Medicaid capitation rates: methodological shortcomings and recommended solutions

At both the federal and state level, managed care programs are considered one of the key solutions to the problem of containing costs in public sector health care programs, such as Medicaid; however, reimbursement issues need to be resolved before managed care programs can fully embrace public sector programs. Federal regulations require state Medicaid agencies to establish capitation rates that use fully documented actuarial methods that do not exceed the equivalent cost to the state for providing services to a like population. State agencies must also assure managed care programs that timely and reliable data is used, a sound actuarial method is employed, and the capitation rate is fair and equitable. Contractor confidence in a rate methodology will facilitate their participation in Medicaid. Reimbursement in managed care systems is usually based on some discount of the fee-for-service (FFS) equivalent capitation. Yet, state agencies differ in their ability to derive an accurate FFS capitation. This paper explores many of the methodological shortcomings common in using the FFS approach and offers some policy and technical solutions.