Money Matters: Making Medicaid Payment More Effective Through Population-Based Payment
By Anne Smithey and Kelsey Brykman
In The Public Interest, May 2023
State Medicaid agencies have been implementing value-based payment (VBP) models for the last decade and are increasingly exploring advanced population-based payment (PBP) models that increase flexibility, predictability, and accountability for participating provider organizations. PBP models show promise in advancing Medicaid priorities, but are still in the early stages of development, and model design and implementation challenges remain.
Value-Based Payment and Population-Based Payment
Research indicates that the method used to pay health care providers can impact how they deliver care.[1, 2] The typical fee-for-service (FFS) payment reimburses provider organizations [3] for volume of services provided, increasing incentives for overtreatment, and there is no accountability to provide high-quality and cost-effective care. VBP models, on the other hand, link provider payment to quality performance and, sometimes, cost of care, which has the potential to incentivize more efficient, coordinated, and high-quality care.[4]
As defined by the Health Care Payment Learning & Action Network (HCP LAN) there are a variety of approaches to VBP that fall along a continuum from less to more advanced:[5]
- Pay-for-performance allows providers to earn a bonus payment for providing high-quality care, or pay a penalty for low-quality care;
- Shared savings and/or shared risk holds providers accountable for cost of care by allowing them to share in savings if spending (their own or total cost of care) is below a benchmark and meets quality requirements, or requires them to cover some portion of overages if spending is above a benchmark; and
- Population-based payment pays providers an upfront fixed rate (often per member per month) to cover care associated with a defined scope of practice, tied to quality incentives.
Under the HCP LAN framework, PBPs are the most advanced type of VBP and have the potential to offer the strongest incentives for health system transformation.[6] Though PBP models can take many forms and cover many different scopes of service, ideally all PBP models are disconnected from FFS payment. This differs from other types of VBP that still primarily rely on FFS reimbursement to pay providers. While PBP models still have fairly low levels of adoption,[7] Medicaid agencies and other payers are increasingly interested in employing these models to drive improvements in health care delivery.
How Does PBP Help Medicaid Achieve its Goals?
State Medicaid agencies across the country are exploring, designing, and implementing PBP models to change how providers are paid and pursue goals of improving health care and outcomes for Medicaid enrollees.[8] PBP models, like all VBP, change how health care provider organizations are paid and can be implemented in all state Medicaid contexts—whether states run their Medicaid program through managed care or directly administer their program (i.e., states with an FFS delivery system). Colorado, Maryland, Massachusetts, New York, Pennsylvania, and Washington state are examples of states leading the way in implementing Medicaid PBP models.[9] These states have models focused on a variety of scopes of service, including models focused on payment for delivery of primary care, delivery of hospital services, or all health care delivery (i.e., total cost of care). PBP models can be leveraged to pursue a variety of Medicaid goals such as: Quality improvement, revenue stability for provider organizations, and cost control.
Care Transformation and Quality Improvement
Under FFS payment, providers can only be paid for services that are associated with a billing code, which can limit the type of services they are able to provide.[10] Additionally, payments linked to billing codes often pay more for procedures compared to consultations or other preventive care, further skewing incentives related to care delivery decisions.[11] Because PBP reimbursement is not directly linked to billing, the model offers increased flexibility for providers to deliver innovative and personalized care.[12] For instance, PBP can allow providers working primarily with patients in under-resourced communities to devote time and effort to screen for social risk factors (e.g., food insecurity) and connect patients to resources that can help address these needs (e.g., assist them in signing up for food assistance, connect them with a local food bank). These types of activities can impact health but are typically not reimbursed or are under-reimbursed in an FFS payment system.
In addition to offering greater flexibility for providers, state Medicaid agencies can also use PBP models to incentivize or require providers to pursue quality improvement and care delivery transformation. It is important that states continue to focus on quality improvement by linking incentive payments within a PBP model to quality of care. Strong quality measures (and accurate rate setting—addressed below) can mitigate the risk of providers stinting on care to earn additional savings. States can also focus on quality and health equity by introducing incentive payments linked to provider organization performance on stratified quality measures.[13, 14] Finally, because provider organizations can keep some of the savings they generate under a PBP model, incentives between provider organizations and payers are aligned—both are working toward more preventive care that keeps people healthy.
Revenue Stability for Provider Organizations
PBP reimbursement offers provider organizations increased revenue stability and predictability.[15] Claims-based payment can take months to be disbursed after a service is provided, while PBP is paid upfront on a regular basis (typically monthly). Getting paid in this manner allows provider organizations the opportunity to plan for and invest in population health management efforts, such as improving technology or developing initiatives focused on health issues prevalent in their patient population. Additionally, depending on the details of model design, provider organizations may better understand what their revenue will look like over time. Increased stability can help providers plan on a longer-term basis to improve care delivery and their experiences at work.[16] Finally, PBP models can insulate providers from short-term shocks to demand, such as the drastic decrease in demand for services during COVID-19.[17] Offering revenue stability for provider organizations through PBP payment also supports Medicaid agency priorities including ensuring access to care, particularly for rural or independent providers who may face more financial challenges under typical FFS payment.[18]
Controlling Cost of Care
Medicaid agencies are particularly interested in developing VBP models that can address the growing cost of health care. Because PBP models shift more financial accountability to provider organizations, these types of models may be particularly impactful at addressing the cost of care by decreasing inefficient and unnecessary care delivery (such as by unnecessary imaging[19]), better managing chronic conditions, and enhancing care coordination. Evidence on the impact of Medicaid PBP models on cost of care is mixed, but there are early indicators that some models are successfully controlling costs.[20] Decisions and goals around scope of service may impact whether models control costs. For instance, primary care models may be more focused on increasing investment in preventive care, while hospital or total cost of care models may be designed with stronger cost control incentives.
Challenges in PBP Model Design
While PBP models show promise for achieving many state Medicaid goals, there are key challenges in PBP model design that are still being explored.[21] For example, states will need to consider approaches to:
- Rate-setting: There are multiple ways to set rates—which can be based on a state’s goals, data availability, and its desire/ability to fully decouple payment from claims. Deciding how rates will be set, collecting sufficient data to set rates while minimizing administrative burden, and determining how rates will be trended forward poses a significant actuarial challenge. Additionally, policymakers must consider how to adjust rates to account for the complexity and level of need of patients, including if they will account for social risk factors[22] alongside clinical complexity. Appropriate rate-setting and risk adjustment methods are areas of active exploration for state Medicaid agencies, and well-developed methods are needed to ensure providers do not “cherry pick” by only serving the healthiest, least complex patients.
- Stakeholder buy-in: For many provider organizations, PBP is a totally new form of revenue that creates greater accountability for cost of care than other VBP models and has significant implications for changing how they do business. Because of this shift, ensuring that providers are interested in the model is critical. Most VBP models are voluntary, so states must gain buy-in from provider groups to participate to achieve large-scale changes in care. A key step in gaining buy-in is ensuring that rate-setting methods are transparent and fair, allowing providers to feel comfortable managing a new financial arrangement. Additionally, in states with Medicaid managed care, the role of the managed care organization (MCO) may be uncertain as providers take on new population health and care management responsibilities. Medicaid agencies designing PBP models will need to ensure the roles of the provider organization and MCO are clear.
- Transitioning to PBP: Because PBPs involve significant changes in how providers do business, many state Medicaid agencies design programs with an intentional “on ramp” that prepares provider organizations to succeed under the new payment system. For instance, states might design models that start with a hybrid payment—under which part of revenue comes via a PBP and part is paid through traditional FFS payment—and move toward a full PBP over time. States may start with “reporting only” years where performance is measured but providers are not held accountable for quality or cost of care. States can also provide technical assistance to help organizations develop new care delivery models and business practices. Regardless of the method Medicaid agencies use to support the transition into a PBP model, agencies are typically interested in continued iteration and improvement of the model over time.
- Multi-payer alignment: A key area of interest for payers and providers is VBP models that align incentives, methodology, and quality measurement across multiple payers.[23] Providers benefit by having a similar set of incentives driving decision-making for all their patients, while payers benefit by increasing the impact of their VBP models. Alignment can be challenging due to the differing needs of different lines of business (e.g., quality measures for the elderly population served by Medicare are very different from pediatric measures for Medicaid or CHIP). Collaboration between policymakers designing these models can decrease complexity and increase buy-in from all stakeholders.
Conclusion
PBP is an innovative type of VBP and its use in Medicaid is growing as states around the country explore this payment approach. State Medicaid agencies are interested in the ability of PBP models to help them achieve their goals around improved delivery and quality of care, revenue stability, and cost savings. However, there are still many design challenges that Medicaid agencies are continuing to explore and refine as they develop and implement these types of models—and policymakers across the country are eagerly waiting to see the impact of these models.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the newsletter editors, or the respective authors’ employers.
Anne Smithey, MPH, is a program officer and Kelsey Brykman, MS, is a senior program officer at the Center for Health Care Strategies, a policy design and implementation partner devoted to improving outcomes for people enrolled in Medicaid. Anne Smithey can be contacted at asmithey@chcs.org.