42 C.F.R. § 457.1203
Rate development standards and medical loss ratio
(a) A state must use payment rates based on public or private payment rates for comparable services for comparable populations, consistent with actuarially sound principles as defined at § 457.10. This requirement for using actuarially sound principles to develop payment rates does not prohibit a state from implementing value-based purchasing models for provider reimbursement, such as pay for performance arrangements, bundled payments, or other service payment models intended to recognize value or outcomes over volume of services; such alternate payment models should be developed using actuarially sound principles to the extent applicable.
(b) A State may establish higher rates than permitted under paragraph (a) of this section if such rates are necessary to ensure sufficient provider participation or provider access or to enroll providers who demonstrate exceptional efficiency or quality in the provision of services.
(c) The rates must be designed to reasonably achieve a medical loss ratio standard, calculated in accordance with the provisions of § 438.8 of this chapter, that—
(1) Is equal to at least 85 percent for the rate year; and
(2) Provides for reasonable administrative costs.
(d) The State must provide to CMS, if requested, a description of the manner in which rates were developed in accordance with the requirements of paragraphs (a), (b), or (c) of this section.
(e) The State must comply with the requirements related to medical loss ratios in accordance with the terms of § 438.74 of this chapter, except contract arrangements described in § 438.6(c) do not apply and the description of the reports received from the MCOs, PIHPs and PAHPs under § 438.8(k) of this chapter will be submitted independently, and not with the rate certification described in § 438.7 of this chapter.
(f) The State must ensure, through its contracts, that each MCO, PIHP, and PAHP complies with the requirements in § 438.8 of this chapter, except that contract arrangements described in § 438.6(c) do not apply.