Kansas legislators hear how capitation, rate cells and FMAP drive Medicaid costs

Megan Leopold, analyst with the Kansas Legislative Research Department, told the Robert G. (Bob) Bethell Joint Committee that most state Medicaid spending flows through capitation payments the Kansas Department of Health and Environment (KDHE) sends to managed care organizations (MCOs).

The capitation payments are “per member per month” amounts set for groups of beneficiaries called rate cells, Leopold said, and those payments are the main driver of Medicaid costs. “These are the state payments or the payments that the state makes to the MCOs,” she said.

The committee then heard from Seth Adamson, managing director and actuary for CABIS Optimus, the actuarial firm that advises KDHE. Adamson described the regulatory and technical framework for setting capitation rates. He said federal law and CMS regulations require rates to be “actuarially sound”: reasonable, appropriate and attainable. “Every year we have to certify that the rates are actually sound,” Adamson said. He explained rates are set annually for a contract year even if a multi-year contract is in place for plan administration.

Adamson and Leopold outlined how rate cells are used to match payment to expected risk: relatively large, lower-cost populations such as children in poverty are paid a low per-member-per-month (PMPM) amount, while small, high-cost populations — long-term-care residents or waiver recipients — receive much higher PMPMs. The actuary demonstrated why making payments only on a statewide average can overpay some plans and underpay others if enrollment mixes differ by plan.

Both presenters flagged federal and state policy levers that materially change spending. Leopold reminded the panel that the federal medical assistance percentage (FMAP) — the federal match — shifts slightly each year and that incremental FMAP changes can move tens of millions of dollars because Kansas’ Medicaid program totals billions. Adamson said other drivers include provider assessment changes, legislative rate increases and federal policy changes.

Committee members pressed for more detail on several operational topics. Questions included how beneficiaries are assigned to MCOs (Leopold: members can choose; if they do not choose, the agency assigns them), why some providers are paid on a prospective payment system (PPS) rather than by service, and how much capitation accuracy the actuaries achieve. Adamson said his team targets a narrow prospective margin and performs midyear updates if policy changes occur.

Leopold and Adamson also discussed program design choices that affect incentives and costs: the state’s decision to give the three MCOs essentially the same per-rate-cell PMPM to preserve competition, and the role of Medicaid-managed care in transferring financial risk from the state to plans.

The presentations closed with the actuary noting that managed care can raise administrative and care-management costs initially but is intended to improve efficiency over time by reducing avoidable utilization.

Ending: The committee asked the agencies and actuarial vendor to provide additional materials — monthly Medicaid reports with code-level detail and historical capitation accuracy — which members referenced as useful for future oversight.