Medicaid Payment Reform

Two snakes medical symbol photo Overview

States are seeking sustainable reforms that enable the Medicaid program to improve quality of health care services while reducing costs. State approaches and innovation models vary. Payment reform, however, plays a central role in many of these efforts.

Payment reform offers a powerful tool for controlling health care spending and often supports changes in the delivery system. Traditionally, Medicaid providers have been reimbursed on a fee-for-service (FFS) 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, improve access, and adopt more effective, efficient models of care delivery to improve quality and reduce costs. Although state Medicaid payment policies vary across states, a few of the most common payment reforms include managed care, non-payment for preventable health-care acquired conditions, the medical home or health home, bundled payments and global payments.

Medicaid payment reform comes with various implementation challenges. A few important considerations when looking at payment systems include the following:

  • Do providers—small outfits in particular—have the necessary technology, infrastructure and access to data to make the shift?  If not, is it feasible? 
  • Is the payment system adequately adjusted for risk?
  • Is the system transparent?
  • Are accurate quality measures included?
  • Are patients educated about the changes in the health care delivery system that are associated with payment reform? 

These and other challenges must be considered when evaluating  payment reform options.  The more common payment innovations are briefly described below. For additional resources and information, refer to the links in the box at upper right.

Payment Reform Models  

Managed Care 
Medicaid managed care programs assume various forms and rely on a range of payment structures. For example, full risk-based managed care relies on networks of providers who assume financial responsibility for a specific group of patients and receive a fixed monthly capitation rate—a set fee per member per month—to provide certain Medicaid beneficiaries a defined set of services. Full risk-based managed care programs may cover comprehensive services or a more limited set of services. Primary Care Case Management, another form of managed care, pays providers a small fee per member per month for case management, but also relies on fee-for-service for other services. Because they assume financial risk, providers are encouraged to emphasize primary care, prevention, and chronic condition management, and to improve access to and coordination of patient care. 

About two-thirds of Medicaid beneficiaries currently receive care through managed care. In some states, beneficiaries have the option to enroll in a Medicaid managed care program; in others, enrollment is mandatory. However, states are increasingly requiring beneficiaries to enroll in managed care programs. At the same time, many states are creating new managed care programs and expanding existing ones to cover additional populations—such as the aged, blind and disabled—and to cover new services, such as behavioral health, dental health and long-term care. At least ten states currently use capitated managed long-term care for populations who require long-term services and supports, such as the elderly and those with disabilities; at least 11 states are planning on implementing this model in 2012 or 2013, according to AARP.

Nonpayment for Preventable Health-Care Acquired Conditions

Nonpayment or payment adjustment policies are used as a tool to reduce the incidence of potentially preventable events. Under this system, Medicaid programs reduce or eliminate payments for preventable adverse events such as hospital acquired infections, medical errors or other conditions that could reasonably have been avoided. Such payment policies create incentives to improve both the quality and safety of health care and also reduce costs.

According to a survey by the Center for Medicaid and State Operations, 21 states had nonpayment policies for health care-acquired conditions in 2011. Additionally, section 2702 of the Patient Protection and Affordable Care Act prohibits the federal government from providing payments to states for health care acquired conditions and other provider-preventable conditions as of July 2012.  The PPACA also allows states to identify additional preventable conditions for which Medicaid payments are prohibited—as long as such prohibitions do not reduce access to care for Medicaid beneficiaries. 

The Medical Home/Health Home 

The medical home, also known as the health home, is an enhanced model of primary care that is designed to provide comprehensive, patient-centered preventive and primary care. The model aims to reduce costs and improve quality and efficiency through greater access to and coordination of care. The medical home relies on a team of providers—such as physicians, nurses, nutritionists, pharmacists, and social workers—to meet a patient’s health care needs.

While medical home payment systems assume various forms, payment structures often build off of fee-for-service payments. One common method of financing this model pays providers a per-member, per-month fee for medical home activities, such as case management and care coordination, in addition to the regular fee-for-service payments. Payment policies often compensate providers for services that are not currently reimbursable—such as care coordination, use of health information technology and patient education to improve patient self-management of disease. Additionally, some medical homes offer bonuses or shared savings if specific cost and quality measures are met.

As of January 2012, 41 states had policies promoting the medical home model for certain Medicaid or CHIP beneficiaries. Additionally, the Patient Protection and Affordable Care Act (PPACA) contains various provisions that support implementation of the medical home/health home model including new payment policies, Medicaid demonstrations, and the creation of Accountable Care Organizations – which are similar to medical homes, on a larger scale. More 

Bundled Payments

Bundled payments move away from fee-for-service by providing a single payment for all services associated with a specific episode of care, rather than a payment for each individual service or procedure. The cost of a patient’s office visits, tests, treatments and hospitalizations associated with a specific illness, medical event, or condition are rolled or “bundled” into a single, “episode-based” payment to providers. If the cost of care  is lower than the bundled payment, providers may share the savings. However, providers also are on the hook if costs are greater than the payment, as they may be required to absorb any loss. Bundled payments can create incentives for the provision of appropriate services, coordination and communication among providers, efficient care delivery, and positive health outcomes. This payment method is common for acute services—when a patient receives short-term medical treatment for a serious, but brief illness or injury, usually in a hospital or emergency room— although bundled payments are also used for health care services associated with managing chronic conditions over a defined period of time.

Arkansas’s Medicaid Payment Improvement Initiative is an example of this payment reform model. It aims to provide incentives to improve care quality and efficiency and reduce Medicaid costs through episode-based payments for medical conditions including upper respiratory infections, perinatal care, attention deficit/hyperactivity disorder (ADHD), congestive heart failure and total joint replacement.    

Section 2704 of the Patient Protection and Affordable Care Act authorizes new Medicaid bundled payment demonstration projects in eight states starting in 2012 to test episode-based payments.  As of December 2012, states chosen to participate had not been announced.

Global Payments

Under a system of global payments, a group or network of health care providers receives a fixed rate per enrollee for a defined scope of services over a specific period of time—typically a month or a year; services outside of this scope are reimbursed on a fee-for-services basis.  In this method of payment, providers, who could be located in different settings, are responsible for the total cost and quality of their patients’ care. Providers receive financial incentives to improve the quality of care and reduce costs. For example, if certain quality measures are achieved, providers have an opportunity to earn additional reimbursement.  

Accountable care organizations often rely on global payments. This new delivery model is currently being tested in multiple states.

Section 2705 of the PPACA authorizes a Medicaid demonstration project—with a focus on safety net hospitals—to shift payment structure to a global capitated payment model for up to five states, beginning in 2010.