---
kind: "section"
citation: "42 C.F.R. § 457.1203"
title: "42"
number: "457.1203"
heading: "Rate development standards and medical loss ratio."
url: "https://uscodex.org/cfr/42/457.1203"
---

# §457.1203. Rate development standards and medical loss ratio.

- (a) A state must use payment rates based on public or private payment rates for comparable services for comparable populations, consistent with actuarially sound principles as defined at [§ 457.10](/cfr/42/457.10.md). This requirement for using actuarially sound principles to develop payment rates does not prohibit a state from implementing 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; such alternate payment models should be developed using actuarially sound principles to the extent applicable.
- (b) A State may establish higher rates than permitted under [paragraph (a)](#a) of this section if such rates are necessary to ensure sufficient provider participation or provider access or to enroll providers who demonstrate exceptional efficiency or quality in the provision of services.
- (c) The rates must be designed to reasonably achieve a medical loss ratio standard, calculated in accordance with the provisions of [§ 438.8](/cfr/42/438.8.md) of this chapter, that—
  - (1) Is equal to at least 85 percent for the rate year; and
  - (2) **Provides for reasonable administrative costs.**
- (d) The State must provide to CMS, if requested, a description of the manner in which rates were developed in accordance with the requirements of paragraphs [(a)](#a), [(b)](#b), or [(c)](#c) of this section.
- (e) The State must comply with the requirements related to medical loss ratios in accordance with the terms of [§ 438.74](/cfr/42/438.74.md) of this chapter, except contract arrangements described in [§ 438.6(c)](/cfr/42/438.6.md?p=c) do not apply and the description of the reports received from the MCOs, PIHPs and PAHPs under [§ 438.8(k)](/cfr/42/438.8.md?p=k) of this chapter will be submitted independently, and not with the rate certification described in [§ 438.7](/cfr/42/438.7.md) of this chapter.
- (f) The State must ensure, through its contracts, that each MCO, PIHP, and PAHP complies with the requirements in [§ 438.8](/cfr/42/438.8.md) of this chapter, except that contract arrangements described in [§ 438.6(c)](/cfr/42/438.6.md?p=c) do not apply.

## Notes

### Amendments

[81 FR 27897, May 6, 2016, as amended at 82 FR 40, Jan. 3, 2017; 89 FR 41285, May 10, 2024]

### Source

Source: 81 FR 27897, May 6, 2016, unless otherwise noted.

### Authority

Authority: 42 U.S.C. 1302.

### Source

Source: 65 FR 33622, May 24, 2000, unless otherwise noted.

### Amendments

[81 FR 27897, May 6, 2016, as amended at 82 FR 40, Jan. 3, 2017; 89 FR 41285, May 10, 2024]