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State Medicaid Programs Are Driving Payment and Delivery System Reform

As the providers of health coverage for millions of Americans, state Medicaid programs are seeking to change the way health care is delivered in communities across the U.S.  States are implementing innovative payment and delivery system policies designed to save money while improving health outcomes.

Every state has its own goals for health reform, as well as unique health insurance market and program contexts, resulting in many possible pathways for achieving success. As they select reform policies, each Medicaid director considers a range of questions, such as which populations to target, potential risks and savings, administrative burdens, which federal authority to utilize, and how to measure value in the health care services that states purchase.

The National Association of Medicaid Directors has identified five broad categories of payment and delivery system reforms that states are pursuing. These categories are not mutually exclusive and may be synergistic in their ability to promote more effective and efficient care.

Payment adjustment policies—Some states are adjusting their payment policies in efforts to reduce the occurrence of potentially preventable events and unnecessary services. For example, Texas Medicaid has implemented reimbursement denials or reductions for hospital-acquired conditions. Texas also has adopted a policy denying payment for elective inductions prior to the 39th gestational week since birth outcomes are markedly better for full-term babies.

Managed fee-for-service—Other states have chosen approaches to incentivize care management, or coordination of health care services, outside of a managed care system for vulnerable patients. These programs, often identified as primary care case management, are designed to support a range of services, such as recruiting providers and managing provider networks, collecting and analyzing data, monitoring and improving the quality of care, and educating patients in ways to control their chronic conditions. Increasingly, these services are paired with payment approaches in which providers and health plans share in any savings. This approach requires considerable infrastructure, as the state Medicaid agency provides many of the functions of a managed care organization.

A number of states have implemented care management programs, including Oregon’s Coordinated Care Organizations, which are health plans and groups of providers that work together to care for Medicaid beneficiaries, and Nevada’s person-centered medical home model, which includes pay-for-performance incentives for providers. Connecticut’s medical home initiative includes a “glide path” option, which provides financial and technical support for providers participating in Medicaid and the state’s program for uninsured adults to undertake practice transformation.

Bundled payments—States also are experimenting with episodic or bundled payments, or single payments that cover multiple services provided during an episode of care. Arkansas Medicaid has proposed retrospectively bundled payments for three types of episodes—acute ambulatory upper respiratory infections, attention deficit hyperactivity disorder, and perinatal care—and plans to include others. It will provide bonuses as well as penalties to providers, who will be held accountable for outcomes across the full episode.

Managed care initiatives—Some states have expressed renewed interest in managed care, the system of coverage that attempts to reduce costs through such mechanisms as cost-sharing and selective contracting with provider networks. Because states generally pay managed care organizations (MCOs) a per-person rate, they face limited risk while MCOs have incentives to coordinate care to control cost overruns. States are considering expanding their existing managed care programs to new populations (such as aged, blind, and disabled individuals) or new types of services (including long-term care and behavioral health). States are also seeking ways to ensure MCOs monitor health care quality and outcomes and provide value to the patients they cover.

In March 2012, Louisiana received approval from the Centers for Medicare and Medicaid Services (CMS) to launch Bayou Health, a managed care program for Medicaid beneficiaries with a choice of three traditional MCOs, along with conditional approval to create a shared savings arrangement. Under the latter, the state would pay a monthly fee to two additional primary care case management health plans to coordinate care for Louisiana’s Medicaid members. The two organizations stand to share in the savings and are at risk for paying back part of the monthly fees if savings are not achieved.

Health homes—Some states are taking advantage of the health homes option in the Affordable Care Act to coordinate care for Medicaid beneficiaries with chronic conditions. States will receive 90 percent federal matching payments for individuals enrolled in health homes, which, like medical homes, are primary care practices that provide around-the-clock access to coordinated care. States can build in incentives for participating providers.

Several states, including Missouri, North Carolina, and Oklahoma, have implemented health homes. Ohio plans to roll out health homes for individuals with serious mental illness by geographic region. West Virginia also plans to create regional health homes.

States are following these and other models to encourage high-value care—an imperative to ensure the sustainability of the program. CMS has begun providing increased support to states seeking to reform their Medicaid programs, including recent guidance on integrated care models as well as through the Center for Medicare and Medicaid Innovation’s new state innovation models grants. Only by learning from each other as well as from leaders in the private sector can Medicaid directors continue to drive improvements in health care delivery and cost containment.

Publication Details



K. Nolan, and A. Kahn, State Medicaid Programs Are Driving Payment and Delivery System Reform, The Commonwealth Fund Blog, September 2012.