Medicaid Capitation Rates: Implications and Options

17 Min Read

May 01, 2002


Susan W. Kannarr, J.D.


Policy Implications for Kansas

    • Managed care organizations (MCOs) may be unwilling to bid on Medicaid business if capitation rates are seen as inadequate.
    • Lack of interest among MCOs in bidding can reduce the state’s options for purchasing services and can put the state in a weaker bargaining position with MCOs.
    • Low payment rates to health care providers may limit the number willing to participate in Medicaid and the number of Medicaid patients participating providers are willing to see.
    • Fewer participating providers may negatively affect access to services for Medicaid beneficiaries.


The rates paid to managed care organizations1 (MCOs) and providers affect the ability of the Medicaid program to ensure benefi­ciaries have access to quality health care. MCOs and individual providers may choose not to partici­pate in the Kansas Medicaid pro­gram if payment rates are set too low. The state, on the other hand, must set rates within boundaries determined by fiscal considerations and regulatory limits.

In November 2000, the Kansas Health Institute convened a group of legislators, provider representatives, state agency officials and other poli­cymakers to discuss issues around Medicaid managed care payment rates in Kansas. As a follow-up, this issue brief will expand on that discussion. Specifically, the brief will provide background information on the Kansas Medicaid managed care program; a discussion of Kansas rates and their potential impacts; an overview of how rates are estab­lished; a summary of financial issues; and a glossary of terms.

Medicaid Managed Care in Kansas

During the 1990s, a large number of states began implementing man­aged care within their Medicaid programs. Reasons for implementing Medicaid managed care included the need to control costs due to overpro­vision of services in the fee-for-service environment and to improve beneficiary access and continuity of care.2 Joining a growing national trend, Kansas passed legislation in 1993 and 1994 requiring the Department of Social and Rehabilitation Services (SRS) to implement managed care in the Medicaid program. In Kansas, Medicaid managed care takes two different forms, capitated managed care and primary care case management. Certain Medicaid participants, largely low-income women and children, are required to participate in managed care.

In the capitated managed care system, SRS pays an MCO a fixed sum per enrollee — a capitation rate — for a required set of services to be delivered to each Medicaid beneficiary enrolled in the MCO. This form of payment is intended to transfer to MCOs the financial risk for beneficiaries who require ser­vices that are more costly than the fixed sum they received from the state. In addition, the MCOs, and not the state, are primarily responsible for recruiting sufficient providers to maintain access for the beneficiaries. However, SRS, by federal law, still maintains ultimate responsibility for assuring beneficiaries have access to services. The MCOs negotiate a fee schedule with providers which may or may not mirror the Medicaid fee-for­service schedule. Kansas’ capitated pro­gram (formerly known as PrimeCare Kansas) has recently been blended with the State Children’s Health Insurance Program and is now part of the HealthWave program. Mental health and dental care are carved-out of the benefit package MCOs are required to provide. These services are provided through a separate system of care. Medicaid capitated managed care is available in 63 counties.

The Primary Care Case Manager (PCCM) model is a more limited form of managed care. Under this system, SRS contracts with physicians who, as PCCMs, take responsibility for coordinating beneficiaries’ care in exchange for a monthly fee of two dollars per beneficiary. Individual services provided by the PCCM or through referral are paid on a fee-for-service basis. Kansas’ PCCM program is called HealthConnect Kansas and is available statewide. This issue brief will focus only on the capitated form of managed care.

 Key Questions for Policymakers

    • Given the potential effect of low Medicaid payment rates on provider participation and bene­ficiary access, how can Kansas balance the desire to improve or maintain access and the need to be fiscally responsible?
    • The state’s ability to increase capitation rates currently is dependent on fee-for-service rates. If federal constraints on capitation rates are reduced or eliminated in 2002, how will Kansas respond given the potential costs involved?
    • In light of the challenges encountered thus far, what is the level of commitment Kansas has to Medicaid capitated managed care?

Capitation Rates and Their Potential Impacts

MCOs typically consider the capita­tion rates paid by SRS for Medicaid patients to be too low. Health care providers in Kansas also believe that the payment rates they accept from Medicaid MCOs are too low. Research indicates that reimbursement rates can affect both access to health care services and health outcomes for Medicaid beneficiaries.3 The adequacy of the established rates can be examined from several perspectives. These include comparisons between Kansas rates and rates paid by other states and assessments of beneficiaries’ access to health care services.

Comparisons to Other States

Assessing rate adequacy by comparing Kansas to other states is helpful, but comparison studies should be used with caution. Inter-state comparisons are complicated by many factors including variations in how states set rates, the use of different age categories, the use of rate adjustments by some states for special services and differences in the services included in the capitation rate. Also, rates considered adequate in one state may not be in another, so comparisons by themselves do not indicate the relative adequacy of a state’s reimbursement rates. With these points in mind, consider the following studies:

    • Preliminary information obtained from the Maternal and Child Health Research Center in Washington, D.C., shows that 1999 Medicaid capitation rates for children in Kansas were the lowest of 42 states included in a comparison study.4 Kansas capitation rates ranged from 25-33 percent of the national average. Kansas rates remained low when compared to other states that also carve-out services such as mental health and dental care from the capitated benefit package. In this second com­parison, Kansas rates were 40 per­cent of the national average.
    • Another study comparing Medicaid rates across states for all low-income families and pregnant women in capitated managed care provides similar information. This study based on 1998 rates ranks Kansas near the bottom with only California, Florida, Georgia and Tennessee ranking below Kansas. Kansas rates were 82 percent of the national average.5
    • A 1997 study of the Medicaid physician fee schedule found that Kansas rates were approximately 84 percent of a four-state average.6
    • Information from the American Academy of Pediatrics’ Medicaid Reimbursement Survey for 1998/1999 that examined selected fee-for-service rates suggested that although the selected Medicaid fee-for-service rates in Kansas compared more favorably to other states than capitation rates, they were also below the national average.7

Access to Health Care Services

Improving access to services was one of the original goals in implement­ing managed care and continues to be an important issue for states. The degree to which beneficiaries have adequate access to health care services can be difficult to measure. One method of measuring access is by examining the availability of health plans and providers in the Medicaid program.

The issue then becomes the causal relationship between payment rates and participation.

Health Plan Participation

After an early influx of commercial MCOs into Medicaid in the early 1990s, a growing number of MCOs are exiting the program or are hesitant to take on Medicaid business due in part to inadequate capitation rates.8 The issue of low capitation rates in Kansas became apparent when two of the state’s three Medicaid health plans dropped out of the program at the end of 1998 largely due to low rates. The only remaining MCO, Horizon Health Plan, went out of business in the spring of 1999. Its Medicaid business was assumed by First Guard Kansas, which is now the only Medicaid health plan in the state.

In 2001, for the first time, Kansas requested bids from health plans to serve participants in both the Medicaid and State Children’s Health Insurance Program (HealthWave). The blended program began operation in October 2001 under the name HealthWave. During the bidding process, it became more clear that low Medicaid capitation rates affect the state’s ability to contract with MCOs. Only one health plan, First Guard Kansas, bid on the blended program and was awarded the contract. According to information from SRS, a second MCO that had been involved with HealthWave since its implementation declined to bid on the blended program citing low Medicaid reimbursement rates as a financial risk it was unwilling to accept.

A number of hypotheses have been put forward to help explain why MCOs are making the decision to exit or refuse to enter Medicaid. Some of the factors cited are listed in the box on this page.9 Another factor may be the level of provider capacity in the state. Proposed federal regulations to imple­ment portions of the Balanced Budget Act of 1997 may also negatively affect the willingness of MCOs to participate in Medicaid in the future, because the regulations would impose significant administrative responsibilities on states and MCOs.

Provider Participation

Research indicates that provider decisions on whether to participate in Medicaid or the number of Medicaid clients existing providers are willing to see are affected by payment levels.10 However, as with health plans, reasons for participation or non-participation in Medicaid are more complex than payment amounts alone. The bigger question is whether participation rates are adequate to serve Medicaid beneficia­ries. This question can be difficult to answer because it is not only the number of providers but also the number of beneficiaries they are willing to see and the amount of capacity open in their practices that determine adequacy.

Infographic Factors affecting health plan decisions to leave or refuse to participate in Medicaid

Limited information is available regarding provider participation rates in Medicaid. However, results from a preliminary analysis of Kansas primary care providers in state fiscal year 2000 for managed care and fee-for-service populations indicates that 95 Kansas counties are underserved by Medicaid participating physicians.11 The analysis also estimates that of 1,510 primary care physician FTEs in the state, approximately 177 are available to Medicaid beneficiaries. There are a number of limitations to this analysis, and the results should be used with some caution.12

Chart showing selected results of pediatrician survey

According to a recent national sur­vey of pediatricians regarding partici­pation in Medicaid and the State Children’s Health Insurance Program (SCHIP), participation by Kansas pedi­atricians is similar to national and regional participation.13 The box above illustrates some results from the survey. The study also found that pediatricians are more likely to accept all private patients than all Medicaid/SCHIP patients. Note that this survey looks at participation in Medicaid as a whole and not just the capitated managed care program. Also, pediatricians are only one of the provider types that serve Medicaid beneficiaries.

The same survey indicated that approximately one in four Kansas pedi­atricians would be willing to see more Medicaid patients if reimbursement was increased.14 The box on this page also shows the level of the pediatricians’ customary fees for a well-child visit they say they would need to receive from Medicaid to increase Medicaid participation. Limited infor­mation is available concerning the amount of increase in fees needed to induce significantly higher provider participation across all types of providers and services. Some studies conclude that raising primary care rates has limited effects on overall Medicaid participation.15 Other research has estimated that substantial rate increases (e.g. to rates higher than those paid by Medicare) are required to increase access beyond a trivial amount.16 Medicaid participation levels may be more attributable to practice capacities, distribution and availability of the provider type to the general population than to payment levels, especially in medical specialties and dentistry.

Establishing Capitation Rates

Kansas and other states have strug­gled with establishing capitation rates within regulatory and fiscal limits while trying to attract MCOs into con­tracts to serve Medicaid beneficiaries. Medicaid capitation amounts are calculated based on fee-for-service rates.

Because fee-for-service rates in Kansas are generally low when measured against other states, the resulting capi­tation rates are also comparably low.17

Quote: the rates paid to managed care organizations and providers affect the ability of the Medicaid program to ensure beneficiaries have access to quality health care.

Within general federal guidelines, states have a great deal of flexibility in establishing the payment rates to individual providers (fee-for-service rates). However, there are significant federal restrictions on the establishment of capitation rates. Under federal law, capitated rates may not exceed fee-for-service costs in an equivalent population. This is referred to as the Upper Payment Limit (UPL). A state’s total managed care program (both capitated and non­capitated models) must be cost effec­tive. In the simplest terms, this means that the costs for operating a managed care program must be less than or equal to costs for operating a fee-for-service system. Therefore, without an increase in the fee-for-service base, there is a limit to the amount Kansas can adjust capitation rates paid to MCOs.

The federal government is in the process of proposing changes that will eliminate the UPL and create a new system for calculating capitation rates that grants states more flexibility. Specifically, the newest proposed regu­lations remove UPL requirements and insert specific requirements for state rate setting methods that are intended to ensure actuarially sound capitation rates and risk-sharing mechanisms.18 Regulations containing these changes as well as a number of other managed care provisions are part of the Balanced Budget Act of 1997 and have been delayed in the regulatory process. The latest publication of the proposed regulations sets an effective date of August 2002. Assuming these regulations become effective, Kansas will need to evaluate its priorities, determine its commitment to Medicaid managed care and decide how or whether capita­tion rates should be adjusted.

The process of developing Medicaid capitation rates and attracting health plans is very complex. Medicaid pro­grams must consider a variety of fac­tors in determining what rates will properly compensate MCOs and ensure public dollars are spent appropriately. These factors include MCO medical costs (the cost of health services), administrative costs, the level of risk the health plan is accepting, the opportunity for third-party payment sources such as auto insurance or other insur­ance policies to share in the cost of providing services to beneficiaries, and allowances for MCO profits. Benefit packages in Medicaid programs tend to be much more specialized than stan­dard commercial packages, adding additional complexity for states seeking to contract with commercial MCOs. States must also balance their “purchaser” role with the traditional responsibilities Medicaid has assumed over the years including the protection of safety-net providers, serving other pop­ulations that do not participate in managed care, financing other types of services such as those for mentally ill and developmentally disabled persons and funding medical education in academic health centers.

Financial Issues

Like many other states, Kansas has not made systematic adjustments to the Medicaid fee-for-service reimbursement rate schedule over the last 35 years. Instead, rate increases have been sporadic and have often been made in response to federal mandates or local crises. States must continually evaluate their priorities and consider the availability of financial resources to sustain Medicaid programs in the long term.

A combination of additional funding from the Legislature and administrative changes has increased capitation rate revenues to MCOs between fiscal year (FY) 1998 and FY 2002. Kansas rate setting methodology considers geographic region, gender, age, and eligi­bility category. Taking these factors into account and applying several assumptions about numbers of beneficiaries,19 revenues to the Medicaid MCO for FY 2002 are expected to exceed FY 2001 revenues by 17.1 per­cent. Increases in rates from July 1, 1998 to July 1, 2000 ranged between 16.3 percent and 57.5 percent depend­ing on the age and sex of the beneficia­ries. Until mid-2001, Kansas capitated rates were based on 1995 fee-for-service rates trended forward using a variety of factors. In 2000 and 2001, the Kansas Medicaid program recalculated capitation rates based on 1998 data. This “rebasing” was utilized in the cal­culation of capitation rates effective July 1, 2001.

States have struggled to balance their desire to support the growing Medicaid program with very real budget constraints since Medicaid was enacted in 1965. Budget challenges have often been dealt with by either lowering payments to providers or by not increasing payment levels and hoping providers would continue serving Medicaid clients. Medicaid is a federal entitlement program, meaning that if persons are eligible, they must be served regardless of state financial con­straints. A potentially more important pressure on Medicaid spending is the political will to help the needy and to not take away benefits. As a result of these realities, states have a limited ability to control Medicaid budgets. States feel the pressure to increase Medicaid rates even as many of them deal with tight overall budgets. According to a survey by the National Conference of State Legislatures (NCSL) in October 2001, nineteen states reported state budget shortfalls, with Medicaid overruns reported in eleven of those states.20

Overarching budget constraints after years of prosperity may force states like Kansas to set priorities among expenditures. The size of the Medicaid program means that even small increases can have significant fiscal impacts. A 1997 study of Kansas Medicaid physician fees estimated that the total (state and federal) cost of increasing the fee schedule to equal the average of rates paid by a 4-state region would be $11 million. Increases to rates equal to those paid by Medicare would cost $40 million and increases equal to private managed care rates would cost $60-70 million.21 These estimates are some­what outdated at this time due to changes in rates and the number of beneficiaries but still provide a point of reference for policymakers.


Medicaid payment rates, whether as reimbursements for individual ser­vices or as capitation payments, affect the decisions of providers and health plans (MCOs) to participate in the Medicaid program. Lack of MCO or individual provider participation, in turn, affects beneficiary choice of health plan and access to health care services. Lack of MCO interest in par­ticipating in Medicaid managed care can also negatively affect the state’s ability to negotiate for the best ser­vices at the right price. Kansas has clearly struggled to maintain participation of MCOs in its capitated managed care program, and it appears that payment rates have played a role. In the past, the ability of the state to increase capitation payments has been limited not only by budgetary considerations but also by federal restrictions. If the federal limits are removed, the state will have an opportunity to address the issue in a new way. Even without the changes, the state has the power to increase capitation rates through the fee-for-service schedule. Either way, Kansas has important decisions to make regarding the Medicaid program and its commit­ment to capitated managed care.

End Notes for Issue Brief Medicaid Capitation Rates Implications and Options

About Kansas Health Institute

The Kansas Health Institute supports effective policymaking through nonpartisan research, education and engagement. KHI believes evidence-based information, objective analysis and civil dialogue enable policy leaders to be champions for a healthier Kansas. Established in 1995 with a multiyear grant from the Kansas Health Foundation, KHI is a nonprofit, nonpartisan educational organization based in Topeka.

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