Implementation of 2025 Reconciliation Law: Medicaid Managed Care Rate Setting Uncertainty & Potential Plan Exits
Managed care is the dominant delivery system for Medicaid enrollees with over three-quarters of Medicaid beneficiaries nationally enrolled in comprehensive managed care organizations (MCOs), accounting for half of total Medicaid spending in FY 2024. The 2025 federal budget reconciliation law is expected to create managed care rate setting challenges for states as the Medicaid provisions impacting enrollment and spending, including program financing changes, work requirements, and more frequent eligibility redeterminations for expansion adults, are rolled out. These changes can create uncertainty about enrollment and acuity as states and their actuaries develop capitation rates. Amid this uncertainty, executives from Elevance Health said during a July earnings call that they were exiting DC’s Medicaid market and expect to exit additional markets. Since then, Louisiana announced an Elevance Health plan will exit at the end of 2026. While MCO entries and exits in specific states or markets are not uncommon, decisions by Elevance Health and the other large, multi-state parent firms about overall participation in Medicaid markets could have broad implications for states, enrollees, and providers, given their large share of national MCO enrollment. This policy watch examines recent and anticipated managed care rate setting challenges and the potential implications of MCO exits.
States and plans expect to face new rate setting challenges with implementation of the 2025 reconciliation law. MCOs are at financial risk for services covered under their contracts, receiving a per member per month “capitation” payment for these services. Capitation rates must be actuarially sound and are applied prospectively, typically for a 12-month rating period, regardless of changes in health care costs or utilization. States may use a variety of risk mitigation tools to ensure payments are not too high or too low, including risk sharing arrangements, risk and acuity adjustments, medical loss ratios (MLR), or incentive and withhold arrangements. In KFF’s 2025 Medicaid budget survey, many states reported anticipating challenges with projecting the potential impacts of federal policy changes, including work requirements and more frequent eligibility redeterminations for expansion adults, which have implications for member enrollment and acuity (or health risk) on average. Provider tax and state directed payment caps and reductions are also expected to create managed care plan rate setting challenges.
These expected rate setting challenges follow a period of rate setting uncertainty that occurred as millions of people were disenrolled during the “unwinding” of the pandemic-era Medicaid continuous enrollment provision. Higher member risk and utilization patterns began to emerge by late 2023, and many states sought federal approval to adjust rates to address these shifts in FY 2024 and FY 2025. KFF analysis of National Association of Insurance Commissioners (NAIC) data shows that the average medical loss ratio (percentage of premium revenue spent on medical care costs) for the Medicaid managed care market increased from 88% in 2023 to 91% in 2024, implying a potential decrease in profitability. This was the highest average MLR seen across health insurance markets (including group, individual, and Medicare Advantage) in 2024 and the highest average MLR observed for the Medicaid managed care market in the past decade.
Overall changes in acuity from work requirements are uncertain. During unwinding, plans experienced an increase in member acuity as enrollment declined and remaining enrollees had higher health care needs and costs. Some multi-state parent firms have indicated publicly on earnings calls that they do not expect acuity changes going forward to be as significant (as the shift that occurred during / post unwinding), in part, because work requirement and more frequent eligibility determination policies target expansion adults (and not all Medicaid populations).
Five for-profit, publicly traded companies – Centene, Elevance Health, UnitedHealth Group, Molina, and Aetna/CVS –account for nearly half of all Medicaid MCO enrollment (Figure 1). These firms have a wide geographic reach in Medicaid, each operating MCOs in 13 or more of the 42 MCO states.
In July 2026, executives from Elevance Health said they expect to exit Medicaid markets over the next 12 to 18 months. During its second quarter 2026 earnings call, executives reported they are reviewing their overall Medicaid portfolio and will plan to exit markets “where the economics don’t support sustainable performance.” Elevance executives did not identify the states/markets where the exits are expected to occur beyond DC, or how many enrollees could be affected. Elevance offers MCOs in 21 states (Figure 2). Its share of Medicaid MCO enrollment varies across states, ranging from 6% to 44% (as of July 2024). Medicaid members account for about 20% of the firm’s overall medical membership. Executives reported that while acuity shifts are moderating and rates are increasingly reflecting experience, utilization remains elevated compared to pre-pandemic levels. The firm expects its full-year 2026 Medicaid operating margin to be -1.75% (the percentage of revenue left over after paying operating costs) and to see incremental acuity pressure in 2027.
Wellpoint DC (an Elevance subsidiary) exited DC’s Medicaid program effective August 1, 2026, following a “mutual agreement” with the DC Department of Health Care Finance. (Wellpoint DC (formerly Amerigroup) was awarded its most recent DC Medicaid MCO contract in 2022 following a contested procurement process.) The contract, which began in April 2023, was scheduled to run through January 2028. In September 2026, the Louisiana Department of Health announced that Elevance’s Healthy Blue plan will exit the state’s Medicaid program after its contract expires at the end of 2026.
The other large for-profit parent firms (Centene, Molina, UnitedHealth, and CVS) did not discuss planning to exit Medicaid markets during their public Q2 2026 earnings calls. However, Centene reportedly plans to exit Arkansas’ Medicaid expansion program in 2027, which uses Medicaid funds to purchase Marketplace coverage, citing current funding challenges.
Managed care plan exits could lead to short-term administrative burden for providers and care disruptions for enrollees. For providers, plan transitions may create additional administrative burden at a time when many may also be helping enrollees navigate new eligibility requirements. Plan transitions may also cause disruptions in care for enrollees if their providers are now out-of-network or they need to obtain new prior authorizations. Disruptions may have more severe consequences for certain populations, such as enrollees who are pregnant or those in the middle of a course of treatment. Federal rules include requirements related to managed care enrollment processes and continuity of care. States can also set requirements for plan transitions through managed care contracts. For example, states can require exiting plans to provide notice of the exit within specified timeframes and to transfer data to the state and the plans receiving their enrollees. States can also set requirements for the receiving plans such as honoring prior authorizations granted by an enrollee’s previous plan and allowing enrollees to see out-of-network providers for a certain period after the transition.
Managed care plan exits could also have longer-term effects on the market. For example, plan exits could result in higher quality of care in the market if lower performing plans exit. At the same time, fewer plans in an (already concentrated) market could reduce competition which could have negative effects on cost, quality, and/or access. State procurement policies and program design can be used to help promote competition and quality in the market by influencing the number and mix of plans in a state.
This work was supported in part by Arnold Ventures. KFF maintains full editorial control over all of its policy analysis, polling, and journalism activities.
Facts Only
* Managed care is the dominant delivery system for Medicaid enrollees, with over three-quarters of beneficiaries enrolled in MCOs nationally.
* The 2025 federal budget reconciliation law is expected to create managed care rate setting challenges due to changes in Medicaid provisions, financing, work requirements, and eligibility redeterminations.
* Capitation rates must be actuarially sound and are applied prospectively for a 12-month rating period.
* States may use risk mitigation tools like risk sharing, acuity adjustments, MLR, or incentive/withhold arrangements to manage payments.
* Many states anticipate challenges in projecting impacts from federal policy changes affecting member enrollment and acuity.
* The average medical loss ratio for the Medicaid managed care market increased from 88% in 2023 to 91% in 2024.
* Five large for-profit firms account for nearly half of all Medicaid MCO enrollment.
* Elevance Health executives indicated plans to exit specific Medicaid markets, and Louisiana announced an Elevance Health plan will exit at the end of 2026.
* Wellpoint DC exited its Medicaid program effective August 1, 2026, via a mutual agreement.
* Plan transitions could create administrative burdens for providers and care disruptions for enrollees, including network changes or prior authorization issues.
* State requirements can mandate notice of exit and data transfer for plan transitions.
Executive Summary
The implementation of the 2025 federal reconciliation law is expected to introduce challenges in Medicaid managed care rate setting for states due to changes affecting enrollment, spending, program financing, work requirements, and eligibility redeterminations. This policy uncertainty has prompted large multi-state parent firms, such as Elevance Health, to exit certain Medicaid markets. For example, Louisiana announced an Elevance Health plan will exit at the end of 2026, following a separate agreement for Wellpoint DC to exit its program in August 2026. These exits and ongoing rate setting uncertainties create potential administrative burdens for providers and care disruptions for enrollees if transition rules are not clearly established.
The market has already experienced uncertainty following the unwinding of continuous enrollment provisions, which led to emerging shifts in member risk and utilization patterns. Analysis of Medicaid managed care markets shows an increase in the average medical loss ratio from 88% in 2023 to 91% in 2024, suggesting potential profitability concerns. While some multi-state firms suggest that acuity changes are moderating due to policies targeting expansion adults, utilization remains elevated. Managed care plan exits present mixed long-term implications: they could lead to higher quality care if lower-performing plans leave, but they risk reducing competition in concentrated markets.
Full Take
The narrative surrounding managed care rate setting is fundamentally shaped by a tension between actuarial necessity, policy uncertainty, and market structure. The process reveals that when large entities manage complex public programs, structural shifts—like federal legislation or eligibility changes—introduce friction into established financial models, forcing providers to navigate ambiguous risk signals. The increase in the Medical Loss Ratio to 91% indicates that the existing cost-sharing structures are already under strain, irrespective of new policy rollouts.
The emergence of plan exits by major players like Elevance Health suggests a pattern where perceived unsustainable economics drive strategic withdrawal, even when acuity shifts appear to be moderating across the broader population. This raises a critical question about market dynamics: does exiting concentration risk lower quality or simply redistribute risk in ways that favor solvency? Furthermore, the potential for carve-outs and mandates during transitions highlights a systemic vulnerability: established continuity of care is contingent upon negotiated administrative rules, which states must define. The underlying implication is that while efficiency goals are pursued through rate setting adjustments, the transition process itself risks creating acute instability for vulnerable populations unless state oversight prioritizes enforceable continuity mechanisms over purely financial outcomes.
Bridge questions: If plan exits result in shifts toward higher quality care, what specific metrics should states prioritize to ensure these benefits are realized equitably? How can regulatory frameworks be designed to incentivize competitive market participation rather than simply allowing large entities to exit based on localized economic calculations? What is the long-term impact of utilizing managed care provider exits as a mechanism for market restructuring versus addressing underlying systemic cost pressures?