---
kind: "range"
citation: "42 C.F.R. §§ 438.4–438.8"
title: "42"
from: "438.4"
to: "438.8"
count: 5
url: "https://uscodex.org/cfr/42/438.4..438.8"
---

# §438.4. Actuarial soundness.

- (a) **Actuarially sound capitation rates defined.** Actuarially sound 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 MCO, PIHP, or PAHP for the time period and the population covered under the terms of the contract, and such capitation rates are developed in accordance with the requirements in [paragraph (b)](#b) of this section.
- (b) **CMS review and approval of actuarially sound capitation rates.** Capitation rates for MCOs, PIHPs, and PAHPs must be reviewed and approved by CMS as actuarially sound. To be approved by CMS, capitation rates must:
  - (1) Have been developed in accordance with the standards specified in [§ 438.5](/cfr/42/438.5.md) and generally accepted actuarial principles and practices. Any differences in the assumptions, methodologies, or factors used to develop capitation rates for covered populations must be based on valid rate development standards that represent actual cost differences in providing covered services to the covered populations. Any differences in the assumptions, methodologies, or factors used to develop capitation rates must not vary with the rate of Federal financial participation (FFP) associated with the covered populations in a manner that increases Federal costs. The determination that differences in the assumptions, methodologies, or factors used to develop capitation rates for MCOs, PIHPs, and PAHPs increase Federal costs and vary with the rate of FFP associated with the covered populations must be evaluated for the entire managed care program and include all managed care contracts for all covered populations. CMS may require a State to provide written documentation and justification that any differences in the assumptions, methodologies, or factors used to develop capitation rates for covered populations or contracts represent actual cost differences based on the characteristics and mix of the covered services or the covered populations.
  - (2) **Be appropriate for the populations to be covered and the services to be furnished under the contract.**
  - (3) Be adequate to meet the requirements on MCOs, PIHPs, and PAHPs in §§ [438.206](/cfr/42/438.206.md), [438.207](/cfr/42/438.207.md), and [438.208](/cfr/42/438.208.md).
  - (4) **Be specific to payments for each rate cell under the contract.**
  - (5) Payments from any rate cell must not cross-subsidize or be cross-subsidized by payments for any other rate cell.
  - (6) Be certified by an actuary as meeting the applicable requirements of this part, including that the rates have been developed in accordance with the requirements specified in § [438.3(c)(1)(ii)](/cfr/42/438.3.md?p=c-1-ii) and [(e)](/cfr/42/438.3.md?p=c-1-e).
  - (7) Meet any applicable special contract provisions as specified in [§ 438.6](/cfr/42/438.6.md).
  - (8) Be provided to CMS in a format and within a timeframe that meets requirements in [§ 438.7](/cfr/42/438.7.md).
  - (9) Be developed in such a way that the MCO, PIHP, or PAHP would reasonably achieve a medical loss ratio standard, as calculated under [§ 438.8](/cfr/42/438.8.md), of at least 85 percent for the rate year. The capitation rates may be developed in such a way that the MCO, PIHP, or PAHP would reasonably achieve a medical loss ratio standard greater than 85 percent, as calculated under [§ 438.8](/cfr/42/438.8.md), as long as the capitation rates are adequate for reasonable, appropriate, and attainable non-benefit costs.
- (c) **Option to develop and certify a rate range.**
  - (1) Notwithstanding the provision at [paragraph (b)(4)](#b-4) of this section, the State may develop and certify a range of capitation rates per rate cell as actuarially sound, when all of the following conditions are met:
    - (i) The rate certification identifies and justifies the assumptions, data, and methodologies specific to both the upper and lower bounds of the rate range.
    - (ii) Both the upper and lower bounds of the rate range must be certified as actuarially sound consistent with the requirements of this part.
    - (iii) The upper bound of the rate range does not exceed the lower bound of the rate range multiplied by 1.05.
    - (iv) The rate certification documents the State's criteria for paying MCOs, PIHPs, and PAHPs at different points within the rate range.
    - (v) The State does not use as a criterion for paying MCOs, PIHPs, and PAHPs at different points within the rate range any of the following:
      - (A) The willingness or agreement of the MCOs, PIHPs, or PAHPs or their network providers to enter into, or adhere to, intergovernmental transfer (IGT) agreements; or
      - (B) The amount of funding the MCOs, PIHPs, or PAHPs or their network providers provide through IGT agreements.
  - (2) When a State develops and certifies a range of capitation rates per rate cell as actuarially sound consistent with the requirements of this [paragraph (c)](#c), the State must:
    - (i) Document the capitation rates, prior to the start of the rating period, for the MCOs, PIHPs, and PAHPs at points within the rate range, consistent with the criteria in [paragraph (c)(1)(iv)](#c-1-iv) of this section.
    - (ii) Not modify the capitation rates under [§ 438.7(c)(3)](/cfr/42/438.7.md?p=c-3).
    - (iii) Not modify the capitation rates within the rate range, unless the State is increasing or decreasing the capitation rate per rate cell within the rate range up to 1 percent during the rating period. However, any changes of the capitation rate within the permissible 1 percent range must be consistent with a modification of the contract as required in [§ 438.3(c)](/cfr/42/438.3.md?p=c) and are subject to the requirements at [paragraph (b)(1)](#b-1) of this section. Any modification to the capitation rates within the rate range greater than the permissible 1 percent range will require the State to provide a revised rate certification for CMS approval, which demonstrates that—
      - (A) The criteria in [paragraph (c)(1)(iv)](#c-1-iv) of this section, as described in the initial rate certification, were not applied accurately;
      - (B) There was a material error in the data, assumptions, or methodologies used to develop the initial rate certification and that the modifications are necessary to correct the error; or
      - (C) **Other adjustments are appropriate and reasonable to account for programmatic changes.**
    - (iv) Post on the website required in [§ 438.10(c)(3)](/cfr/42/438.10.md?p=c-3) the following information prior to executing a managed care contract or contract amendment that includes or modifies a rate range:
      - (A) The upper and lower bounds of each rate cell;
      - (B) A description of all assumptions that vary between the upper and lower bounds of each rate cell, including for the assumptions that vary, the specific assumptions used for the upper and lower bounds of each rate cell; and
      - (C) A description of the data and methodologies that vary between the upper and lower bounds of each rate cell, including for the data and methodologies that vary, the specific data and methodologies used for the upper and lower bounds of each rate cell.

# §438.5. Rate development standards.

- (a) **Definitions.** As used in this section and [§ 438.7(b)](/cfr/42/438.7.md?p=b), the following terms have the indicated meanings:

  Budget neutral means a standard for any risk sharing mechanism that recognizes both higher and lower expected costs among contracted MCOs, PIHPs, or PAHPs under a managed care program and does not create a net aggregate gain or loss across all payments under that managed care program.

  Prospective risk adjustment means a methodology to account for anticipated variation in risk levels among contracted MCOs, PIHPs, or PAHPs that is derived from historical experience of the contracted MCOs, PIHPs, or PAHPs and applied to rates for the rating period for which the certification is submitted.

  Retrospective risk adjustment means a methodology to account for variation in risk levels among contracted MCOs, PIHPs, or PAHPs that is derived from experience concurrent with the rating period of the contracted MCOs, PIHPs, or PAHPs subject to the adjustment and calculated at the expiration of the rating period.

  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.

- (b) **Process and requirements for setting actuarially sound capitation rates.** In setting actuarially sound capitation rates, the State must follow the steps below, in an appropriate order, in accordance with this section, or explain why they are not applicable:
  - (1) Consistent with [paragraph (c)](#c) of this section, identify and develop the base utilization and price data.
  - (2) Consistent with [paragraph (d)](#d) of this section, develop and apply trend factors, including cost and utilization, to base data that are developed from actual experience of the Medicaid population or a similar population in accordance with generally accepted actuarial practices and principles.
  - (3) Consistent with [paragraph (e)](#e) of this section, develop the non-benefit component of the rate to account for reasonable expenses related to MCO, PIHP, or PAHP administration; taxes; licensing and regulatory fees; contribution to reserves; risk margin; cost of capital; and other operational costs associated with the MCO's, PIHP's, or PAHP's provision of State plan services to Medicaid enrollees.
  - (4) Consistent with [paragraph (f)](#f) of this section, make appropriate and reasonable adjustments to account for changes to the base data, programmatic changes, non-benefit components, and any other adjustment necessary to establish actuarially sound rates.
  - (5) Take into account the MCO's, PIHP's, or PAHP's past medical loss ratio, as calculated and reported under [§ 438.8](/cfr/42/438.8.md), in the development of the capitation rates, and consider the projected medical loss ratio in accordance with [§ 438.4(b)(9)](/cfr/42/438.4.md?p=b-9).
  - (6) Consistent with [paragraph (g)](#g) of this section, if risk adjustment is applied, select a risk adjustment methodology that uses generally accepted models and apply it in a budget neutral manner across all MCOs, PIHPs, or PAHPs in the program to calculate adjustments to the payments as necessary.
- (c) **Base data.**
  - (1) States must provide all the validated encounter data, FFS data (as appropriate), and audited financial reports (as defined in [§ 438.3(m)](/cfr/42/438.3.md?p=m)) that demonstrate experience for the populations to be served by the MCO, PIHP, or PAHP to the actuary developing the capitation rates for at least the three most recent and complete years prior to the rating period.
  - (2) States and their actuaries must use the most appropriate data, with the basis of the data being no older than from the 3 most recent and complete years prior to the rating period, for setting capitation rates. Such 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. Data must be in accordance with actuarial standards for data quality and an explanation of why that specific data is used must be provided in the rate certification.
  - (3) **Exception.**
    - (i) States that are unable to base their rates on data meeting the qualifications in [paragraph (c)(2)](#c-2) of this section that the basis of the data be no older than from the 3 most recent and complete years prior to the rating period may request approval for an exception; 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.
    - (ii) States that request an exception from the base data standards established in this section must set forth a corrective action plan to come into compliance with the base data standards no later than 2 years after the last day of the rating period for which the deficiency was identified.
- (d) **Trend.** Each trend must be reasonable and developed in accordance with generally accepted actuarial principles and practices. Trend must be developed primarily from actual experience of the Medicaid population or from a similar population.
- (e) **Non-benefit component of the rate.** 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, contribution to reserves, risk margin, cost of capital, and other operational costs associated with the provision of services identified in [§ 438.3(c)(1)(ii)](/cfr/42/438.3.md?p=c-1-ii) to the populations covered under the contract.
- (f) **Adjustments.** Each adjustment must reasonably support the development of an accurate base data set for purposes of rate setting, address appropriate programmatic changes, reflect the health status of the enrolled population, or reflect non-benefit costs, and be developed in accordance with generally accepted actuarial principles and practices.
- (g) **Risk adjustment.** Prospective or retrospective risk adjustment methodologies must be developed in a budget neutral manner consistent with generally accepted actuarial principles and practices.

# §438.6. Special contract provisions related to payment.

- (a) **Definitions.** As used in this section, the following terms have the indicated meanings:

  Academic medical center means a facility that includes a health professional school with an affiliated teaching hospital.

  Average commercial rate means the average rate paid for services by the highest claiming third-party payers for specific services as measured by claims volume.

  Base amount is the starting amount, calculated according to [paragraph (d)(2)](#d-2) of this section, available for pass-through payments to hospitals in a given contract year subject to the schedule in [paragraph (d)(3)](#d-3) of this section.

  Condition-based payment means a prospective payment for a defined set of Medicaid covered service(s) that are tied to a specific condition and delivered to Medicaid managed care enrollees under the contract.

  Final State directed payment cost percentage means the annual amount calculated, in accordance with [paragraph (c)(7)(iii)](#c-7-iii) of this section, for each State directed payment for which written prior approval is required under [paragraph (c)(2)(i)](#c-2-i) of this section and for each managed care program.

  Incentive arrangement means any payment mechanism under which a MCO, PIHP, or PAHP may receive additional funds over and above the capitation rates it was paid for meeting targets specified in the contract.

  Inpatient hospital services means the same as specified at [§ 440.10](/cfr/42/440.10.md).

  Maximum fee schedule means any State directed payment where the State requires an MCO, PIHP, or PAHP to pay no more than a certain amount for a covered service(s).

  Minimum fee schedule means any State directed payment where the State requires an MCO, PIHP, or PAHP to pay no less than a certain amount for a covered service(s).

  Nursing facility services means the same as specified in [§ 440.40(a)](/cfr/42/440.40.md?p=a).

  Outpatient hospital services means the same as specified in [§ 440.20(a)](/cfr/42/440.20.md?p=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 the MCO, PIHP, or PAHP and hospitals, physicians, or nursing facilities that is not for the following purposes: A specific service or benefit provided to a specific enrollee covered under the contract; a provider payment methodology permitted under [paragraphs (c)(1)(i) through (iii)](#c-1-i..c-1-iii) of this section for services and enrollees covered under the contract; a subcapitated payment arrangement for a specific set of services and enrollees covered under the contract; GME payments; or FQHC or RHC wrap around payments.

  Performance measure means, for State directed payments, a quantitative measure with a numerator and denominator that is used to monitor performance at a point in time or track performance over time, of service delivery, quality of care, or outcomes as defined in [§ 438.320](/cfr/42/438.320.md) for enrollees.

  Population-based payment means a prospective payment for a defined set of Medicaid service(s) for a population of Medicaid managed care enrollees covered under the contract attributed to a specific provider or provider group.

  Qualified practitioner services at an academic medical center means professional services provided by both physicians and non-physician practitioners affiliated with or employed by an academic medical center.

  Risk corridor means a risk sharing mechanism in which States and MCOs, PIHPs, or PAHPs may share in profits and losses under the contract outside of a predetermined threshold amount.

  State plan approved rates means amounts calculated for specific services identifiable as having been provided to an individual beneficiary described under CMS approved rate methodologies in the Medicaid State plan. Supplemental payments contained in a State plan are not, and do not constitute, State plan approved rates.

  Supplemental payments means amounts paid by the State in its FFS Medicaid delivery system to providers that are described and approved in the State plan or under a demonstration or waiver thereof and are in addition to State plan approved rates. Disproportionate share hospital (DSH) and graduate medical education (GME) payments are not, and do not constitute, supplemental payments.

  Total payment rate means the aggregate for each managed care program of:

  - (i) The average payment rate paid by all MCOs, PIHPs, or PAHPs to all providers included in the specified provider class for each service identified in the State directed payment;
  - (ii) The effect of the State directed payment on the average rate paid to providers included in the specified provider class for the same service for which the State is seeking prior approval under [paragraph (c)(2)(i)](#c-2-i) of this section;
  - (iii) The effect of any and all other State directed payments on the average rate paid to providers included in the specified provider class for the same service for which the State is seeking prior approval under [paragraph (c)(2)(i)](#c-2-i) of this section; and
  - (iv) The effect of any and all allowable pass-through payments, as defined in [paragraph (a)](#a) of this section, to be paid to any and all providers included in the provider class specified in the State directed payment for which the State is seeking prior approval under [paragraph (c)(2)(i)](#c-2-i) of this section on the average payment rate to providers in the specified provider class.

    Total published Medicare payment rate means amounts calculated as payment for specific services that have been developed under Title XVIII Part A and Part B.

    Uniform increase means any State directed payment that directs the MCO, PIHP, or PAHP to pay the same amount (the same dollar amount or the same percentage increase) per Medicaid covered service(s) in addition to the rates the MCO, PIHP or PAHP negotiated with the providers included in the specified provider class for the service(s) identified in the State directed payment.

    Withhold arrangement means 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. The targets for a withhold arrangement are distinct from general operational requirements under the contract. Arrangements that withhold a portion of a capitation rate for noncompliance with general operational requirements are a penalty and not a withhold arrangement.

- (b) **Basic requirements.**
  - (1) If used in the payment arrangement between the State and the MCO, PIHP, or PAHP, all applicable risk-sharing mechanisms, such as reinsurance, risk corridors, or stop-loss limits, must be documented in the contract and rate certification documents for the rating period prior to the start of the rating period, and must be developed in accordance with [§ 438.4](/cfr/42/438.4.md), the rate development standards in [§ 438.5](/cfr/42/438.5.md), and generally accepted actuarial principles and practices. Risk-sharing mechanisms may not be added or modified after the start of the rating period.
  - (2) Contracts with incentive arrangements may not provide for payment in excess of 105 percent of the approved capitation payments attributable to the enrollees or services covered by the incentive arrangement, since such total payments will not be considered to be actuarially sound. For all incentive arrangements, the contract must provide that the arrangement is—
    - (i) For a fixed period of time and performance is measured during the rating period under the contract in which the incentive arrangement is applied.
    - (ii) **Not to be renewed automatically.**
    - (iii) **Made available to both public and private contractors under the same terms of performance.**
    - (iv) Does not condition MCO, PIHP, or PAHP participation in the incentive arrangement on the MCO, PIHP, or PAHP entering into or adhering to intergovernmental transfer agreements.
    - (v) Necessary for the specified activities, targets, performance measures, or quality-based outcomes that support program initiatives as specified in the State's quality strategy at [§ 438.340](/cfr/42/438.340.md).
  - (3) Contracts that provide for a withhold arrangement must ensure that the capitation payment minus any portion of the withhold that is not reasonably achievable is actuarially sound as determined by an actuary. The total amount of the withhold, achievable or not, must be reasonable and take into consideration the MCO's, PIHP's or PAHP's financial operating needs accounting for the size and characteristics of the populations covered under the contract, as well as the MCO's, PIHP's or PAHP's capital reserves as measured by the risk-based capital level, months of claims reserve, or other appropriate measure of reserves. The data, assumptions, and methodologies used to determine the portion of the withhold that is reasonably achievable must be submitted as part of the documentation required under [§ 438.7(b)(6)](/cfr/42/438.7.md?p=b-6). For all withhold arrangements, the contract must provide that the arrangement is—
    - (i) For a fixed period of time and performance is measured during the rating period under the contract in which the withhold arrangement is applied.
    - (ii) **Not to be renewed automatically.**
    - (iii) **Made available to both public and private contractors under the same terms of performance.**
    - (iv) Does not condition MCO, PIHP, or PAHP participation in the withhold arrangement on the MCO, PIHP, or PAHP entering into or adhering to intergovernmental transfer agreements.
    - (v) Necessary for the specified activities, targets, performance measures, or quality-based outcomes that support program initiatives as specified in the State's quality strategy under [§ 438.340](/cfr/42/438.340.md).
- (c) **State directed payments under MCO, PIHP, or PAHP contracts—**
  - (1) **General rule.** Except as specified in this [paragraph (c)](#c), in [paragraph (d)](#d) of this section, in a specific provision of Title XIX, or in another regulation implementing a Title XIX provision related to payments to providers, that is applicable to managed care programs, the State may not in any way direct the MCO's, PIHP's or PAHP's expenditures under the contract.
    - (i) The State may require the MCO, PIHP or PAHP to 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) The State may require MCOs, PIHPs, or PAHPs to participate in a multi-payer or Medicaid-specific delivery system reform or performance improvement initiative.
    - (iii) The State may require the MCO, PIHP, or PAHP to:
      - (A) Adopt a minimum fee schedule for providers that provide a particular service under the contract using State plan approved rates.
      - (B) Adopt a minimum fee schedule for providers that provide a particular service under the contract using a total published Medicare payment rate that was in effect no more than 3 years prior to the start of the rating period and the minimum fee schedule to be used by the MCO, PIHP, or PAHP is equivalent to 100 percent of the specified total published Medicare payment rate.
      - (C) Adopt a minimum fee schedule for providers that provide a particular service under the contract using rates other than the State plan approved rates or one or more total published Medicare payment rates described in [paragraph (c)(1)(iii)(B)](#c-1-iii-B) of this section.
      - (D) Provide a uniform dollar or percentage increase for providers that provide a particular service under the contract.
      - (E) Adopt a maximum fee schedule for providers that provide a particular service under the contract, so long as the MCO, PIHP, or PAHP retains the ability to reasonably manage risk and has discretion in accomplishing the goals of the contract.
  - (2) **Standards for State directed payments.**
    - (i) State directed payments specified in paragraphs [(c)(1)(i)](#c-1-i) and [(ii)](#c-1-ii) and [(c)(1)(iii)(C) through (E)](#c-1-iii-C..c-1-iii-E) of this section must have written prior approval that the standards and requirements in this section are met.
    - (ii) Each State directed payment must meet the following standards. Specifically, each State directed payment must:
      - (A) Be based on the utilization and delivery of services;
      - (B) Direct expenditures equally, and using the same terms of performance, for a class of providers providing the service under the contract;
      - (C) Expect to advance at least one of the goals and objectives in the quality strategy in [§ 438.340](/cfr/42/438.340.md);
      - (D) Have an evaluation plan that measures the degree to which the State directed payment advances at least one of the goals and objectives in the quality strategy in [§ 438.340](/cfr/42/438.340.md) and includes all of the elements outlined in [paragraph (c)(2)(iv)](#c-2-iv) of this section;
      - (E) Not condition provider participation in State directed payments on the provider entering into or adhering to intergovernmental transfer agreements;
      - (F) Result in achievement of the stated goals and objectives in alignment with the State's evaluation plan and, upon request from CMS, the State must provide an evaluation report documenting achievement of these stated goals and objectives;
      - (G) Comply with all Federal legal requirements for the financing of the non-Federal share, including but not limited to, [42 CFR 433](/cfr/42/433.md), [subpart B](/cfr/42/subpartB.md);
      - (H) (1) Ensure that providers receiving payment under a State directed payment attest that they do not participate in any hold harmless arrangement for any health care-related tax as specified in [§ 433.68(f)(3)](/cfr/42/433.68.md?p=f-3) of this subchapter in which the State or other unit of government imposing the tax provides for any direct or indirect payment, offset, or waiver such that the provision of the payment, offset, or waiver directly or indirectly guarantees to hold the taxpayer harmless for all or any portion of the tax amount, and

        (2) Ensure either that, upon CMS request, such attestations are available, or that the State provides an explanation that is satisfactory to CMS about why specific providers are unable or unwilling to make such attestations;

      - (I) Ensure that the total payment rate for each service and provider class included in the State directed payment must be reasonable, appropriate, and attainable and, upon request from CMS, the State must provide documentation demonstrating the total payment rate for each service and provider class; and
      - (J) Be developed in accordance with [§ 438.4](/cfr/42/438.4.md), and the standards specified in §§ [438.5](/cfr/42/438.5.md), [438.7](/cfr/42/438.7.md), and [438.8](/cfr/42/438.8.md).
    - (iii) The total payment rate for each State directed payment for which written prior approval is required under [paragraph (c)(2)(i)](#c-2-i) of this section for inpatient hospital services, outpatient hospital services, nursing facility services, or qualified practitioner services at an academic medical center must not exceed the average commercial rate. To demonstrate compliance with this paragraph, States must submit:
      - (A) The average commercial rate demonstration, for which States must use payment data that:

        (1) Is specific to the State;

        (2) Is no older than from the three most recent and complete years prior to the rating period of the initial request following the applicability date of this section;

        (3) Is specific to the service(s) addressed by the State directed payment;

        (4) Includes the total reimbursement by the third-party payer and any patient liability, such as cost sharing and deductibles;

        (5) Excludes payments to FQHCs, RHCs, and from any non-commercial payers, such as Medicare; and

        (6) Excludes any payment data for services or codes that the applicable Medicaid MCOs, PIHPs, or PAHPs do not cover.

      - (B) A total payment rate comparison, for which States must provide a comparison of the total payment rate for these services included in the State directed payment to the average commercial rate that:

        (1) Is specific to each managed care program that the State directed payment applies to;

        (2) Is specific to each provider class to which the State directed payment applies;

        (3) Is projected for the rating period for which the State is seeking prior approval of the State directed payment under [paragraph (c)(2)(i)](#c-2-i) of this section;

        (4) Uses payment data that are specific to each service included in the State directed payment; and

        (5) Describes each of the components of the total payment rate as a percentage of the average commercial rate (demonstrated by the State as provided in [paragraph (c)(2)(iii)(A)](#c-2-iii-A) of this section) for each of these services included in the State directed payment.

      - (C) The ACR demonstration described in [paragraph (c)(2)(iii)(A)](#c-2-iii-A) of this section must be included with the initial documentation submitted for written prior approval of the State directed payment under [paragraph (c)(2)(i)](#c-2-i) of this section, and then subsequently updated at least once every 3 years thereafter as long as the State continues to include the State directed payment that requires prior approval under [paragraph (c)(2)(i)](#c-2-i) of this section in any MCO, PIHP, or PAHP contract. The total payment rate comparison described in [paragraph (c)(2)(iii)(B)](#c-2-iii-B) of this section must be included with the documentation submitted for written prior approval under [paragraph (c)(2)(i)](#c-2-i) of this section and updated with each amendment and subsequent renewal.
    - (iv) For State directed payments for which written prior approval under [paragraph (c)(2)(i)](#c-2-i) of this section is required, the State must include a written evaluation plan with its submission for written prior approval under [paragraph (c)(2)(i)](#c-2-i) of this section and an updated written evaluation plan with each amendment and subsequent renewal. The evaluation plan must include the following elements:
      - (A) Identification of at least two metrics that will be used to measure the effectiveness of the State directed payment in advancing at least one of the goals and objectives in the quality strategy on an annual basis, which must:

        (1) Be specific to the State directed payment and, when practicable and relevant, attributable to the performance by the providers for enrollees in all of the State's managed care program(s) to which the State directed payment applies; and

        (2) Include at least one performance measure as defined in [§ 438.6(a)](#a) as part of the metrics used to measure the effectiveness of the State directed payment;

      - (B) Include baseline statistics on all metrics that will be used in the evaluation of the State directed payment for which the State is seeking written prior approval under [paragraph (c)(2)(i)](#c-2-i) of this section;
      - (C) Include performance targets for all metrics to be used in the evaluation of the State directed payment for which the State is seeking written prior approval under [paragraph (c)(2)(i)](#c-2-i) of this section that demonstrate either maintenance or improvement over the baseline statistics and not a decline relative to baseline. The target for at least one performance measure, as defined in [§ 438.6(a)](#a), must demonstrate improvement over baseline; and
      - (D) Include a commitment by the State to submit an evaluation report in accordance with [§ 438.6(c)(2)(v)](#c-2-v) if the final State directed payment cost percentage exceeds 1.5 percent.
    - (v) For any State directed payment for which written prior approval is required under [paragraph (c)(2)(i)](#c-2-i) of this section that has a final State directed payment cost percentage greater than 1.5 percent, the State must complete and submit an evaluation report using the evaluation plan outlined during the prior approval process under [paragraph (c)(2)(iv)](#c-2-iv) of this section.
      - (A) **This evaluation report must—** (1) Include all of the elements in [paragraph (c)(2)(iv)](#c-2-iv) of this section as specified in the approved evaluation plan;

        (2) Include three most recent and complete years of annual results for each metric as required in [paragraph (c)(2)(iv)(A)](#c-2-iv-A) of this section; and

        (3) Be published on the public facing website as required under [§ 438.10(c)(3)](/cfr/42/438.10.md?p=c-3).

      - (B) States must submit the initial evaluation report as described in [paragraph (c)(2)(v)(A)](#c-2-v-A) of this section to CMS no later than 2 years after the conclusion of the 3-year evaluation period. Subsequent evaluation reports must be submitted to CMS every 3 years.
    - (vi) **Any State directed payments described in paragraph (c)(1)(i) or (ii) of this section must—**
      - (A) Make participation in the value-based purchasing, delivery system reform, or performance improvement initiative available using the same terms of performance to a class of providers providing services under the contract related to the reform or improvement initiative;
      - (B) If the State directed payment for which written prior approval is required under [paragraph (c)(2)(i)](#c-2-i) of this section conditions payment upon performance, the payment to providers under the State directed payment:

        (1) Cannot be conditioned upon administrative activities, such as the reporting of data nor upon the participation in learning collaboratives or similar administrative activities;

        (2) Must use a common set of performance measures across all of the payers and providers specified in the State directed payment;

        (3) Must define and use a performance measurement period that must not exceed the length of the rating period and must not precede the start of the rating period in which the payment is delivered by more than 12 months, and all payments must be documented in the rate certification for the rating period in which the payment is delivered;

        (4) Must identify baseline statistics on all metrics that will be used to measure the performance that is the basis for payment to the provider from the MCO, PIHP, or PAHP; and

        (5) Must use measurable performance targets, which are attributable to the performance by the providers in delivering services to enrollees in each of the State's managed care program(s) to which the State directed payment applies, that demonstrate maintenance or improvement over baseline data on all metrics that will be used to measure the performance that is the basis for payment to the provider from the MCO, PIHP, or PAHP.

      - (C) If the State directed payment is a population-based or condition-based payment, the State directed payment must:

        (1) Be based upon the delivery by the provider of one or more specified Medicaid covered service(s) during the rating period or the attribution of a covered enrollee to a provider for treatment during the rating period;

        (2) If basing payment on the attribution of enrollees to a provider, have an attribution methodology that uses data that are no older than the three most recent and complete years of data; seeks to preserve existing provider-enrollee relationships; accounts for enrollee preference in choice of provider; and describes when patient panels are attributed, how frequently they are updated, and how those updates are communicated to providers;

        (3) Replace the negotiated rate between an MCO, PIHP, or PAHP and providers for the Medicaid covered service(s) included in the population or condition-based payment; no other payment may be made by an MCO, PIHP, or PAHP to the same provider on behalf of the same enrollee for the same services included in the population or condition-based payment; and

        (4) Include at least one metric in the evaluation plan required under [paragraph (c)(2)(iv)](#c-2-iv) of this section that measures performance at the provider class level; the target for this performance measure, as defined in [§ 438.6(a)](#a), must be set to demonstrate improvement over baseline.

    - (vii) **Any State directed payment described in paragraph (c)(1)(iii) of this section must—**
      - (A) Condition payment from the MCO, PIHP, or PAHP to the provider on the utilization and delivery of services under the contract for the rating period for which the State is seeking written prior approval only; and
      - (B) Not condition payment from the MCO, PIHP, or PAHP to the provider on utilization and delivery of services outside of the rating period for which the State is seeking written prior approval and then require that payments be reconciled to utilization during the rating period.
    - (viii) A State must complete and submit all required documentation for each State directed payment for which written prior approval is required under (c)(2)(i) and for each amendment to an approved State directed payment, respectively, before the start date of the State directed payment or the start date of the amendment.
  - (3) **Approval and renewal timeframes.**
    - (i) Approval of a State directed payment described in paragraphs [(c)(1)(i)](#c-1-i) and [(ii)](#c-1-ii) of this section is for one rating period unless a multi-year approval of up to three rating periods is requested and meets all of the following criteria:
      - (A) The State has explicitly identified and described the State directed payment in the contract as a multi-year State directed payment, including a description of the State directed payment by year and if the State directed payment varies by year.
      - (B) The State has developed and described its plan for implementing a multi-year State directed payment, including the State's plan for multi-year evaluation, and the impact of a multi-year State directed payment on the State's goals and objectives in the State's quality strategy in [§ 438.340](/cfr/42/438.340.md).
      - (C) The State has affirmed that it will not make any changes to the State directed payment methodology, or magnitude of the payment, described in the contract for all years of the multi-year State directed payment without CMS written prior approval. If the State determines that changes to the State directed payment methodology, or magnitude of the payment, are necessary, the State must obtain written prior approval of such changes under [paragraph (c)(2)](#c-2) of this section.
    - (ii) Written prior approval of a State directed payment described in [paragraph (c)(1)(iii)(C) through (E)](#c-1-iii-C..c-1-iii-E) of this section is for one rating period.
    - (iii) **State directed payments are not automatically renewed.**
  - (4) **Reporting requirements.** The State must submit to CMS, no later than 1 year after each rating period, data to the Transformed Medicaid Statistical Information System, or in any successor format or system designated by CMS, specifying the total dollars expended by each MCO, PIHP, and PAHP for State directed payments, including amounts paid to individual providers. The initial report will be due after the first rating period that begins after the release of reporting instructions by CMS. Minimum data fields to be collected include the following, as applicable:
    - (i) **Provider identifiers.**
    - (ii) **Enrollee identifiers.**
    - (iii) **MCO, PIHP or PAHP identifiers.**
    - (iv) **Procedure and diagnosis codes.**
    - (v) **Allowed, billed, and paid amounts.** Paid amounts include the amount that represents the MCO's, PIHP's or PAHP's negotiated payment amount, the amount of the State directed payment, and any other amounts included in the total amount paid to the provider.
  - (5) **Requirements for Medicaid Managed Care contract terms for State directed payments.** State directed payments must be specifically described and documented in the MCO's, PIHP's, or PAHP's contracts. The MCO's, PIHP's or PAHP's contract must include, at a minimum, the following information for each State directed payment:
    - (i) The State directed payment start date and, if applicable, the end date within the applicable rating period;
    - (ii) A description of the provider class eligible for the State directed payment and all eligibility requirements;
    - (iii) A description of the State directed payment, which must include at a minimum:
      - (A) **For State directed payments described in paragraphs (c)(1)(iii)(A), (B), and (C) of this section—** (1) The required fee schedule;

        (2) The procedure and diagnosis codes to which the fee schedule applies;

        (3) The applicable dates of service within the rating period for which the fee schedule applies;

        (4) For State directed payments that specify State plan approved rates, the contract must also reference the State plan page, when it was approved, and a link to the currently approved State plan page when possible; and

        (5) For State directed payments that specify a Medicare-referenced fee schedule, the contract must also include information about the Medicare fee schedule(s) that is necessary to implement the State directed payment, including identifying the specific Medicare fee schedule, the time period for which the Medicare fee schedule is in effect, and any material adjustments due to geography or provider type that need to be applied.

      - (B) **For State directed payments described in paragraphs (c)(1)(iii)(D) of this section—** (1) Whether the uniform increase will be a specific dollar amount or a percentage increase of negotiated rates;

        (2) The procedure and diagnosis codes to which the uniform dollar or percentage increase applies;

        (3) The specific dollar amount or percentage increase that the MCO, PIHP or PAHP must apply or the methodology to establish the specific dollar amount or percentage increase;

        (4) The applicable dates of service within the rating period for which the uniform increase applies; and

        (5) The roles and responsibilities of the State and the MCO, PIHP, or PAHP, the timing of payments, and other significant relevant information.

      - (C) **For State directed payments described in paragraph (c)(1)(iii)(E) of this section—** (1) The fee schedule the MCO, PIHP, or PAHP must ensure that payments are below;

        (2) The procedure and diagnosis codes to which the fee schedule applies;

        (3) The applicable dates of service within the rating period for which the fee schedule applies; and

        (4) Details of the State's exemption process for MCOs, PIHPs, or PAHPs and providers to follow if they are under contractual obligations that result in the need to pay more than the maximum fee schedule.

      - (D) For State directed payments described in paragraphs [(c)(1)(i)](#c-1-i) and [(ii)](#c-1-ii) of this section that condition payment based upon performance:

        (1) The approved performance measures upon which payment will be conditioned;

        (2) The approved measurement period for those measures;

        (3) The approved baseline statistics for all measures against which performance will be measured;

        (4) The performance targets that must be achieved on each measure for the provider to obtain the performance-based payment;

        (5) The methodology to determine if the provider qualifies for the performance-based payment, as well as the amount of the payment; and

        (6) The roles and responsibilities of the State and the MCO, PIHP, or PAHP, the timing of payments, what to do with any unearned payments, and other significant relevant information.

      - (E) For State directed payments described in paragraphs [(c)(1)(i)](#c-1-i) and [(ii)](#c-1-ii) of this section using a population-based or condition-based payment as defined in [paragraph (a)](#a) of this section:

        (1) The Medicaid covered service(s) that the population or condition-based payment is for;

        (2) The time period that the population or condition-based payment covers;

        (3) When the population or condition-based payment is to be made and how frequently;

        (4) A description of the attribution methodology, if one is used, which must include at a minimum the data used, when the panels will be established, how frequently those panels will be updated, and how the attribution methodology will be communicated to providers; and

        (5) The roles and responsibilities of the State and the MCO, PIHP, or PAHP in operationalizing the attribution methodology if an attribution methodology is used.

    - (iv) Any encounter reporting and separate reporting requirements necessary for auditing the State directed payment in addition to the reporting requirements in [paragraph (c)(4)](#c-4) of this section; and
    - (v) All State directed payments must be specifically described and documented in the MCO's, PIHP's, and PAHP's contracts that must be submitted to CMS no later than 120 days after the start date of the State directed payment.
  - (6) **Payment to MCOs, PIHPs, and PAHPs for State Directed Payments.** The final capitation rate for each MCO, PIHP, or PAHP as described in [§ 438.3(c)](/cfr/42/438.3.md?p=c) must account for all State directed payments. Each State directed payment must be accounted for in the base data, as an adjustment to trend, or as an adjustment as specified in [§ 438.5](/cfr/42/438.5.md) and [§ 438.7(b)](/cfr/42/438.7.md?p=b). The State cannot withhold a portion of the capitation rate to pay the MCO, PIHP, or PAHP separately for a State directed payment nor require an MCO, PIHP, or PAHP to retain a portion of the capitation rate separately to comply with a State directed payment.
  - (7) **Final State directed payment cost percentage.** For each State directed payment for which written prior approval is required under [paragraph (c)(2)(i)](#c-2-i) of this section, unless the State voluntarily submits the evaluation report per [paragraph (c)(2)(v)](#c-2-v) of this section, the State must calculate the final State directed payment cost percentage and if the final State directed payment cost percentage is below 1.5 percent the State must provide a final State directed payment cost percentage report to CMS as follows:
    - (i) **State directed payment cost percentage calculation.** The final State directed payment cost percentage must be calculated on an annual basis and recalculated annually.
    - (ii) **State directed payment cost percentage certification.** The final State directed payment cost percentage must be certified by an actuary and developed in a reasonable and appropriate manner consistent with generally accepted actuarial principles and practices.
    - (iii) **Calculation of the final State directed payment cost percentage.** The final State directed payment cost percentage is the result of dividing the amount determined in [paragraph (c)(7)(iii)(A)](#c-7-iii-A) of this section by the amount determined in [paragraph (c)(7)(iii)(B)](#c-7-iii-B) of this section.
      - (A) The portion of the actual total capitation payments that is attributable to the State directed payment for which the State has obtained written prior approval under [paragraph (c)(2)(i)](#c-2-i) of this section, for each managed care program.
      - (B) The actual total capitation payments, defined at [§ 438.2](/cfr/42/438.2.md), for each managed care program, including all State directed payments in effect under [§ 438.6(c)](#c) and pass-through payments in effect under [§ 438.6(d)](#d).
    - (iv) **Annual CMS review of the final State directed payment cost percentage.** The State must submit the final State directed payment cost percentage annually to CMS for review as a separate report concurrent with the rate certification submission required in [§ 438.7(a)](/cfr/42/438.7.md?p=a) for the rating period beginning 2 years after the completion of each 12-month rating period that includes a State directed payment for which the State has obtained written prior approval under [paragraph (c)(2)(i)](#c-2-i) of this section.
  - (8) **Applicability dates.** States must comply with:
    - (i) Paragraphs [(a)](#a), [(c)(1)](#c-1), [(c)(1)(iii)](#c-1-iii), [(c)(2)(i)](#c-2-i), [(c)(2)(ii)(A) through (C)](#c-2-ii-A..c-2-ii-C), [(c)(2)(ii)(E)](#c-2-ii-E), [(c)(2)(ii)(G)](#c-2-ii-G), [(c)(2)(ii)(I)](#c-2-ii-I) and [(J)](#c-2-ii-J), [(c)(2)(vi)(A)](#c-2-vi-A), (c)(3) of this section beginning on July 9, 2024.
    - (ii) Paragraphs [(c)(2)(iii)](#c-2-iii), [(c)(2)(vi)(B)](#c-2-vi-B), and (c)(2)(vi)(C)(1) and (2) of this section no later than the first rating period for contracts with MCOs, PIHPs and PAHPs beginning on or after July 9, 2024.
    - (iii) Paragraphs (c)(2)(vi)(C)(3) and (4), (c)(2)(viii) and [(c)(5)(i) through (iv)](#c-2-c-5-i..c-2-c-5-iv) of this section no later than the first rating period for contracts with MCOs, PIHPs and PAHPs beginning on or after 2 years after July 9, 2024.
    - (iv) Paragraphs [(c)(2)(ii)(D)](#c-2-ii-D) and [(F)](#c-2-ii-F), (c)(2)(iv), (c)(2)(v), (c)(2)(vii), (c)(6) and (c)(7) of this section no later than the first rating period for contracts with MCOs, PIHPs and PAHPs beginning on or after 3 years after July 9, 2024.
    - (v) [Paragraph (c)(5)(v)](#c-5-v) of this section no later than the first rating period for contracts with MCOs, PIHPs and PAHPs beginning on or after 4 years after July 9, 2024.
    - (vi) [Paragraph (c)(4)](#c-4) of this section no later than the date specified in the T-MSIS reporting instructions released by CMS.
    - (vii) [Paragraph (c)(2)(ii)(H)](#c-2-ii-H) of this section no later than the first rating period for contracts with MCOs, PIHPs, and PAHPs beginning on or after January 1, 2028.
- (d) **Pass-through payments under MCO, PIHP, and PAHP contracts—**
  - (1) **General rule.** States may continue to require MCOs, PIHPs, and PAHPs to make pass-through payments (as defined in [paragraph (a)](#a) of this section) to network providers that are hospitals, physicians, or nursing facilities under the contract, provided the requirements of this [paragraph (d)](#d) are met. States may not require MCOs, PIHPs, and PAHPs to make pass-through payments other than those permitted under this [paragraph (d)](#d).
    - (i) In order to use a transition period described in this [paragraph (d)](#d), a State must demonstrate that it had pass-through payments for hospitals, physicians, or nursing facilities in:
      - (A) Managed care contract(s) and rate certification(s) for the rating period that includes July 5, 2016, and were submitted for CMS review and approval on or before July 5, 2016; or
      - (B) If the managed care contract(s) and rate certification(s) for the rating period that includes July 5, 2016 had not been submitted to CMS on or before July 5, 2016, the managed care contract(s) and rate certification(s) for a rating period before July 5, 2016 that had been most recently submitted for CMS review and approval as of July 5, 2016.
    - (ii) CMS will not approve a retroactive adjustment or amendment, notwithstanding the adjustments to the base amount permitted in [paragraph (d)(2)](#d-2) of this section, to managed care contract(s) and rate certification(s) to add new pass-through payments or increase existing pass-through payments defined in [paragraph (a)](#a) of this section.
  - (2) **Calculation of the base amount.** The base amount of pass-through payments is the sum of the results of paragraphs [(d)(2)(i)](#d-2-i) and [(ii)](#d-2-ii) of this section.
    - (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 that includes pass-through payments 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 12-month period immediately 2 years prior to the rating period that will include pass-through payments.
    - (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 that includes pass-through payments 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 the eligible populations for the 12-month period immediately 2 years prior to the rating period that will include pass-through payments.
    - (iii) The base amount must be calculated on an annual basis and is recalculated annually.
    - (iv) States may calculate reasonable estimates of the aggregate differences in paragraphs [(d)(2)(i)](#d-2-i) and [(ii)](#d-2-ii) of this section in accordance with the upper payment limit requirements in [42 CFR part 447](/cfr/42/part447.md).
  - (3) **Schedule for the reduction of the base amount of pass-through payments for hospitals under the MCO, PIHP, or PAHP contract and maximum amount of permitted pass-through payments for each year of the transition period.** For States that meet the requirement in [paragraph (d)(1)(i)](#d-1-i) of this section, pass-through payments for hospitals may continue to be required under the contract but must be phased out no longer than on the 10-year schedule, beginning with rating periods for contract(s) that start on or after July 1, 2017. For rating periods for contract(s) beginning on or after July 1, 2027, the State cannot require pass-through payments for hospitals under a MCO, PIHP, or PAHP contract. Until July 1, 2027, the total dollar amount of pass-through payments to hospitals may not exceed the lesser of:
    - (i) A percentage of the base amount, beginning with 100 percent for rating periods for contract(s) beginning on or after July 1, 2017, and decreasing by 10 percentage points each successive year; or
    - (ii) 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 [paragraph (d)(1)(i)](#d-1-i) of this section.
  - (4) **Documentation of the base amount for pass-through payments to hospitals.** All contract arrangements that direct pass-through payments under the MCO's, PIHP's or PAHP's contract for hospitals must document the calculation of the base amount in the rate certification required in [§ 438.7](/cfr/42/438.7.md). The documentation must include the following:
    - (i) The data, methodologies, and assumptions used to calculate the base amount;
    - (ii) The aggregate amounts calculated for paragraphs [(d)(2)(i)(A)](#d-2-i-A), [(d)(2)(i)(B)](#d-2-i-B), [(d)(2)(ii)(A)](#d-2-ii-A), [(d)(2)(ii)(B)](#d-2-ii-B) of this section; and
    - (iii) The calculation of the applicable percentage of the base amount available for pass-through payments under the schedule in [paragraph (d)(3)](#d-3) of this section.
  - (5) **Pass-through payments to physicians or nursing facilities.** For States that meet the requirement in [paragraph (d)(1)(i)](#d-1-i) of this section, rating periods for contract(s) beginning on or after July 1, 2017 through rating periods for contract(s) beginning on or after July 1, 2021, may continue to require pass-through payments to physicians or nursing facilities under the MCO, PIHP, or PAHP contract of no more than the total dollar amount of pass-through payments to physicians or nursing facilities, respectively, identified in the managed care contract(s) and rate certification(s) used to meet the requirement of [paragraph (d)(1)(i)](#d-1-i) of this section. For rating periods for contract(s) beginning on or after July 1, 2022, the State cannot require pass-through payments for physicians or nursing facilities under a MCO, PIHP, or PAHP contract.
  - (6) **Pass-through payments for States transitioning services and populations from a fee-for-service delivery system to a managed care delivery system.** Notwithstanding the restrictions on pass-through payments in paragraphs [(d)(1)](#d-1), [(3)](#d-3), and [(5)](#d-5) of this section, a State may require the MCO, PIHP, or PAHP to make pass-through payments to network providers that are hospitals, nursing facilities, or physicians under the contract, for each rating period of the transition period for up to 3 years, when Medicaid populations or services are initially transitioning from a fee-for-service (FFS) delivery system to a managed care delivery system, provided the following requirements are met:
    - (i) The services will be covered for the first time under a managed care contract and were previously provided in a FFS delivery system prior to the first rating period of the transition period.
    - (ii) The State made supplemental payments, as defined in [paragraph (a)](#a) of this section, to hospitals, nursing facilities, or physicians during the 12-month period immediately 2 years prior to the first year of the transition period.
    - (iii) The aggregate amount of the pass-through payments that the State requires the MCO, PIHP, or PAHP to make is less than or equal to the amounts calculated in paragraph [(d)(6)(iii)(A)](#d-6-iii-A), [(B)](#d-6-iii-B), or [(C)](#d-6-iii-C) of this section for the relevant provider type for each rating period of the transition period. In determining the amount of each component for the calculations contained in [paragraphs (d)(6)(iii)(A) through (C)](#d-6-iii-A..d-6-iii-C), the State must use the amounts paid for services during the 12-month period immediately 2 years prior to the first rating period of the transition period.
      - (A) **Hospitals.** For inpatient and outpatient hospital services, calculate the product of the actual supplemental payments paid and the ratio achieved by dividing the amount paid through payment rates for hospital services that are being transitioned from payment in a FFS delivery system to the managed care contract by the total amount paid through state plan approved rates for hospital services made in the State's FFS delivery system. Both the numerator and denominator of the ratio should exclude any supplemental payments made to the applicable providers.
      - (B) **Nursing facilities.** For nursing facility services, calculate the product of the actual supplemental payments paid and the ratio achieved by dividing the amount paid through state plan approved rates for nursing facility services that are being transitioned from payment in a FFS delivery system to the managed care contract by the total amount paid through payment rates for nursing facility services made in the State's FFS delivery system. Both the numerator and denominator of the ratio should exclude any supplemental payments made to the applicable providers.
      - (C) **Physicians.** For physician services, calculate the product of the actual supplemental payments paid and the ratio achieved by dividing the amount paid through state plan approved rates for physician services that are being transitioned from payment in a FFS delivery system to the managed care contract by the total amount paid through payment rates for physician services made in the State's FFS delivery system. Both the numerator and denominator of the ratio should exclude any supplemental payments made to the applicable providers.
    - (iv) The State may require the MCO, PIHP, or PAHP to make pass-through payments for Medicaid populations or services that are initially transitioning from a FFS delivery system to a managed care delivery system for up to 3 years from the beginning of the first rating period in which the services were transitioned from payment in a FFS delivery system to a managed care contract, provided that during the 3 years, the services continue to be provided under a managed care contract with an MCO, PIHP, or PAHP.
- (e) **Payments to MCOs and PIHPs for enrollees that are a patient in an institution for mental disease.** The State may make a monthly capitation payment to an MCO or PIHP for an enrollee aged 21-64 receiving inpatient treatment in an Institution for Mental Diseases, as defined in [§ 435.1010](/cfr/42/435.1010.md) of this chapter, so long as the facility is a hospital providing mental health or substance use disorder inpatient care or a sub-acute facility providing mental health or substance use disorder crisis residential services, and length of stay in the IMD is for a short term stay of no more than 15 days during the period of the monthly capitation payment. The provision of inpatient mental health or substance use disorder treatment in an IMD must meet the requirements for in lieu of services at [§ 438.3(e)(2)(i) through (iii)](/cfr/42/438.3.md?p=e-2-i..e-2-iii). For purposes of rate setting, the State may use the utilization of services provided to an enrollee under this section when developing the inpatient mental health or substance use disorder component of the capitation rate, but must price utilization at the cost of the same services through providers included under the State plan.

# §438.7. Rate certification submission.

- (a) **CMS review and approval of the rate certification.** States must submit to CMS for review and approval, all MCO, PIHP, and PAHP rate certifications concurrent with the review and approval process for contracts as specified in [§ 438.3(a)](/cfr/42/438.3.md?p=a).
- (b) **Documentation.** The rate certification must contain the following information:
  - (1) **Base data.** A description of the base data used in the rate setting process (including the base data requested by the actuary, the base data that was provided by the State, and an explanation of why any base data requested was not provided by the State) and of how the actuary determined which base data set was appropriate to use for the rating period.
  - (2) **Trend.** Each trend factor, including trend factors for changes in the utilization and price of services, applied to develop the capitation rates must be adequately described with enough detail so CMS or an actuary applying generally accepted actuarial principles and practices can understand and evaluate the following:
    - (i) The calculation of each trend used for the rating period and the reasonableness of the trend for the enrolled population.
    - (ii) Any meaningful difference in how a trend differs between the rate cells, service categories, or eligibility categories.
  - (3) **Non-benefit component of the rate.** The development of the non-benefit component of the rate must be adequately described with enough detail so 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. The actuary may document the non-benefit costs according to the types of non-benefit costs under [§ 438.5(e)](/cfr/42/438.5.md?p=e).
  - (4) **Adjustments.** All adjustments used to develop the capitation rates must be adequately described with enough detail so that CMS, or an actuary applying generally accepted actuarial principles and practices, can understand and evaluate all of the following:
    - (i) How each material adjustment was developed and the reasonableness of the material adjustment for the enrolled population.
    - (ii) **The cost impact of each material adjustment and the aggregate cost impact of non-material adjustments.**
    - (iii) Where in the rate setting process the adjustment was applied.
    - (iv) **A list of all non-material adjustments used in the rate development process.**
  - (5) **Risk adjustment.**
    - (i) All prospective risk adjustment methodologies must be adequately described with enough detail so that CMS or an actuary applying generally accepted actuarial principles and practices can understand and evaluate the following:
      - (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) All retrospective risk adjustment methodologies must be adequately described with enough detail so that CMS or an actuary applying generally accepted actuarial principles and practices can understand and evaluate the following:
      - (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) Application of an approved risk adjustment methodology to capitation rates does not require a revised rate certification because payment of capitation rates as modified by the approved risk adjustment methodology must be within the scope of the original rate certification. The State must provide to CMS the payment terms updated by the application of the risk adjustment methodology consistent with [§ 438.3(c)](/cfr/42/438.3.md?p=c).
  - (6) **Special contract provisions.** A description of any of the special contract provisions related to payment in [§ 438.6](/cfr/42/438.6.md) and ILOS in [§ 438.3(e)(2)](/cfr/42/438.3.md?p=e-2) that are applied in the contract.
- (c) **Rates paid under risk contracts.** The State, through its actuary, must certify the final capitation rate paid per rate cell under each risk contract and document the underlying data, assumptions and methodologies supporting that specific capitation rate.
  - (1) The State may pay each MCO, PIHP or PAHP a capitation rate under the contract that is different than the capitation rate paid to another MCO, PIHP or PAHP, so long as each capitation rate per rate cell that is paid is independently developed and set in accordance with this part.
  - (2) If the State determines that a retroactive adjustment to the capitation rate is necessary, the retroactive adjustment must be supported by a rationale for the adjustment and the data, assumptions and methodologies used to develop the magnitude of the adjustment must be adequately described with enough detail to allow CMS or an actuary to determine the reasonableness of the adjustment. These retroactive adjustments must be certified by an actuary in a revised rate certification and submitted as a contract amendment to be approved by CMS. All such adjustments are also subject to Federal timely claim filing requirements.
  - (3) The State may increase or decrease the capitation rate per rate cell, as required in [paragraph (c)](#c) of this section and [§ 438.4(b)(4)](/cfr/42/438.4.md?p=b-4), up to 1.5 percent during the rating period without submitting a revised rate certification, as required under [paragraph (a)](#a) of this section. However, any changes of the capitation rate within the permissible range must be consistent with a modification of the contract as required in [§ 438.3(c)](/cfr/42/438.3.md?p=c) and are subject to the requirements at [§ 438.4(b)(1)](/cfr/42/438.4.md?p=b-1). Notwithstanding the provisions in [paragraph (c)](#c) of this section, CMS may require a State to provide documentation that modifications to the capitation rate comply with the requirements in §§ [438.3(c)](/cfr/42/438.3.md?p=c) and [(e)](/cfr/42/438.3.md?p=e) and [438.4(b)(1)](/cfr/42/438.4.md?p=b-1).
  - (4) The State must submit a revised rate certification for any changes in the capitation rate per rate cell, as required under [paragraph (a)](#a) of this section for any special contract provisions related to payment described in [§ 438.6](/cfr/42/438.6.md) and ILOS in [§ 438.3(e)(2)](/cfr/42/438.3.md?p=e-2) not already described in the rate certification, regardless of the size of the change in the capitation rate per rate cell.
  - (5) Retroactive adjustments to the capitation rates, as outlined in [paragraph (c)(2)](#c-2) of this section, resulting from a State directed payment described in [§ 438.6(c)](/cfr/42/438.6.md?p=c) must be a result of adding or amending any State directed payment consistent with the requirements in [§ 438.6(c)](/cfr/42/438.6.md?p=c), or a material error in the data, assumptions or methodologies used to develop the initial capitation rate adjustment such that modifications are necessary to correct the error.
  - (6) The rate certification or retroactive adjustment to capitation rates resulting from any State directed payments must be submitted no later than 120 days after the start date of the State directed payment.
- (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 the information provided in addition to the rate certification is proffered by the State, the actuary, or another party.
- (e) **Provision of additional guidance.** CMS will issue guidance, at least annually, which includes all of the following:
  - (1) **The Federal standards for capitation rate development.**
  - (2) The documentation required to determine that the capitation rates are projected to provide for all reasonable, appropriate, and attainable costs that are required under the terms.
  - (3) The documentation required to determine that the capitation rates have been developed in accordance with the requirements of this part.
  - (4) Any updates or developments in the rate review process to reduce State burden and facilitate prompt actuarial reviews.
  - (5) The documentation necessary to demonstrate that capitation rates competitively bid through a procurement process have been established consistent with the requirements of [§§ 438.4 through 438.8](/cfr/42/438.4..438.8.md).
- (f) **Applicability dates.**
  - (1) [Paragraph (b)(6)](#b-6) of this section applies to the rating period for contracts with MCOs, PIHPs and PAHPs beginning on or after 60 days following July 9, 2024. Until that applicability date, States are required to continue to comply with [paragraph (b)(6)](#b-6) of this section contained in [42 CFR](/cfr/42.md), parts [430](/cfr/42/part430.md) to [481](/cfr/42/part481.md), edition most recently published prior to the final rule.
  - (2) [Paragraph (c)(6)](#c-6) of this section apply no later than the first rating period for contracts with MCOs, PIHPs and PAHPs beginning on or after 4 years after July 9, 2024.

# §438.8. Medical loss ratio (MLR) standards.

- (a) **Basic rule.** The State must ensure, through its contracts starting on or after July 1, 2017, that each MCO, PIHP, and PAHP calculate and report a MLR in accordance with this section. For multi-year contracts that do not start in 2017, the State must require the MCO, PIHP, or PAHP to calculate and report a MLR for the rating period that begins in 2017.
- (b) **Definitions.** As used in this section, the following terms have the indicated meanings:

  Credibility adjustment means an adjustment to the MLR for a partially credible MCO, PIHP, or PAHP to account for a difference between the actual and target MLRs that may be due to random statistical variation.

  Full credibility means a standard for which the experience of an MCO, PIHP, or PAHP is determined to be sufficient for the calculation of a MLR with a minimal chance that the difference between the actual and target medical loss ratio is not statistically significant. An MCO, PIHP, or PAHP that is assigned full credibility (or is fully credible) will not receive a credibility adjustment to its MLR.

  Member months mean the number of months an enrollee or a group of enrollees is covered by an MCO, PIHP, or PAHP over a specified time period, such as a year.

  MLR reporting year means a period of 12 months consistent with the rating period selected by the State.

  No credibility means a standard for which the experience of an MCO, PIHP, or PAHP is determined to be insufficient for the calculation of a MLR. An MCO, PIHP, or PAHP that is assigned no credibility (or is non-credible) will not be measured against any MLR requirements.

  Non-claims costs means those expenses for administrative services that are not: Incurred claims (as defined in [paragraph (e)(2)](#e-2) of this section); expenditures on activities that improve health care quality (as defined in [paragraph (e)(3)](#e-3) of this section); or licensing and regulatory fees, or Federal and State taxes (as defined in [paragraph (f)(2)](#f-2) of this section).

  Partial credibility means a standard for which the experience of an MCO, PIHP, or PAHP is determined to be sufficient for the calculation of a MLR but with a non-negligible chance that the difference between the actual and target medical loss ratios is statistically significant. An MCO, PIHP, or PAHP that is assigned partial credibility (or is partially credible) will receive a credibility adjustment to its MLR.

- (c) **MLR requirement.** If a State elects to mandate a minimum MLR for its MCOs, PIHPs, or PAHPs, that minimum MLR must be equal to or higher than 85 percent (the standard used for projecting actuarial soundness under [§ 438.4(b)](/cfr/42/438.4.md?p=b)) and the MLR must be calculated and reported for each MLR reporting year by the MCO, PIHP, or PAHP, consistent with this section.
- (d) **Calculation of the MLR.** The MLR experienced for each MCO, PIHP, or PAHP in a MLR reporting year is the ratio of the numerator (as defined in [paragraph (e)](#e) of this section) to the denominator (as defined in [paragraph (f)](#f) of this section). A MLR may be increased by a credibility adjustment, in accordance with [paragraph (h)](#h) of this section.
- (e) **Numerator—**
  - (1) **Required elements.** The numerator of an MCO's, PIHP's, or PAHP's MLR for a MLR reporting year is the sum of the MCO's, PIHP's, or PAHP's incurred claims (as defined in (e)(2) of this section); the MCO's, PIHP's, or PAHP's expenditures for activities that improve health care quality (as defined in [paragraph (e)(3)](#e-3) of this section); and fraud prevention activities (as defined in [paragraph (e)(4)](#e-4) of this section).
  - (2) **Incurred claims.**
    - (i) Incurred claims must include the following:
      - (A) Direct claims that the MCO, PIHP, or PAHP paid to providers (including under capitated contracts with network providers) for services or supplies covered under the contract and services meeting the requirements of [§ 438.3(e)](/cfr/42/438.3.md?p=e) provided to enrollees.
      - (B) Unpaid claims liabilities for the MLR reporting year, including claims reported that are in the process of being adjusted or claims incurred but not reported.
      - (C) **Withholds from payments made to network providers.**
      - (D) **Claims that are recoverable for anticipated coordination of benefits.**
      - (E) **Claims payments recoveries received as a result of subrogation.**
      - (F) Incurred but not reported claims based on past experience, and modified to reflect current conditions, such as changes in exposure or claim frequency or severity.
      - (G) **Changes in other claims-related reserves.**
      - (H) **Reserves for contingent benefits and the medical claim portion of lawsuits.**
    - (ii) Amounts that must be deducted from incurred claims include the following:
      - (A) **Overpayment recoveries received from network providers.**
      - (B) **Prescription drug rebates received and accrued.**
    - (iii) Expenditures that must be included in incurred claims include the following:
      - (A) The amount of incentive and bonus payments made, or expected to be made, to network providers that are tied to clearly-defined, objectively measurable, and well-documented clinical or quality improvement standards that apply to providers.
      - (B) The amount of claims payments recovered through fraud reduction efforts, not to exceed the amount of fraud reduction expenses. The amount of fraud reduction expenses must not include activities specified in [paragraph (e)(4)](#e-4) of this section.
      - (C) The amount of payments made to providers under State directed payments described in [§ 438.6(c)](/cfr/42/438.6.md?p=c).
    - (iv) Amounts that must either be included in or deducted from incurred claims include, respectively, net payments or receipts related to State mandated solvency funds.
    - (v) Amounts that must be excluded from incurred claims:
      - (A) **Non-claims costs, as defined in paragraph (b) of this section, which include the following—** (1) Amounts paid to third party vendors for secondary network savings.

        (2) Amounts paid to third party vendors for network development, administrative fees, claims processing, and utilization management.

        (3) Amounts paid, including amounts paid to a provider, for professional or administrative services that do not represent compensation or reimbursement for State plan services or services meeting the definition in [§ 438.3(e)](/cfr/42/438.3.md?p=e) and provided to an enrollee.

        (4) Fines and penalties assessed by regulatory authorities.

      - (B) **Amounts paid to the State as remittance under paragraph (j) of this section.**
      - (C) Amounts paid to network providers under to [§ 438.6(d)](/cfr/42/438.6.md?p=d).
    - (vi) Incurred claims paid by one MCO, PIHP, or PAHP that is later assumed by another entity must be reported by the assuming MCO, PIHP, or PAHP for the entire MLR reporting year and no incurred claims for that MLR reporting year may be reported by the ceding MCO, PIHP, or PAHP.
  - (3) **Activities that improve health care quality.** Activities that improve health care quality must be in one of the following categories:
    - (i) An MCO, PIHP, or PAHP activity that meets the requirements of 45 CFR [158.150(a)](/cfr/45/158.150.md?p=a) and [(b)](/cfr/45/158.150.md?p=b) and is not excluded under [45 CFR 158.150(c)](/cfr/45/158.150.md?p=c).
    - (ii) An MCO, PIHP, or PAHP activity related to any EQR-related activity as described in § [438.358(b)](/cfr/42/438.358.md?p=b) and [(c)](/cfr/42/438.358.md?p=c).
    - (iii) Any MCO, PIHP, or PAHP expenditure that is related to Health Information Technology and meaningful use, meets the requirements placed on issuers found in [45 CFR 158.151](/cfr/45/158.151.md), and is not considered incurred claims, as defined in [paragraph (e)(2)](#e-2) of this section.
  - (4) **Fraud prevention activities.** MCO, PIHP, or PAHP expenditures on activities related to fraud prevention consistent with regulations adopted for the private market at [45 CFR part 158](/cfr/45/part158.md). Expenditures under this paragraph must not include expenses for fraud reduction efforts in [paragraph (e)(2)(iii)(B)](#e-2-iii-B) of this section.
- (f) **Denominator—**
  - (1) **Required elements.** The denominator of an MCO's, PIHP's, or PAHP's MLR for a MLR reporting year must equal the adjusted premium revenue. The adjusted premium revenue is the MCO's, PIHP's, or PAHP's premium revenue (as defined in [paragraph (f)(2)](#f-2) of this section) minus the MCO's, PIHP's, or PAHP's Federal, State, and local taxes and licensing and regulatory fees (as defined in [paragraph (f)(3)](#f-3) of this section) and is aggregated in accordance with paragraph (i) of this section.
  - (2) **Premium revenue.** Premium revenue includes the following for the MLR reporting year:
    - (i) State capitation payments, developed in accordance with [§ 438.4](/cfr/42/438.4.md), to the MCO, PIHP, or PAHP for all enrollees under a risk contract approved under [§ 438.3(a)](/cfr/42/438.3.md?p=a), excluding payments made under [§ 438.6(d)](/cfr/42/438.6.md?p=d).
    - (ii) **State-developed one time payments, for specific life events of enrollees.**
    - (iii) Other payments to the MCO, PIHP, or PAHP approved under [§ 438.6(b)(3)](/cfr/42/438.6.md?p=b-3).
    - (iv) Unpaid cost-sharing amounts that the MCO, PIHP, or PAHP could have collected from enrollees under the contract, except those amounts the MCO, PIHP, or PAHP can show it made a reasonable, but unsuccessful, effort to collect.
    - (v) **All changes to unearned premium reserves.**
    - (vi) Net payments or receipts related to risk sharing mechanisms developed in accordance with [§ 438.5](/cfr/42/438.5.md) or [§ 438.6](/cfr/42/438.6.md).
    - (vii) Payments to the MCO, PIHP, or PAHP for expenditures under State directed payments described in [§ 438.6(c)](/cfr/42/438.6.md?p=c).
  - (3) **Federal, State, and local taxes and licensing and regulatory fees.** Taxes, licensing and regulatory fees for the MLR reporting year include:
    - (i) **Statutory assessments to defray the operating expenses of any State or Federal department.**
    - (ii) **Examination fees in lieu of premium taxes as specified by State law.**
    - (iii) Federal taxes and assessments allocated to MCOs, PIHPs, and PAHPs, excluding Federal income taxes on investment income and capital gains and Federal employment taxes.
    - (iv) **State and local taxes and assessments including—**
      - (A) Any industry-wide (or subset) assessments (other than surcharges on specific claims) paid to the State or locality directly.
      - (B) **Guaranty fund assessments.**
      - (C) Assessments of State or locality industrial boards or other boards for operating expenses or for benefits to sick employed persons in connection with disability benefit laws or similar taxes levied by States.
      - (D) State or locality income, excise, and business taxes other than premium taxes and State employment and similar taxes and assessments.
      - (E) State or locality premium taxes plus State or locality taxes based on reserves, if in lieu of premium taxes.
    - (v) Payments made by an MCO, PIHP, or PAHP that are otherwise exempt from Federal income taxes, for community benefit expenditures as defined in [45 CFR 158.162(c)](/cfr/45/158.162.md?p=c), limited to the highest of either:
      - (A) Three percent of earned premium; or
      - (B) The highest premium tax rate in the State for which the report is being submitted, multiplied by the MCO's, PIHP's, or PAHP's earned premium in the State.
  - (4) **Denominator when MCO, PIHP, or PAHP is assumed.** The total amount of the denominator for a MCO, PIHP, or PAHP which is later assumed by another entity must be reported by the assuming MCO, PIHP, or PAHP for the entire MLR reporting year and no amount under this paragraph for that year may be reported by the ceding MCO, PIHP, or PAHP.
- (g) **Allocation of expense—**
  - (1) **General requirements.**
    - (i) Each expense must be included under only one type of expense, unless a portion of the expense fits under the definition of, or criteria for, one type of expense and the remainder fits into a different type of expense, in which case the expense must be pro-rated between types of expenses.
    - (ii) Expenditures that benefit multiple contracts or populations, or contracts other than those being reported, must be reported on a pro rata basis.
  - (2) **Methods used to allocate expenses.**
    - (i) Allocation to each category must be based on a generally accepted accounting method that is expected to yield the most accurate results.
    - (ii) Shared expenses, including expenses under the terms of a management contract, must be apportioned pro rata to the contract incurring the expense.
    - (iii) Expenses that relate solely to the operation of a reporting entity, such as personnel costs associated with the adjusting and paying of claims, must be borne solely by the reporting entity and are not to be apportioned to the other entities.
- (h) **Credibility adjustment.**
  - (1) A MCO, PIHP, or PAHP may add a credibility adjustment to a calculated MLR if the MLR reporting year experience is partially credible. The credibility adjustment is added to the reported MLR calculation before calculating any remittances, if required by the State as described in [paragraph (j)](#j) of this section.
  - (2) A MCO, PIHP, or PAHP may not add a credibility adjustment to a calculated MLR if the MLR reporting year experience is fully credible.
  - (3) If a MCO's, PIHP's, or PAHP's experience is non-credible, it is presumed to meet or exceed the MLR calculation standards in this section.
  - (4) CMS will publish base credibility factors for MCOs, PIHPs, and PAHPs that are developed according to the following methodology:
    - (i) CMS will use the most recently available and complete managed care encounter data or FFS claims data, and enrollment data, reported by the states to CMS. This data may cover more than 1 year of experience.
    - (ii) CMS will calculate the credibility adjustment so that a MCO, PIHP, or PAHP receiving a capitation payment that is estimated to have a medical loss ratio of 85 percent would be expected to experience a loss ratio less than 85 percent 1 out of every 4 years, or 25 percent of the time.
    - (iii) The minimum number of member months necessary for a MCO's, PIHP's, or PAHP's medical loss ratio to be determined at least partially credible will be set so that the credibility adjustment would not exceed 10 percent for any partially credible MCO, PIHP, or PAHP. Any MCO, PIHP, or PAHP with enrollment less than this number of member months will be determined non-credible.
    - (iv) The minimum number of member months necessary for an MCO's, PIHP's, or PAHP's medical loss ratio to be determined fully credible will be set so that the minimum credibility adjustment for any partially credible MCO, PIHP, or PAHP would be greater than 1 percent. Any MCO, PIHP, or PAHP with enrollment greater than this number of member months will be determined to be fully credible.
    - (v) A MCO, PIHP, or PAHP with a number of enrollee member months between the levels established for non-credible and fully credible plans will be deemed partially credible, and CMS will develop adjustments, using linear interpolation, based on the number of enrollee member months.
    - (vi) CMS may adjust the number of enrollee member months necessary for a MCO's, PIHP's, or PAHP's experience to be non-credible, partially credible, or fully credible so that the standards are rounded for the purposes of administrative simplification. The number of member months will be rounded to 1,000 or a different degree of rounding as appropriate to ensure that the credibility thresholds are consistent with the objectives of this regulation.
    - (i) **Aggregation of data.** MCOs, PIHPs, or PAHPs will aggregate data for all Medicaid eligibility groups covered under the contract with the State unless the State requires separate reporting and a separate MLR calculation for specific populations.
- (j) **Remittance to the State if specific MLR is not met.** If required by the State, a MCO, PIHP, or PAHP must provide a remittance for an MLR reporting year if the MLR for that MLR reporting year does not meet the minimum MLR standard of 85 percent or higher if set by the State as described in [paragraph (c)](#c) of this section.
- (k) **Reporting requirements.**
  - (1) The State, through its contracts, must require each MCO, PIHP, or PAHP to submit a report to the State that includes at least the following information for each MLR reporting year:
    - (i) **Total incurred claims.**
    - (ii) **Expenditures on quality improving activities.**
    - (iii) **Fraud prevention activities as defined in paragraph (e)(4) of this section.**
    - (iv) **Non-claims costs.**
    - (v) **Premium revenue.**
    - (vi) **Taxes, licensing and regulatory fees.**
    - (vii) Methodology(ies) for allocation of expenditures, which must include a detailed description of the methods used to allocate expenses, including incurred claims, quality improvement expenses, Federal and State taxes and licensing or regulatory fees, and other non-claims costs, as described in [45 CFR 158.170(b)](/cfr/45/158.170.md?p=b).
    - (viii) **Any credibility adjustment applied.**
    - (ix) **The calculated MLR.**
    - (x) **Any remittance owed to the State, if applicable.**
    - (xi) A comparison of the information reported in this paragraph with the audited financial report required under [§ 438.3(m)](/cfr/42/438.3.md?p=m).
    - (xii) **A description of the aggregation method used under paragraph (i) of this section.**
    - (xiii) **The number of member months.**
  - (2) A MCO, PIHP, or PAHP must submit the report required in [paragraph (k)(1)](#k-1) of this section in a timeframe and manner determined by the State, which must be within 12 months of the end of the MLR reporting year.
  - (3) MCOs, PIHPs, or PAHPs must require any third party vendor providing claims adjudication activities to provide all underlying data associated with MLR reporting to that MCO, PIHP, or PAHP within 180 days of the end of the MLR reporting year or within 30 days of being requested by the MCO, PIHP, or PAHP, whichever comes sooner, regardless of current contractual limitations, to calculate and validate the accuracy of MLR reporting.
- (l) **Newer experience.** A State, in its discretion, may exclude a MCO, PIHP, or PAHP that is newly contracted with the State from the requirements in this section for the first year of the MCO's, PIHP's, or PAHP's operation. Such MCOs, PIHPs, or PAHPs must be required to comply with the requirements in this section during the next MLR reporting year in which the MCO, PIHP, or PAHP is in business with the State, even if the first year was not a full 12 months.
- (m) **Recalculation of MLR.** In any instance where a State makes a retroactive change to the capitation payments for a MLR reporting year where the report has already been submitted to the State, the MCO, PIHP, or PAHP must re-calculate the MLR for all MLR reporting years affected by the change and submit a new report meeting the requirements in [paragraph (k)](#k) of this section.
- (n) **Attestation.** MCOs, PIHPs, and PAHPs must attest to the accuracy of the calculation of the MLR in accordance with requirements of this section when submitting the report required under [paragraph (k)](#k) of this section.