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Medicaid Payment and Delivery System Reform: Early Insights from 10 Medicaid Expansion States

Medicaid payment and delivery reform in 10 states


Issue: Expanded Medicaid enrollment under the Affordable Care Act has heightened the importance of states’ roles as principal purchasers of health care for low-income and medically vulnerable populations. Concurrently, the federal government has augmented states’ purchasing tools.
Goal: To examine the evolution of payment and delivery system reform in 10 ACA Medicaid expansion states.
Methods: Analysis of state managed care policies, including a detailed review of purchasing documents as well as interviews with senior agency officials in 10 states.
Findings and Conclusions: States have made health system reform a core element of their Medicaid expansions, with the aim of improving access, quality, efficiency, and population health. States have sought to incorporate evidence-based practice and payment strategies, with an emphasis on populations likely to benefit from improved care management and on better integration of treatment for physical and behavioral health problems. Seven of 10 are directly engaged in provider payment and delivery system reform. Agencies noted the importance of experienced provider networks in addressing complex health and social needs, along with managed care’s role in quality improvement and payment reform. States embrace their roles as payers and health care innovators, identifying stability of both coverage and the underlying federal policy environment as key factors.


With nearly 75 million beneficiaries, Medicaid is the nation’s largest public insurer, as well as its most important source of health care financing. Both roles were elevated under the Affordable Care Act’s (ACA) Medicaid expansion, which added approximately 12 million adult beneficiaries, a significant proportion of whom are older, in poor health, or both.1

Managed care has been a core feature of Medicaid for nearly 25 years. Major enrollment growth has increased the need for organized health care delivery arrangements that can promote access to care while controlling costs. Indeed, many of the features of marketplace plans, like narrow networks and close oversight of specialty care, have long been features of Medicaid managed care.2

States have various options when structuring their Medicaid managed care plans. They can contract with managed care organizations (MCOs) to furnish a comprehensive range of services on a shared financial risk basis. Thirty-nine state Medicaid programs use this option, which is especially prevalent in states with large Medicaid populations; in 28 states, managed care organizations enroll least 75 percent of all Medicaid beneficiaries.3 States also can create more limited primary care management arrangements or contract with entities that specialize in a certain type of health care, such as behavioral or oral health. States also can — similar to self-insuring employers — retain overall operational and financial responsibility while using administrative service organizations to perform functions like member enrollment, oversight of provider networks, utilization management, and claims payment.

Regardless of the model chosen, Medicaid managed care is subject to extensive federal and state regulation, including standards for actuarial soundness and medical loss ratios (i.e., the percentage of premium dollars spent on health care and quality improvement vs. profit), consumer safeguards, and quality improvement. In addition to issuing regulations, states supplement and clarify these federal standards through the large purchasing contracts that support Medicaid managed care. Federal law also permits states to incorporate alternative payment methods into managed care. These include partial capitation or bundled payments that potentially can improve quality and efficiency. States also can opt to allow their plans to offer certain types of services “in lieu of” services normally covered, such as paying for home visits for new mothers and infants instead of office visits alone.

Because of its size and prevalence, Medicaid plays a major role as a health care payer, especially in expansion states. As such, the program has the potential to influence considerably the availability and quality of health care. This is particularly true in cases where Medicaid is the dominant payer, like maternity and pediatric care, behavioral health, and health care for patients with physical and behavioral health conditions. Furthermore, the purchasing strategies used by a payer representing a significant portion of the insured population carry broad implications for the health care system overall. There is extensive policy interest in the decisions Medicaid programs make in their roles as health care purchasers.

We sought greater understanding of how managed care purchasing is evolving in Medicaid expansion states, which face the challenge of adapting the modern tools of managed care purchasing to fit a beneficiary population that has grown sizably.

The Study

This study, which took place in summer 2017, examines Medicaid managed care for beneficiaries eligible for coverage based on low family income alone, as opposed to those who meet both financial and age or disability requirements. We conducted an extensive review of state rules, policies, and contracting documents, supplemented by interviews with senior Medicaid officials in all study states.

We examined the experiences of 10 states — California, Colorado, Connecticut, Maryland, Massachusetts, Michigan, Minnesota, New York, Ohio, and Washington — that are diverse in size, location, urban/rural mix, and population demographics. (Connecticut, which is included in this study because of its unique approach to large-scale managed care, directly oversees its own managed care system, using private contractors for day-to-day administration only. The state does not enter into MCO risk contracts, but its strategies parallel those used by states that do.) Together these state populations account for 43 percent of the total Medicaid population,4 63 percent of the Medicaid expansion population,5 and 42 percent of all risk-based managed care enrollment.6


Active engagement in delivery system reform. The study states all define their role as active health care purchasers focused on improved health outcomes and greater health care value. States’ strategies for improving health care quality and efficiency are reflected in their purchasing documents. These documents focus attention on improving plan performance of member outreach and health improvement, care delivery, care management, network design, quality, and greater alignment of services through formal relationships between plan operations and other programs such as school health, special education, child welfare, community food and housing programs, and community employment services. Four states — California, Massachusetts, New York, and Washington — link their managed care strategies to Medicaid’s Section 1115 Delivery System Reform Incentive Payment (DSRIP) initiatives that are aimed at improving the quality and efficiency of health care.7

Special populations. States place special emphasis on populations likely to benefit from better-managed care (Exhibit 1). Not surprisingly, given the increased numbers of working-age adults enrolled in Medicaid as a result of the ACA expansion — many of whom are older, affected by serious health problems, or both — adults with chronic physical and mental health conditions emerge as one of the most common emphases. Addressing addiction and substance use disorders emerges as a priority in nine of 10 states. Children are a major focus, especially those in foster care and out-of-home placements, who are often at risk for serious health conditions. Improving care for people experiencing a period of homelessness is a priority in several states.


States focus on these areas of interest in various ways. For instance, some states are working to improve integration of physical and behavioral health care, while others focus on ensuring that networks include needed providers in strategic locations, like school-based health centers, child and adolescent health centers, and behavioral health homes for children and adults with serious and chronic mental conditions. Other states emphasize specific network competencies such as care management for women with high-risk pregnancies or for people experiencing homelessness.


Service delivery integration. While all states have focused on better integration of physical, behavioral, and social services, seven (Colorado, Connecticut, Maryland, Massachusetts, Minnesota, New York, and Washington) have taken the additional step of working to reform the health care delivery system using models that can provide comprehensive care, care management for patients with multiple conditions, and links to health and social services through organized provider networks in accountable care organizations (ACOs), coordinated care organizations (CCOs), or other similar systems. Regardless of whether the focus is at the managed care level or on the underlying structure of health care delivery through special initiatives such as accountable health care, states are placing a greater focus on the overall reach and quality of health care itself, using health information to advance evidence-based care and systematic strategies for improving quality and efficiency.

Some states have identified specific populations for special attention. New York, Washington, Maryland, and Ohio, for example, concentrate on homeless people, high-risk pregnant women, and residents of communities with healthy food shortages. For a long time, Colorado and Minnesota have focused on models of clinical and social integration designed to reach high-need populations. Washington, Massachusetts, and New York are also moving in this direction. California is testing a “whole-person” approach to care to integrate health and social services through defined relationships between provider systems, community organizations, and social services programs. Connecticut’s day-to-day plan administrator oversees the state’s strategy related to health and social services integration.

State integration models tend to couple strengthened primary care management for people with mild-to-moderate conditions with more intensive care for the highest-need patients. Some states use health plans that furnish or arrange for a full array of physical and behavioral health care. Other states, such as Connecticut, use contractors with specialized expertise in caring for the highest-need populations — those experiencing severe behavioral health conditions.

Special network capabilities. All states have established basic expectations regarding the capability of provider networks to deliver covered services using standards for scheduled and unscheduled (e.g., urgent and emergency) care, waiting times, and travel distance (Exhibit 2).8 Several states have identified certain types of providers whose inclusion in networks is an explicit managed care contract requirement. Four states expressly identify safety-net providers as required network providers; six states require networks that have special capabilities such as the ability to care for people with special health care needs, foster care children, people whose first language is not English, people with HIV/AIDS, and incarcerated populations. Three states identify pediatric centers of excellence as a required type of provider.


Quality improvement and payment incentives. States use targeted performance improvement measures (Exhibit 3). The vast majority of study states either tie designated quality improvement goals to payment incentives, or plan to do so. This includes additional bonuses above a base payment or repayment of amounts withheld from initial payment amounts, based on positive performance. (This latter payment incentive model is termed return of payment withholds). These target goals tend to be based on established and proven performance measurement systems, such as HEDIS. Colorado calculates payments — and Ohio plans to soon — based on the amount of improvement achieved. Michigan uses withholds for performance bonus awards and Washington requires that 30 percent of each contractor’s payments be value-based.



Among various quality improvement measures, nine states tie well-child visits to financial incentives; eight tie infant and maternity care visits to financial incentives. More than half of the study states link financial incentives to clinical process-of-care measures for adult body mass index (BMI) levels, prevention or screening measures like immunization rates or adolescent well-care visits, or service measures like hospital readmission rates and emergency department/ambulatory care utilization rates. The move to using outcomes measures appears to be occurring more slowly; states indicated that this approach is something they hope to achieve.


Testing new payment approaches. States are beginning to test innovative payment approaches, such as bundled payments or payment for episodes of care (i.e., paying for an entire care cycle rather than for individual procedures) or partial capitation payments (i.e., payment of a monthly, all-inclusive amount for a defined bundle of services). These models are designed to transition away from a payment system based on volume and toward outcome-based performance (Exhibit 4). Six states go beyond the threshold question of alternative payment models and are beginning to link financial incentives to these newer payment approaches. Six states use subcapitation (i.e., paying network providers a fixed amount per member per month for a defined set of services) to promote the assumption of a certain amount of financial risk by participating providers for specific covered services. Four states are already using or plan to use bundled payments for specific episodes of care. Connecticut, for example, has decided to bundle obstetric care into a single global payment for both medical and hospital care partly to reduce the number of cesarean sections; Ohio incorporates bundled payments for specific acute needs as part of its patient-centered medical home model. A few states are using global payment strategies (i.e., a single payment for all clinical and hospital services) in connection with prenatal, delivery, and postpartum care. Some are moving toward shared-shavings approaches; these involve permitting network providers to share in the savings achieved from more efficiently furnished care that lowers health costs and to absorb a certain amount of the financial loss if there are avoidable expenditures. Four states have begun to test specific alternative payment models for federally qualified health center services. Historically these health centers have been paid for each separate encounter, similar to the way physicians are paid for office visits. The alternative models attempt to reduce the overall volume of individual visits to hold down costs while using strategies like group care, when appropriate, and of lower-cost alternatives to clinician encounters.


Seven states are testing coverage of alternative services — such as home visits in lieu of services furnished in clinical care setting, or the substitution of previously uncovered services, such as additional day clinic treatment services in lieu of the amount of residential treatment that may ordinarily be covered under a state Medicaid plan. States also are beginning to test the concept of “value-added” services through payment arrangements with integrated provider systems that reward investments in health improvement.9 Examples being tested include the provision of bike helmets, gym membership discounts, and enhanced transportation benefits.



For 25 years, managed care has played a central role in federal and state Medicaid policy. In an era of expanded coverage, with Medicaid now paying for health care for one of five Americans, states have moved to incorporate modern delivery and payment reform strategies into the managed care model. State programs are focusing on a diverse range of ideas, purchasing principles, and health priorities. But they share a common vision of a health care system that performs well for patients while integrating clinical care with health and social services. Medicaid has emerged as not only a major source of health care financing but as a key tool for improving patient and population health. With its dominant presence in low-income communities, Medicaid delivery and payment reform strategies have the potential to achieve a sufficient level of diffusion to achieve population-level results over time.

States also share common challenges: perennially tight budgets; a surge in enrollment that places heightened demands on the system; enrollment growth among older, working-age adults in poor health; the challenge of moving from process to outcome measures for care; designing health care that works well in poor communities with elevated health risks; cost pressures brought about by new technologies and major health crises like the opioid epidemic; ensuring access to necessary specialty care; limited evidence regarding the effectiveness of payment and delivery system reform tools, along with the complexity of their implementation for payers and providers alike; and the time needed to change health care delivery on a mass scale.

In the face of these challenges, states also identified factors that help promote positive results. These include: stable beneficiary enrollment over time, a federal regulatory environment that promotes testing and measuring new approaches, and incorporating a wide range of stakeholders, including managed care organizations; health care professionals and integrated delivery systems; and health, educational, and social service programs dedicated to improving health at a community and population level. In addition, states have brought energy and commitment to the challenge facing 21st century American health care: improving the health of people while slowing the growth of health care costs.


1 S. L. Decker, D. Kostova, G. M. Kenney et al., “Health Status, Risk Factors, and Medical Conditions Among Persons Enrolled in Medicaid vs. Uninsured Low-Income Adults Potentially Eligible for Medicaid Under the Affordable Care Act,” Journal of the American Medical Association, June 26, 2013 309(24):2579–86.

2 J. Giovannelli, K. Lucia, and S. Corlette, Regulation of Health Plan Provider Networks, Health Policy Brief #160 (Health Affairs, July 28, 2016).

3 J. Paradise, Data Note: Medicaid Managed Care Growth and Implications of the Medicaid Expansion (Henry J. Kaiser Family Foundation, April 2017).

4 Kaiser State Health Facts, Total Monthly Medicaid and CHIP Enrollment, Timeframe: July 2017 (Henry J. Kaiser Family Foundation, n.d.).

5 Kaiser State Health Facts, Medicaid Expansion Enrollment, Timeframe: FY 2016 (Henry J. Kaiser Family Foundation, n.d.).

6 Kaiser State Health Facts, Total Medicaid Managed Care Enrollment, Timeframe: 2014 (Henry J. Kaiser Family Foundation, n.d.).

7 Medicaid and CHIP Payment and Access Commission, Delivery System Reform Incentive Payment (DSRIP) Programs (MACPAC, March 2015); and K. Heflin, Driving Health Care Innovation Through DSRIP: State of the States (Center for Health Care Strategies, Oct. 20, 2016).

8 Connecticut treats all participating Medicaid providers as part of its managed care strategy.

942 CFR Part 438.3(e)(2) (Electronic Code of Federal Regulations, n.d.).

Publication Details



Sara Rosenbaum, Harold and Jane Hirsh Professor of Health Law and Policy, Milken Institute School of Public Health at the George Washington University

[email protected]


S. Rosenbaum, S. Schmucker, S. Rothenberg et al., Medicaid Payment and Delivery System Reform: Early Insights from 10 Medicaid Expansion States, The Commonwealth Fund, October 2017.