42 C.F.R. § 438.4 : Public Health — CENTERS FOR MEDICARE & MEDICAID SERVICES, DEPARTMENT OF HEALTH AND HUMAN SERVICES — MEDICAL ASSISTANCE PROGRAMS — MANAGED CARE — GENERAL PROVISIONS — 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) 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 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, 438.207, and 438.208.
(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) and (e).
(7) Meet any applicable special contract provisions as specified in §438.6.
(8) Be provided to CMS in a format and within a timeframe that meets requirements in §438.7.
(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, 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, 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) 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), 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) of this section.
(ii) Not modify the capitation rates under § 438.7(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) and are subject to the requirements at paragraph (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) 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) 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.

42 C.F.R. §438.4

81 FR 27852, 5/6/2016; 85 FR 72837, 12/14/2020; 85 FR 72837, 7/1/2021