMAP) than the regular state FMAP. In those
cases, the portions or amounts of the costs subject to the different FMAP should be
shown as part of the rate certification to the extent possible.
iv. CMS requests that states that operated the managed care program or programs
covered by the rate certification in previous rating periods provide:
(a) A comparison to the final certified rates or rate ranges in the previous rate
certification. For the first rate certification for a rating period, this should be a

Page 7 of 31

comparison to the prior rating period’s rates or rate ranges. For rate certifications
that revise or amend rates in a rating period, this should be a comparison to the
latest certified rates for the rating period.
(b) A description of any other material changes to the capitation rates or the rate
development process not otherwise addressed in the other sections of this
guidance.
2. Data
A. Rate Development Standards
i. In accordance with 42 CFR §438.5(c), states and actuaries must follow rate
development standards related to base data, including:
(a) states must provide all the validated encounter data and/or fee-for-service (FFS)
data (as appropriate) and audited financial reports (as defined in see §438.3(m))
that demonstrates experience for the populations to be served by the health plan to
the state’s actuary developing the capitation rates for at least the three most recent
and complete years prior to the rating period.
(b) states and their actuaries must use the most appropriate base data, from the three
most recent and complete years prior to the rating period, for developing
capitation rates.
(c) base data must be derived from the Medicaid population, or, if data on the
Medicaid population is not available, derived from a similar population and
adjusted to make the utilization and price data comparable to data from the
Medicaid population.
(d) states that are unable to develop rates using data that is no older than from the
three most recent and complete years prior to the rating period may request
approval for an exception as follows:
(i) this request should be submitted by the state as soon as the actuary starts
developing the rate certification and makes a determination that encounter
data will not comply with 42 CFR §438.5(c)(1)-(2).
(ii) the request must describe why an exception is necessary and describe the
actions the state intends to take to come into compliance with those
requirements.
(iii)the request must also describe the state’s proposed corrective action plan
outlining how the state will come into compliance with the base data standards
per 42 CFR §438.5(c) no later than two years from the rating period for which
the deficiency is identified.

Page 8 of 31

B. Appropriate Documentation
i. In accordance with 42 CFR §438.7(b)(1), the rate certification must include:
(a) a description of base data requested by the actuary for the rate setting process,
including:
(i) a summary of the base data that was requested by the actuary.
(ii) a summary of the base data that was provided by the state.
(iii) an explanation of why any base data requested was not provided by the state.
ii. The rate certification, as supported by the assurances from the state, must thoroughly
describe the data used to develop the capitation rates, including:
(a) a description of the data, including:
(i) the types of data used, which may include, but is not limited to: fee-forservice claims data; managed care encounter data; health plan financial data;
information from program integrity audits; or other Medicaid program data.
(ii) the age or time periods of all data used.
(iii)the sources of all data used (e.g., State Medicaid Agency; other state agencies;
health plans; or other third parties).
(iv) if a significant portion of the benefits under the contract with the managed
care entity are provided through arrangements with subcontractors that are
also paid on a capitated basis (or subcapitated arrangements), a description of
the data received from the subcapitated plans or providers; or, if data is not
received from the subcapitated plans or providers, a description of how the
historical costs related to subcapitated arrangements were developed or
verified.
(b) information related to the availability and the quality of the data used for rate
development, including:
(i) the steps taken by the actuary or by others (e.g., State Medicaid Agency;
health plans; external quality review organizations; financial auditors; etc.) to
validate the data, including:
(A) completeness of the data.
(B) accuracy of the data.
(C) consistency of the data across data sources.
(ii) a summary of the actuary’s assessment of the data.

Page 9 of 31

(iii)any other concerns that the actuary has over the availability or quality of the
data.
(c) a description of how the actuary determined what data was appropriate to use for
the rating period, including:
(i) if fee-for-service claims or managed care encounter data are not used (or are
not available), this description should include an explanation of why the data
used in rate development is appropriate for setting capitation rates for the
populations and services to be covered.
(ii) if managed care encounter data was not used in the rate development, this
description should include an explanation of why encounter data was not used
as well as any review of the encounter data and the concerns identified which
led to not including the encounter data.
(d) if there is any reliance or use of a data book in the rate development, the details of
the template and relevant instructions used in the data book.
iii. The rate certification, as supported by the assurances from the state, must thoroughly
describe any significant adjustments, and the basis for the adjustments, that are made
to the data, including but not limited to adjustments for:
(a) the credibility of the data.
(b) completion factors.
(c) errors found in the data.
(d) changes in the program between the time period from which the data is obtained
and the rating period (e.g., changes in the population covered; changes in benefits
or services; changes to payment models or reimbursement rates to providers; or
changes to the structure of the managed care program).
(e) exclusions of certain payments or services from the data.
3. Projected Benefit Costs and Trends
A. Rate Development Standards
i. Final capitation rates must be based only upon the services allowed in 42 CFR
§438.3(c)(1)(ii) and 438.3(e).
ii. Variations in the assumptions used to develop the projected benefit costs for covered
populations must be based on valid rate development standards and not based on the
rate of federal financial participation associated with the covered populations.
iii. In accordance with 42 CFR §438.5(d), each projected benefit cost trend assumption
must be reasonable and developed in accordance with generally accepted actuarial

Page 10 of 31

principles and practices. Trend assumptions must be developed primarily from actual
experience of the Medicaid population or from a similar population, and including
consideration of other factors that may affect projected benefit cost trends through the
rating period.
iv. If the projected benefit costs include costs for in-lieu-of services defined at 42 CFR
§438.3(e)(2) (i.e., substitutes for State Plan services or settings), the utilization and
unit costs of the in-lieu-of services must be taken into account in developing the
projected benefit costs of the covered services (as opposed to utilization and unit
costs of the State plan services or settings), unless a statute or regulation explicitly
requires otherwise. The costs of an IMD as an in-lieu-of-service must not be used in
rate development. See Section I, item 3.A.v.
v. States may make a monthly capitation payment to an MCO or PIHP (in a “risk
contract” as defined in 42 CFR §438.2) for an enrollee age 21 to 64 receiving
inpatient treatment in an Institution for Mental Diseases (IMD) (as defined in 42 CFR
§435.1010) for a short-term stay of no more than 15 days during the period of the
monthly capitation payment in accordance with 42 CFR §438.6(e). In this case, when
developing the projected benefit costs for these services, the actuary must use the unit
costs of providers delivering the same services included in the State Plan, as opposed
to the unit costs of the IMD services. The actuary may use the utilization of the
services provided to an enrollee in an IMD in developing the utilization component of
projected benefit costs. The data used for developing the projected benefit costs for
these services must not include:
(a) costs associated with an IMD stay of more than 15 days.
(b) any other costs for any services delivered during the time an enrollee is in an IMD
for more than 15 days.
vi. In connection with section 12002 of the 21st Century Cures Act (P.L. 114-255), CMS
requests the following information be provided in the certification for programs that
allow IMDs to be used an in lieu of service provider. For purposes of this section, an
enrollee means an individual, ages 21 to 64, who received treatment in an IMD:
(a) the number of unique enrollees ages 21 to 64 who received treatment in an IMD
through a managed care plan during any point in the base data period;
(b) the range of and the average number of months and of length of stay during those
months that enrollees received care in an IMD;
(i) CMS requests that the certification provide: the minimum, maximum, mean
and median number of months enrollees who received care in an IMD for
each base data year;

Page 11 of 31

(ii) CMS requests that the certification provide: the minimum, maximum, mean
and median length of stay in an IMD (which could include multiple stays per
month, or states that extend across 2 or more months) in each base data year.
(c) the impact that providing treatment through IMDs has had on the capitation rates.
(i) CMS requests that the certification provide the amount of the capitation rates
for IMD services; additionally, the rate certification may include the estimated
net impact of using IMD as an in lieu of service on the capitation rates (which
would include the costs of IMD services and any reductions in costs of other
services).
B. Appropriate Documentation
i. The rate certification must clearly document the final projected benefit costs by
relevant level of detail (e.g., rate cell, or aligned with how the state makes payments
to the plans).
ii. The rate certification and supporting documentation must describe the development
of the projected benefit costs included in the capitation rates, including:
(a) a description of the data, assumptions, and methodologies used to develop the
projected benefit costs and, in particular, all significant and material items in
developing the projected benefit costs.
(b) any material changes to the data, assumptions, and methodologies used to develop
projected benefit costs since the last rate certification must be described.
iii. The rate certification and supporting documentation must include a section on
projected benefit cost trends (i.e. an estimate the projected change in benefit costs
from the historical base data period(s) to the rating period of the rate certification) in
accordance with 42 CFR §438.7(b)(2).
(a) this section must include:
(i) any data used or assumptions made in developing projected benefit cost
trends, including a description of the sources of those data and assumptions.
(A) the descriptions of data and assumptions should include citations
whenever possible.
(B) the description should state whether the trend is developed primarily
with actual experience from the Medicaid population or provide
rationale for the experience from a similar population that is utilized,
and consideration of other factors expected to impact trend.
(ii) the methodologies used to develop projected benefit trends.

Page 12 of 31

(iii)any comparisons to historical benefit cost trends, or other program benefit cost
trends, that were analyzed as part of the development of the trend for the
rating period of the rate certification.
(b) this section must include the projected benefit cost trends separated into
components, specifically:
(i) the projected benefit cost trends should be separated into:
(A) changes in price (i.e., pricing differences due to different provider
reimbursement rates or payment models); and
(B) changes in utilization (i.e., differences in the amount, duration, or mix
of benefits or services provided).
(ii) if the actuary did not develop the projected benefit cost trends using price and
utilization components, the actuary should describe and justify the method(s)
used to develop projected benefit cost trends.
(iii)the projected benefit cost trends may include other components as applicable
and used by the actuary in developing rates (e.g., changes in location of
service delivery; the effect of utilization or care management on projected
benefit cost trends; regional differences or variations).
(c) variations in the projected benefit cost trends must be explained. Projected benefit
cost trends may vary by:
(i) Medicaid populations.
(ii) rate cells.
(iii)subsets of benefits within a category of services (e.g., specialty vs. nonspecialty drugs).
(d) any other material adjustments to projected benefit cost trends must be described
in accordance with 42 CFR §438.7(b)(4), including:
(i) a description of the data, assumptions, and methodologies used to determine
each adjustment.
(ii) the cost impact of each material adjustment.
(iii)where in the rate setting process the material adjustment was applied.
(e) any other adjustments to projected benefit costs trends must be listed. CMS also
requests the following detail about non-material adjustments:
(i) the impact of managed care on the utilization and the unit costs of health care
services.

Page 13 of 31

(ii) changes to projected benefit costs trend in the rating period outside of regular
changes in utilization or unit cost of services.
iv. If the projected benefit costs include additional services deemed by the state to be
necessary to comply with the parity standards of the Mental Health Parity and
Addiction Equity Act as required by 42 CFR §438.3(c)(1)(ii), the following must be
described:
(a) the categories of service that contain these additional services necessary for
parity.
(b) the percentage of cost that these services represent in each category of service.
(c) how these services were taken into account in the development of the projected
benefit costs, and if this approach was different than that for any of the other
services in the categories of service.
v. For in-lieu-of services defined at 42 CFR §438.3(e)(2) (i.e., substitutes for State Plan
services), the following information must be provided and documented:
(a) the categories of covered service that contain in-lieu-of-services.
(b) the percentage of cost that in-lieu-of services represent in each category of
service.
(c) how the in-lieu-of services were taken into account in the development of the
projected benefit costs, and if this approach was different than that for any of the
other services in the categories of service.
(d) for inpatient psychiatric or substance use disorder services provided in an IMD
setting, rate development must comply with the requirements of 42 CFR
§438.6(e) and the data and assumptions utilized should be described in the rate
certification.
vi. The rate certification must describe how retrospective eligibility periods are
accounted for in rate development, including but not limited to:
(a) the managed care plan’s responsibility to pay for claims incurred during the
retroactive eligibility period.
(b) how the claims information are included in the base data.
(c) how the enrollment or exposure information is included in the base data.
(d) how the capitation rates are adjusted to reflect the retroactive eligibility period,
and the assumptions and methodologies used to develop those adjustments.

Page 14 of 31

vii. The rate certification must clearly document the impact on projected costs for all
material changes to covered benefits or services since the last rate certification,
including, but not limited to:
(a) more or fewer state plan benefits covered by Medicaid managed care.
(b) any recoveries of overpayments made to providers by health plans in accordance
with 42 CFR §438.608(d).
(c) requirements related to payments from health plans to any providers or class of
providers.
(d) requirements or conditions of any applicable waivers.
(e) requirements or conditions of any litigation to which the state is subjected.
viii. For each change related to covered benefits or services, the rate certification must
include an estimated impact of the change on the amount of projected benefit costs
and a description of the data, assumptions, and methodologies used to develop the
adjustment.
(a) any change determined by the actuary to be non-material can be grouped with
other non-material changes and described within the rate certification, provided
that:
(i) the rate certification includes a list of all non-material adjustments used in the
rate development process.
(ii) the actuary must give a description of why the changes were not considered
material and how they were aggregated into a single adjustment.
(iii) the rate certification provides a description of where in the rate setting
process the adjustments were applied.
(iv) The rate certification documents the aggregate cost impact of all non-material
adjustments.
4. Special Contract Provisions Related to Payment
A. Incentive Arrangements
i. Rate Development Standards
(a) the rate certification and supporting documentation must describe any incentives
included in the contract between the state and the health plans. An incentive
arrangement, as defined in 42 CFR §438.6(a), is any payment mechanism under
which a health plan may receive additional funds over and above the capitation
rate it was paid for meeting targets specified in the contract.

Page 15 of 31

(i) the rate certification must include documentation that the incentive
arrangement will not exceed 105% of the approved capitation payments under
the contract that are attributable to the enrollees or services covered by the
incentive arrangements as required in 42 CFR §438.6(b)(2).
ii. Appropriate Documentation
(a) the rate certification must include a description of the incentive arrangement. An
adequate description includes at least:
(i) time period of the arrangement, if different than the rating period.
(ii) enrollees, services, and providers covered by the incentive program.
(iii)the purpose of the incentive arrangement (e.g. specified activities, targets,
performance measures, or quality-based outcomes, etc.).
(iv) a description of any effect that each incentive arrangement has on the
development of the capitation rates.
B. Withhold Arrangements
i. Rate Development Standards
(a) the rate certification and supporting documentation must describe any withhold
arrangements in the contract between the state and the health plans. As defined in
42 CFR §438.6(a), a withhold arrangement is any payment mechanism under
which a portion of a capitation rate is withheld from an MCO, PIHP, or PAHP
and a portion of or all of the withheld amount will be paid to the MCO, PIHP, or
PAHP for meeting targets specified in the contract.
(i) the targets for a withhold arrangement are distinct from general operational
requirements under the contract.
(ii) arrangements that withhold a portion of a capitation rate for noncompliance
with general operational requirements are a penalty and not a withhold
arrangement.
(b) in accordance with 42 CFR §438.6(b)(3), the capitation payment(s) minus any
portion of the withhold that is not reasonably achievable must be actuarially
sound.
ii. Appropriate Documentation
(a) the rate certification must include a description of the withhold arrangement. An
adequate description includes at least the following:

Page 16 of 31

(i) the time period of the arrangement, if different than the rating period and the
purpose of the arrangement (e.g. specified activities, targets, performance
measures, or quality-based outcomes, etc.).
(ii) a description of the total percentage of the certified capitation rates being
withheld through withhold arrangements.
(iii)an estimate of the percentage of the withheld amount in a withhold
arrangement that is not reasonably achievable and the basis for that
determination, including the data, assumptions, and methodologies used to
make this determination.
(iv) a description of how the total withhold arrangement, achievable or not, is
reasonable and takes into consideration the health plan’s financial operating
needs accounting for the size and characteristics of the populations covered
under the contract, as well as the health plan’s capital reserves as measured by
the risk-based capital level, months of claims reserve, or other appropriate
measure of reserves.
(v) a description of any effect that the withhold arrangements have on the
development of the capitation rates.
C. Risk-Sharing Mechanisms
i. Rate Development Standards
(a) in accordance with 42 CFR §438.6(b), if the state utilizes risk-sharing

mechanisms with its health plan(s), such as reinsurance, risk corridors, or stoploss limits, these arrangements must be described in the contract(s) and must be
developed in accordance with §438.4, the rate development standards in §438.5,
and generally accepted actuarial principles and practices.
(b) the rate certification and supporting documentation must describe any risk
mitigation that may affect the rates or the final net payments to the health plan(s)
under the applicable contract.
ii. Appropriate Documentation
(a) the rate certification and supporting documentation must include a description of
any other risk-sharing arrangements, such as a risk corridor or a large claims pool.
An adequate description of these includes at least the following:
(i) a rationale for the use of the risk sharing arrangement.
(ii) a detailed description of how the risk-sharing arrangement is implemented.
(iii)a description of any effect that the risk-sharing arrangements have on the
development of the capitation rates.

Page 17 of 31

(iv) documentation demonstrating that the risk-sharing mechanism has been
developed in accordance with generally accepted actuarial principles and
practices.
(b) if the contract includes a remittance/payment requirement for being below/above

a specified medical loss ratio (MLR), the rate certification and supporting
documentation must include a description of this MLR arrangement. An adequate
description includes at least the following:
(i) the methodology used to calculate the medical loss ratio.
(ii) the formula for calculating a remittance/payment for having a medical loss
ratio below/above the minimum requirements.
(iii)any other consequences for a remittance/payment for a medical loss ratio
below/above the minimum requirements.
(c) if the contract has reinsurance requirements, the rate certification and supporting
document must include a description of the reinsurance requirements. An
adequate description includes at least the following:
(i) a detailed description of any reinsurance requirements under the contract
associated with the rate certification, including the reinsurance premiums and
any relevant historical reinsurance experience.
(ii) identification of any effect that the reinsurance requirements have on the
development of the capitation rates.
(iii)documentation that the reinsurance mechanism has been developed in
accordance with generally accepted actuarial principles and practices.
(iv) if the actuary develops the reinsurance premiums, a description of how the
reinsurance premiums were developed, including the data, assumptions and
methodology used.
D. Delivery System and Provider Payment Initiatives
i. Rate Development Standards
(a) consistent with 42 CFR §438.6(c), states may utilize delivery system and provider
payment initiatives, including requiring managed care plans to:
(i) implement value-based purchasing models for provider reimbursement, such
as pay for performance arrangements, bundled payments, or other service
payment models intended to recognize value or outcomes over volume of
services.
(ii) participate in a multi-payer or Medicaid-specific delivery system reform or
performance improvement initiative.
(iii)adopt a minimum fee schedule for network providers that provide a particular
service under the contract.

Page 18 of 31

(iv) provide a uniform dollar or percentage increase for network providers that
provide a particular service under the contract.
(v) adopt a maximum fee schedule for network providers that provide a particular
service under the contract, so long as the health plan retains the ability to
reasonably manage risk and has discretion in accomplishing the goals of the
contract.
ii. Appropriate Documentation
(a) the rate certification and supporting documentation must include a description of
any delivery system and provider payment initiatives. An adequate description
includes at least the following:
(i) a brief description of the delivery system and provider payment initiatives
included in the rates for this rating period.
(ii) the amount of these payments within the rate development, both in total and
on a per member per month basis (if applicable).
(iii)the providers receiving these payments.
(iv) a description of any effect the delivery system or provider payment initiative
has on the development of capitation rates, including the data, assumptions
and methodologies used to make this determination.
(v) a description of how the payments are included in the capitation rates
consistent with the 438.6(c) preprint submitted to CMS.
E. Pass-Through Payments
i. Rate Development Standards
(a) a pass-through payment is any amount required by the state to be added to the
contracted payment rates, and considered in calculating the actuarially sound
capitation rate, between MCOs, PIHPs, or PAHPs and hospitals, physicians, or
nursing facilities that is not for one of the following purposes:7
(i) a specific service or benefit provided to a specific enrollee covered under the
contract;
(ii) a provider payment methodology permitted under 42 CFR §438.6(c)(1)(i)
through (iii) for services and enrollees covered under the contract;
(iii)a subcapitated payment arrangement for a specific set of services and
enrollees covered under the contract;
7
States may not require health plans to make pass-through payments other than those permitted to network
providers that are hospitals, physicians, and nursing facilities in accordance with 42 CFR 438.6(d)(1).

Page 19 of 31

(iv) graduate Medical Education (GME) payments; or
(v) Federally Qualified Health Center (FQHC) or Rural Health Clinic (RHC)
wrap around payments.
(b) pass-through payments to hospitals must comply with the requirements of 42 CFR
§438.6(d). In accordance with 42 CFR §438.6(d)(3), the aggregate pass-through
payments to hospitals may not exceed the lesser of: (1) 90 percent of the base
amount; or (2) the total dollar amount of pass-through payments to hospitals
identified in the managed care contract(s) and rate certification(s) used to meet the
requirement of 42 CFR §438.6(d)(1)(i).
(c) the base amount is determined as the sum of (i) and (ii) below:
(i) for inpatient and outpatient hospital services that will be provided to eligible
populations through the MCO, PIHP, or PAHP contracts for the rating period
and that were provided to the eligible populations under MCO, PIHP, or
PAHP contracts two years prior to the rating period, the state must determine
reasonable estimates of the aggregate difference between:
(A) the amount Medicare FFS would have paid for those inpatient and
outpatient hospital services utilized by the eligible populations under the
MCO, PIHP, or PAHP contracts for the 12-month period immediately two
years prior to the rating period that will include pass-through payments;
and
(B) the amount the MCOs, PIHPs, or PAHPs paid (not including pass-through
payments) for those inpatient and outpatient hospital services utilized by
the eligible populations under MCO, PIHP, or PAHP contracts for the 12month period immediately 2 years prior to the rating period.
(ii) for inpatient and outpatient hospital services that will be provided to eligible
populations through the MCO, PIHP, or PAHP contracts for the rating period
and that were provided to the eligible populations under Medicaid FFS for the
12-month period immediately 2 years prior to the rating period, the state must
determine reasonable estimates of the aggregate difference between:
(A) the amount Medicare FFS would have paid for those inpatient and
outpatient hospital services utilized by the eligible populations under
Medicaid FFS for the 12-month period immediately 2 years prior to the
rating period that will include pass-through payments; and
(B) the amount the state paid under Medicaid FFS (not including pass-through
payments) for those inpatient and outpatient hospital services utilized by

Page 20 of 31

the eligible populations for the 12- month period immediately 2 years
prior to the rating period that will include pass-through payments.
(d) the base amount should be the actual amount calculated in the Section I, Item
4.E.i.c of the guide and should not be trended forward.
(e) states may calculate reasonable estimates of the aggregate differences in
paragraph (c) in accordance with the upper payment limit requirements in 42 CFR
part 447.
(f) capitation rates may only include pass-through payments to hospitals, physicians
and nursing facilities in accordance with 42 CFR 438.6(d); states may not include
pass-through payments to providers other than hospitals, physicians, and nursing
facilities in the capitation rates.
ii. Appropriate Documentation
(a) the rate certification and supporting documentation must include a description of
all existing pass-through payments incorporated into the rates for this rating
period. An adequate description includes at least the following:
(i) a description of the pass-through payment.
(ii) the amount of the pass-through payments, both in total and on a per member
per month basis (if applicable).
(iii)the providers receiving the pass-through payments.
(iv) the financing mechanism for the pass-through payment.
(v) the amount of pass-through payments incorporated into capitation rates in the
previous rating period.
(vi) the amount of pass-through payments incorporated into capitation rates for the
rating period in effect on July 5, 2016.
(b) the certification must document the following information about the base amount
for hospital pass-through payments:
(i) the data, methodologies, and assumptions used to calculate the base amount.
(ii) the aggregate amounts calculated for Section I, Item 4.E.i.c.i.A, Section I,
4.E.i.c.i.B, Section I, Item 4.E.i.c.ii.A, and Section I, 4.E.i.c.ii.B.
5. Projected Non-Benefit Costs
A. Rate Development Standards
i. In accordance with 42 CFR §438.5(e), the development of the non-benefit component
of the rate must include reasonable, appropriate, and attainable expenses related to
MCO, PIHP or PAHP administration, taxes, licensing and regulatory fees,

Page 21 of 31

contribution to reserves, risk margin, and cost of capital. In addition, the non-benefit
component must include other operational costs associated with the provision of
services under the contract, including those to comply with the parity standards of the
Mental Health Parity and Addiction Equity Act, as required by 42 CFR
§438.3(c)(1)(ii).
ii. Non-benefit costs may be developed as per member per month (PMPM) costs or as a
percentage of projected benefit costs or capitation rates, and different approaches can
be taken for different categories of costs. For non-benefit costs that may be difficult
to allocate to specific enrollees or groups of enrollees, or for taxes and fees that are
assessed as a percentage of premiums, it may be reasonable to calculate those nonbenefit costs as a percentage of benefit costs or capitation rates.
iii. Variations in the assumptions used to develop the projected non-benefit costs for
covered populations must be based on valid rate development standards and not based
on the rate of federal financial participation associated with the covered populations.
iv. Section 9010 of the Patient Protection and Affordable Care Act imposes a Health
Insurance Providers Fee on each covered entity engaged in the business of providing
health insurance for United States health risk. CMS policy regarding how this fee
may be considered in Medicaid managed care rate development is outlined in CMS’s
“Medicaid and CHIP FAQs: Health Insurance Providers Fee for Medicaid Managed
Care Plans,” dated October 2014.8 States have the flexibility to account for the Health
Insurance Providers Fee on a prospective or retrospective basis into rate development
for either the data year or fee year. Any payment for the fee must be incorporated in
the health plan capitation rates.
(a) due to the health insurance provider fee moratorium established by the
Consolidated Appropriations Act of 2016, CMS does not expect any health
insurance provider fees to be paid for calendar year 2017 by managed care plans
that are subject to that fee. Therefore, no amounts should be included in Medicaid
managed care capitation rates for fees that would have been paid by plans to the
IRS for 2017 (which would have been assessed off of 2016 net premiums).9 This
fee remains in effect for calendar year 2018 and beyond.
B. Appropriate Documentation
i. The rate certification and supporting documentation must describe the development
of the projected non-benefit costs included in the capitation rates in enough detail so
8

https://www.medicaid.gov/federal-policy-guidance/downloads/faq-10-06-2014.pdf  
More information on this issue can be found at: https://www.irs.gov/Businesses/Corporations/Affordable-CareAct-Provision-9010

9

Page 22 of 31

CMS or an actuary applying generally accepted actuarial principles and practices can
identify each type of non-benefit expense that is included in the rate and evaluate the
reasonableness of the cost assumptions underlying each expense in accordance with
42 CFR §438.7(b)(3). To meet this standard, the documentation must include:
(a) a description of the data, assumptions, and methodologies used to develop the
projected non-benefit costs, and in particular, all significant and material items in
developing the projected non-benefit costs.
(b) any material changes to the data, assumptions, and methodologies used to develop
projected non-benefit costs since the last rate certification.
(c) any other material adjustments must be described in accordance with 42 CFR
§438.7(b)(4), including:
(i) a description of the data, assumptions, and methodologies used to
determine each adjustment.
(ii) where in the rating setting process each adjustment was applied.
(iii)the cost impact of each material adjustment.
ii. States and actuaries should estimate the projected non-benefit costs for each of the
following categories of costs:
(a) administrative costs.
(b) taxes, licensing and regulatory fees, and other assessments and fees.
(c) contribution to reserves, risk margin, and cost of capital.
(d) other material non-benefit costs.
iii. Regarding the Health Insurance Providers Fee, the rate certification and supporting
documentation must:
(a) specifically address how this fee is incorporated into capitation rates if the
managed care plan is required to pay the fee for 2018 or 2019.
(b) if the fee is incorporated into the rates in the initial rate certification, an
explanation of whether the amount included in the rates is based on the data year
or fee year during the rating period of the rate certification.
(c) a description of how the amount of the fee was determined, and whether or not
any adjustments would be made to the rates once the actual amount of the fee is
known.
(d) if the fee is not incorporated into the rates in the rate certification because the
rates will be adjusted to account for the fee subsequently, an explicit statement

Page 23 of 31

that the fee is not included, and a description of when and how the rates will
ultimately be adjusted to account for the fee.
(e) if the capitation rates include benefits as described in 26 CFR §57.2(h)(2)(ix)
(e.g., long-term care, nursing home care, home health care, or community-based
care), CMS recommends that the per member per month cost associated with
those benefits be explicitly reported as a separate amount in the rate certification
in order to more accurately account for the appropriate revenue on which the
plans will be assessed.
(f) for managed care plans that were required to pay the fee in 2014, 2015, and 2016,
a description as to whether or not the fee has been included in the capitation rates
for those years (either prospectively in the rates or through amendments to the
initially certified rates).
6. Risk Adjustment and Acuity Adjustments
A. Rate Development Standards
i. Risk adjustment is a methodology to account for the health status of enrollees via
relative risk factors when predicting or explaining costs of services covered under the
contract for defined populations or for evaluating retrospectively the experience of
MCOs, PIHPs, or PAHPs contracted with the state.
ii. As required by 42 CFR §438.5(g), if risk adjustment is applied prospectively or
retrospectively, states and their actuaries must select a risk adjustment methodology
that uses generally accepted models and must apply it in a budget neutral manner,
consistent with generally accepted actuarial principles and practices, across all
MCOs, PIHPs or PAHPs in the program to calculate adjustments to the payments as
necessary.
iii. An adjustment applied to the total payments across all managed care plans to account
for significant uncertainty about the health status or risk of a population is considered
an acuity adjustment, which is a permissible adjustment under 42 CFR §438.5(f). (81
FR 27595)
(a) acuity adjustments may be used prospectively or retrospectively.
(b) while retrospective acuity adjustments may be permissible, they are intended
solely as a mechanism to account for differences between assumed and actual
health status when there is significant uncertainty about the health status or risk of
a population, such as: (1) new populations coming into the Medicaid program; or
(2) a Medicaid population that is moving from FFS to managed care when
enrollment is voluntary and there may be concerns about adverse selection. In the
latter case, there may be significant uncertainty about the health status of which
individuals would remain in FFS versus move to managed care; although this
uncertainty is expected to decrease as the program matures.

Page 24 of 31

(c) CMS may also consider acuity adjustments as a risk mitigation strategy when
there is unusual and significant uncertainty about the health status of the
population (e.g., covering a new population in Medicaid).
B. Appropriate Documentation
i. In accordance with 42 CFR §438.7(b)(5)(i), the rate certification must describe all
prospective risk adjustment methodologies, including:
(a) the data, and any adjustments to that data, to be used to calculate the adjustment.
(b) the model, and any adjustments to that model, to be used to calculate the
adjustment.
(c) the method for calculating the relative risk factors and the reasonableness and
appropriateness of the method in measuring the risk factors of the respective
populations.
(d) the magnitude of the adjustment on the capitation rate per MCO, PIHP, or PAHP.
(e) an assessment of the predictive value of the methodology compared to prior rating
periods.
(f) any concerns the actuary has with the risk adjustment process.
ii. In accordance with 42 CFR §438.7(b)(5)(ii), the rate certification must describe all
retrospective risk adjustment methodologies, including:
(a) the party calculating the risk adjustment.
(b) the data, and any adjustments to that data, to be used to calculate the adjustment.
(c) the model, and any adjustments to that model, to be used to calculate the
adjustment.
(d) the timing and frequency of the application of the risk adjustment.
(e) any concerns the actuary has with the risk adjustment process.
iii. The rate certification and supporting documentation must also specifically include:
(a) any changes that are made to risk adjustment models since the last rating period.
(b) documentation that the risk adjustment model is budget neutral in accordance
with 42 CFR §438.5(g).
iv. If an acuity adjustment is being used, the rate certification must include a description
of the acuity adjustment and its basis that is adequate to evaluate its reasonableness
and whether it is consistent with generally accepted actuarial principles and practices.
Such a description includes at least:

Page 25 of 31

(a) the reason that there is significant uncertainty about the health status of the
population and the need for an acuity adjustment.
(b) the acuity adjustment model(s) being used to calculate acuity adjustment scores.
(c) the specific data, including the source(s) of the data, being used by the acuity
adjustment model(s).
(d) the relationship and potential interactions between the acuity adjustment.
(e) how frequently the acuity adjustment scores are calculated.
(f) a description of how the acuity adjustment scores are being used to adjust the
capitation rates.
(g) documentation that the acuity adjustment mechanism has been developed in
accordance with generally accepted actuarial principles and practices.

Section II. Medicaid Managed Care Rates with Long-Term Services and
Supports
This section of the guidance is directed to all states setting Medicaid managed care rates that are
subject to the actuarial soundness requirements in 42 CFR §438.4 and include long-term services
and supports (LTSS) as defined at 42 CFR §438.2(a). In determining whether or not rates have
been developed in accordance with generally accepted actuarial practices and principles, CMS
will apply the specific considerations below. 
1. Managed Long-Term Services and Supports
A. For managed long-term services and supports (MLTSS) programs, or for programs that
include MLTSS as part of the covered benefits, the guidance above in Section I regarding
the required standards for rate development and CMS’s expectations for appropriate
documentation required in the rate certification is also applicable for rates for provision
of MLTSS.
B. Rate Development Standards
i. States may take different approaches for rate setting for MLTSS. The two most
common approaches are to structure the rate cells:
(a) by health care status and the level of need of the beneficiaries (“blended”); or
(b) by the long-term care setting that the beneficiary uses (“non-blended”).
C. Appropriate Documentation

Page 26 of 31

i. The rate certification and supporting documentation for MLTSS programs, or for
programs that include MLTSS as part of the covered benefits must also specifically
address the following considerations:
(a) the structure of the capitation rates and rate cells or rating categories (e.g.
blended, non-blended, etc.).
(b) the structure of the rates and the rate cells, and the data, assumptions, and
methodology used to develop the rates in light of the overall rate setting approach.
(c) any other payment structures, incentives, or disincentives used to pay the MCOs,
PIHPs or PAHPs (for example, states may provide additional payments to plans
that transition beneficiaries from institutional long-term care settings into other
settings, or may pay adjusted rates during time periods of setting transitions).
(d) the expected effect that managing LTSS has on the utilization and unit costs of
services.
(e) any effect that the management of this care is expected to have within each care
setting and any effect in managing the level of care that the beneficiary receives
(e.g., in-home care, community long-term care, nursing facility care).
ii. The projected non-benefit costs, such as administrative costs and care coordination
costs, may differ for populations receiving MLTSS from other managed care
programs, and the rate certification should describe how the projected non-benefit
costs were developed for populations receiving these services.
iii. The rate certification should provide information on historical experience, analysis,
and other sources (e.g., studies or research) used to develop the assumptions used for
rate setting.

Section III. New Adult Group Capitation Rates
This section of the guidance is focused on rate setting for the new adult group under section
1902(a)(10)(A)(i)(VIII) of the Social Security Act. For states that have previously covered the
new adult group, this guide describes the information expected from states related to how the
capitation rates or the rate development process has changed since the most recent rate
certification. Because this is a newly eligible group, CMS expects that rate development may
require additional review in this area to ensure that rates are developed in accordance with
generally accepted actuarial practices and principles. To support such review, CMS expects
states to provide additional documentation as described below.
1. Data

Page 27 of 31

A. In addition to the expectations for all Medicaid managed care rate certifications, as
supported by assurances from the state, described in Section I, the rate certification must
describe any data used to develop new adult group rates.
B. For states that have covered the new adult group in Medicaid managed care plans in
previous rating periods (i.e. starting in 2014, 2015, 2016, and/or January through
June2017), CMS expects the rate certification, as supported by assurances from the state,
to describe:
i. Any new data that is available for use in this rate setting.
ii. How the state and the actuary followed through on any plans to monitor costs and
experience for newly eligible adults.
iii. How actual experience and costs in previous rating periods have differed from
assumptions and expectations in previous rate certifications.
iv. How differences between projected and actual experience in previous rating periods
have been used to adjust these rates.
2. Projected Benefit Costs
A. In addition to the guidance for all Medicaid managed care rate certifications described in
Section I, states should include in the rate certification submission and supporting
documentation a description of the following issues related to the projected benefit costs
for the new adult group:
i. For states that covered the new adult group in previous rating periods:
(a) any data and experience specific to newly eligible adults covered in previous
rating periods that was used to develop projected benefits costs for capitation
rates.
(b) any changes in data sources, assumptions, or methodologies used to develop
projected benefits costs for capitation rates since the last rate certification.
(c) how assumptions changed from rate certification(s) for previous rating periods on
the following issues:
(i) acuity or health status adjustments (in most cases comparing the new adult
group enrollees to other Medicaid adult enrollees).
(ii) adjustments for pent-up demand.
(iii)adjustments for adverse selection.
(iv) adjustments for the demographics of newly eligible adults.

Page 28 of 31

(v) differences in provider reimbursement rates or provider networks, including
any differences between provider reimbursement rates or provider networks
for newly eligible adult rates and other Medicaid population rates.
1. variations in the assumptions used to develop the projected benefit
costs for covered populations must be based on valid rate development
standards and not based on the rate of federal financial participation
associated with the covered populations.
(vi) other material adjustments to newly eligible adults projected benefit costs.
B. For any state that is covering the new adult group, regardless if they have been covered in
previous rating periods, the following key assumptions related to the new adult group
must be included in the rate certification and supporting documentation:
i. Acuity or health status adjustments (in most cases comparing new adult group
enrollees to other Medicaid adult enrollees).
ii. Adjustments for pent-up demand.
iii. Adjustments for adverse selection.
iv. Adjustments for the demographics of the new adult group.
v. Differences in provider reimbursement rates or provider networks, including any
differences between provider reimbursement rates or provider networks for the new
adult group rates and other Medicaid population rates.
vi. Other material adjustments to the new adult group projected benefit costs.
C. The rate certification and supporting documentation must describe any changes to the
benefit plan offered to the new adult group.
D. The rate certification and supporting documentation must describe any other material
changes or adjustments to projected benefit costs.
3. Projected Non-Benefit Costs
A. In addition to the guidance all Medicaid managed care rate certifications described in
Section I, states must include in the rate certification submission and supporting
documentation a description of the following issues related to the projected non-benefit
costs for the new adult group:
i. For states that covered the new adult group in Medicaid managed care plans in
previous rating periods, any changes in data sources, assumptions, or methodologies
used to develop projected non-benefit costs since the last rate certification.
ii. How assumptions changed from the rate certification(s) for previous rating periods on
the following issues:

Page 29 of 31

(a) administrative costs.
(b) care coordination and care management.
(c) provision for operating or profit margin.
(d) taxes, fees, and assessments.
(e) other material non-benefit costs.
B. The rate certification and supporting documentation must include information on key
assumptions related to the new adult group and any differences between the assumptions
for this population and the assumptions used to develop projected non-benefit costs for
other Medicaid populations for the following issues:
i. Administrative costs.
ii. Care coordination and care management.
iii. Provision for operating or profit margin.
iv. Taxes, fees, and assessments.
v. Other material non-benefit costs.
4. Final Certified Rates
A. In addition to the expectations for all Medicaid managed care rate certifications described
in Section I, CMS requests under 42 CFR §438.7(d)10 that states that covered the new
adult group in Medicaid managed care plans in previous rating periods provide:
i. A comparison to the final certified rates or rate ranges in the previous rate
certification.
ii. A description of any other material changes to the capitation rates or the rate
development process not otherwise addressed in the other sections of this guidance.
5. Risk Mitigation Strategies
A. CMS requests under 42 CFR §438.7(d) that states describe the risk mitigation strategy
specific to the new adult group rates.
B. For states that covered the new adult group in Medicaid managed care plans in previous
rating periods, CMS requests the following information:
i. Any changes in the risk mitigation strategy from those used during previous rating
periods.
10

The regulation provides: (d) Provision of additional information. The State must, upon CMS' request, provide
additional information, whether part of the rate certification or additional supplemental materials, if CMS
determines that information is pertinent to the approval of the certification under this part. The State must identify
whether or not the information provided in addition to the rate certification is proffered by the State, the actuary, or
another party.

Page 30 of 31

ii. The rationale for making the change in the risk mitigation strategy or removing the
risk mitigation used during previous rating periods.
iii. Any relevant experience, results, or preliminary information available related to the
risk mitigation strategy used during previous rating periods.

Page 31 of 31