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Transforming Community Health Centers into Patient-Centered Medical Homes: The Role of Payment Reform

The Patient Protection and Affordable Care Act of 2010 (Affordable Care Act) significantly altered the landscape of American health care policy. In addition to expanding coverage to millions of uninsured and increasing funding to expand community health centers, the Affordable Care Act initiates efforts to change how health care is paid for and delivered in the United States. For example, the law encourages state Medicaid programs to develop medical homes, also known as "health homes," for Medicaid patients with chronic diseases. More broadly, the law calls on federal and state governments to consider other methods to transform health care delivery, including strategies such as creating accountable care organizations and bundling episodes of care. The large increases in the number of people with health insurance, including Medicaid patients, after the implementation of health reform will require the nation and the states to consider strategies to strengthen primary care services as part of a high performance health system.

This report examines how changes in the way federally qualified health centers are financed could support the transformation of these critical safety-net providers into high performing patient-centered medical homes. Federally qualified health centers (FQHCs), also known as community health centers or clinics, are nonprofit facilities that provide comprehensive primary medical care—and often dental, vision, and behavioral health services—to low-income patients in medically underserved areas, regardless of a person's ability to pay.

In late 2009, we conducted a survey of state primary care associations, which represent community health centers in their states. We followed up this survey with interviews of selected health center, state agency, and managed care staff about medical home and quality initiatives in their states. In the majority of states, health centers receive payments to serve as primary care providers or medical homes, generally under Medicaid, and more recently have begun to serve as patient-centered medical homes. There was great diversity in the nature of medical home programs, medical home criteria, and stages of development. In some cases, private physicians are eligible for medical home payments, but health centers are not.

FQHCs have long sought to provide quality team-based, comprehensive primary care and typically viewed themselves as serving as medical homes, even before there were formal definitions for medical homes. Nonetheless, many FQHCs have demonstrated interest in attaining formal recognition as a medical home.

Preliminary data from a George Washington University survey of FQHCs, conducted from 2010 to 2011, indicate that about 6 percent of centers have attained National Committee for Quality Assurance–Patient Centered Medical Home (NCQA–PCMH) recognition, another 12 percent have a pending application, and 40 percent expect to seek recognition in the next 18 months. Some (12%) have received or applied for recognition from a state medical home program and 11 percent are considering another national recognition program. One reason some centers do not consider applying is there is no financial reward for attaining recognition, as some states do not have medical home incentive programs for FQHCs.

We present several financing recommendations to increase the incentives for FQHCs to transform themselves into high-performing medical homes:

  • Establish recommended standards for patient- and community-centered medical homes that apply to FQHCs. A variety of national and state recognition programs exist for medical or health homes, but they generally focus only on patient-centered medical care. Health centers also seek to provide community-centered services, such as offering access to patients regardless of ability to pay; providing nonmedical services like behavioral, dental, or enabling services (like case management, health education, and translation); and conducting community needs assessments and other prevention-oriented projects. It may be relevant to establish standards that emphasize these broader community-oriented service components.
  • States should include FQHCs in Medicaid health home projects. Under the Affordable Care Act, state Medicaid programs may establish health home projects for those with chronic health conditions. In the past, some state medical home programs excluded FQHCs because they are paid differently than physician practices. Since FQHCs provide primary care to a substantial and growing number of Medicaid patients, they should be included in all state Medicaid health home projects.
  • Clarify that states may pay FQHCs more than the levels prescribed by the prospective payment system. Although federal Medicaid policy that governs health center payments does not prevent states from paying FQHCs more than the prospective payment system (PPS) level, which is based on historical Medicaid costs and then updated, some states appear to interpret the statute as constituting a cap on FQHC payment levels.
  • If states adopt medical or health home incentives, providing monthly case management fees per Medicaid patient is a reasonable approach. States considering this option could add a monthly medical home case management fee, in addition to regular FQHC reimbursements, as an appropriate way to create a payment incentive for medical home status. This is already used in many states and is the method planned for the Medicare FQHC Advanced Primary Care Practice demonstration project.
  • Clarify how states may increase FQHC payment levels under Medicaid. Under current federal rules, states may change PPS payments to individual health centers when the centers demonstrate a change in the scope of Medicaid services. However, there is no specific provision for changing the PPS payments when a health center increases the quality or intensity of services it provides.
  • Maintain the all-inclusive per-visit payment rates in Medicaid. Under federal law, Medicaid payments to FQHCs are paid on a flat, all-inclusive, per-visit (or per encounter) basis. To change the system would require substantially changing all FQHC payment rates, which would take years to develop. Given current state budget problems, in which state Medicaid programs have often trimmed provider payment rates, opening all FQHC payment rates to recalculation could place them at substantial risk of unanticipated reductions.
  • The Centers for Medicare and Medicaid Services (CMS) should ensure that Medicare policies are consistent with medical home goals. CMS has announced two Medicare advanced primary care medical home demonstration projects, one for FQHCs and one that permits multipayer projects in several states. CMS should continue to develop these projects. CMS is also actively developing policies in related areas, such as those related to Medicare accountable care organizations, and should ensure that the objectives of those policies are ultimately supportive of medical home policies as well.
  • The Health Resources and Services Administration has long encouraged quality of care for FQHCs and supports Section 330 grantees as NCQA–PCMHs, but could consider additional efforts. The Health Resources and Services Administration (HRSA) seeks to build on the already strong quality of care delivered by health centers by focusing on quality improvements and ways that payment reforms could affect health centers. HRSA provides grants to subsidize the cost of NCQA–PCHM applications for FQHCs that receive federal Section 330 grants. In allocating funds to grantees, HRSA has not traditionally used quality of care in funding decisions. HRSA is improving information collected about the quality of care at Section 330 grantees under its Uniform Data System. In the future, HRSA could develop incentives to improve the quality of care at health centers or performance as medical homes. It could develop further efforts to help integrate health center coordination in medical home, health home, and advanced primary care projects, working with Medicare, Medicaid, and the Children's Health Insurance Program—and eventually the health insurance exchanges.

As the concept of a medical home and other paradigms to strengthen the health care infrastructure are implemented, FQHCs will serve as laboratories for innovation to test new care models. Adequate and appropriately structured financial incentives are critical to the success of any model of health care delivery, and the medical home is no exception. In addition to changes to the reimbursement system that would better align incentives, other supports for providers such as training and technical assistance are necessary to bolster and support the infrastructure.

Publication Details



L. Ku, P. Shin, E, Jones, et al., Transforming Community Health Centers Into Patient-Centered Medical Homes: The Role of Payment Reform, The Commonwealth Fund, September 2011.