Medicaid’s Costly Middlemen: Managed Care Organizations

The lede to Chris Pope's report on Medicaid Middlemen:

https://manhattan.institute/article/reining-in-medicaid-managed-care

Reining in Medicaid Managed Care
By Chris Pope - May 28, 2026

Table of Contents

• Executive Summary
• What Is Medicaid Managed Care?
• The Debate Over Medicaid Managed Care
• Evidence on MMC
• Recommendations
• Conclusion
• Appendix
• About the Author
• Endnotes

Executive Summary

When Medicaid, the U.S. program that purchases health care for the poorest Americans, originally went into effect, states paid directly for health-care services provided to beneficiaries. But in recent decades, states increasingly subcontract procurement to private insurers known as managed care organizations (MCOs). From 1992 to 2022, the proportion of Medicaid beneficiaries enrolled in MCOs increased from 9% to 77%. This health-care delivery system of state Medicaid agencies contracting with MCOs is called Medicaid managed care (MMC).

Private insurers design benefits, raise funds, manage risk, and develop networks of providers to treat their policyholders. But in MMC, the government dictates the bulk of benefits, provides all of the revenue, carries most of the risk, and largely determines the terms of payment to medical providers.

States argue that their employment of MCOs reduces costs and improves benefits. However, payments to these private insurers are usually not set through competitive bidding; the nature of plan expenditures cannot easily be compared from state to state; and there is little evidence of savings being passed on to taxpayers. In fact, the lack of transparency has encouraged states to increasingly use MCOs to bypass traditional restrictions on the amount and purposes for which they can claim federal Medicaid matching funding.

Federal policymakers have exempted MMC from many regulatory constraints on payments for Medicaid services under the assumption that it is inherently more cost-effective. This is a mistake. Payments made to Medicaid MCOs should be subject to stricter federal controls and their activities subject to much greater transparency. This will ensure that Medicaid’s structure gives taxpayers the best value for money.

What Is Medicaid Managed Care?

Medicaid is a system of federal matching funds for states to provide comprehensive health-care benefits to low-income residents. Initially, states paid health-care providers directly to treat Medicaid beneficiaries, but over recent decades they have increasingly used private insurers known as MCOs to purchase services.

The federal government generally provides between $1 and $3 to states for every $1 that states spend on health-care benefits for most Medicare beneficiaries, with higher-income states entitled to a higher matching rate. States may also claim $9 in federal funding for every $1 that they spend on health-care services for beneficiaries made eligible by the 2010 Affordable Care Act.

State Medicaid programs must provide a basic set of health-care and long-term care benefits to a core group of beneficiaries. But they may also claim federal matching funding to provide additional benefits to those beneficiaries or to expand Medicaid eligibility to a broader set of residents.[1]

There is no upper limit on the total federal matching funds that each state may claim for its own Medicaid expenditures. But the ability of states to claim federal funding is supposed to be limited to covered health-care and long-term care services, beneficiaries who are eligible for Medicaid, and payment amounts sufficient to enlist enough health-care providers to provide these services.

After Medicaid’s establishment in 1965, MMC was gradually expanded through waivers. The first managed care pilot was developed in 1968 in California, and managed care was implemented on a statewide basis from 1971.[2] Congress found that MCOs took advantage of this system to provide inadequate networks and engage in profiteering. In 1976, lawmakers sought to ensure quality care by limiting MCO participation to insurance plans that had more privately funded enrollees than Medicaid beneficiaries.[3] This requirement was gradually loosened before the Balanced Budget Act of 1997 formally permitted states to contract with Medicaid-only MCOs under specific regulations that ensured an adequate provider network and quality assurance.[4]

With broad support from policymakers at state and federal levels, the proportion of Medicaid spending distributed through MMC greatly expanded over recent decades. In 2022, it accounted for 77% of Medicaid enrollees and 54% of the program’s spending (Figure 1).

Managed care share rose steadily, reaching about 75% of Medicaid enrollment and about 55% of spending by 2022.
Comprehensive MMC is currently employed to varying degrees by 41 states and the District of Columbia.[6] In 2024, the proportion of Medicaid spending distributed through MMC in these states ranged from 3% in Colorado to 91% in Iowa (Figure 2).

Most states directed at least half of Medicaid spending to comprehensive managed care in 2024, with substantial variation by state.
Most states use MMC to deliver Medicaid benefits to children and able-bodied adults, but many still rely on direct payments to finance services for disabled and elderly beneficiaries whose medical needs are more complex (Figure 3). Behavioral health services, substance abuse treatment, and dental care are also typically carved out of MMC contracts. In 2021, only 24 states paid for long-term care though managed care.[8] Until the 2010 Affordable Care Act allowed MCOs to claim Medicaid’s mandatory discounts on prescription drugs, most states also carved drugs out of managed care.

Managed care enrollment is highest for children and new adults and lowest for elderly beneficiaries across states in 2022.
States may allow Medicaid beneficiaries to opt for managed care plans or may require them to do so. If states require beneficiaries to enroll in managed care, they must provide a choice of at least two plans. Beneficiaries who do not choose plans may be auto-assigned to an MCO. Nationwide, 45% of beneficiaries are in plans to which they were assigned by states.[10]

MCOs must cover all mandatory Medicaid benefits and optional benefits established by states. That means they must generally provide access to hospital and physician services without charging beneficiaries premiums or out-of-pocket costs. MCOs are subject to network adequacy requirements for primary care, specialist physicians, hospitals, pharmacists, behavioral health providers, and pediatric dentists. They must also report physician fees, service utilization, quality-of-care metrics, and denials of payment due to prior authorization.[11] States must assure the solvency of MCOs and ensure that plans spend at least 85% of their revenues on health-care services.[12]

States typically contract with MCOs for three- to five-year periods, with contracts subject to approval by the Centers for Medicare & Medicaid Services (CMS). States have wide discretion over the content of contracts beyond the minimum federal requirements.[13]

State Medicaid programs generally pay MCOs up-front monthly fees for each beneficiary enrolled.[14] Federal law requires these payments to be “actuarially sound”—in other words, “projected to provide for all reasonable, appropriate, and attainable costs.” That means they must cover the price and volume of services consumed by Medicaid beneficiaries. As a result, state payments to MCOs are typically indexed for the expected increase in medical prices.

States can set different rates for subcategories of enrollees (such as the disabled or children) or risk-adjust payments according to age and health status. These risk adjustments may be based on beneficiaries’ medical diagnoses or their use of medical services. States may also choose to compensate MCOs for certain costly patients (such as those suffering from AIDS) on a fee-for-service basis or to provide add-on “kick payments” for unanticipated costs (such as childbirth). States may provide additional bonus payments to plans for compliance with target metrics, such as the quality of medical care or reductions in racial health disparities.[15] They also often provide additional ad hoc payments to ensure the solvency of plans, if actual costs exceed earlier official projections.

MCOs have some freedom over the procurement of medical care. For example, MMC payments to hospitals are exempt from “upper payment limits” on Medicaid hospital fees, which would otherwise limit the federal matching funds for states. In 2016, CMS formally authorized “state-directed payments” to allow states to specify terms of payment from MCOs to hospitals at levels greatly exceeding those which Medicare would pay. States may also require MCOs to pay for nonmedical goods “in lieu of services,” which would not otherwise be eligible for federal matching funds......

The MDHHS summary of the Michigan MCO situation is a three page pdf document which doesn't lend itself to reproduction on this site:

https://www.medicaid.gov/Medicaid/downloads/michigan-mcp.pdf