Innovations in Health Care: A Toolkit for State Legislators

Background

Private market health insurance—insurance offered through employers and on the individual market—is the predominant form of health coverage for most people. According to the most recent U.S. census, about 217 million Americans are enrolled in some kind of private insurance coverage. Plans sold on the private market are sold by commercial insurance providers and are considered any kind of health insurance plan not offered by the government, such as Medicare or Medicaid. A provision in the Affordable Care Act (ACA) that required every American to purchase some form of health insurance took effect in 2014. Afterward, the number of uninsured Americans decreased substantially. However, in 2017, for the first time since the law was enacted, the number of nonelderly individuals (those from birth to age 64) who went without health insurance coverage increased by 700,000 people. This means approximately 10.2 percent, or 27.4 million, of this demographic did not purchase insurance coverage.

Commercial insurance providers are private companies that contract with businesses or individuals to cover certain health care services outlined in a health plan. Employers often offer health insurance as a benefit to their employees. Individuals and groups can also purchase plans directly from commercial insurers or by purchasing through the state’s health insurance exchange, or individual marketplace, as set forth in the ACA. The exchanges are administered through either a state or federal platform where both individuals and businesses can purchase private insurance plans.

Most private insurance policies are designed either as a health maintenance organization (HMO) or preferred provider organization (PPO). An HMO requires a patient to be evaluated by a primary care provider (PCP) to determine the appropriate plan of care. This could include making a referral to a specialist or ordering additional tests to confirm the correct course of treatment is followed. In contrast, a PPO plan allows patients to see any health care provider within the plan’s network of providers without first being seen by a PCP. There are also fewer restrictions on seeing out-of-network providers. Because of the flexibility they offer, PPO plans are usually more expensive than HMO plans.

Although HMOs and PPOs are the most common plan types, other designs are available. An exclusive provider organization (EPO) is an arrangement where coverage only applies if the person receives treatment at facilities and from providers that are in their network. They are like PPOs in that members are not required to see a PCP first, but they are also like HMOs because enrollees must use a specific network of providers. Point of service, or POS, plans are a hybrid of HMOs and PPOs. In these plans, members are required to choose an in-network PCP but can see an out-of-network physician for a higher fee.

Plans range in price and in the scope of services covered. Coverage depends on several factors, including an individual’s personal medical history and the amount of money the patient, or the sponsoring employer, is willing to spend on monthly premiums, copayments, co-insurance and deductibles. The deductible is the cost that must be covered by the enrollee before the plan begins to cover costs. Copayments are typically paid at the time of service in the form of a flat fee by the enrollee to cover a portion of the care that is otherwise covered by the plan. Co-insurance is similarly a portion of the cost covered by the enrollee but is based on a percentage of the cost of care.

Private Insurance Overview

Plans purchased either on the exchanges or directly from an insurer are called “fully insured” plans. There are two types of fully insured plans: individual and group. Employers and other group sponsors typically purchase group insurance plans and then allow their employees to elect in or out of coverage. Employers with fewer than 50 full-time employees are known as small groups, although a few states have increased that threshold to 100 employees. These private market insurance plans are different not only from public insurance options, but also from “self-insured” plans, in which employers front the costs of their employee’s medical care instead of paying premiums to an insurer.

Companies with 51 or more employees (or 101 for select states) are known as large groups and are not subject to the same ACA requirements as the individual and small group markets. Despite this, as of 2016, employers in the large group market have been required under the ACA to offer affordable insurance plans that meet the minimum essential coverage (MEC) provision to 95 percent of their full-time employees. Full-time employees are those who work 30 or more hours a week. A plan is considered affordable if an employee’s contributions for employee-only coverage (not including dependents) does not exceed a certain percentage of his or her household income. The MEC requirement is defined as “bronze level” on the ACA marketplace, meaning the health insurer will pay at least 60 percent of the cost of each health service or treatment. Employers can elect to offer higher levels of coverage, including “silver,” where the insurer covers 70 percent of a service or treatment cost, “gold,” which covers 80 percent of the cost, and “platinum,” which covers 90 percent.

Percentage of Firms Offering Health Benefits, by Firm Size, Region and Industry, 2018

	Percentage of Firms Offering Health Benefits
Firm size
3-9 workers	47*
10-24 workers	64*
25-49 workers	71
50-199 workers	91
200-999 workers	96
1,000-4,999 workers	99
5,000 or more workers	100
All small firms (3-199 workers)	56
All larger firms (200 or more workers)	98
Region
Northeast	64
Midwest	57
South	49
West	61
Industry
Agriculture/Mining/Construction	61
Manufacturing	68
Transportation/Communications/Utilities	64
Wholesale	69
Retail	42*
Finance	64
Service	53
State/local government	90*
Health care	59
All Firms	57

Note: Estimates are based on the sample of both firms that completed the entire survey and those that answered just one question about whether they offer health benefits.

* Estimates statistically different from estimate for all firms not in the indicated size, region or industry category.

Source: KFF Employer Health Benefits Survey, 2018

States have the option of allowing health insurance issuers that offer coverage in the large group market to offer such coverage through the marketplace. Those plans, however, must include the 10 essential health benefits (EHBs), such as maternity care, prescription drugs and hospitalization. Larger employers often forego the private market and opt instead to cover employees’ medical costs directly. These self-insured plans offer employers some flexibility in plan design and face different regulations at the state and federal levels than fully insured plans. In 2018, 56 percent of small firms and 98 percent of large firms offered health insurance to at least some of their workers, with an overall rate of 57 percent.

Although this report describes health insurance obtained through the private market, it should be noted that consumers can purchase alternative forms of coverage such as an association health plan (AHP) or short-term limited duration plan (STLD). These plans often provide a less costly option, but they do not have to comply with the guidelines outlined in the ACA. To learn more about these types of plans, please read the complementary brief in this toolkit, “Alternative Coverage Options.”

Costs of Coverage

Unsurprisingly, much of the legislative focus on insurance has involved the cost of coverage. The increasing price of insurance premiums, as well as the related charges of sometimes expensive medical treatments, are complicated issues that state legislatures grapple with perennially. In the private market, enrollees pay a monthly premium to take part in an insurance plan. If the enrollee is insured through his or her employer, the employer may cover part or all the enrollee’s premium. Most insurance plans also contain deductibles, copayments and sometimes, co-insurance.

The ACA attempts to increase coverage by creating incentives such as tax credits and other subsidies for individuals and employers. As an example, the ACA allows employers in the small group market to deduct up to half the cost of premiums they pay for their employees. People living under 400 percent of the federal poverty level may be eligible for advance premium tax credits (APTCs) and cost-sharing reductions (CSRs) under the ACA. As of mid-2018, approximately 87 percent of the people who purchased a plan on the marketplace received one of these subsidies.

Private Insurance Policy Levers and Options

States are the primary regulators of fully insured plans but have a limited role in regulating self-insured plans. Self-funded, large employer sponsored plans are federally regulated under the Employee Retirement Income Security Act (ERISA) of 1974. While the ACA sets rules and minimum standards to guide insurers in the private market, states are free to regulate as they see fit as long as their regulations do not circumvent federal law. All states have an insurance commissioner or department that acts as an intermediary between insurance companies and consumers within the state. There are several ways in which states can regulate insurance with various policy objectives in mind.

First, states might consider legislation to define or refine how their state insurance department works. State insurance departments and commissioners are responsible for protecting consumers’ rights. Their duties include making information, such as complaints against insurers, available to consumers, and answering customers’ questions about claims. Legislators can consider how comprehensive this information is and how easy it is to access. Furthermore, states can task their insurance commissioners with enhancing the rights of consumers. Examples include laws strengthening patients’ rights to certain treatments that might not be covered by most insurers or allowing patients who need urgent care access to treatments that normally require a lengthy prior authorization process.

States that use the federal platform for their health insurance exchanges could also consider shifting to a state-based exchange. While Oregon has only considered such a move, Nevada and New Mexico hope to have their new state-run platforms for the 2020-2021 plan years.

Legislators in many states have been engaged in overseeing and reviewing the results of marketplace enrollment and some have considered changes to open enrollment periods. Most states have open enrollment periods between Nov. 1 and Dec. 15. However, seven states—California, Colorado, Connecticut, Massachusetts, Minnesota, New York and Rhode Island—plus the District of Columbia extended the time for both the 2018 and 2019 enrollment periods.

States, usually through the insurance department, will annually review rates submitted by insurers selling products on the exchange to determine whether their rate increases are reasonable. The federal default threshold rate increase beginning in 2019 is 15 percent. States also have the option to apply for a state-specific threshold. If rates are determined to be unreasonable, state responses will vary according to state law.

Every state has a statutory list of required coverage for specific treatments and access to specialty care, almost all of which were enacted 10 years ago or more. For example, treatment for diabetes is mandated in 46 states. Prior to the passage of the ACA, many insurers did not provide coverage for preexisting conditions the patient had before joining the health plan. Since the ACA now mandates EHBs, this “federal floor” can be expanded upon by states, which can mandate that insurers provide coverage for additional conditions and treatments.

According to the Commonwealth Fund, there are three provisions built into the ACA designed to protect people living with preexisting conditions:

• The “guaranteed issue” requirement prevents insurance companies from denying a policy to someone with a preexisting condition.
• The “preexisting condition exclusion” does not allow carriers to refuse coverage of services that people need to treat a preexisting condition.
• The “community rating” provision prevents an insurer from charging a higher premium based on a person’s health status.

With uncertainty at the federal level, protections for individuals with preexisting conditions have generated significant interest among state lawmakers on both sides of the aisle. As of August 2018, four states—Colorado, Massachusetts, New York and Virginia—have adopted all three ACA equivalent protections. An additional 14 states have incorporated partial provisions into state law, and 29 states have not enacted any protections.

Another provision in the ACA prohibits dollar limits, or caps, on yearly or lifetime spending by an insurance company on an individual patient. Some states, reacting to the unpredictable nature of federal health care reform, have considered legislation to maintain the prohibition of these bans at the state level.

Not only can states affect change through state regulation and legislation, they can explore applying for a federal 1332 waiver. Also known as State Relief and Empowerment Waivers, a 1332 waiver allows states to tailor their individual and small group markets to address specific populations in their state. The federal government established broad guidelines to encourage states to initiate reform. These include allowing states to experiment with alternative versions of insurance exchanges, letting states change the set of mandated health benefits covered, increasing the number of people covered, and implementing creative payment structures for financing their health care programs. These waivers and the process of applying for them are discussed in more detail in a subsequent brief in this toolkit on reinsurance, “Reinsurance Programs and High-Risk Pools.” Currently, eight states have received CMS approval.

Conclusion

State legislatures have several options to consider in regulating health insurance and coverage. As the national conversation on health care continues to evolve, and as gridlock in Congress deters federal action, states have taken up the mantle of health care reforms. Goals and policy tactics vary from state to state but generally aim to contain costs, improve coverage and expand access. As lawmakers continue to grapple with which approaches will be best for residents in their districts, the accompanying briefs in this toolkit focus on strategies they can use.

Overview

Prior to the Affordable Care Act (ACA) becoming law in 2010, Americans who were not eligible for employer-subsidized or public health insurance programs often found coverage through a category known as individual or commercial health insurance. In many locations, however, consumers faced limited or costly options in the commercial health insurance market. For enrollees with preexisting conditions, such as asthma, diabetes, arthritis or cancer, health insurance coverage could be costlier than coverage for healthier enrollees—or denied altogether. Private insurance coverage also often excluded benefits such as maternity care or prescription drugs. Moreover, insurers could use other types of premium ratings, like gender or age, which allowed them to sell policies at higher monthly premiums than for other enrollees.

After the ACA, insurance carriers were banned from using such practices. Furthermore, the ACA established a new option for health coverage, known as health insurance exchanges or marketplaces. The exchanges use an online eligibility and enrollment platform that provides a place for individuals and families to compare prices and benefits and purchase coverage. The ACA also established the Small Business Health Options Program (SHOP) as an exchange for small employers to purchase coverage for themselves and their employees.

Plans sold both in and out of the exchanges must follow the same set of rules: They must be guaranteed issue, meaning they must offer all applicants a plan regardless of health status or other factors; they must follow the ACA’s cost-sharing guidelines; and they must cover 10 “essential health benefits,” or EHBs, with no lifetime or annual maximums. To help mitigate the risk of taking on enrollees with greater health risks and potential costs, the ACA imposed an individual health insurance mandate, which required that all Americans purchase some form of health coverage. Even though the individual mandate penalty was reduced to $0 under the Tax Cuts and Jobs Act of 2017, the mandate itself remains in place pending further congressional or legal action.

Federal subsidies. A major component of the ACA related to exchanges is the availability of federal subsidies. There are two types of subsidies: advance premium tax credits (APTCs) and cost-sharing reductions (CSRs). Enrollees with annual household incomes between 100 percent and 400 percent of the federal poverty level (FPL) can access APTCs to reduce their monthly insurance premiums. Enrollees can use APTCs to purchase a plan from any tier on the ACA health insurance marketplaces. Those with annual household incomes below 250 percent FPL can also receive extra savings with CSRs to reduce the amount they pay toward deductibles, copays and other cost-sharing mechanisms for plans purchased through the marketplaces. To qualify for CSRs, enrollees much purchase a plan in the “silver” metal tier.

Health plans in the ACA are sold in four levels of coverage: bronze, silver, gold and platinum. Bronze plans have the most affordable premiums but offer the least amount of coverage and the highest out-of-pocket expenses. In contrast, platinum level plan premiums are the most expensive but provide greater coverage with less out-of-pocket costs.

For the past five years, at least 80 percent of exchange consumers have been eligible for APTCs. Of that group, 50 percent or more received CSRs. In 2017, advance tax credits reduced the actual monthly premium paid by an individual from an average of $460 per month to $167 per month. It should be noted that, although many who shop for insurance through the exchanges receive subsidies, individuals or families with incomes above 400 percent FPL may also use the marketplaces to buy nonsubsidized health coverage.

The ACA requires insurers to provide CSRs to people with lower earnings and, until recently, the federal government reimbursed carriers for those subsidies. The law was challenged and reversed in 2016 and the federal government stopped making CSR payments to insurers the following year. As Health Affairs reports, all but two states—Vermont and North Dakota—and the District of Columbia allowed insurers to amend their rate filings for plan year 2018. To buffer against the loss of CSR reimbursements, insurance regulators in 43 states allowed plans to ”silver load.” This method permits the insurer to pass the full effect of the reduction in funds onto silver tier marketplace plans.

This had a positive consequence for many consumers. Since premium tax credits are tied to the second lowest-cost silver plan, consumers received higher premium tax credits from the government. And because consumers can use their tax credits to purchase a plan in any of the four metal tiers, about 4.5 million people could obtain a bronze-level plan at no cost in 2018.

Guidance released from the Centers for Medicare & Medicaid Services (CMS) states that silver-loading is allowed for the 2019 plan year, but the discussion of CSR payments continues to evolve. Despite the Trump administration’s previous action to discontinue the reimbursements, there are projections of significant costs to insurers and taxpayers, as well as estimates of increases in insurance exchange premiums.

Policy Options

All states were given the opportunity to receive federal planning and implementation grants to develop their health insurance exchange platforms. An exchange has operated within each state since 2014. Exchanges are intended and designed as a state-federal collaboration. Each state is given the choice of whether or not to run its own exchange, create its own website, take on plan management tasks, or defer to the federal government for some or all of these responsibilities. States have taken on varying degrees of responsibility for operating exchanges, giving some states more autonomy over certain policy decisions.

As of 2018, 11 states and the District of Columbia have a fully state-run exchange, or state-based marketplaces (SBMs), which allow for more locally focused decisions and administration. The state legislature and executive agencies can set deadlines and hours of operation, enforce consumer regulations and personalize marketing activities such as using storefronts and social media. Five states have a hybrid structure with a state-run exchange but federal web platform. In 17 other states, the federal government is legally responsible for all marketplace functions but defers to the state to manage the plans. Another 17 states have adopted or defaulted entirely to the federally facilitated marketplace.

Despite differing choices, all 50 states and the District of Columbia have the authority to regulate in-state sales of health insurance policies. This state regulation is focused on the individual and small group market, most commonly defined as between one and 50 enrollees or full-time employees. Over the past 30 years, all states also have established coverage requirements for a wide range of specific treatments and benefits. They have also required reimbursement by specific categories of providers not traditionally covered, such as chiropractors, psychologists, podiatrists or social workers.

The EHBs created within the ACA were aligned with, but not identical to, widely used existing state laws. The newly defined federal mandates for coverage were tied to state “benchmark plans,” defined as an exchange’s silver plan within a certain region. In plan years 2017, 2018 and 2019, each state’s EHB benchmark plan had to be one that was sold in its marketplace in 2014. A 2018 HHS notice makes significant changes to the way in which states can select an EHB benchmark plan by offering three new options for plan year 2020 and annually thereafter:

• Option 1: Selecting the EHB-benchmark plan that another state used for the 2017 plan year.
• Option 2: Replacing one or more categories of EHBs under its EHB-benchmark plan used for the 2017 plan year with the same category or categories from the EHB-benchmark plan that another state used for the 2017 plan year.
• Option 3:  Otherwise selecting a set of benefits that would become the state’s EHB-benchmark plan.

The notice also grants insurers greater flexibility to substitute benefits across the 10 EHB benefit categories, if permitted by the state. States that opt not to exercise one of these options will continue to use the same benchmark plan from plan years 2017 to 2019.

State Examples

State-Run Exchange—Colorado. The Colorado General Assembly enacted bipartisan legislation creating a state-run exchange in 2011, choosing to create a nonprofit entity governed by an independent 12-member board. The Colorado exchange, Connect for Health Colorado, allows all qualified health plans to participate in the exchange rather than selecting specific carriers. State general funds cannot be used to establish or operate the exchange, and the law established a financial assessment on insurers to support the exchange starting in 2014. It also created the Legislative Health Benefit Exchange Implementation Review Committee. The board has emphasized creative public marketing using paid and public service ads, a colorful and interactive website for eligibility determinations and enrollment, and state-managed Twitter and Facebook accounts. Connect for Health has also operated storefronts during open enrollment periods. State and local navigators and assistors play a highly visible role in person and on the phone to help consumers shop for and purchase appropriate plans. In 2014, approximately 129,000 Coloradans signed up for private health insurance through Connect for Health Colorado during the first open enrollment period. For 2019, enrollment increased to more than 169,000 covered people.

Federally facilitated marketplace—Florida. Florida was one of 18 states in which the legislature, by 2011 state statute, sought to prohibit any person from being compelled to purchase health insurance. The governor also refused to accept the $1 million in planning funds to design a health exchange, as part of a challenge to the ACA. Even so, Florida residents were able to access the federal platform, HealthCare.gov, during the enrollment period beginning Oct. 1, 2013. Florida has experienced the highest sign-up rate of any state. In 2014, its first year, 983,775 people purchased insurance on the marketplace, with 91 percent receiving financial assistance; in 2018, enrollment grew to 1,715,000.

Federal-state partnership—Iowa. In 2012, Iowa’s governor announced that the state would run the plan management portion of the exchange. It would allow the federal default approach to define EHBs based on the state’s largest operating small group health plan. Iowa accepted $59 million in total federal grants. For 2018, silver metal tier plans in Iowa faced the highest annual premium increase in the nation, at 69 percent. Despite projections that enrollment might decrease, after federally mandated subsidies were deducted from premiums, the state’s enrollment in 2018 was 3 percent higher than in 2017.

2018-2019 federal rules. Under the Trump administration, several new issues and approaches are affecting state-based coverage for 2018 and beyond.

• Individual mandate penalty. While most of the 2010 federal law remains in effect, in 2017, Congress eliminated the individual mandate penalty for those who do not obtain minimum essential coverage, effective Jan. 1, 2019. In response, some states have established a state-based requirement to obtain coverage to replace the federal requirement.
• Innovation waivers for reinsurance. Some states are mitigating the rising cost of premiums by implementing a reinsurance program, using a Section 1332 Innovation Waiver. Built into the ACA, 1332 waivers allow states to explore ways to modify key parts of the health law while still fulfilling the original aims of the ACA. Seven states—Alaska, Maine, Maryland, Minnesota, New Jersey, Oregon and Wisconsin—have begun operating or received approval for state reinsurance programs, allowing federal and state funds to provide a buffer against high-cost enrollees and thereby lowering monthly premiums.
• Association health plans (AHPs). As of July 2018, new federal regulations allow for the expanded sale of health policies outside of the health insurance exchanges that do not need to comply with certain ACA consumer protections. These policies are designed to be less expensive. Such plans, for example, can exclude coverage of the EHBs and charge higher rates based on various demographic factors such as gender or, in some cases, pre-existing conditions. Several states with state-based exchanges have moved to restrict these non-ACA-compliant policies. The full effect of selling such policies will be a matter of discussion and evaluation in 2019.
• Short-term plans: Previously limited to three-month duration, the final rule allows these plans to be renewed or extended for up to 36 months. Much like AHPs, this expanded category of lower-cost health insurance can be non-compliant with the requirements of policies on health exchanges.
• The Small Business Health Options Program (SHOP). This option was designed and launched in 2014 for small employers who want to provide health and/or dental insurance to their employees “affordably, flexibly, and conveniently.” SHOP was available through the federal platform at HealthCare.gov, but is now only available through SHOP-registered agents and brokers, directly through carriers, or in some cases through state-based SHOP platforms. The federal platform continues to provide eligibility determinations for participating in SHOP and qualifying for the small business tax credit. See 2019 SHOP Plans and Prices.
• Enrollment Results. After five years of operation there is an informative track record of results, with comparative examples in the following table.

Health Insurance Exchanges: Structure and Enrollment

State	Run by	Number of people enrolled, 2018	Number of people enrolled, 2017	% change in enrollment 2017-2018
Alaska	Federal	18,313	19,145	-4.35%
Alabama	Federal	170,211	178,414	-4.60%
Arizona	Federal	165,758	196,291	-15.55%
Arkansas	State-FP	68,100	70,404	-3.27%
California	State	1,521,524	1,556,676	-2.26%
Colorado	State	165,777	161,568	2.61%
Connecticut	State	114,134	111,542	2.32%
Delaware	Fed-state	24,500	27,584	-11.18%
District of Columbia	State	22,469	21,248	5.75%
Florida	Federal	1,715,227	1,760,025	-2.55%
Georgia	Federal	480,912	493,880	-2.63%
Hawaii	State-FP	19,799	18,938	4.55%
Idaho	State	94,507	100,082	-5.57%
Iowa	Fed-state	53,217	51,573	3.19%
Illinois	Fed-state	334,979	356,403	-6.01%
Indiana	Federal	166,711	174,611	-4.52%
Kansas	Federal	98,238	98,780	-0.55%
Kentucky	State-FP	81,155	89,569	10.37%
Idaho	State	94,507	100,082	-5.57%
Louisiana	Federal	109,855	143,577	-23.49%
Maine	Federal	75,809	79,407	-4.53%
Maryland	State	153,584	157,832	-2.69%
Massachusetts	State	270,688	266,664	1.51%
Michigan	Fed-state	293,940	321,451	-8.56%
Minnesota	State	116,358	109,974	5.81%
Mississippi	Federal	83,649	88,483	-5.46%
Missouri	Federal	243,382	244,382	-0.41%
Montana	Federal	47,699	52,473	-9.10%
Nebraska	Federal	88,213	84,371	4.55%
Nevada	State-FP	91,003	89,061	2.18%
New Hampshire	Fed-state	49,573	53,024	-6.51%
New Jersey	Federal	274,782	295,067	-6.87%
New Mexico	State-FP	49,792	54,653	-8.89%
New York	State	253,102	242,880	4.21%
North Carolina	Federal	519,803	549,158	-5.35%
North Dakota	Federal	22,486	21,982	2.29%
Ohio	Federal	230,127	238,843	-3.65%
Oklahoma	Federal	140,184	146,286	-4.17%
Oregon	State-FP	156,105	155,430	0.43%
Pennsylvania	Federal	389,081	426,059	-8.68%
Rhode Island	State	33,021	29,456	12.10%
South Carolina	Federal	215,983	230211	-6.18%
South Dakota	Federal	29,652	29,622	0.10%
Tennessee	Federal	228,646	234,125	-2.34%
Texas	Federal	1,126,838	1,227,290	-8.18%
Utah	Federal/state	194,118	197,187	-1.56%
Vermont	State	28,762	30,682	-6.26%
Virginia	Federal	400,015	410,726	-2.61%
Washington	State	242,850	225,594	7.65%
Wisconsin	Federal	225,435	242,863	-7.18%
West Virginia	Federal	27,409	34,045	-19.49%
Wyoming	Federal	24,529	24,826	-1.20%
		2018 Exchange Enrollment	2017 Exchange Enrollment	% Change in Enrollment 2017 to 2018
National Total		11,760,418	12,216,003	-3.73%
Federal Only Totals		8,289,073	8,751,102	-5.28%
State and State-FP Only		3,471,345	3,464,901	0.19%

Calculated by CMS/CCIIO and AP. Source: Commonwealth Fund, “The Affordable Care Act’s Health Insurance Marketplace by Type”

• State: State-run exchange
• Fed-State: State-run exchange using federally-supported website
• State-FP: State-federal partnership
• Federal: Federally-facilitated marketplace/exchange

Overview

Before the Affordable Care Act (ACA) took effect in 2010, with its requirement that insurers cover people with preexisting conditions, many people were uninsured. Millions of Americans with a preexisting medical condition sought coverage but were unable to purchase it, either because they applied and were rejected or were offered coverage at rates they could not afford. Due to their complex or costly health conditions, these uninsured individuals are a segment of the larger uninsured population that needs health insurance coverage the most.

Too many customers with high risks or costs can push an insurance company toward insolvency or even bankruptcy. Before the ACA, insurers could mitigate these costs by charging consumers different premiums based on several factors, including gender, age and health status, which usually included preexisting health conditions. They could also offer coverage that excluded benefits for preexisting conditions altogether. This practice is part of risk selection, a broad set of practices that insurers use to avoid excess risk.

Between 1976 and 2010, 35 states took action to provide coverage for people with preexisting conditions and established some form of a high-risk health insurance pool. Typically, such a pool is created so health insurance providers can pool clients into premium rating categories to spread the risk. When an enrolled customer is diagnosed with a condition that is expensive to treat, such as cancer or hemophilia, or even common conditions such as diabetes or severe asthma, the insurance carrier must cover these costly claims. Pooling risk allows the higher costs of less healthy individuals to be offset by lower costs of healthier people. Across the states that established these high-risk pools, national enrollment in them reached approximately 226,615 by the end of 2011. Although a few states still operate some form of high-risk pool, after the ACA was implemented, many of these programs were phased out and are no longer operational.

Denying coverage or charging higher premiums based on health status is now prohibited under the ACA, and all individual market enrollees must be classified into a single risk pool. Now, if too many people with high-cost medical needs seek coverage, but not enough healthy people are in the risk pool to counter the costs, insurers charge higher premiums to all enrollees to offset the expenses of the high-need individuals.

During the first three years of the ACA, a temporary federal reinsurance program was established to discourage insurers from setting higher premiums. The program aimed to alleviate uncertainty about who would enroll in the exchanges and marketplaces and what their medical costs would be. As described by the Commonwealth Fund, the threshold specified in the ACA, often called an “attachment point,” was $45,000. It allowed insurers with claimants who surpassed $45,000 in medical expenses annually to qualify for reinsurance reimbursements of 100 percent of the cost, capped at $250,000. The program was financed by assessing fees on both individual and employer plans, including large-group, self-insured employers.

Assuming carriers would gain familiarity with the market and would be able to price their products accordingly, the program was phased out by the end of 2016, as required by the federal law. By the end of 2014, it is estimated that it reduced average premiums in the marketplaces and exchanges by as much as 14 percent. In 2017, the year following the program’s dissolution, the marketplaces saw the most severe jump in premiums they had since the ACA’s inception. This has led to states to once again implement creative solutions to help ease these steep increases.

Policy Options

Resurfacing as a new solution to mitigating risk selection and rising premiums, reinsurance has generated considerable attention from states. Often referred to as insurance for insurers, reinsurance works by cushioning insurers’ obligation to pay expensive medical claims incurred by their members. It does so by covering some of those expenses when they exceed a certain threshold or attachment point. Similarly, insurers can pay premiums coupled with federal funds to cover the claims of specific high-cost enrollees that they group into a high-risk pool. Although states are not required to use federal funds for reinsurance programs, states that do want to receive federal funds must first receive approval from the Centers for Medicare & Medicaid Services (CMS).

To initiate a reinsurance program or invisible high-risk pool using federal funds, states must meet certain criteria. First, they must apply to the CMS for a section 1332 State Innovation Waiver, or what the Trump administration now refers to as a State Relief and Empowerment Waiver. The waiver process originated during the Obama administration, and the Trump administration has further encouraged states to use it as a way to expand coverage options and stabilize their health insurance marketplaces.

Section 1332 waivers give states an opportunity to fashion a new coverage system customized for local context and preferences while still fulfilling the aims of the ACA. To help fund these efforts, states can receive “pass-through” money that the federal government would have otherwise spent on premium tax credits, cost-sharing reductions and small employer tax credits.

According to Health Affairs, “For state-based reinsurance programs, states receive pass-through funding based on the amount of premium tax credits that the federal government would have otherwise provided to eligible individuals absent the waiver.”

Under the ACA, states were required to enact legislation to authorize the state to apply for a 1332 waiver. The Trump administration has since reinterpreted the statute. Now states can fulfill the requirement with existing general statutory authority to implement or enforce the ACA in combination with executive action specific to the 1332 waiver. Prior to the proposed regulation, more than a dozen states passed legislation authorizing use of waivers for varying purposes. To date, seven states have enacted laws to initiate reinsurance programs and all seven have received federal approval. 

There are four statutory guardrails that states must meet before they gain CMS approval:

• Provide coverage that is at least as comprehensive as would be provided without the waiver.
• Provide coverage and cost-sharing protections against excessive out-of-pocket spending that are at least as affordable for the state’s residents as would be provided absent a waiver.
• Provide coverage to a comparable number of state residents.
• The proposal will not increase the federal deficit.

Although not intending to replace them, the Trump administration recently relaxed these guardrails and announced five principles to help further guide federal regulators in approving or denying a state’s waiver or not. The Department of Health and Human Services (HHS) and the Department of the Treasury are responsible for reviewing waiver applications. Regulators will look more favorably upon a proposal if it advances one or more of the following:

• Provide increased access to affordable private-market coverage over public programs, including association health plans and short-term limited duration plans, and increase insurer participation and promote competition.
• Encourage sustainable spending growth by promoting more cost-effective coverage, restraining growth in federal spending, and eliminating state regulations that limit market choice and competition.
• Foster state innovation.
• Support and empower those in need, such as low-income earners or those with high health costs.
• Promote consumer-driven health care.

Although gaining in popularity, critics of state-based reinsurance programs cite several challenges in the implementation process. The most common critique is that, since a state must put up the initial funds for a reinsurance program, it would be difficult for some states with significant budget constraints to adopt this policy. However, once the program is fully implemented, pass-through funding from the federal government can help support the program in future years. In the case of state reinsurance programs, the amount of pass-through funding the state receives is based on what the federal government saves in premium tax credits.

State Examples

Reinsurance

The first state to implement a reinsurance program with a 1332 waiver was Alaska. Enacted in 2016, the Alaska Legislature established the Alaska Reinsurance Program (ARP) to reinsure 100 percent of claims from policyholders that live with 33 high-cost medical conditions. Originally funded by the state general fund and an assessment on insurers, the program is now supported with pass-through funding. So far, the ARP has generated $58 million dollars in savings. The latest rate filings showed a 25 percent decrease in premiums since the program began and many customers will see a significant price drop—from $1,043 in 2017 to $770 for 2019.

Newly approved for 2018, Maine’s waiver uses a similar structure and reinsures claims for eight specific categories of high-cost medical conditions. The Maine Guaranteed Access Reinsurance Association (MGARA) is funded through a $4 per-member, per-month assessment on insurers and third-party administrators. MGARA implements a risk corridor, where reinsurance pays 90 percent of claims above $47,000 and 100 percent after the claimant surpasses $77,000. The state estimates it will receive over $33 million in pass-through funding from the federal government in 2019.

Whereas Alaska and Maine created reinsurance programs based on certain high-cost health conditions, the remaining five states with approved reinsurance programs chose options that work more like traditional reinsurance. For instance, the Minnesota Premium Security Plan (MPSP) covers 80 percent of claims for individuals up to $250,000 once a $50,000 threshold is passed. The program was initially financed using the state general fund and by leveraging funds from the Minnesota Health Care Access Fund (HCAF). The HCAF, which also funds the states’ Medicaid plan, is financed by a 1 percent premium tax and a 2 percent assessment on providers.

After initial implementation, the state expected to receive federal pass-through funding on saved premium tax credits. For 2018, Minnesota received more than $130 million in pass-through funding from the federal government. Even more, 2019 premiums in the individual market are projected to be, on average, 13 percent lower than they would have been without the reinsurance program.

Maryland was one of the more recent states to receive approval from CMS. The Maryland Reinsurance Program (MRP) is financed through a 2.75 percent tax on carriers and Medicaid managed care organizations (MCOs). The MRP will reimburse insurers 80 percent of claims up to $250,000, although the attachment point has yet to be determined. It is estimated that premiums for the 2019 plan year will be 30 percent lower than they would have been without the waiver and will increase enrollment by 5.8 percent. Furthermore, the pass-through savings provided by the federal government are estimated to be over $373 million in 2019 alone. The program will run through 2020, with the potential to be extended through 2023.

High-Risk Pools

North Dakota still operates a high-risk pool program. The Comprehensive Health Association of North Dakota (CHAND) offers health insurance to residents with high-cost preexisting conditions who are unable to find adequate or affordable health insurance in the private market or who have lost their employer-sponsored group health insurance. CHAND covers major medical and prescription drug expenses, subject to certain limitations and exclusions.

A person is eligible to receive $1 million in benefits from CHAND during his or her lifetime. An individual who has received $1 million in CHAND benefits from any combination of benefit plans is not eligible to obtain new coverage through the association. Premiums fund approximately one-half to two-thirds of the program, not to exceed 135 percent of premiums charged in the state for similar coverage. The balance is covered by assessments to companies that write $100,000 in annual premiums on behalf of residents of North Dakota.

North Dakota is currently exploring, through the 1332 waiver process, how to leverage CHAND to gain additional dollars through the federal government. During the 2018 session, lawmakers commissioned a study on the feasibility and desirability of a North Dakota 1332 waiver by exploring the following options:

Modify North Dakota’s current high-risk pool, the CHAND, to allow a greater number of high-risk North Dakotans to obtain their health insurance from CHAND. Analyze the corresponding insurance company assessments necessary for CHAND to successfully operate with increased high-risk membership.

Modify CHAND into an invisible high-risk pool where high-risk North Dakotans can obtain their health insurance.

Create a reinsurance program independent of CHAND.

The conclusion of the study found that, ultimately, the creation of a reinsurance program would be a more viable option.

Conclusion

Reinsurance programs using 1332 waivers may not be a silver bullet to rein in the problem of escalating premiums, but the latest programs do appear to be viable options for states to explore. With enhanced guidelines and looser restrictions under the Trump administration, it is even easier for states to be creative in how plans are developed and marketed within their own boundaries.

Background

The Medicaid Buy-In Program allows working people with disabilities whose income disqualifies them from enrolling in their state’s Medicaid program to gain Medicaid coverage by paying premiums, thus “buying into” the program. The program was initially established by the Balanced Budget Act (BBA) of 1997 and expanded by the Ticket to Work and Work Incentives Improvement Act (TWWIIA) of 1999. The BBA has an income eligibility threshold of 250 percent of the federal poverty level (FPL) and TWWIIA provided an option for states to set their own income eligibility limits, including zero limitations.

In addition, passage of the Family Opportunity Act of 2005 (FOA) provided a Medicaid buy-in option for families of children with disabilities. The goal of FOA was to help families stay together and retain employment. The FOA set the Medicaid income eligibility limit at a maximum of 300 percent of FPL.

Similar programs proposed since the passage of the Affordable Care Act (ACA) would create health coverage options for additional uninsured populations through a Medicaid “public option” offered through state ACA marketplaces, with the ability to obtain tax subsidies for those who qualify for them. These programs may also be referred to as Medicaid buy-in but should not be confused with the traditional Medicaid Buy-In Program for people with disabilities or the FOA.

This brief considers buy-in programs for people with disabilities, which originated with the idea that more people with disabilities could remain in the workforce if they did not face losing their Medicaid benefits when they made too much money under the program’s income guidelines. Keeping Medicaid is important to people with disabilities because the program covers some services of special importance to them that many employer-based insurance plans do not, such as personal care services, nursing facility services or occupational therapy.

The Centers for Medicare & Medicaid Services (CMS) has a well-established process to approve such buy-in programs on a case-by-case basis. As of 2018, 46 states had a Medicaid Buy-In Program for working adults with disabilities¹ and six offered similar programs to children with disabilities whose parents cannot afford private insurance that covers their medical needs.

Medicaid buy-in programs give states the flexibility to extend Medicaid coverage to select populations without necessarily participating in full-fledged Medicaid expansion for the general population. Accordingly, states participating in the Medicaid expansion under the ACA, which covers people with incomes up to 138 percent of FPL can use buy-in programs to expand health coverage to additional people beyond the ACA’s income limit. The Medicaid Buy-In Program also gives states that have not expanded Medicaid the option to provide coverage to additional people beyond the eligibility limits established in their Medicaid programs.

Buy-in programs also allow for fiscal flexibility. States can still establish income ceilings and require monthly premiums. Also, when using a Section 1115 waiver, they do not have to provide the same benefit coverage mandated by normal Medicaid requirements. Many states have established tiered systems in which individuals or families with higher incomes pay higher premiums.

In order to implement a Medicaid buy-in option, states must obtain approval from CMS, through either a State Plan Amendment or a waiver. The specific type of approval required depends on the population to be covered and the benefits they will be offered. For instance, some buy-in programs may operate under Section 1115 demonstration waivers, which allow broad flexibility for programs that promote the objectives of the Medicaid program. Other states have implemented buy-in programs for children with disabilities within their Medicaid State Plans under the authority of the FOA.

Financial and Budget Considerations

The budgetary impact of a buy-in program varies from state to state because of the flexibility given to states in implementing their programs, such as their ability to require copayments and premiums, and because CMS waivers allow for different rates of reimbursement. Under the traditional Medicaid program, the federal government reimburses state expenses on at least a dollar for dollar match with no cap, depending on each state’s Federal Medical Assistance Percentages (FMAP). This is not necessarily the case for buy-in programs under a waiver, which may establish a cap on the federal funds provided.

The federal government reimburses buy-in programs under the same matching formula as traditional Medicaid. CMS can also grant waivers to states trying to expand coverage to other adults and establish varying rates of reimbursement. Under a Section 1115 waiver, for instance, states demonstrating that the expanded coverage will be budget neutral to the federal government can open eligibility to otherwise ineligible adults and receive federal reimbursement, though the rate of reimbursement varies from program to program.

State Examples

Colorado: In addition to its status as a Medicaid expansion state under the ACA, Colorado offers both working adults with disabilities and children with disabilities options to buy in to its Medicaid program. Disabled children whose families earn less than 450 percent of FPL may participate in the buy-in program, which covers the same benefits as the state’s traditional Medicaid program and has no co-payments. Families must pay a monthly premium, depending on their income, as follows:

Families with income between 134 percent and 200 percent of FPL, the first tier required to pay a premium, owe $90 a month.

Families with income between 201 percent and 301 percent of FPL pay a premium of $130 a month.

Families earning more than 301 percent of FPL owe $200 a month.

Colorado’s buy-in program for adults is open to anyone between the ages of 16 and 64 who works, has a disability and earns less than 450 percent of FPL. The program covers the same benefits as the state’s traditional Medicaid program, which includes modest copayments. Certain qualified individuals are also able to access additional long-term services and supports. Participants must pay a monthly premium, ranging from $25 to $200 a month, depending on income.

Texas: Texas opted not to expand Medicaid to the general population under the ACA, but provides options for working adults with disabilities and, since 2011, for children with disabilities under the federal FOA provisions. The Medicaid buy-in for children (MBIC) is open to children in families earning less than 300 percent of the federal poverty guidelines and covers all the same services as the state’s traditional Medicaid program. Families are required to pay both a premium and a share of the cost of their child’s care until the family reaches a predetermined cost-share limit.

Families with incomes less than 200 percent of the poverty level have a cost-share limit of 5 percent of the family’s total income.

The cost-share limit rises to 7.5 percent for families earning between 201 percent and 300 percent of FPL.

Once a family reaches its cost-share limit, the Medicaid program covers the balance of the child’s covered medical costs.

The Texas Medicaid buy-in program for adults is open to state residents who work, have a disability and earn less than 250 percent of FPL. The program covers the same benefits as the state’s traditional Medicaid program. Individuals making more than $1,471 a month must pay a monthly premium assessed on the basis of earned income and other forms of income (such as Social Security).

Maine: Maine offers a buy-in program for both working adults with disabilities and children. Unlike in Colorado and Texas, Maine’s buy-in program for children, a dual Medicaid and Childrens’ Health Insurance Program (CHIP), covers all children whose families earn between 140 percent and 213 percent of FPL, not just children with disabilities. Families with existing insurance can buy into the program as supplemental insurance. The program charges premiums on a sliding scale based on income.

Working adults with disabilities are eligible to buy into Medicaid as long as their monthly income from wages and other earnings totals less than 250 percent of FPL after deductions and they have assets of less than $8,000. The program offers all the benefits of Maine’s traditional Medicaid program and beneficiaries pay premiums of $10 or $20 a month, depending on income.

Conclusion

According to CMS, “Research has shown that the program is not just good for beneficiaries and employers; it is also good policy for Medicaid. An analysis of expenditures and services used showed Medicaid Buy-In participants incurred lower annual Medicaid costs than other adult disabled Medicaid enrollees. In a University of Kansas study, findings indicated Medicaid Buy-In participants had a better quality of life while Medicaid expenditures were less.”

According to the latest 50-state published data posted by the Kaiser Family Foundation, the structures and eligibility for state Medicaid buy-in programs vary as seen in the table that follows.

Medicaid Eligibility through Buy-In Programs for Working People with Disabilities

Location	Monthly Income Limit	Asset Limit: Individual	Asset Limit: Couple	Monthly Income at Which Premiums Begin
Alabama	—	—	—	—
Alaska	$3,607	$10,000	$15,000	Varies by income and household size
Arizona	$2,453	N/A	N/A	>$500
Arkansas	N/A	N/A	N/A	NR
California	$2,453	$2,000	$3,000	$1, premium based on total countable income up to 250% FPL
Colorado	$4,414	N/A	N/A	>40% FPL
Connecticut	$6,250	$10,000	$15,000	Household income >200% FPL
Delaware	$2,698	N/A	N/A	>$981 for individual and $1,328 for couple (100% FPL)
District of Columbia	$2,943	N/A	N/A	No premium
Florida	—	—	—	—
Georgia	$2,199	$4,000	$6,000	$1,472 (150% FPL)
Hawaii	—	—	—	—
Idaho	$1,946	$6,600	$6,600	No premium
Illinois	$3,433	$25,000	$25,000	$251
Indiana	$3,433	$2,000	$3,000	$1,472 (150% FPL)
Iowa	$2,453	$12,000	$13,000	$1,473 (>150% FPL)
Kansas	$2,943	$15,000	$15,000	>$981 for individual and $1,328 for couple (100% FPL)
Kentucky	$2,453	$5,000	$10,000	No premium
Louisiana	$981	$10,000	Excludes spouse	No premium
Maine	$2,453	$8,000	$12,000	$1,473 (>150% FPL)
Maryland	$2,943	$10,000	$15,000	$1,001 (101% FPL)
Massachusetts	N/A	N/A	N/A	$1,473 (>150% FPL)
Michigan	$2,453	$75,000	Excludes spouse	$1,353 (138% FPL)
Minnesota	N/A	$20,000	Excludes spouse	$65.01
Mississippi	$4,971	$24,000	$26,000	$1,472 (150% FPL)
Missouri	—	—	—	—
Montana	$2,453	$15,000	$30,000	100% FPL or less
Nebraska	$981	$4,000	$6,000	NR
Nevada	$2,453	$15,000	Excludes spouse	$1, <200% FPL premium based on 5% of income; 200-250% FPL premium based on 7.5% of income
New Hampshire	$4,414	$27,592	$41,386	$1,472 (150% FPL)
New Jersey	$2,453	$20,000	$30,000	NR
New Mexico	$2,453	$10,000	$15,000	No premium
New York	$2,453	$20,000	$30,000	150% FPL
North Carolina	N/A	$23,448	$23,448	>200% FPL
North Dakota	$2,206	$13,000	$16,000	$10.10
Ohio	$2,453	$11,473	$11,473	$1,472 (150% FPL)
Oklahoma	—	—	—	—
Oregon	$2,493	$5,000	Excludes spouse	$735
Pennsylvania	$2,453	$10,000	$10,000	$1, premium based on 5% of monthly gross income
Rhode Island	$1,962	$10,000	$20,000	150% FPL
South Carolina	—	—	—	—
South Dakota	$2,453	$8,000	Excludes spouse	No response
Tennessee	—	—	—	—
Texas	$2,453	$5,000	Excludes spouse	$1,472 (150% FPL)
Utah	$2,453	$15,000	$15,000	$982 (100% FPL)
Vermont	$2,453	$4,000	$6,000	No premium
Virginia	$785	$2,000	$3,000	No premium
Washington	$2,158	N/A	N/A	$65
West Virginia	$2,453	$2,000	$3,000	$1, premium based on 3.5% of monthly gross income
Wisconsin	$2,452	$15,000	Excludes spouse	>150% FPL
Wyoming	$2,199	N/A	N/A	$1, premium based on 7.5% of monthly gross income

Source: 2015, The Henry J. Kaiser Family Foundation⁹

Table Definitions:

N/A: None. No monthly income or asset limit specified.

NR: Data not reported.

— : No Medicaid Buy-In program for working people with disabilities.

Overview

While most Americans buy their health insurance in the private market, the issue remains at the forefront of political debate because consumers are paying persistently higher premiums. One analysis by the U.S. Department of Health and Human Services (HHS) showed that the average premium for individuals buying insurance in the private market more than doubled in four years—from $2,784 per year in 2013 to $5,712 in 2017. With premiums in some states experiencing percentage increases in the double digits for the 2019 enrollment period, ensuring affordable plans for consumers continues to be a top priority for many policymakers.

According to a Commonwealth Fund report, more than 60 percent of participants in the individual market are either self-employed, or own or work for a small business, making this population particularly susceptible to market fluctuations. Recognizing these concerns, the federal government endorsed expanding certain coverage alternatives, which are intended to give states more flexibility to mitigate surges in premiums. Acting on these new possibilities, state legislatures have taken the lead in developing plans that offer broader choices for their residents.

Background

When the Affordable Care Act (ACA) was enacted in 2010, the law’s individual mandate required, with a few exceptions, people to buy a qualifying health plan (QHP) that met specific ACA requirements, or risk paying a fine. Under the law, a QHP provides 10 essential health benefits (EHBs), follows established limits on cost-sharing (including deductibles, copayments and out-of-pocket maximum amounts), and meets other obligations. The ACA also directed that all insurance policies sold on both the federal and state-based exchanges, and in the small group and individual markets, must cover the same set of services. These include mental health and substance use disorder services, pregnancy and maternity care, and prescription drugs. Although the mandate remains in federal law, as of January 2019, Congress repealed the monetary penalty starting in the 2019 tax year.

Under the ACA, states have primary authority to regulate insurance carriers and products within their boundaries. Even without the protections of the ACA, all 50 states can regulate and initiate policies affecting health insurance. Before the ACA, many states had enacted a substantial number of laws that require private-market health insurers to cover specific benefits and services. While laws vary from state to state, they generally provide a structure that combines business regulation, employer incentives and consumer protections. Nonetheless, the variations can be extensive, especially in required benefits.

These statutes, and state insurance departments and other agencies that administer them, play a significant role. States can allow or regulate alternative coverage, safeguard the solvency of insurance companies, prevent unfair or predatory practices by insurance companies, and address consumer complaints. 

State Examples

Association Health Plans, or AHPs, are intended to offer low-cost, high-quality health coverage with less administrative burden to their members. Self-employed individuals and small businesses—those with 50 or fewer employees—who share a common business interest, such as trade organizations, farm bureaus and chambers of commerce, can band together to form AHPs. A type of multiple employer welfare agreement (MEWA), AHPs have been around since the 1970s but have attracted renewed attention in recent months due to a final regulation issued in June 2018 by the Trump administration. In the rule, the U.S. Department of Labor broadened the definition of “employer” under the federal Employee Retirement Income Security Act (ERISA) of 1974, making it easier for some AHPs to form and be considered a single plan for multiple employers.

As a single, multi-employer plan under ERISA, these AHPs would not have to comply with many ACA requirements, such as the rating rules, which prohibit insurance carriers from discriminating based on gender, age and other factors. The plans are also exempt from providing the same consumer protections and comprehensive package of EHBs guaranteed under the ACA. AHPs can be either “self-insured” or “fully insured.” Self-insured means the employers bear the risk of paying employees’ medical claims while fully-insured means the company purchases insurance through a carrier that is responsible for administering and paying claims.

ERISA sets standards of conduct for those who manage an employee benefit plan and its assets, also known as a fiduciary. According to the Department of Labor, states have primary responsibility over the solvency and licensing of MEWAs, and the Department of Labor enforces the fiduciary provisions for ERISA-covered plans. One survey found that more than 60 percent of employees (more than 100 million, including family members) are in plans that fall under federal, rather than state, oversight, including over 90 percent of workers in companies with 5,000 or more employees. This means that small businesses and proprietors who move into an AHP would no longer be protected by, or subject to, state regulation.

There are concerns that by exempting AHPs from state oversight, it could increase the risk of fraud, insolvency and market instability. Historically, AHPs have been susceptible to these types of unfavorable business practices, leaving policyholders responsible for unpaid claims. Additionally, this might also give AHPs the ability to “cherry-pick” healthy individuals from the larger risk pool, potentially destabilizing the individual market.

Soon after the Trump administration issued the final rule, Iowa enacted legislation allowing the Iowa Farm Bureau Federation to provide a health benefit plan to its members that is similar to an AHP. In November 2018, the Farm Bureau Health Plan started accepting applications for coverage and offering three different plan designs from which customers can choose. Under the new law, Farm Bureau health plans are not considered insurance and not subject to state insurance regulation. Farm Bureau plans are not considered QHPs and therefore do no have to meet federal ACA standards.

In Nebraska, the Farm Bureau (NEFB) announced its plan to adopt an AHP soon after the new rule took effect. The NEFB estimates that it represents 61,000 ranchers, farmers and their families across the state. Medica, a nonprofit health insurer and the sole insurer for Nebraska under the ACA, developed coverage options and premiums for the plan and is working with Farm Bureau agents to sell the new health care products. The AHP is fully insured through Medica and will be available to all NEFB members, regardless of current health status. NEFB also established the Nebraska Farm Bureau Employee Insurance Consortium to sponsor and manage the member health plan and help comply with state and federal laws for AHPs. The consortium is led by a seven-member board of NEFB employer-members.

In contrast, California enacted a law that prohibits sole proprietors or co-owners of a business from participating in AHPs. It also restricts which plans and plan sponsors can offer an AHP. Researchers at Georgetown University’s Health Policy Institute also noted that at least two states, Utah and Pennsylvania, require AHPs to be in existence for several years before they can sell insurance, and require some AHPs to be licensed as insurers.

Short-Term, Limited-Duration Plans, or STLDs, are another option that the Trump administration has encouraged. These plans were originally designed for individuals who need temporary coverage, such as when a person has a transition in employment or needs coverage outside the open enrollment period.

Under the Obama administration, these plans were limited to a three-month duration and could not be extended or renewed. In August 2018, the Trump administration issued a new rule allowing these plans to be purchased for up to 12 months and extended for up to three years.

STLDs are not mentioned or defined in the ACA, putting them outside the scope of the law. In fact, the ACA defines individual health insurance coverage as, “coverage offered to individuals in the individual market, but does not include short-term limited-duration insurance.” Because STLDs are characterized in this way, they do not provide the same protections that plans on the exchanges afford. These include covering people with preexisting conditions, excluding lifetime caps on coverage and allowing parents to cover children on their plans until age 26.

Where some states like Iowa have applauded these moves, others have responded sharply to the new rule. For instance, California enacted a law in September 2018 that will prohibit the sale or renewability of any STLD plans starting on Jan. 1, 2019. The state already had significant restrictions on STLD plans that limited them to a duration of six months with the possibility for a single six-month renewal. An analysis by the Commonwealth Fund found that three other states, New York, New Jersey and Massachusetts, also prohibit the sale of STLDs, while 23 others have adopted regulations severely restricting the sale, contractual duration and renewability of these plans.

Health Reimbursement Accounts, also known as HRAs or health savings accounts (HSAs), are another way that small employers can offer coverage to their employees. An HRA allows small businesses to put aside money in a tax-free account that employees most commonly use to pay for out-of-pocket medical costs such as routine medical visits and treatments for disease. In addition, many expenses that may not be covered by traditional health insurance can be paid for through HRA accounts. These include prescription drugs, eye care, dental care, COBRA premiums, acupuncture, Braille books, midwife services, seeing-eye dogs, qualified long-term care services and more.

Soon, other types of employers may be able to opt out of a “one-size-fits-all” group plan and provide funds to their workers to buy coverage in the individual market with a tax-free HRA. Employers with fewer than 50 workers already have the option to create HRAs under the 21st Century Cures Act.  Furthermore, a proposed rule by HHS and the departments of labor and treasury would relax HRA guidelines, allowing companies of all sizes that don’t have group health plans to pay for employees’ individual premiums through HRAs. The rule would also allow employers that do offer group health plans to fund HRAs with up to $1,800 that workers could use to buy certain benefits, like dental insurance, or to pay for short-term plan premiums. If adopted, the U.S. Treasury expects this ruling to affect 10 million employees spread across 800,000 employers, with almost 1 million newly insured though HRAs.

One concern about expanding the use of HRAs is that it could lead to employers persuading their employees with high health costs to use an HRA to buy individual coverage through the ACA, ultimately reducing their own group health plan costs. This could cause an imbalance in the individual market risk pool, with sicker enrollees potentially leading to higher premiums in the marketplace. In the absence of an individual mandate penalty, higher premiums might provide incentives to people who cannot afford them to leave the market and go without insurance completely.

Conclusion

Interest in alternative coverage options has been renewed in recent years, though not without arguments on both sides. These alternatives may be attractive for small businesses and sole proprietors, yet critics have expressed apprehension about how they will not only affect the individual market, but also consumers. Since these types of plans fall outside ACA oversight, consumers are not afforded the same protections as they would be under the ACA. These include the guaranteed issue clause, under which an insurance carrier must sell a policy to an applicant regardless of health status, and the community rating rule, where insurance companies must charge all members in the pool the same premium. Plans sold under the ACA are also banned from imposing lifetime limits.

One concern raised is that AHPs and STLDs have a history of fraud due to the lack of regulatory oversight. One of the most common forms of misappropriation is when plan administrators collect premiums from their members but fail to pay the medical claims submitted from facilities, patients and providers. Between 2000 and 2002, 144 scams left more than 200,000 policyholders with more than $252 million in medical bills. Just recently, the Federal Trade Commission (FTC) shut down a health insurance carrier in Florida that allegedly collected over $100 million in premiums but left tens of thousands uninsured and responsible for substantial medical bills.

There is also concern that these policy changes will destabilize the individual and small group market by siphoning younger, healthier people away from the private marketplaces, leaving an older, sicker population in the ACA-compliant market. Some worry that these new coverage options will only confuse consumers when they emulate major medical coverage. When someone buys a plan under such a circumstance, they often can run into substantial medical bills, not because they lack health insurance but because the insurance plan they purchased does not provide adequate coverage.

While many states have welcomed the new rules, attorneys general from 11 states and Washington, D.C., have filed suit against the Trump administration. They charge that the rules allow the selling of insurance that offers less coverage and consumer protections than are required by law. Four states, Texas, Nebraska, Georgia and Louisiana, have pledged to defend the rule. They contend that the department is engaged in “reasoned decision-making” by expanding the definition of “employer” to allow more companies to “easily enter into multiple-employer welfare plans and take advantage of the group buying power that large employers naturally use.”

As health care costs continue to rise, so do state interests in innovative ideas to improve quality and reduce costs. While a companion brief in this toolkit addresses innovative state approaches to Medicaid payment models, this brief addresses alternative payment models in private insurance plans and provides potential actions policymakers may consider.

Under the traditional payment system, known as a fee-for-service model, insurers and individuals pay for each service they receive from a health care provider. While this model provides some simplicity in understanding what a patient is paying for, it can create challenges in accounting for the quality or outcome of the care provided. Prescribing the wrong medication for a misdiagnosed patient, for instance, will result in that patient and his or her insurer making a second payment to a physician or emergency room and a second prescription.

Several alternative payment models seek to shift health care providers’ incentives from a system that rewards volume to a system that rewards better health outcomes. In doing this, policymakers will face several challenges, including the scarcity of conclusive data that any single new approach will produce actual cost savings and continuing discussion about how to measure the “quality” or “value” associated with specific services and health outcomes.

Alternative Payment Models

Accountable Care Organizations (ACOs). ACOs focus on creating cost savings by coordinating care among cross-disciplinary providers who have agreed to share responsibility for the cost and quality of their patients’ care. While many ACOs still rely on a fee-for-service model, payers measure the actual cost of care against a predetermined target. When costs exceed that target, providers may pay financial penalties. When costs come in below the target, the payers reward the providers with some of the cost savings. This payment model recognizes that overlapping care and redundant or excessive tests can increase costs and coordination can increase the quality of patient care.  

Although ACOs are most commonly associated with Medicare and other public programs, privately managed ACOs have grown to be a significant part of the health care industry. In 2016, the Commonwealth Fund reported that some 28 million Americans relied on more than 800 ACOs nationwide for coverage. The Leavitt Partners, a health care consulting firm, found that 488 ACOs operated in 2013, half of them outside the Medicare market. NCSL’s brief “Accountable Care Organizations (ACOs)—Health Cost Containment” provides examples of state attempts to manage both private and Medicaid costs using ACOs.

Bundled Payments. Under a bundled payment model, insurers and other payers agree to provide a lump sum for a single “episode of care,” such as a hip replacement or maternity care. When providers receive the payment, insurers withhold a fraction, usually from 2 percent to 3 percent of the agreed upon amount. This incentivizes providers to keep the cost of care below the resulting 97 percent to 98 percent payment, as they will keep any cost savings. As an illustration, if an insurer agreed to pay $1,000 for a full episode of care, which includes a patient’s surgery and recovery, it would withhold $20. If the care provider keeps the cost below $980, both the care providers and the insurer reap a financial reward through cost savings. This model shifts most of the financial risk away from patients and payers and onto care providers, who have additional incentive to avoid superfluous or redundant treatment and to prioritize comprehensive care that prevents complications. NCSL maintains an “Episode of Care and Bundled Payments—Health Cost Containment” brief with information about bundled payments as well as other forms of episodic care, such as capitation payments.  

Capitation Payments. Capitation payments, common in managed care plans, are similar to bundled payments but are made at a population level, rather than at an individual level. Instead of reimbursing care providers for episodes of care, payers pay a fee for each patient each month. This fee broadly reflects cost of care in the region and patient risks. Care providers are responsible for keeping cumulative costs below the cumulative payment. Because this payment model shifts significant financial risks to care providers, it works best for those who serve a large and diverse group of patients with many healthy members.

Health Management Organizations (HMOs). HMOs are one prevalent example of capitated payments. This payment approach most often is based on a single health insurance plan that usually limits coverage to care from doctors and practitioners who work for or contract with the HMO. It generally won’t cover out-of-network care except in an emergency. An HMO may require enrollees to live or work in its service area to be eligible for coverage. HMOs often provide integrated care and focus on prevention and wellness.

Patient-Centered Medical Homes. Patient-centered medical homes use coordinated teams of providers, such as physicians, nurse practitioners, social workers, nutritionists and perhaps specialists, to provide a range of needed services, which is especially effective for high-risk and high-needs patients. Such intensive services increase the primary care costs but can save money by reducing emergency room visits and hospital stays. NCSL has more information available on patient-centered medical homes on our medical homes webpage.

Clinical Pathways. This payment model, most useful in intensive and high-cost health care environments, has gained the most traction in oncology care. Clinical pathway payment models provide a system of choices and decision-making tools to prioritize the patient’s needs and the lowest cost option. For instance, where two treatments exist of equal effectiveness and quality, providers would be equipped with the tools and incentives to prescribe the lower cost option. One way of doing this is to use a database of hundreds of common medical problems, including information about the severity or progression of the medical issue at hand. Physicians can consult this database to find effective treatments while taking into account the unique circumstances of each patient’s condition. Long-term and with broad-scale application, these savings could add up for payers.

State Examples

Vermont: All-Payer ACO Model. Vermont, with the support of the Centers for Medicare & Medicaid Services (CMS), formally adopted its innovative all-payer ACO approach in 2016, with its first year of full implementation for Medicare and Medicaid in 2017. The model incentivizes health care providers and payers, including commercial health care payers, Medicare and Medicaid, to prioritize health care value and quality with a focus on health outcomes.

The model allows ACO providers to participate in both a Medicare and Medicaid ACO agreement in which the ACO receives capitated monthly payments. Providers receive a monthly payment to cover all costs of their covered patients. The highly coordinated structure inherent to ACOs allows for cost savings by closely aligning patient care among various providers, and the capitated payment structure incentivizes further savings by rewarding efficiency.

Initial positive results from the transition are highlighted in the Commonwealth Fund’s report. It found that Medicaid beneficiaries attributed to the ACO were making greater use of primary care and behavioral health services, as well as pharmacy benefits, and made fewer emergency room visits compared with other beneficiaries. By 2022, Vermont aims to have nearly 70 percent of its 624,000 residents attributed to an ACO. Commercial insurers began implementing the model in 2018 and initial findings are expected in 2019.

Arkansas: Multi-payer Bundled Payments. The Arkansas Health Care Payment Improvement Initiative, begun in 2012, includes most of the state’s largest payment providers—including Medicaid, private insurers and some of the state’s largest employers, such as Walmart. The initiative uses bundled payments that cover specific episodes of care instead of individual services. The initiative also implemented a new patient-centered medical home model to allow for better treatment of chronic conditions.

Several early metrics suggest the model helps save costs. Blue Cross Blue Shield reports that the average hospital stay for patients experiencing congestive heart failure shrank by 17 percent from 2014 to 2015. In addition, a report by the National Bureau of Economic Research found that the state’s perinatal episode of care reduced spending by 3.8 percent relative to other states.

Massachusetts: Patient-Centered Medical Home Initiative. From 2012 to 2014, Massachusetts implemented the Patient-Centered Medical Home Initiative. This encouraged health plans, through incentives and penalties, to contract with providers on a global payment basis instead of the standard fee-for-service method. The Massachusetts cost-control legislation included benchmarks intended to encourage providers in the state Medicaid program and other programs to move toward ACOs. The initiative also limited total health spending within Massachusetts to the rate of inflation and provided for annual reporting to assess success of this provision, as well as to examine cost drivers. The law builds on the momentum in the private market by developing processes for certifying organizations as ACOs and patient-centered medical homes. In addition, the law provided the Health Policy Commission with the authority to create a program through which organizations can be designated as “Model ACOs.” Only ACOs that have demonstrated best practices for quality improvement, cost containment and patient protections can earn this distinction. The law required state insurance providers, like the state’s Medicaid program and Health Connector (Massachusetts’ health insurance exchange that connects consumers to private and public insurance), to prioritize these ACOs to deliver publicly funded health care.

The Massachusetts Executive Office of Health and Human Services (EOHHS) set the goal for all primary care practices in Massachusetts to become patient-centered medical homes by the year 2015. The Massachusetts PCMH Initiative (PCMHI) is intended to address a series of challenges, including: fragmented care that harms patient health status and increases costs; increasing prevalence of chronic disease, and suboptimal management of chronic disease among patients with such illness; and a growing shortage of primary care providers. Early evaluations of the program have found statistically significant improvements in chronic disease management, prevention and care coordination in participating providers. Researchers believe this will translate into cost savings down the road.

New England States: The Primary Care Investments Workgroup, launched in 2017, includes representatives from four states—Connecticut, Massachusetts, Rhode Island and Vermont. The group’s main goal was to explore opportunities for improving primary care by comparing each state’s strategies and activities. During meetings over the past year, the group engaged in discussions about each state’s approach to primary care investments, including their policy environments and data capabilities, and potential opportunities for collaboration. Their report issued in October 2018 compares spending across major payers, with primary care making up just 8 percent of overall care costs.

Conclusion

No single document or initiative can provide a comprehensive menu of every policy option available to legislators searching for solutions to rising health care costs. The U.S. health care system remains tremendously complex and prescriptions for improved health outcomes and cost savings will naturally vary from state to state, depending on local challenges and opportunities. Any long-term approach to cost-containment, balanced with quality care, will likely use multiple approaches tailored to fit each state.

Background

Over its 50-year history, Medicaid has been an important and evolving issue for state policymakers. Approximately one in five, or 65 million, Americans received coverage through Medicaid in March 2019, making it the largest source of coverage for low-income children, pregnant women, adults, seniors and people with disabilities. Although federal law sets Medicaid minimum standards related to eligible groups, required benefits and provider payments, it offers states latitude in decisions about program eligibility, optional benefits, premiums and cost-sharing, delivery system and provider payments. States have adopted a wide range of innovative strategies to improve enrollee health and the value of their Medicaid programs. As a result, each state Medicaid program is unique, reflecting that states have options through their state plan amendments or by using Section 1115 waivers to design programs that better meet their needs and priorities.

This brief provides an overview of Medicaid coverage, enrollment, costs and implications for state lawmakers. This introduction to Medicaid is followed by a series of toolkit briefs that address key public and private insurance coverage issues and opportunities for state policymakers.

Medicaid Overview

Medicaid is a publicly financed program that provides health insurance for millions of low-income Americans, including eligible low-income adults, children, pregnant women, elderly adults and people with disabilities. Created by Congress in 1965 under Title XIX of the Social Security Act, Medicaid is a shared program between the federal government and the states. While the federal government provides substantial funding and oversight for Medicaid through the Centers for Medicare & Medicaid Services (CMS), each state manages its own Medicaid program and must contribute matching funds. States vary in the amount of legislative oversight they provide to their programs. Federal statute establishes the fundamental program parameters. Although Medicaid is an optional program, all 50 states, the District of Columbia and the territories participate.

Federal law requires participating states to cover certain services and allows states to select from a menu of other optional services. Federal law also requires state Medicaid programs to cover certain populations and allows states the option of covering others. One reason Medicaid is called an “entitlement program” is because states must provide coverage to certain groups or “categories” of eligible people as defined by law. In addition, federal funding is guaranteed for these groups and is provided based on need. When there’s an economic recession and individuals lose income and employment, federal Medicaid funding is designed to automatically grow as enrollment increases.

The following groups are entitled to services through the Medicaid program (they are sometimes referred to as “categorically eligible”):

• Low-income infants and children who qualify for Medicaid and/or the Children’s Health Insurance Program (CHIP) based on income or other guidelines.
• Low-income pregnant women and certain parents of qualified children.
• Low-income individuals of all ages with disabilities.
• Low-income seniors, most of whom are also covered by Medicare, often referred to as individuals who are “dually eligible” for both programs.

The Affordable Care Act (ACA) extended Medicaid coverage to all adults under the age of 65 with incomes below 138 percent of the federal poverty line. The ACA faced almost immediate legal challenges. The June 2012 Supreme Court ruling in National Federation of Independent Business (NFIB) v. Sebelius upheld the constitutionality of the ACA, but essentially made the Medicaid expansion provision an option for states, rather than mandatory.  As shown in Figure 1, as of February 2019, 36 states including the District of Columbia had adopted Medicaid expansion as permitted under provisions of the ACA. Most states that opted to expand Medicaid did so through a legislative process and a state plan amendment, while seven states—Arizona, Arkansas, Indiana, Iowa, Michigan, Montana and New Hampshire—used a Section 1115 waiver, which allowed them to modify some of the federal requirements. Information on each state’s eligibility levels is available on the website for the Centers for Medicare & Medicaid Services.

Medicaid and State Budgets

States bear substantial costs of providing health care for indigent patients. When low-income people have access to care through Medicaid, the costs are shared with the federal government rather than shifted elsewhere, such as other tax-funded programs, emergency rooms or private insurance plans in the form of higher premiums. Medicaid helps states pay for uncompensated care for indigent patients, those who are uninsured and cannot pay for their health care. Medicaid reimbursement can help support hospital services, particularly rural hospitals, hospitals with a high volume of Medicaid clients and Federally Qualified Health Centers. When people have access to care, chronic conditions can be managed more effectively—possibly preventing a crisis or emergency care, and ultimately reducing costs.

Medicaid accounts for about 17 percent of total state spending, according to The Pew Charitable Trusts. As health care costs rise faster than other sectors of the economy, states struggle to keep costs down while preserving other programs and safety-net services. Medicaid spending per person is growing at a comparable or slower rate than private insurance but increasing Medicaid enrollment continues to drive overall increases in state expenditures for Medicaid.

Outside of enrollment increases, one of the key cost drivers in Medicaid is providing coverage for people with complex health care needs such as multiple chronic conditions and serious disabilities, as well as being the primary payer for high-cost services like long-term care. As described in a subsequent brief in this series, the top 5 percent of patients, ranked by their health care expenses, account for about half of the nation’s health care expenditures, including a large share of Medicaid budgets. Individuals with disabilities and the elderly comprise 24 percent of the Medicaid population, but they account for 63 percent of all Medicaid costs.

Figure 2 illustrates trends in Medicaid’s share of state budgets between 1989 and 2015. As of 2015, Medicaid accounted for greater than 28 percent of spending from all sources (federal and state funding), almost 20 percent of spending from state general funds only, and nearly 16 percent of spending from all sources of state funds (including other dedicated sources of revenue like tobacco master settlement agreement funds or health care related taxes).

State Medicaid Policy Levers and Options

Since Medicaid is a joint state-federal partnership with shared authority and financing, state lawmakers have important roles in funding and overseeing their programs. These roles may include expanding Medicaid, enacting legislation to define Section 1115 waiver components, defining payment and delivery system reforms, implementing new eligibility rules or incentives, improving data capacity to inform decisions, and establishing work groups or task forces. Although federal law sets Medicaid minimum standards related to eligible groups and required benefits, states have significant latitude to make decisions about program eligibility, optional benefits, premiums and cost sharing, delivery system and provider payments. These decisions are then implemented either through a state plan amendment process or through a Medicaid waiver process.

• A Medicaid state plan is an agreement between a state and the federal government describing how that state administers its Medicaid program (as well as CHIP in states that administer their CHIP programs through Medicaid) within federal requirements.
• A Medicaid waiver is a written approval from the federal government (reviewed and determined by CMS) that allows states to vary from the rules of the standard federal program. In other words, the state is allowed to “waive” some of the requirements of the federal program. States have long used waivers for increased flexibility in how they deliver services in their state program in a way that meets their unique needs. Waivers authorized by the Social Security Act include Section 1915 and Section 1115. Section 1915 waivers allow states to require beneficiaries to use a specified provider network. In addition, Section 1915 waivers are a key tool for states to deliver long-term services and supports in community-based settings.
• Section 1115 waivers are demonstration or pilot projects that states can use to test new concepts. As of April 2019, 39 states had at least one approved 1115 waiver and 17 states had one or more waivers pending approval by CMS, according to tracking by the Kaiser Family Foundation. States have used these waivers to extend coverage to additional populations not defined in law, use healthy behavior incentives to reduce cost-sharing obligations and require some cost-sharing. They also have used them to deliver Medicaid long-term services and supports through capitated managed care, under which the provider is paid a flat fee for each patient covered. In addition, states have received federal approval to use these waivers to charge premiums or require beneficiaries to work to maintain coverage—approaches not previously approved for use in the Medicaid program.

A significant number of Section 1115 waivers involve behavioral health. For example, state legislators are taking steps to integrate primary medical care and behavioral health delivery systems to improve health outcomes and control Medicaid costs for the 9 million enrollees with a behavioral health diagnosis and the 3 million with a substance use disorder. According to the Kaiser Family Foundation, as of April 2019, 28 states were using Section 1115 Medicaid waivers to provide enhanced behavioral health services to targeted groups, expand Medicaid eligibility to additional populations with behavioral health needs, and fund physical and behavioral health integration and other delivery system reforms.

Conclusion

As Medicaid consumes a larger share of state budgets, policymakers seek ways to improve outcomes, reduce costs and make sure their state’s program is managed as efficiently and effectively as possible. While there is no silver bullet, states are adopting a wide array of strategies to reduce spending, improve care outcomes and quality, and provide states with a return on their health investments. Companion briefs in this toolkit on high-need, high-cost Medicaid enrollees and behavioral and physical health integration outline various steps states are taking to fund and implement care coordination models or care management programs that improve outcomes for people with complex needs. .

Five percent of patients account for about half of the nation’s health care expenditures. The same is true of the Medicaid program, with 5 percent of enrollees accounting for over half (54 percent) of Medicaid expenditures. Further, 1 percent of beneficiaries with complex care needs account for one-quarter of all Medicaid expenditures, according to the Centers for Medicare and Medicaid Services (CMS). Due to the complexity of their illnesses or conditions, these “high-need” patients are the most costly, relative to healthier groups.

The Commonwealth Fund, a nonprofit private foundation, defines “high-need” patients as those having two or more chronic medical conditions and physical or cognitive limitations. A 2017 National Academy of Medicine report finds that high-need patients:

• Are often seniors and younger adults with disabilities, chronic mental illness and/or substance abuse disorders.
• Have short-term needs, such as those following a complex surgery, or long-term needs related to multiple chronic conditions.
• Are more likely than others not defined as high-need to have public insurance (83 percent have Medicare, Medicaid or both), report being in fair to poor health, and have a behavioral or substance abuse condition.

High-need adults also are more likely than other adults to have unmet emotional and social needs, such as social isolation or emotional distress (e.g., caused by inability to pay the rent or utility bill). These circumstances can compound their medical condition and increase public health care spending. Researchers found one in 20 adults (5 percent) age 18 and older who live in the United States, or about 12 million people, met this definition of high need. Young people with complex medical conditions represent 0.4 to 0.7 percent of all U.S. children, or between 320,000 to 560,000 individuals, and account for about one-third (34 percent) of all Medicaid spending on children.

According to the Commonwealth Fund, high-need patients are a growing population that could benefit from coordinated health services. A 2016 survey administered by the foundation found that the health care system fails to meet the complex needs of these patients. The study’s authors concluded that “with better access to care and good patient-provider communication, high-need patients are less likely to delay essential care and less likely to go to the emergency department for nonurgent care, and thus less likely to accrue avoidable costs.”

Best and Promising Practices to Improve Outcomes for High-Need, High-Cost Groups

Across the country, states fund and implement care coordination models, or care management programs, that improve outcomes for people with complex needs. The programs are designed to decrease costly and unnecessary treatments and avoid preventable hospital and emergency room visits. While many of these programs offer the potential to reduce costs while improving patients’ health, evidence is scarce and few have demonstrated net cost savings to date. Cost savings analysis is difficult to demonstrate when the programs are embedded in a fee-for-service care system. A team of researchers at the Commonwealth Fund state that “incentives created by accountable care and other value-based purchasing initiatives may strengthen the business case for adopting carefully designed and well-executed care coordination models.” Research shows that the most effective models include the elements outlined below.

Several care coordination models have shown promise for high-need, high-cost patients, including:

• Interdisciplinary primary care (coordination of preventive, primary, acute and long-term care services)
• Enhancements to primary care (including care and case management, disease management, preventive home visits, geriatric evaluation and management, chronic disease self-management and more)
• Transitional care (improved discharge transitions from hospital to home)
• Acute care in patients’ homes (programs that substitute care in the patient’s home instead of in a hospital)
• Team care in nursing homes
• Comprehensive care in hospitals

The evaluation of these models shows positive results in areas related to quality of care or a patient’s quality of life. Most models reduced hospital stays, though the evidence was mixed. Three models—interdisciplinary primary care for heart failure patients, transitional care from hospital to home and “hospital-at-home” programs—showed evidence of lower cost.

State Examples

States are taking various steps to coordinate care for Medicaid beneficiaries with complex health and social service needs. As described in the companion brief on Medicaid payment models, states are adopting payment and delivery reforms, including through health homes and accountable care organizations. Their goals are to encourage collaboration and care coordination among different providers, reduce spending on unnecessary services and reward providers for delivering higher-quality care. States are adopting the following strategies to improve outcomes and control spending for this population.

Targeting Services to High-Need Enrollees

CMS in 2017 approved a five-year extension to Utah’s Section 1115 Primary Care Network demonstration. The extension adds covered benefits for, and continues providing health coverage to, vulnerable populations, some of whom are not eligible for Medicaid under the state plan. The approval authorizes Utah to provide benefits to “targeted adults” to improve their health outcomes. These include individuals without dependent children earning up to 5 percent of the federal poverty level and who are chronically homeless, and adults who need substance use or mental health treatment, including those involved in the criminal justice system.

Coordinating Care and Financing for Dual-Eligible Enrollees

States are addressing the high cost of caring for individuals who are eligible for both Medicare and Medicaid, also known as “dual-eligible” patients. State efforts emphasize coordinated care in a patient’s home or in the community, which could bring substantial savings by lowering the rate of emergency room use, reducing hospital admissions and readmissions, and decreasing reliance on long-term care facilities. For example:

• Massachusetts’ One Care Program is the first Section 1115 demonstration focusing exclusively on the dual-eligible population younger than age 65. Under the demonstration, participating health plans receive capitated Medicare and Medicaid payments to provide medical, behavioral health, and long-term services and supports. The One Care model involves interdisciplinary care teams whose members work with patients to identify and address their unmet needs. One study of Care One found a 7.5 percent reduction in hospital admissions and a 6.4 percent drop in emergency department visits for enrollees after 12 months of participation. Studies also pointed out that the program incurred more costs in the first year, stemming from up-front expenses for developing provider networks, meeting the needs of patients with substance use disorders, and managing care transitions.

As of 2018, 31 states operated the Program of All-Inclusive Care for the Elderly (PACE) as a strategy for helping frail, elderly patients with functional limitations stay in their homes. PACE pools funding from Medicare and Medicaid to offer a comprehensive set of services to enrollees, most of whom are eligible for Medicare and Medicaid benefits. A literature review on the PACE program found mixed results on enrollee use of acute and long-term care services. PACE enrollees had fewer hospitalizations than individuals in fee-for-service Medicare, but higher rates of nursing home admission. The study found that the program increased Medicaid expenditures and had a neutral effect on Medicare costs.

Using Data to Identify and Support High-Need Patients

States are improving their capacity to use data to identify and support beneficiaries with complex care needs. For example:

• New Jersey’s “hot-spotting” initiative, under the Camden Coalition of Healthcare Providers, tracks “super-utilizers.” The coalition identifies “hot spots” in the community that have a high concentration of high-need health patients to improve their care and reduce costs. AmeriCorps volunteers help connect super-utilizers to outpatient resources and accompany patients to appointments, coordinate medications, determine benefit eligibility and offer emotional support. The coalition’s founder, Dr. Jeffrey Brenner, reported a 50 percent drop in avoidable hospitalizations among patients helped by the coalition.
• Washington state developed the Predictive Risk Intelligence System (PRISM) to identify and support care management for high-risk Medicaid patients. The tool identifies clients in need of comprehensive care coordination based on their risk scores, which reflect a variety of factors, including outpatient and inpatient services, medications, and emergency room and office visits. PRISM integrates patient data from medical, social service, behavioral health and long-term care data systems, and displays client data for clinicians and care managers who can use it for a variety of purposes, such as to monitor patients’ medication use or identify potential barriers to care.
• According to the Washington Department of Social and Health Services, early results from the Chronic Care Management (CCM) program showed net savings of $27 per member per month. They also found increased patient satisfaction and reduced mortality for individuals enrolled in CCM pilots relative to a control group. Despite its small sample size and other limitations, the study’s authors noted “promising potential to improve health outcomes and control costs for patients with high medical risk and major functional limitations.”
• Moreover, a 2015 article published by the Deloitte consulting firm finds that “by moving data and information management to the front end of the work so it becomes a day-to-day tool for decision-making rather than a back-end tool for accountability, states are working toward redefining the business model for health and human services.” The authors go on to note that such tools can identify which interventions work and which blend of services can help each client.

Developing and Replicating Approaches

CMS in 2015 selected the District of Columbia and four states—New Jersey, Oregon, Texas and Virginia—to participate in a multi-state Medicaid Innovation Accelerator Program, which focused on improving care for beneficiaries with complex care needs and high costs. The program worked with state Medicaid programs to design, plan and implement strategies to improve care coordination for high-need beneficiaries. For example:

• New Jersey focused on substance use services for young adults dependent on opiates using 1115 waiver demonstration authority. According to New Jersey’s Section 1115 waiver renewal application, the state sought technical assistance through CMS’ Substance Use Disorder (SUD) and Beneficiaries with Complex Needs accelerator programs. The programs helped the state identify a value-based reimbursement method that offers incentives for better health outcomes and develop data analytic capabilities to share enrollee information across state agencies. The state’s work in these programs informed its 2017 Section 1115 waiver, which created an SUD continuum of care that uses Medicaid and state funds to provide comprehensive and coordinated benefits to adults and children.
• Oregon engaged with the accelerator program to evaluate the use of health services and quality of care being provided to the dually eligible Medicare and Medicaid population under the state’s Coordinated Care Organization (CCO) model.” Oregon joined the program to support its efforts to bring together “All Payer All Claims” data and Medicaid data to inform a statewide evaluation of dually eligible beneficiaries in coordinated care. As a result, according to the Section 1115 waiver renewal, the Oregon Health Authority (OHA) anticipated “having better data integration to allow us to take a deeper dive into duals’ work and help inform legislative and policy initiatives going forward.” The 2016 program evaluation published by OHA and the Oregon Health and Science University found that Medicaid’s transformation to coordinated care organizations “improved quality of care for dual-eligibles to some degree, but did not lead to any meaningful improvement in health service use.”

Millions of Americans of all ages need long-term services and supports (LTSS) that result from disabling conditions and chronic illnesses. LTSS includes nursing facility care, adult day care, transportation, home health aides or family caregiving assistance and personal care services. Specific services help individuals complete activities of daily living—for example, dressing, bathing, housework, and managing medications or finances. Services are provided in the home or in institutional settings such as nursing homes, supportive housing or assisted living facilities.

People who require LTSS represent a diverse group, including those older than 65 and younger adults with different types of physical and mental disabilities, as well as children who are medically fragile. Demand for such services is projected to grow in the coming years—as are the associated costs, which are often paid for by public dollars. Medicaid, the largest single payer of LTSS across age groups, accounts for about half of all LTSS spending.

Home- and Community-Based Services

In response to consumer demands, court cases and federal law changes, states have been reforming their Medicaid-funded long-term care systems by moving away from costly institutional care toward home- and community-based services (HCBS), which typically cost less and are more popular among people who need LTSS. According to the Kaiser Family Foundation, in 2015, the median annual cost for nursing facility care was $91,250. Even though HCBS are generally less expensive than institution-based care, they may still represent a major financial commitment or burden for individuals, their families and states. In 2015, the median cost for one year of home health aide services (at $20 per hour, 44 hours per week) was almost $45,800 and adult day care (at $69 per day, five days per week) totaled almost $18,000.

Unlike nursing facility care, which is a mandatory service under Medicaid’s federal requirements, states may choose whether to cover HCBS in their Medicaid programs. To qualify for Medicaid-supported HCBS, a person must meet the criteria for a nursing facility level of care. States vary on the specific services they offer and the authority they use to establish these programs. Some home- and community-based services are offered within a Medicaid state plan, while other HCBS programs operate under Medicaid 1915(c) or 1115 waivers. Under waiver programs, states have the flexibility to target services to specific populations, such as seniors with dementia or children with developmental disabilities. Otherwise, absent a waiver, Medicaid rules require states to offer access to similar types and levels of care to all Medicaid enrollees, as needed.

As more people who qualify for LTSS receive such care in community settings, Medicaid spending on HCBS outpaced spending on institutional long-term care for the first time in 2013 and continues to increase. In fact, 55 percent of Medicaid spending on LTSS was for HCBS in 2015. The federal Money Follows the Person demonstration project has provided grants to help states rebalance their Medicaid long-term care systems by helping individuals transition from institutions back into community-based services. The Centers for Medicare & Medicaid Services (CMS) last awarded funds in 2016, but the 43 participating states and the District of Columbia have until 2020 to expend funds.

Managed Long-Term Services and Supports

State policymakers are taking steps to ensure that affordable and high-quality long-term services and supports are accessible to the growing population in need of such services, and to manage the impact to state budgets.

State legislators can play key roles in reforming their LTSS systems by both shifting services to home settings and to capitated, managed care plans—providing a per-patient monthly payment rather than a set fee for each health service. State Medicaid agencies increasingly provide long-term services and supports through capitated contracts with managed care organizations, known as managed long-term services and supports (MLTSS). States adopt MLTSS for a variety of reasons, including to integrate primary care, behavioral health, and long-term care services. MLTSS encourages health care providers to deliver coordinated, patient-centered care, and it also can improve outcomes through care management, coordinated care teams and value-based purchasing.

According to a 2018 study published by Truven Health Analytics, state Medicaid agencies have “rapidly increased” the use of managed care to provide LTSS. Medicaid spending for MLTSS more than doubled in three years from 2012 to 2015, and continued growth is expected as states implement new programs. Given the complex health care needs of MLTSS beneficiaries, it is important for states to monitor access to necessary services and supports as they transition away from fee-for-service and into managed care programs. According to a 2017 study, four states that had adopted MLTSS agreed that “maintaining access to LTSS is critical to the success of MLTSS.”

Those states had taken several steps—such as adopting provider network standards and transition of care policies—to ensure uninterrupted access to necessary long-term services and supports. As shown in Figure 1, as of January 2018, 24 states were operating MLTSS programs, which collectively covered 1.8 million beneficiaries. States use different Medicaid managed care authorities to establish these programs, including through federal waivers, such as Section 1115, Section 1915(a) or Section 1915 (b)/(c) waivers, or through state plan authority.

State Examples

As of August 2018, 18 states used Section 1115 waivers to provide capitated MLTSS, according to the Kaiser Family Foundation. For example:

• New Jersey combined four 1915(c) home- and community-based services waivers into one comprehensive 1115 Medicaid waiver between 2012 and 2017. The waiver expanded managed care to include LTSS and behavioral health services for individuals receiving MLTSS. According to a 2015 program evaluation, the state reported that nearly 33 percent of the Medicaid long-term care population was enrolled in HCBS, up from about 29 percent in July of 2014. The nursing facility population decreased by more than 1,500 individuals between 2014 and 2015. While increasing numbers served in HCBS “seem promising,” the evaluation finds that most stakeholders felt it was too early to know the full impact of MLTSS on consumers or providers.
• Tennessee operates the CHOICES in Long Term Services and Supports program for seniors and adults with physical disabilities. The program provides HCBS to help individuals live in their home or community, and nursing facility services when needed. The state also operates the Employment and Community First CHOICES program for individuals of all ages who have an intellectual or developmental disability. Between 2005 and 2017, the percentage of elderly and adults with physical disabilities receiving nursing facility services has declined from 97 percent to 62 percent, while the percentage of individuals receiving HCBS has increased from 3 percent to 39 percent. Funds awarded to the state through CMS’ Money Follows the Person program have helped transition individuals in nursing homes and institutions to home and community-based care. Tennessee also operates the Program of All-Inclusive Care for the Elderly (PACE) in Hamilton County to help frail, elderly patients with functional limitations stay in their homes.
• Wisconsin supports consumer choice through several innovative programs, including the Family Care and IRIS (Include, Respect, I Self-Direct) programs. These Medicaid waiver programs provide eligible individuals with HCBS in an effort to avoid using costly institutions. Family Care has been found to provide cost-effective and quality care, prompting lawmakers to pass legislation in 2015 that expanded the program statewide. According to the Wisconsin Department of Human Services, the per member per month cost for Family Care members was $3,340, or $550 less per member per month for individuals enrolled in the state’s legacy waivers.

The LTSS State Scorecard—a tool created by AARP, the Commonwealth Fund and The SCAN Foundation—aims to improve LTSS by providing comparable state data to measure progress and performance and identify areas for improvement. The scorecard measures 25 indicators across five dimensions: affordability and access; choice of setting and provider; quality of life and quality of care; support for family caregivers; and effective transitions between care settings or providers. Beginning in 2017, the scorecard also examined housing and transportation measures since affordable and accessible housing and transportation help the aging population and individuals with disabilities remain in their homes and communities. Figure 2 shows rankings from the LTSS State Scorecard.

Evidence of Effectiveness

A 2018 study published by the Medicaid and CHIP Payment Access Commission (MACPAC) finds “modest evidence of some successes” in state MLTSS programs, yet unanswered questions resulting from limited data and insufficient targeted quality measures. Another 2018 study released by CMS compared use of institutional care, home- and community-based services, and personal care by MLTSS enrollees in New York’s Managed Long-Term Care (MLTC) program and Tennessee’s CHOICES program, relative to comparable fee-for-service beneficiaries. It found mixed results “with respect to the goal of rebalancing care from institutional settings to care in home- and community-based settings.” For example, enrollment in New York’s MLTC program was associated with lower institutional care and higher use of HCBS and personal care as compared with individuals enrolled in fee-for-service LTSS. After enrollment in Tennessee’s CHOICES program, enrollees were more likely to use personal care, but changes in their use of institutional care were not significant, compared with individuals enrolled in fee-for-service programs.

Conclusion

States continue to innovate to improve their health systems, motivated by rising costs, inefficiencies and consumer demands for better care. Overall, new payment designs are driving innovation in how states pay for and deliver health care, improving the chances that smart investments in health will move the overall system toward better outcomes, lower costs and better access to care.

As the largest payer of behavioral health services in the United States, Medicaid plays an important role in covering and paying for a broad array of services to address mental illness and substance use disorders. One in five Medicaid enrollees has a behavioral health diagnosis and, when combined with physical health care services, this population accounts for about half of total Medicaid expenditures (see right). Total Medicaid spending for enrollees with a behavioral health diagnosis is nearly four times higher than that for individuals without a diagnosis. This reflects the array of physical conditions, such as asthma or diabetes, that often accompany a behavioral health diagnosis.

As policymakers consider how to control Medicaid costs and improve health outcomes for the 9 million enrollees with a behavioral health diagnosis and the 3 million with a substance use disorder, many are taking steps to integrate primary and behavioral health care. States have adopted various strategies to address the traditionally fragmented system of care and to integrate behavioral and physical health, including through comprehensive managed care, health homes and accountable care organizations (ACOs).

How Integration Helps Address Barriers, Improve Care and Reduce Costs

Historically, the health care system has dealt with a person’s physical needs separately from his or her behavioral needs, using different payment structures for each. When care is fragmented and physical needs are treated separately from behavioral ones, it ultimately leads to higher costs and less effective results. An estimated 60 to 70 percent of patients with behavioral health conditions who seek care in emergency rooms or primary care clinics leave without receiving treatment for their mental health or substance abuse needs. This increases the chances that they will have difficulty recovering from those conditions. Moreover, a 2017 report by the Milbank Memorial Fund found that only 15 to 25 percent of children with psychiatric disorders receive needed care.

Integrating services can help address these challenges. According to the Centers for Medicare & Medicaid Services (CMS), “Given the prevalence of mental health conditions in the Medicaid population, the high level of Medicaid spending on behavioral health care, and the adverse impact that uncoordinated care can have on people’s health, initiatives to integrate physical and mental health are a top priority for Medicaid agencies.” Effective, integrated care offers better access to individualized treatments, increased collaboration among providers, a decrease in unnecessary emergency services, greater adherence to treatment and increased mental and physical health. The American Psychiatric Association found that integrated behavioral health care can save between 9 percent and 16 percent of the additional costs incurred by patients with behavioral health issues.

State Examples

States, the federal government and health care providers have made significant investments and enacted a wide range of strategies to integrate physical and behavioral services. Examples of state actions and evidence of their effectiveness follow.

Integrate Behavioral Health in the Primary Care Setting

Primary care settings “have become a gateway for many individuals with behavioral health and primary care needs,” finds the U.S. Substance Abuse and Mental Health Services Administration (SAMHSA). To address patients’ needs, primary care providers are integrating behavioral health care services through care managers, behavioral health consultants or consultation models.

States are adopting various strategies to support integration within the primary care setting. For example, in 2015, Iowa lawmakers passed legislation to establish patient-centered medical homes, accountable care organizations and other integrated care models to improve quality and health while reducing health care costs. Legislators required the Department of Public Health to collaborate with Iowa Medicaid and child health specialty clinics to integrate the “1st Five” initiative. It supports health providers in efforts to detect social-emotional and developmental delays in children from birth to age 5, and coordinates referrals, interventions and follow-up. While its long-term effects are not yet available, a 2016 provider survey shows progress toward the initiative’s goal of expanding and supporting the universal use of screening and surveillance tools in health practices. The percent of 1st Five health practices using a high-quality screening tool increased from 40 percent in 2013 to 64 percent in 2016. Almost 90 percent of providers reported that the program helped reduce barriers to implementing surveillance and screening.

Integrate Care Through Health Homes

Some states are integrating physical and mental health care under Medicaid’s primary care health home model. Using an evidence-based collaborative care approach, primary care providers, care managers and psychiatric consultants work together to provide care and monitor patients’ progress. These programs have been shown to be both clinically effective and cost-effective for a variety of mental health conditions, such as anxiety and depression. Community mental health centers are among the providers designated as health homes for Medicaid beneficiaries with serious mental illnesses.

CMS in 2011 approved Missouri’s State Plan Amendment to create Community Mental Health Center (CMHC) Healthcare Homes (HCH) for enrollees with serious mental illness. The homes provide care coordination and disease management for chronic conditions. A 2016 analysis found that the program achieved disease management goals, such as improved cholesterol and blood glucose levels for diabetic patients, as well as cost savings of $20.7 million for all enrollees for the first year of services.

Adopt Reimbursement and Licensure Policies to Remove Practice Barriers

Several states have enacted reimbursement and portable licensure policies to remove barriers for health care practitioners who provide telehealth services. For example, lawmakers in Alaska passed legislation in 2016 to remove disciplinary sanctions for certain providers, such as psychologists and professional counselors, who practice via telehealth. The law also requires Medicaid to expand the use of telehealth for primary care, behavioral health and urgent care, and establishes demonstration projects to improve the state’s behavioral health system for Medicaid recipients. Mississippi and New Mexico use statewide telehealth programs to build provider capacity and increase access for both behavioral and physical health services. Early evidence indicates that these programs result in equal or better care when compared to traditional in-person services and may result in cost savings.

Consolidate Behavioral Health and Medicaid Administration

Recognizing that separate agencies and funding streams can perpetuate fragmentation, some states have taken steps to consolidate or improve coordination among state agencies responsible for administering Medicaid, social services and behavioral health. For example:

• Arizona’s 2015 consolidation of physical and behavioral health under its Medicaid agency led to increased attention to behavioral health integration. It also resulted in more strategic purchasing of health care services for Medicaid enrollees and improved sharing of patients’ health information among providers, along with other positive results, according to a 2017 analysis.
• Washington state lawmakers passed legislation in 2018 to transfer oversight of behavioral health programs from the Department of Social and Health Services to the Washington State Health Care Authority, the agency responsible for administering Medicaid. According to HB 1388, “The legislature therefore intends to consolidate state behavioral health care purchasing and oversight within the health care authority, positioning the state to use its full purchasing power to get the greatest value for its investment.” In addition, the law consolidates behavioral health licensing and certification functions within the Department of Health, a move that will “streamline processes leading to improved patient safety outcomes.”

Facilitate Integration Through Section 1115 Waivers

States design and improve their Medicaid programs within the flexibility allowed under existing federal law, using long-standing tools such as Section 1115 waivers to best meet their state’s unique needs. Legislators play important roles by enacting legislation related to Medicaid waivers and engaging with federal partners during waiver development, implementation and oversight.

According to tracking by the Kaiser Family Foundation, as of August 2018, 23 states were using Section 1115 Medicaid waivers to provide enhanced behavioral health services to targeted groups. They also used the waivers to expand Medicaid eligibility to additional populations with behavioral health needs, fund physical and behavioral health integration and make other delivery system reforms. Sixteen states had pending waiver proposals that included behavioral health provisions. For example:

• Arizona’s Health Care Cost Containment System Section 1115 waiver provides health care services through a statewide, capitated managed care delivery system for both mandatory and optional Medicaid groups. Federal law requires state Medicaid programs to cover certain mandatory populations, such as low-income infants and children who qualify for Medicaid and/or the Children’s Health Insurance Program (CHIP) based on income or other guidelines. States are also allowed the option of covering others, such as low-income adults who would not otherwise qualify for coverage. CMS approved Arizona’s waiver in September 2016 to integrate physical and behavioral health through regional behavioral health authorities and children’s rehabilitative services plans. In January 2017, CMS approved an amendment to establish the Targeted Investments Program, which provides incentive payments to Medicaid providers for increasing physical and behavioral health integration.
• Delaware’s Section 1115 waiver implemented the Promoting Optimal Mental Health for Individuals through Supports and Empowerment (PROMISE), a voluntary program that provides enhanced behavioral health services and supports for targeted Medicaid beneficiaries. PROMISE enrollees have severe and persistent mental illnesses and/or a substance use disorders and require home- and community-based services to live and work in integrated settings. A 2018 interim evaluation found that while still in its early stages, PROMISE has started to expand access to behavioral health services.
• Massachusetts’ Section 1115 waiver implemented a statewide Accountable Care Organization (ACO) aimed at improving integration of care and coordination among providers, reducing the rate of growth in spending and avoidable use of services, and maintaining access and quality.¹⁸

As part of their efforts to improve people’s health and save money, states have undertaken a variety of approaches to promote health and well-being among people enrolled in Medicaid and other public health plans. Noting growing state interest in the topic, researchers at the Commonwealth Fund found that states are implementing a variety of programs to motivate enrollees to stop smoking, lose weight, and obtain timely prenatal care and child immunizations. “By providing rewards for healthy behaviors,” the fund reports that “these states are trying to give members a greater stake in improving their health status, enhance prevention and health outcomes, and reduce program costs.”

Overview

Several Medicaid programs offer incentives or rewards to encourage healthy behaviors, such as taking prescriptions as directed, ensuring their kids get well-child visits, exercising and maintaining a healthy diet, and quitting smoking. Incentives and rewards vary across states. They can include contributions to a health savings account, credits that can be used to pay for health-related products, or access to a service—such as a dental visit—that is not part of the standard benefits.

As of May 2018, 18 states operated a Medicaid health behavior incentive program. One state—Kentucky—had received approval from the Centers for Medicare & Medicaid Services (CMS), but had not yet implemented the program, according to a study by Duke University. Since 2014, states typically used Section 1115 waivers to implement incentive programs, often as part of Medicaid expansion.

Since Medicaid regulations do not permit financial incentives for healthy behaviors, states have flexibility to offer financial and other incentives in other ways, most notably through Section 1115 demonstration waivers. States can apply for Section 1115 waivers to make certain types of changes to their Medicaid program not typically allowed under law, such as offering incentives for healthy behavior to reduce patients’ cost-sharing obligations. CMS has encouraged states to propose reforms through these waivers that promote Medicaid’s objectives, including reforms that strengthen enrollee engagement in their personal health care through “incentive structures that promote responsible decision-making.”

State Examples

In 2014, Florida lawmakers required Medicaid managed care organizations—permitted under the state’s Section 1115 demonstration waiver—to offer incentives for three specific behaviors: smoking cessation, weight loss and streatment for substance misuse. Under the waiver, known as the Managed Medical Assistance Program, managed care plans are required to establish voluntary Healthy Behaviors programs “to encourage and reward healthy behaviors.” These include quitting smoking, losing weight, and entering alcohol or substance abuse treatment programs. The programs provide incentives and rewards, such as vouchers or coupons for over-the-counter medications or health-related products, to participating Medicaid enrollees. Although the plans must cover the three behaviors mentioned above, they also have the flexibility to offer incentives for additional behaviors such as well-child visits and pregnancy care. Early findings indicate that 10 percent of members who enrolled in the program completed it. Program evaluations also showed that enrollees were more likely to participate in certain programs (well-child visits and pregnancy care) over others (smoking cessation, weight loss and substance abuse prevention).

The Healthy Indiana Plan (HIP) provides a consumer-driven health care program for Medicaid-eligible low-income, nondisabled adults, 19 to 64 years old, with incomes up to 138 percent of the federal poverty level and without other insurance. The Section 1115 demonstration waiver authorizes the state to offer coverage for adults through a Personal Wellness and Responsibility (POWER) account, which operates like a health savings account. POWER accounts pay for a member’s first $2,500 of services covered under the plan and then the member’s managed care entity covers subsequent services.

Participation in “HIP Plus” is encouraged by offering enhanced benefits and financial incentives, such as allowing members to roll over a portion of unused funds to subsequent years. Adult beneficiaries who consistently make required monthly contributions to their POWER account have access to HIP Plus, which includes dental, vision and chiropractic coverage. The approach seeks to promote efficiencies in use of health care services, encourage preventive care and discourage unnecessary care, according to the approved waiver. For example, members are not required to make copayments or use their POWER account to pay for preventive services, providing a financial incentive for preventive care. People who do not contribute to the POWER account can be moved to a basic plan without enhanced services or disenrollment for those whose income is above the federal poverty level.

The program’s 2018 waiver renewal contains elements designed to promote tobacco cessation, reduce substance use disorders, enhance chronic disease management, engage members in work or other community activities, and help prepare members for future enrollment in commercial insurance plans. Under the approved waiver, the state can apply a premium surcharge for beneficiaries who use tobacco and do not participate in tobacco cessation activities. Charging beneficiaries for a specific behavior (i.e., tobacco use), will enable the state to test whether offering such disincentives achieves better health outcomes.

Evaluations have shown mixed results relating to enrollee awareness and understanding the POWER accounts. A 2016 independent evaluation found that two-thirds (66 percent) of HIP Plus members reported hearing about the accounts. A 2018 analysis, published in Health Affairs, reported on a survey of Medicaid enrollees eligible for Indiana’s waiver program. It found that 39 percent of respondents had not heard of the POWER accounts, 26 percent knew about them but were not consistently making required payments, and 36 percent were making regular payments. The study noted that 57 percent of members who were making regular payments to their POWER accounts held favorable opinions, reporting that the program helped them think about which health care services they needed.

Kentucky’s recently approved Helping to Engage and Achieve Long Term Health (HEALTH) waiver includes consumer-driven tools, such as an awards account, which provides incentives for healthy behaviors that enrollees can use to obtain enhanced benefits. A deductible account is intended to educate beneficiaries about the cost of health care. All adults eligible for Kentucky HEALTH can earn “My Rewards” dollars by completing specified activities, such as receiving preventive care or attending health and financial literacy classes. They can use those funds for enhanced benefits, such as non-medical dental and vision services, not covered by the Kentucky HEALTH plan. Enrollees can receive a payout of $500 from their account when they transition to a commercial insurance plan for 18 months or more.

Michigan’s Public Act 107 of 2013 directed the Department of Community Health to seek a federal waiver and authorized the Healthy Michigan Plan. The legislation encourages healthy behaviors and use of preventive services, while discouraging “low-value services,” such as non-urgent emergency room visits. Michigan’s approved Healthy Michigan Plan waiver allows the state to test cost-sharing and financial responsibility for the new adult eligibility group. For example, the waiver requires adults with incomes above 100 percent of the federal poverty level to contribute a percentage of their family income toward the cost of health care. The waiver seeks to reduce uncompensated care, encourage enrollees to seek preventive care and encourage healthy behaviors, among other outcomes. The demonstration established MI Health Accounts, which track and record enrollee payments and liabilities. Beneficiaries can receive rewards or incentives for demonstrating specific healthy behaviors, such as completing a health risk assessment and seeing a primary care provider. A 2018 program evaluation found that two-thirds (64 percent) of surveyed enrollees said they were more likely to contact their doctor’s office before going to the emergency room than before they enrolled in the Healthy Michigan Plan.

Evidence of Effectiveness

Research on whether healthy behavior incentives improve health outcomes is mixed. According to 2017 study by the Vanderbilt University School of Medicine, financial incentives and rewards are effective for one-time or short-term activities, such as filling a prescription, receiving a recommended vaccine or attending a follow-up visit. However, they are not as effective for changing behaviors that require ongoing maintenance, such as losing weight or quitting tobacco, which researchers noted “often are the behaviors that influence health care costs the most.” Low levels of participation, lack of awareness that the programs exist, administrative challenges and environmental barriers, such as lack of transportation, may hinder the effectiveness of such efforts.

Further research is needed to understand the effect of incentive programs on health outcomes and Medicaid costs. A synthesis of Medicaid healthy behavior incentives suggests that incentive programs “could increase beneficiaries’ use of preventive services and provide resources to a financially disadvantaged population.” Enrolled members have expressed high levels of satisfaction. Moreover, the analysis found that enrollees receiving incentives to quit smoking along with other supports, such as toll-free “quitlines” or counseling, had higher smoking cessation rates at six months than their counterparts who did not receive incentives.

Based on their review of Medicaid healthy behavior programs, researchers point out the following lessons learned and best practices for healthy behavior initiatives:

• Ensure that enrollees are aware of and understand how incentives work.
• Create positive incentives for one-time or short-term activities that have evidence showing they improve patient health.
• Make incentives worthwhile, timely and simple.
• Identify technology and data systems needed to track health behaviors and distribute incentives.
• Evaluate program effectiveness.

Policymakers seeking to improve the quality of health care while controlling its costs are increasingly reforming how care is delivered and paid for. Traditionally, Medicaid providers have been reimbursed on a fee-for-service basis, which compensates for every service, test or procedure provided. Rather than reward volume, payment reform models seek to reward value and create financial incentives for health care providers to focus on primary and preventive care. Such models are designed to improve access to care and adopt more effective, efficient ways of delivering it.

Moving from volume-based to value-based care is a high priority for state Medicaid programs, according to a recent survey from the National Association of Medicaid Directors (NAMD). As a result, states are putting in place a wide array of delivery system and payment reforms, described below, that reward providers for delivering high-quality and cost-effective care to Medicaid beneficiaries. Despite their prevalence and potential to improve value and health outcomes, delivery system and payment reforms are complex and take time to develop, implement and show results.

The federal government has taken the lead in nudging the payment reform process along. In 2015, the U.S. Department of Health and Human Services (HHS) announced new goals to move Medicare away from paying for volume of services and instead paying for quality, patient-centered care through alternative payment models. HHS set new targets to shift 50 percent of fee-for-service Medicare payments to alternative quality or value payment models by 2018, and encouraged similar goals for the rest of the health care system. That year, HHS launched the Health Care Payment Learning and Action Network, a public-private partnership involving public and private health plans, including fee-for-service Medicaid, to accelerate adoption of alternative payment models.

Overall, new payment approaches typically include financial incentives to encourage appropriate and timely care, reduce spending on unnecessary services, promote collaboration and care coordination among different providers, and reward providers for delivering high-quality care. States can leverage their market power as large purchasers of health care to use new payment models that may simultaneously contain costs and improve care.

Some legislatures have required state Medicaid programs to implement payment reform. For example, in 2012, Massachusetts lawmakers passed legislation to require the state Medicaid agency to move 80 percent of its provider payments into alternative payment models by 2015. According to a March 2018 report by the Massachusetts Health Policy Commission, use of alternative payment methods among the state’s three largest payers increased to 56 percent in 2016. Over one-third (36 percent) of Medicaid beneficiaries were enrolled in managed care plans (described below) as opposed to traditional fee-for-service models. The report notes that federal approval of Massachusetts’ waiver to adopt a statewide Accountable Care Organization (ACO) program in 2018  will increase alternative payment model coverage for MassHealth members. It anticipates that the “added incentives for controlling costs and improving care coordination could help reduce spending among those enrollees.”

State Examples

A 2016 NAMD survey of state Medicaid programs found that states have invested significant resources to implement alternative payment models. They include additional payments for providers who meet performance expectations, bundled or episode-based payments, and population-based payments. These, and other state approaches for designing payment and delivery reforms that help improve the quality of care and reduce costs for people enrolled in Medicaid, are summarized below.

Managed care refers to health care plans that integrate financing and health care services to covered individuals by arrangements with selected providers. Such systems include a comprehensive set of services, standards for selecting health care providers, formal programs for ongoing quality assurance, and significant incentives for members to use providers and procedures associated with the plan. Despite the opportunities to deliver more efficient care, there are concerns that these “capitated” payment systems—which pay providers a set amount for each enrolled person assigned to them, whether or not the person seeks care—can have unintended consequences. They can reduce access to services or create incentives for health plans to discourage beneficiaries with complex health care needs from enrolling. States have taken several steps—such as adopting provider network standards and care transition policies—to ensure uninterrupted access to necessary services. As of 2017, 39 states and the District of Columbia had Medicaid contracts with managed care organizations (MCOs). More than two-thirds of these states (27 and the District of Columbia) have enrolled 75 percent or more of Medicaid beneficiaries in MCOs. Some states—including Arizona, California, Kentucky, New York and Tennessee—have enrolled more than 90 percent of beneficiaries in managed care plans.

Performance-based reimbursements are tied to quality and efficiency metrics, offer incentives for good health outcomes and pay for coordination of a patient’s care by a group of providers, such as physicians, nurses and social workers. According to a 2016 survey of state Medicaid directors, at least 12 states provided additional payments, usually in the form of a per-member, per-month payment, in exchange for meeting performance expectations. This model supports infrastructure for transformation efforts or for high-value services, such as care coordination, that typically are not reimbursed.

For example, Colorado’s Accountable Care Collaborative program has seven organizations known as Regional Accountable Entities (RAEs) that are responsible for coordinating care and connecting members to primary and behavioral health care services. They are eligible to receive higher per-member per-month payments for meeting specific performance targets, such as increased well visits or reduced emergency room visits. In addition, RAEs are eligible to receive up to 5 percent of their annual behavioral health capitation rate for reaching certain goals, such as increased enrollee follow-up with a mental health provider after an inpatient hospital discharge for a mental health condition. The state’s approach includes three core components: primary care medical providers (PCMPs), which serve as medical homes; regional accountable entities (RAEs) that develop networks of primary care medical providers; and a statewide data analytics portal. The portal supports providers and regional entities by providing information about key performance indicators and other performance measures. A 2016 evaluation of a prior iteration of the program found that Colorado’s Accountable Care Collaborative reduced expenditures by $60 per member per month for adults and $20 for children while maintaining quality of care.

Delivery System Reform Waivers. According to NAMD, several states have used a Section 1115 Medicaid waiver to create Delivery System Reform Incentive Payment (DSRIP) programs. These allow the state to reward providers for implementing successful delivery system and payment reform initiatives. Although the future of the Centers for Medicare & Medicaid Services (CMS) approval for DSRIP waivers is uncertain, several states operate a DSRIP or DSRIP-like program, including California, Kansas, Massachusetts, New Hampshire, New Jersey, New Mexico, New York, Rhode Island, Texas and Washington. For example:

• In 2011, Texas received federal approval for a Section 1115 waiver to increase access to health care, improve well-being and reduce costs. In addition to expanding Medicaid managed care statewide, the waiver created a DSRIP program, through which providers could earn payments for meeting approved reporting and performance metrics. Providers implemented approximately 1,500 DSRIP projects to improve behavioral health, access to primary and specialty care, chronic care management, and health promotion and disease prevention. A 2017 evaluation of Texas’ 1115 waiver found that  Texas’ DSRIP projects have increased access to primary and preventive care, emergency department (ED) diversion, and attention to people with behavioral health needs.
• In January 2017, Washington state received federal approval of its request for a Section 1115 waiver. The Medicaid Transformation Project waiver uses DSRIP to fund projects that show measurable improvements in Medicaid clients’ health outcomes. Under the DSRIP program, regional organizations known as Accountable Communities of Health (ACHs) and Medicaid MCOs must demonstrate improvement toward and attainment of transformation targets. These include value-based purchasing and performance in clinical quality and outcome metrics. A 2017 participant survey found high levels of member satisfaction and a perception that ACHs are achieving positive effects on health system transformation, cross-sector collaboration and regional health outcomes.

Bundled payments, also known as episodes of care (EOC), provide a lump sum to a group of providers functioning as a team to divide among themselves for all services related to a patient’s specific illness. Bundled payments are increasingly used for high-cost procedures, such as cardiac bypass surgery, diabetes or maternity care. Such models provide an incentive to maintain quality without overtreating patients, since only a certain amount of money is allocated to meet patients’ needs, based on practice standards and other factors. Medicare is partnering with more than 500 hospitals and related health care organizations to make bundled payments for all the care associated with four dozen conditions and procedures, such as strokes and joint replacements.

Three states—Arkansas, Ohio and Tennessee—have implemented episode of care payments in Medicaid for a wide range of procedures (e.g., bypass surgery or joint replacement), medical conditions, and/or perinatal and behavioral health care. The Arkansas Payment Improvement Initiative, the only state with published results on episode of care payments, did not significantly affect screening rates for pregnant Medicaid beneficiaries. However, the study found a slight decrease in the rate of cesarean section deliveries and length of inpatient stays for C-section births.

Global payments pay a health care organization to provide all needed care for a specific population, such as a large company’s employees or people living in a certain geographic area. Health care providers must meet certain quality criteria, such as offering timely preventive screenings and promptly following up on test results with patients. They receive bonuses if their patients stay healthy and avoid costly hospitalizations. For example, Oregon’s Coordinated Care Organizations (CCOs) are reimbursed for services by a global payment that includes physical health services, such as primary care visits and medical tests, as well as mental health and substance abuse treatment, oral health care, and some long-term services and supports. CCOs can also receive bonus payments for specific outcomes, such as reduced emergency department visits among CCO members and increased developmental screenings for enrolled children. A December 2017 program evaluation found that financial incentives were “strongly associated with improvements in performance,” with two-thirds of CCO incentive measures showing improvement in at least two of three years between 2013 and 2015.

Accountable Care Organizations (ACOs) offer a way of both delivering and paying for patient care. Typically, ACOs are a partnership between a payer, such as a private or government insurer, and a network of doctors, hospitals and other providers that share responsibility for providing care to patients. ACOs create savings incentives by offering providers bonuses for efficiencies and quality care that results in keeping their patients healthy and out of the hospital, including focusing on prevention and managing patients with chronic diseases.

According to the Center for Health Care Strategies, “State-based Medicaid accountable care organizations (ACOs) are becoming increasingly prevalent, with more states pursuing this model as a way to align provider and payer incentives to focus on value instead of volume.” As shown in the map, 12 states had implemented Medicaid ACOs as of February 2018 and 10 states were considering ACO adoption. For example:

• In 2010, the Minnesota Legislature passed legislation that directed the commissioner of human services to develop and implement a demonstration project to test alternative and innovative health care delivery systems, including accountable care organizations. Minnesota established a statewide Medicaid ACO program known as Integrated Health Partnerships (IHPs) in 2013. Through it, the state’s Department of Human Services contracts with provider organizations, or IHPs, to provide primary care and other covered services to Medicaid enrollees Under the model, participating health care providers work together across specialties and service settings to deliver efficient and effective care for more than 460,000 Medicaid enrollees. The Minnesota Department of Human Services estimates that the program saved over $200 million between 2013 and 2016 through decreased use of emergency rooms and shorter hospital stays. About $70 million of these savings were returned to IHPs as shared savings.
• In 2011, Utah’s SB 180 required the Department of Health to amend the Medicaid state plan to replace the fee-for-service model with one or more risk-based delivery models. The legislation directed the department to restructure Medicaid’s provider payment provisions to reward health care providers for delivering the most appropriate service at the lowest cost that maintains or improves enrollees’ health status. To achieve these goals, Utah Medicaid began contracting with ACOs to provide medical services to Medicaid members in 2013. Most of the state’s Medicaid enrollees who are not elderly or disabled are currently enrolled in one of the state’s Medicaid ACOs. A 2018 quality review report found that all of Utah’s Medicaid and Children’s Health Insurance Program (CHIP) ACOs exceeded national averages on several measures. They topped the average number of adolescents being immunized and children being treated appropriately for upper respiratory infection. Most of the state’s ACOs exceeded national performance rates for a wide range of other measures, such as comprehensive diabetes care, managing antidepressant medication and controlling high blood pressure. The report noted opportunities for improvement, for example, in the rates of well-child visits and breast cancer screening.