The Capitation Rate Was Certified. Then CMS Changed Who’s In It.
Beginning with rating periods on or after September 30, 2026, CMS says Medicaid managed care capitation rates, state directed payments, and in-lieu-of-service arrangements can no longer reflect noncitizens who are ineligible for full Medicaid benefits. States and actuaries must rebuild rate assumptions, and MCOs must stand up a parallel fee-for-service payment path, in the same week a separate federal eligibility cutoff takes effect.
A financing statute got reinterpreted. Capitation rates are the ones that have to change.
On September 30, 2025, CMS issued State Medicaid Director (SMD) Letter #25-003, announcing a changed interpretation of Section 1903(v) of the Social Security Act, the provision authorizing federal financial participation (FFP) for emergency medical care for noncitizens who do not qualify for full Medicaid benefits, an arrangement commonly called emergency Medicaid. The letter set its own effective date: for Medicaid managed care rating periods starting on or after September 30, 2026, this population’s costs can no longer appear anywhere inside risk-based managed care financing, including capitation rate development and payment, state directed payments, in-lieu-of-service and setting (ILOS) arrangements, and contracts with primary care case managers or primary care case management entities.
CMS followed with State Health Official (SHO) Letter #26-001, implementing Section 71109 of the 2025 reconciliation law, Public Law 119-21, titled “Alien Medicaid Eligibility.” The letter instructs states to review, and where necessary revise, Medicaid managed care contracts to state explicitly that plan payment is limited to expenditures for which FFP is actually available under Section 1903(v).
States and their actuaries must determine whether the rule requires adjustments to capitation rate development. Rate certifications and state directed payment preprints must now exclude all data and assumptions tied to this population.
This is not a disclosure requirement. It is a rebuild.
Each of these is a distinct operational change, not a single policy switch. A plan can get the capitation exclusion right and still fail the claims-routing change, or get both right and still miss the SDP preprint requirement. CMS wrote the guidance as one interpretation of one statute; it lands on health plans as four or five separate system and contract changes.
What SHO #26-001 and the March 2026 bulletin actually require
From CMS State Health Official Letter #26-001 and the March 12, 2026 CMCS Informational Bulletin.
- Contract languageStates must review, and where necessary revise, MCO contracts to state explicitly that payment is limited to expenditures for which FFP is available under Section 1903(v).
- Rate certificationsActuaries must evaluate whether Section 1903(v)(5) requires adjustments to capitation rate development, and document the exclusion methodology.
- Submission portalAs of July 1, 2026, all Medicaid managed care contract and rate submissions to CMS must go through the MC-Review portal, not email.
- Oversight postureCMS’s first Medicaid Managed Care Oversight Reviews (MCORs), launched in four states notified in December 2025, are already examining how states use and report MCO sanctions.
This reads like an eligibility update. It behaves like an actuarial integrity mandate.
Most coverage of this change, where it exists at all, will frame it as an eligibility administrative matter: CMS narrowed who counts, states redetermine, done. That framing understates what actually has to happen inside a Medicaid MCO. A capitation rate is not a policy statement. It is a certified actuarial model, built on assumptions about a defined population’s cost and utilization, signed by an actuary, and reviewed by CMS as a condition of federal financial participation. Removing a population from that model after the model was already built for the current rating cycle is not an edit. It is a partial rebuild, with the same certification standard applied to the revised version as applied to the original.
Two deadlines, one week apart, that are not the same deadline
The September 30, 2026 capitation trigger and the October 1, 2026 federal match eligibility cutoff are frequently discussed as though they are one event. They are not. The first governs what a Medicaid managed care actuarial model may reflect. The second governs which enrollees keep federal matching funds for full Medicaid benefits at all. A state’s redetermination work under the second deadline is what ultimately tells a plan’s actuary which enrollees belong in the excluded category for the first. Where that redetermination work runs behind schedule, and multi-state redetermination efforts of this scale routinely do, the actuarial exclusion is being finalized against a population list that may still be moving underneath it.
For health plans, the practical consequence is that this is not a one-time correction. It is the first test of a capitation rate-integrity discipline that CMS appears to be building into the rate-setting cycle itself, not layering on as a side letter.
CMS did not send a memo about eligibility. It sent instructions for reopening a certified actuarial model mid-cycle.
One statute reinterpretation, six functions with real exposure
Actuarial / Finance
Capitation rate development has to be rebuilt to exclude a defined population’s cost and utilization, with the exclusion methodology documented in the certification itself.
Compliance
MCO contracts need explicit language limiting payment to FFP-eligible expenditures under Section 1903(v), which may require a formal amendment, not a policy memo.
Claims / Operations
Emergency Medicaid claims for the excluded population need a working fee-for-service or non-risk payment path, tested before real volume arrives.
Eligibility / Enrollment
Plans need a reliable way to identify excluded enrollees, coordinated with the state’s separate October 1, 2026 redetermination effort.
IT / Data Governance
Transformed Medicaid Statistical Information System (T-MSIS) reporting must reflect new state-directed-payment data fields by September 2026, and submissions must route through the newly mandatory MC-Review portal.
Delegation Oversight
Delegated entities handling claims adjudication or eligibility verification need the same exclusion logic as the health plan’s own systems, not an assumed pass-through.
No single function owns this. The table below assigns responsibility; the list after it sequences the work.
The requirement touches actuarial, compliance, claims, eligibility, IT, and delegation oversight at once. Treating it as any one function’s project is the most common way plans will miss a piece of it.
| Function | Required response | Evidence to retain |
|---|---|---|
| Actuarial / Finance | Rebuild capitation rate development to exclude cost and utilization data for noncitizens ineligible for full Medicaid benefits, consistent with the 2026-2027 Rate Development Guide, and document the exclusion methodology in the rate certification. | Rate certification with documented exclusion methodology; actuary sign-off; comparison of pre- and post-exclusion rate assumptions. |
| Compliance | Confirm MCO contracts have been reviewed and, where necessary, amended to state explicitly that payment is limited to expenditures with available FFP under Section 1903(v), per SHO #26-001. | Contract amendment records; compliance sign-off on SHO #26-001 and the March 12, 2026 CMCS Informational Bulletin. |
| Claims / Operations | Stand up or confirm a fee-for-service or non-risk PIHP/PAHP payment path for emergency Medicaid claims tied to the excluded population, and test claims routing logic before volume arrives. | Claims routing test results; payment rail configuration documentation; sample claims processed through the new path. |
| Eligibility / Enrollment | Coordinate with the state on which enrollees fall into the excluded category, and reconcile that list against the separate October 1, 2026 federal match eligibility redetermination. | Enrollee classification reconciliation log; redetermination status tracking documentation. |
| IT / Data Governance | Update T-MSIS reporting to reflect new state-directed-payment-specific data fields no later than September 2026, and confirm rate and contract submissions route through the mandatory MC-Review portal. | T-MSIS submission records; MC-Review portal submission confirmation. |
| Delegation Oversight | Confirm any delegated entity handling claims adjudication or eligibility verification has updated its logic to reflect the exclusion, not just the health plan’s own systems. | FDR delegation agreement addenda; delegated entity attestation of system updates. |
Within 7 days
Confirm with your state Medicaid agency whether your current or upcoming capitation rate certification reflects the Section 71109 exclusion, and if not, when the state expects to submit a revised rate.
Identify whether your plan has an operational fee-for-service or non-risk payment path ready to receive emergency Medicaid claims for the excluded population.
Within 30 days
Reconcile your plan’s enrollee classification data against the state’s redetermination status for the October 1, 2026 federal match eligibility cutoff.
Review MCO contract language with compliance and legal to confirm it explicitly limits payment to FFP-eligible expenditures under Section 1903(v).
Within 60 to 90 days
Confirm delegated entities handling claims adjudication or eligibility verification have implemented the exclusion logic, and obtain written attestation.
Establish a standing reconciliation process between actuarial, claims, and eligibility functions for future rating-period changes.
PCOOB Weekly’s assessment is that Section 71109’s managed care implementation is a capitation rate-integrity requirement dressed in eligibility-policy language, and plans that treat it purely as an eligibility question are underestimating the actuarial and operational lift. The federal government has reinterpreted a financing statute in a way that requires states and MCOs to unwind a population’s data from an actuarial model that, in ordinary circumstances, is certified once per rating period and treated as settled.
The available evidence suggests this is not a one-time cleanup. CMS built the exclusion directly into the 2026-2027 Rate Development Guide, made the MC-Review portal mandatory the same year, and launched its first Medicaid Managed Care Oversight Reviews examining how states enforce MCO compliance. Read together, these are the ingredients of a standing verification regime, not a single guidance letter. This is an inference about CMS’s likely posture, not a confirmed enforcement plan. Plans that treat September 30, 2026 as the finish line, rather than the start of an ongoing reconciliation discipline, are the ones most likely to be revisiting this problem at the next rate certification cycle.
Questions payer leaders should ask
- 01Does our current capitation rate certification reflect the Section 71109 exclusion, and who confirmed that with the state’s actuary?
- 02Do we have a tested, operational payment path for emergency Medicaid claims tied to the excluded population, or are we still routing them through risk-based payment by default?
- 03How confident are we that our enrollee classification data matches the state’s October 1, 2026 eligibility redetermination results?
- 04Have our MCO contracts been formally amended to reflect SHO #26-001’s FFP-limitation requirement?
- 05Have we confirmed our delegated entities, not just our own systems, have implemented the exclusion logic?
- 06Are we prepared to demonstrate exactly how our rate certification methodology excluded this population’s data and assumptions?
- 07Is our T-MSIS reporting updated to reflect the new state-directed-payment-specific data fields on the September 2026 timeline?
- 08If a member’s eligibility status changes mid-rating-period, do we have a defined process for shifting their claims between risk-based and fee-for-service payment?
Sources
- CMS State Medicaid Director Letter #25-003, “Medicaid Managed Care Payments and Emergency Medical Condition Coverage for Aliens Ineligible for Full Medicaid Benefits” (September 30, 2025)
- CMS State Health Official Letter #26-001, “Implementation of Section 71109, Alien Medicaid Eligibility”
- CMCS Informational Bulletin, “Medicaid and CHIP Managed Care Monitoring and Oversight” (March 12, 2026)
- CMS, “2026-2027 Medicaid Managed Care Rate Development Guide” (February 19, 2026)
- CMS, Medicaid.gov Managed Care Additional Guidance index
Until next week, stay briefed.
Frequently asked questions
What is “emergency Medicaid” and why does it matter to Medicaid managed care organizations?
Emergency Medicaid is the federal financial participation (FFP) available under Section 1903(v) of the Social Security Act for treatment of an emergency medical condition for noncitizens who do not qualify for full Medicaid benefits. It matters to Medicaid managed care organizations (MCOs) because, beginning with rating periods on or after September 30, 2026, CMS says these claims can no longer be paid through risk-based capitation and must instead route through fee-for-service or non-risk payment arrangements.
Does this change affect Medicare Advantage plans?
No. Section 71109 and the related CMS guidance apply to Medicaid managed care capitation rates, state directed payments, and related arrangements. Medicare Advantage organizations are not directly affected by this specific requirement, though plans that operate both Medicaid and Medicare Advantage lines of business should confirm their Medicaid-side systems reflect the change without affecting Medicare Advantage claims processing.
What is the difference between the September 30, 2026 capitation change and the October 1, 2026 eligibility cutoff?
The September 30, 2026 date governs when Medicaid managed care capitation rates, state directed payments, and related arrangements must exclude noncitizens ineligible for full Medicaid benefits. The October 1, 2026 date is a separate statutory deadline limiting federal Medicaid and CHIP matching funds for full benefits to lawful permanent residents, Cuban-Haitian entrants, and Compact of Free Association migrants. States must complete eligibility redeterminations for the second deadline, which directly affects who falls into the excluded population for the first.
What should a Medicaid MCO’s compliance team verify first?
Confirm whether the plan’s current capitation rate certification and state directed payment preprints have been revised to exclude data and assumptions tied to noncitizens ineligible for full Medicaid benefits, per SHO #26-001, and confirm the plan has an operational, tested payment path for these individuals’ emergency Medicaid claims outside the risk-based contract.