Now is "absolutely the time" for Medicaid payment reform

While surging Medicaid enrollment and plunging revenues are making headlines, a less visible issue is how states pay for health care. However, this may be the single best answer to containing costs under health care reform, according to a May 2010 policy brief from the Center for Health Care Strategies (CHCS) in Hamilton, NJ.

The brief, Payment Reform: Creating a Sustainable Future for Medicaid, reports on redesigning Medicaid payment policies to increase the value of care being purchased.

States are taking several different approaches to payment reforms. For some states, such as New York, the starting point was an analysis of existing payment methodologies and payment levels in both fee-for-service and Medicaid managed care, and in both the acute and long-term care sectors.

Eighty percent of Medicaid funding is still fee-for-service. "Fee-for-service payments are the building blocks of reform. Rationalizing these payments provides both an immediate opportunity to contain costs and enhance quality," says Deborah Bachrach, JD, a senior program consultant with CHCS. "It is also the foundation of more expansive reforms, such as bundled payments and medical homes."

Timing is right

Ms. Bachrach says, "Now is absolutely the time for states to be evaluating their payment policies and initiating payment reforms. Across-the-board rate cuts may save dollars, at least in the short run, but they are not reform."

These cuts potentially undermine access and quality, as well. "Sound payment policies are essential to addressing current budget shortfalls and to prepare for the enrollment into Medicaid of 15 to 20 million more people starting in 2014," says Ms. Bachrach.

In addition, Ms. Bachrach says that Medicaid's ability to influence the cost and effectiveness of care "will be enhanced to the extent it collaborates with other payers. And Medicaid will find it difficult to participate in multipayer initiatives unless it has first adopted sound payment policies."

Several demonstrations are authorized in health care reform legislation to test out new methods of payment, aligned with collaborative care models.

"This is a really exciting opportunity for states to take advantage of," says Allison Hamblin, CHCS' director of complex populations. "Current Medicaid payment methodologies limit states' abilities to pay for care coordination activities among providers. That is a challenge we are facing in many of the pilots we are supporting in this area."

The hope is that the demonstrations will give states the ability to test novel ways to finance these models of care. "These new financing and care delivery options offer the potential to much more effectively manage care for complex populations," says Ms. Hamblin.

However, Ms. Hamblin notes that many states are in hiring freezes. With the many demands of preparing for expansion, they may not have the resources to fully capitalize on these opportunities to test new approaches.

"The real challenge is going to be figuring out how to implement expansion in a way that most effectively meets the needs of the newly covered populations. Many will have multiple physical and behavioral health conditions," says Ms. Hamblin. "Pursuing one or more of the demonstration opportunities will enable states to get a head start on developing the care delivery and payment systems required to serve millions of new beneficiaries come 2014."

New opportunities

Health care reform, says Ms. Bachrach, "provides tremendous opportunities for state Medicaid agencies, with its focus on chronically ill patient populations and integrated care models. You can expect Medicaid agencies to take full advantage."

One example is the law's provision for health homes. States will be eligible for a 90% federal match for health home services provided to individuals with serious behavioral health problems or two chronic conditions such as asthma, diabetes, obesity, and heart disease.

Covered services include many that are key to managing the care of these high-need, high-cost patients, but have not traditionally been covered by state Medicaid programs, says Ms. Bachrach. These include care coordination and health promotion, post-discharge community follow-up, patient and family support, and referral to community and social support services.

"Several states are considering how this provision might be combined with the Affordable Care Act's support for community health workers and incentives for Medicaid patients who adopt healthy behaviors that have been demonstrated to prevent chronic diseases," says Ms. Bachrach. There is also substantial state interest in integrated funding for dual-eligibles.

"All of these populations are among the most medically complicated and costly populations for state Medicaid programs," says Ms. Bachrach. "States are dedicated to developing more effective payment and care models. The overarching challenge, however, for state Medicaid agencies is staff shortages, making development of even critical new programs difficult."

Brian Osberg, Minnesota's state Medicaid director, says that health care reform "is an opportunity for us to advance our service and payment reform activities that we already started here, and a chance for Medicaid to participate in some of these initiatives."

The state is applying for an advanced primary care demonstration involving Medicare's participation in Minnesota's health care home arrangement. "We have a multipayer model here," says Mr. Osberg. "It is important that we have critical mass to make it work for providers, as opposed to having Medicare doing its own separate demonstration."

Minnesota is looking to implement new models of payment for episodes of care, both for Medicaid and Medicare. The health care reform law provides 90% federal funding for the health care home fee arrangement. "We will be well positioned to take advantage of that in January 2011," says Mr. Osberg. "We will also consider global payment demonstration models for safety net hospitals and pediatric accountable care organizations, consistent with what we want to advance here in Minnesota."

There is also a directive from the state legislature to develop an accountable care organization demonstration by next year. "There are a lot of things in the law that allow for flexibility around service and payment reform that we will certainly take a close look at," says Mr. Osberg. "The new law provides possibilities, and we are going to examine those possibilities."

A pay-for-performance arrangement for Medicaid is already in place, as part of the Bridges to Excellence program initiated by large employers. "So, we are part of that here, but we also want to eventually look at expanding those incentives to our own clients," says Mr. Osberg. "At one point, we had money to do that. Unfortunately, it was a victim of the budget deficit, so we lost those incentives."

Minnesota Medicaid already has approval from the Centers for Medicare & Medicaid Services to do a health care home payment arrangement. "We will be paying a care coordination fee. That is on its way, and the next stage is to develop a total cost of sharing arrangement," says Mr. Osberg. "Providers who see our clients have the incentive to manage the entire cost of care. That is the next level of payment reform that we want to focus on."

Contact Ms. Bachrach at (212) 866-0801 or, Ms Hamblin at (609) 528-8400 or, and Mr. Osberg at or (651) 431-2189.