August 2020 Advising Congress on Medicaid and CHIP Policy

Directed Payments in Medicaid Managed Care

The 2016 Medicaid managed care rule created a new option for states to require managed care plans to pay providers according to specific rates or methods, referred to as directed payments. Typically, directed payments are used to establish minimum payment rates for certain types of providers or to require participation in value-based payment arrangements that advance the state’s quality and access goals. This brief reviews the history of directed payment policy and examines the use of directed payments based on MACPAC’s review of directed payments approved as of June 6, 2019.

Supplemental Payments and Managed Care

Under the Medicaid statute, states have broad flexibility to design their own payment methods under fee- for-service (FFS) arrangements. The two broad categories of payments are (1) base payments, which are paid per service, and (2) supplemental payments, which are typically made in a lump sum for a fixed period of time (MACPAC 2020a). In fiscal year (FY) 2018, states made a total of $56 billion in supplemental payments to hospitals, mental health facilities, nursing facilities, and physicians, which was 36 percent of total FFS payments to these providers (MACPAC 2019a).

States also have flexibility to finance the non-federal share of Medicaid payments from multiple sources, including state general funds, provider taxes, and intergovernmental transfers (IGTs) from local governments. In general, most FFS base payments are financed by state general funds, while most FFS supplemental payments are financed by provider taxes or IGTs (MACPAC 2020a).1

Under actuarial soundness rules, states may not make supplemental payments for services covered under the managed care contract. This is because if rates are sufficient to cover the reasonable, appropriate, and obtainable costs of providing services covered under the managed care contract, then plans and providers would not need additional payments for these services.

One consequence of the move to managed care is that it can lead to a loss of supplemental payment funding for some providers. Such losses can be substantial given that as of July 2017, over two-thirds of Medicaid enrollees were enrolled in managed care, and managed care accounted for about half of Medicaid benefit spending in FY 2018 (MACPAC 2019a). For this reason, some states excluded certain services or populations from managed care or sought demonstration waiver authority under Section 1115 of the Social Security Act to continue making supplemental payments that are tied to delivery system reforms or uncompensated care costs.2

Prior to 2016, a small number of states offset the loss of FFS supplemental payments by increasing capitation rates paid to managed care organizations (MCOs) and requiring MCOs to direct these additional

2 funds to particular providers. These payments, known as pass-through payments, were typically not tied to use of services and were often financed by providers through IGTs or provider taxes.

In 2016, the Centers for Medicare and Medicaid Services (CMS) made a comprehensive update to Medicaid managed care regulations (CMS 2016).3 As part of this regulatory update, CMS required states to phase out the use of pass-through payments while also creating a new option for states to direct payments to providers under certain conditions. Specifically, CMS required that directed payments be tied to utilization and delivery of services, be distributed equally to specified providers under the managed care contract, advance at least one goal in the state’s managed care quality strategy, and not be conditioned on provider participation in intergovernmental transfer (IGT) agreements (42 CFR § 438.6(c)).

As noted above, states may also use Section 1115 demonstration waivers to continue making supplemental payments to some providers, such as delivery system reform incentive payments (DSRIP). However, CMS has indicated that it does not plan to renew existing DSRIP demonstrations and is encouraging states to develop plans to sustain the progress made on delivery system reform goals under DSRIP by increasing the use of value-based payment (VBP) strategies in managed care. Directed payments are one mechanism that states can use to require MCOs to use specific VBP models.

Directed Payment Options

In 2017, CMS issued additional guidance and a pre-print form for states to use when applying for approval of directed payment arrangements (CMS 2017). The pre-print form includes checkboxes and spaces for states to indicate the option it is pursuing and describe its program.4 Directed payment arrangements are categorized into two broad categories:

• State-directed fee schedules with minimum and maximum amounts for particular services, or uniform dollar or percentage increase in payment above negotiated capitated rates. The state may propose to use an approved state plan fee schedule, a Medicare fee schedule, or an alternative fee schedule established by the state.

• Value-based purchasing directed payment arrangements require payments to participate in specified VBP initiatives, such as pay-for-performance incentives or shared-savings arrangements for accountable care organizations (ACOs). States may also design their own VBP models. States do not have to have a directed payment arrangement in order for MCOs to adopt state plan payment rates or to implement value-based payment arrangements; current regulations allow MCOs to negotiate such provider payment policies. For example, in MACPAC’s recent review of hospital payment policies in five states, several MCOs noted that they paid hospitals using state FFS payment rates and methods even though it was not required (Marks et al. 2018). Similarly, in MACPAC’s review of value-based payment in managed care, several MCOs reported that they were implementing VBP initiatives without a state-directed payment (Bailit 2020).

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CMS Review Process

CMS reviews directed payment pre-prints using a process similar to that used to review Medicaid state plan amendments. After an initial review of the state submission, CMS may send clarifying questions and request revisions before official approval. Directed payment arrangements are typically approved for one year at a time (to correspond with the length of MCO contracts and capitation rate approvals), but states can receive multi-year approval in some circumstances. CMS has not made approved directed payment pre-prints publicly available. After approval, states must incorporate the directed payment arrangement into their managed care contracts and capitation rates. The portion of the capitation rate that is attributable to directed payments is included in the actuarial rate certification that CMS reviews, but information on spending on directed payment arrangements is not publicly available.

Use of Directed Payments

As of June 6, 2019, CMS had approved 121 directed payment arrangements in 34 states.5 About three- quarters of those were state-directed fee schedules, and about one-quarter were state-directed VBP arrangements (Figure 1).

FIGURE 1. Distribution of Types of Approved Directed Payment Arrangements, 2019

Directed VBP fee 24% schedules 76%

Share of fee schedule Share of VBP Fee schedule type arrangements VBP type arrangements Minimum fee schedule 61% Pay for performance 52% Uniform dollar or Population-based percentage increase 34% payment 24% Maximum fee schedule 11% Bundled payment 7% Other 31% Notes: VBP is value-based purchasing. Based on analysis of 121 directed payment arrangements approved as of June 6, 2019. Analysis excludes prior versions of directed payment arrangements that have been renewed or amended after they were initially approved (n=57). Totals do not sum because one directed payment arrangement can include multiple types of fee schedules or VBP. Source: MACPAC, 2020, analysis of directed payment pre-prints approved as of June 6, 2019.

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Directed fee schedules Almost two-thirds of directed fee schedule directed payment arrangements approved as of June 2019 established a minimum fee schedule for a class of providers. Most of these arrangements required MCOs to use the Medicaid state plan fee schedule or the Medicare fee schedule. About one-third of directed fee schedule arrangements required MCOs to increase payments to providers by a uniform dollar amount during the managed care rate year, similar to a lump sum supplemental payment in FFS which is also made for a fixed period of time (Table 1). Of the 92 unique state directed fee schedules, 40 (43 percent) were targeted to hospitals and 32 (35 percent) were financed by provider taxes or IGTs, which was slightly higher than the share that were financed by state general funds (32 percent). Other provider types targeted included physicians, mental health providers (institutions and practitioners), and nursing facilities. TABLE 1. Number and Type of State Directed Fee Schedules by Provider Type and Funding Source, 2019

Total unique Type of directed fee schedule programs Minimum fee Uniform dollar or Maximum fee Share of Program characteristics schedule percentage increase schedule Number total Total 56 31 10 92 100% Provider type Hospitals 14 22 6 40 43% Physicians and other 17 7 – 24 26% professional service providers Mental health providers 14 3 1 17 18% Nursing facilities 10 3 2 14 15% Dental providers 10 3 2 13 14% HCBS providers 9 1 1 10 11% Transportation providers 5 – – 5 5% Other clinics 11 2 4 15 16% Funding source State general fund 15 10 9 29 32% Intergovernmental transfer 7 11 1 18 20% Health care-related tax 2 11 2 14 15% Other non-state general fund 1 4 – 5 5% Not specified 33 – 1 34 37%

Notes: HCBS is home and community-based services. Totals do not sum because a single directed payment arrangement can target multiple provider types or have multiple funding sources. – Dash indicates zero. Source: MACPAC, 2020, analysis of directed payment pre-prints approved as of June 6, 2019. States are using directed payments for a variety of purposes. The amount of spending also varies.6 For example, New Jersey estimated that its program to increase payments for childhood screenings by $10 per visit would cost a total of $5.9 million; Michigan estimated that its hospital rate increase program

5 would cost a total of $1.7 billion. In state fiscal year (SFY) 2016, directed payments accounted for 40 percent of managed care payments to hospitals and were larger than FFS supplemental payments to hospitals in Michigan (Marks et al. 2018).7 Value-based purchasing

About half of the 29 VBP directed payment arrangements approved as of June 2019 were pay-for- performance incentives, and the rest were tied to cost and quality goals, such as bundled payments or shared savings payments to ACOs.8 State-directed VBP programs were often targeted to hospitals. Most VBP directed payment arrangements (62 percent) were financed with state general funds, which is higher than the share financed by IGTs or provider taxes (17 percent) (Table 2).

TABLE 2. Number and Type of State Directed Value-Based Purchasing Programs by Provider Type and Funding Source, 2019 Total unique Type of directed VBP programs Pay for Bundled Population- performance payment based payment Share Program (Category 2 (Category 3 (Category 4 Other (not of characteristics APM) APM) APM) categorized) Number total Total 15 2 7 9 29 100% Provider type Hospitals 9 – 3 4 15 52% Physicians and other professional service providers 4 – 7 2 10 34% Mental health providers 2 2 1 3 7 24% Nursing facilities – – 1 – 1 3% Dental providers – – – 1 1 3% HCBS providers – – 1 – 1 3% Transportation providers – – – – – – Other clinics 1 1 2 1 5 17% Funding source State general fund 8 2 4 8 18 62% Intergovernmental transfer 3 – – – 3 10% Health care-related tax 2 – – – 2 7% Not specified 3 – 3 1 7 24%

Notes: APM is alternative payment model. APM categories refer to the categories identified by the Healthcare Payment Learning and Action Network. HCBS is home and community-based services. Totals do not sum because a single directed payment arrangement can target multiple provider types or have multiple funding sources. – Dash indicates zero. Source: MACPAC, 2020, analysis of directed payment pre-prints approved as of June 6, 2019.

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In some states, directed payments are being used to complement and sustain DSRIP programs. For example, in SFY 2018, California was authorized to make $640 million in directed payments to public hospitals as part of its Quality Incentive Payment (QIP) program, in addition to the $1.4 billion in payments for these hospitals that was authorized under the state’s Public Hospital Redesign Incentives in Medi-Cal (PRIME) program (the successor to the state’s DSRIP program).9 In October 2019, the state released a proposal to fully transition its PRIME program to a managed care directed payment that would make a similar amount of payments to safety net hospitals based on performance on a common set of quality measures (DHCS 2019).

Policy Issues

Although many directed payment arrangements codify FFS payment policies in managed care, some provide large amounts of additional funding to providers above the base payment rate for services. These additional payments to providers in managed care raise many of the same types of policy questions as supplemental payments in FFS. Specifically, questions arise about whether this additional funding is targeted appropriately and based on measures of need rather than on the availability of financing for the non-federal share of the payment. However, provider-level data on directed payments are not available to that would allow us to analyze these questions.

In 2018, CMS proposed modifying its review process for directed payments; the agency would no longer require additional review of state directed fee schedules that use approved FFS rates and would allow for multi-year approval of VBP directed payment arrangements. In addition, CMS proposed allowing states to make new pass-through payments for up to three years for populations or services that are newly transitioned from FFS to managed care (CMS 2018). This proposed rule has not been finalized.

In MACPAC’s comment letter on the proposed 2018 managed care rule, the Commission raised concerns about the lack of transparency of directed payments and pass-through payments and suggested that CMS collect and report payment data at the provider level. In addition, the Commission also noted the importance of monitoring the existing requirement that directed payments advance the goals of a state’s managed care quality strategy (MACPAC 2019b).10

Endnotes

1 In state fiscal year 2012, 70 percent of FFS base payments were financed by state general funds, compared to 36 percent of disproportionate share hospital (DSH) payments and 22 percent of non-DSH supplemental payments financed by state general funds (GAO 2015).

2 For example, 12 states currently have approved delivery system reform incentive payment (DSRIP) or DSRIP-like programs, and 9 states have uncompensated care pools authorized under Section 1115 demonstrations (MACPAC 2020b).

3 In 2018, CMS proposed additional revisions to this rule that have not yet been finalized (CMS 2018).

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4 The directed payment pre-print does not include specific questions about how states finance directed payments, but states may include information on the funding sources for directed payment arrangements on their applications or in response to questions from CMS.

5 Analysis excludes prior versions of directed payment arrangements that have been renewed or amended after they were initially approved (n=57).

6 Although CMS does not include a question on the directed payment pre-prints about states’ anticipated spending under directed fee schedules, some states included this information in their responses to CMS’s questions.

7 MACPAC interviewed Michigan state officials in 2018 as part of a study about the development of Medicaid hospital payment policies and learned that the state’s directed payment arrangement is intended to preserve funding to hospitals previously made through pass-through payments that are no longer permissible under the 2016 managed care rule. State officials noted that the transition from pass-through payments to directed payments resulted in a change in the distribution of payments among hospitals because of the requirement that directed payments be tied to the utilization and delivery of services. This directed payment arrangement is financed by provider taxes and the total amount of funding is based on the amount of provider tax revenue received (Marks et al. 2018).

8 The directed payment pre-print provides states with the option to classify their VBP models using the Health Care Payment Learning and Action Network framework, but among the pre-prints that MACPAC reviewed, not all states used this framework and some directed payment arrangements overlapped multiple categories.

9 The amount of funding under the QIP program is based on the amount of pass-through payments that California was previously making to public hospitals. The quality improvement goals for QIP are intended to be complimentary to the quality improvement goals for PRIME (CAPH 2018).

10 State quality strategies are public documents that outline the goals of each state’s managed care program and its process for conducting independent reviews of MCO performance. The 2016 managed care rule added the requirement that state managed care quality strategies be updated and evaluated at least once every three years (42 CFR § 438.340).

References

Bailit Health. 2020. State strategies to promote value-based payment through Medicaid managed care: Final report to the Medicaid and CHIP Payment and Access Commission. Washington, DC: Bailit Health. https://www.macpac.gov/publication/factors-affecting-the-development-of-medicaid-hospital-payment-policies-findings- from-structured-interviews-in-five-states/ California Association of Public Hospitals (CAPH). 2018. Quality incentive program: Medicaid managed care rule. September 14. Oakland, CA: CAPH. https://caph.org/2018/09/14/quality-incentive-program-medicaid-managed-care-rule/. Centers for Medicare & Medicaid Services (CMS), U.S. Department of Health and Human Services. 2020. CMCS Informational bulletin regarding “Medicaid Managed Care Options in Responding to COVID-19.” May 14, 2020. Baltimore, MD: CMS. https://www.medicaid.gov/sites/default/files/Federal-Policy-Guidance/Downloads/cib051420.pdf. Centers for Medicare & Medicaid Services (CMS), U.S. Department of Health and Human Services. 2018. Medicaid Program: Medicaid and the Children’s Health Insurance Program (CHIP) Managed Care. Proposed Rule. Federal Register 83, no. 220 (November 14): 57264–57299. https://www.federalregister.gov/documents/2018/11/14/2018-24626/medicaid-program- medicaid-and-childrens-health-insurance-plan-chip-managed-care.

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Centers for Medicare & Medicaid Services (CMS), U.S. Department of Health and Human Services. 2017. CMCS Informational bulletin regarding “Delivery system and provider payment initiatives under Medicaid managed care contracts.” November 2, 2017. Baltimore, MD: CMS. https://www.medicaid.gov/federal-policy-guidance/downloads/cib11022017.pdf. Centers for Medicare & Medicaid Services (CMS), U.S. Department of Health and Human Services. 2016. Medicaid and Children's Health Insurance Program (CHIP) Programs; Medicaid Managed Care, CHIP Delivered in Managed Care, and Revisions Related to Third Party Liability. Final Rule. Federal Register 81, no. 88 (May 6): 27498–27901. https://www.federalregister.gov/d/2016-09581. Department of Health Care Services (DHCS), State of California. 2019. California advancing and innovating Medicaid (CalAIM) proposal. October 28, 2019. Sacramento, CA: DHCS. https://www.dhcs.ca.gov/provgovpart/Documents/CalAIM/CalAIM_Proposal_102819.pdf. Marks, T. K. Gifford, S. Perlin, et al. 2018. Factors affecting the development of Medicaid hospital payment policies: Findings from structured interviews in five states: Final report to the Medicaid and CHIP Payment and Access Commission. Washington, DC: Health Management Associates. https://www.macpac.gov/publication/factors-affecting-the-development- of-medicaid-hospital-payment-policies-findings-from-structured-interviews-in-five-states/. Medicaid and CHIP Payment and Access Commission (MACPAC). 2019a. MACStats: Medicaid and CHIP data book. December 2019. Washington, DC: MACPAC. https://www.macpac.gov/macstats/. Medicaid and CHIP Payment and Access Commission (MACPAC). 2019b. Letter from Penny Thompson to Seema Verma regarding “CMS-2408-P Medicaid program: Medicaid and Children’s Health Insurance Plan (CHIP) managed care.” January 14, 2019. https://www.macpac.gov/publication/letter-to-cms-administrator-verma-on-proposed-medicaid-and-chip- managed-care-rule/. Medicaid and CHIP Payment and Access Commission (MACPAC). 2020a. Base and supplemental payments to hospitals. Washington, DC: MACPAC. https://www.macpac.gov/publication/medicaid-base-and-supplemental-payments-to-hospitals/. Medicaid and CHIP Payment and Access Commission (MACPAC). 2020b. Delivery system reform incentive payment programs. Washington, DC: MACPAC. https://www.macpac.gov/publication/delivery-system-reform-incentive-payment- programs/. Pettersson, J., B. Mori, L. Roth, and J. Clarkson. 2018. Approved Medicaid state directed payments: How states are using § 438.6(c) “preprints” to respond to the managed care final rule. Seattle, WA: Milliman. http://www.milliman.com/insight/2018/Approved-Medicaid-state-directed-payments-How-states-are-using-438_6c- Preprints-to-respond-to-the-managed-care-final-rule/. U.S. Government Accountability Office (GAO). 2015. States' increased reliance on funds from health care providers and local governments warrants improved CMS data collection. Report no. GAO-14-627. Washington, DC: GAO. https://www.gao.gov/products/D08098.