State Directed Payments: Part I—Medicaid Financing 101

The importance of Medicaid as it relates to health care access, policy, and impact is hard to overstate. Medicaid provides health insurance for almost one-third of all children and is the primary payer of long-term services and supports in the United States. Indeed, this federal-state program accounts for nearly twenty percent of all healthcare expenditures nationally.

To understand the US health care system one must, therefore, understand Medicaid. That is why, in this continuing series, we introduce a nuts and bolts look at Medicaid financing. There are two themes to Medicaid financing and administration that we should address from the outset: its complexity and its fragmentation.

To say that Medicaid financing is complicated is an understatement. And not surprisingly many stakeholders gloss over the details of Medicaid financing, focusing instead on what is, for many, the perceived end game – provider payment. But as financing requirements and responsibilities among CMS, states, and managed care plans shift those payments at the provider level can grow or shrink. In other words, the actual cost and correlating benefit of delivering Medicaid services is impacted by more than just the “bottom line” rate. It is therefore incumbent upon all Medicaid stakeholders to pay attention when these shifts are occurring. No matter how long that runway to change may seem.

MEDICAID FINANCING 101

The Medicaid program operates as a state/federal partnership. The federal government sets minimum requirements for the program and provides states certain flexibilities to design programs that meet the needs of their populations. Under this partnership, financing is shared with federal and state dollars funding the program—creating fiscal complexity. As the Medicaid program has shifted to managed care, health plans have become part of the administration and financing of the program leading to increased complexity and decreased transparency.

One such example of the financial complexity that managed care adds is with pass-through and directed payments. However, before we dive into these special payment arrangements it may be helpful to step back and describe the typical payment structure under risk-based managed care arrangements—capitation.

Capitation. States typically pay managed care organizations (MCOs) through periodic payments for a defined package of benefits – capitation payments. These payments are typically made on a per member per month (PMPM) basis. It is then in the purview of the contracted MCO to negotiate with providers to provide services to their enrollees either on a fee-for-service (FFS) basis or through subcapitated payments.

Pass-through Payment. A pass-through payment is any amount required by the state to be added to the contracted payment rates between the MCO and hospitals, physicians, or nursing facilities that is not for the following purposes:

• a specific service or benefit covered under the contract and provided to a specific enrollee;
• a provider payment methodology permitted for delivery system and provider payment initiatives;
• a subcapitated payment arrangement for a specific set of services and enrollees covered under the contract;
• Graduate Medical Education payments; or
• Federally Qualified Health Center (FQHC) or Rural Health Center (RHC) wrap around payments.

Directed Payment. State directed payments are like pass-through payments in that states require the MCOs to make payments to providers. These payments however must meet additional requirements codified in federal regulation to be approved—the most important being that state directed payments must be based on the delivery and utilization of services to Medicaid beneficiaries covered under the contract, outcomes, and quality of the delivered services.

MEDICAID FINANCING TODAY

Today I, therefore, want to bring you up to speed on what is happening in Medicaid financing with State Directed Payments. To fully understand this update we need to go back to 2016 when CMS finalized the Medicaid Managed Care Final Rule. Among many, many other things, the Final Rule set a timeline to phase out pass-through payments in managed care. As “replacement” states were presented a new option to create directed payments to providers under limited conditions. Six years later, state use of directed payments has surpassed CMS expectations and spending has far exceeded that of the payments arrangements that CMS set out to eliminate. With no limits in sight for these payments, we should all be tracking what is next. And that is just what the Medicaid and CHIP Payment and Access Commission (MACPAC) has been trying to figure out.

MACPAC is a non-partisan legislative branch agency that is tasked with serving as an independent source of information on Medicaid and CHIP. They provide Congress, the Secretary of the U.S. Department of Health and Human Services, and the states with policy and data analysis and recommendations on issues related to Medicaid and the State Children’s Health Insurance Program (CHIP). Members of MACPAC are appointed for their broad expertise and wide range of perspectives on Medicaid and CHIP. In short, they are a very smart and experienced group of folks that have long been invested stakeholders in the Medicaid program.

MAPAC has published countless issue briefs and data reports on the topic of Medicaid financing and has recently been focused on understanding how states have leveraged state directed payments to fund their programs. Although there has been limited information available from CMS on these transactions, the MACPAC analyses have provided important insights into the directed payment program and identified a series of gaps and shortcomings of the program. These findings have resulted in a series of recommendations that MACPAC will present in a Chapter of its June Report to Congress.

This article is the first in a series of three that I will present on the topic of State Directed Payments over the next three months. Because of the complexity of Medicaid financing, I thought it was best to take this topic on in bite-size increments. In this article, we reviewed some foundational financing and administration terms and principles as it relates to this joint-federal program. This background will equip us to then discuss some of the more complex constructs of Medicaid financing that states can choose from to leverage federal funding and direct MCOs to increase payments to select providers.

In May, we will continue with an important foundational overview of Medicaid Supplemental Payments—namely the Disproportionate Share Hospital (DSH) Program and the Upper Payment Limit (UPL) Program followed by a brief description of the State Directed Payment regulations laid out by CMS. These payment options are key to understanding Medicaid financing because they represent more than 25 percent of payments to key Medicaid providers (i.e., hospitals and nursing facilities). We will then review insights from the MACPAC analyses on the use of state directed payments and the concerns that have been raised about directed payments, highlighting states with state directed payments that have been used to significantly increase funding to select provider groups. Finally, when MACPAC releases its June 2022 Report to Congress, I will provide a summary of its Chapter on Transparency and Oversight of Directed Payments in Medicaid Managed Care which will include recommendations to Congress on how to improve the program. As well as my perspective on the impact of such recommendations on Medicaid stakeholders in states across the country.

I hope that you will continue to follow this series and sharpen your knowledge on one of the most complex and important topics—financing— that is the underpinning of the Medicaid program.