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August 2020Advising Congress on Medicaid and CHIP PolicyDirected Payments in Medicaid Managed CareThe 2016 Medicaid managed care rule created a new option for states to require managed care plans topay providers according to specific rates or methods, referred to as directed payments. Typically, directedpayments are used to establish minimum payment rates for certain types of providers or to requireparticipation 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 basedon MACPAC’s review of directed payments approved as of June 6, 2019.Supplemental Payments and Managed CareUnder the Medicaid statute, states have broad flexibility to design their own payment methods under feefor-service (FFS) arrangements. The two broad categories of payments are (1) base payments, which arepaid per service, and (2) supplemental payments, which are typically made in a lump sum for a fixed periodof time (MACPAC 2020a). In fiscal year (FY) 2018, states made a total of 56 billion in supplementalpayments to hospitals, mental health facilities, nursing facilities, and physicians, which was 36 percent oftotal 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 localgovernments. In general, most FFS base payments are financed by state general funds, while most FFSsupplemental payments are financed by provider taxes or IGTs (MACPAC 2020a).1Under actuarial soundness rules, states may not make supplemental payments for services covered underthe managed care contract. This is because if rates are sufficient to cover the reasonable, appropriate, andobtainable costs of providing services covered under the managed care contract, then plans and providerswould 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 paymentfunding for some providers. Such losses can be substantial given that as of July 2017, over two-thirds ofMedicaid enrollees were enrolled in managed care, and managed care accounted for about half ofMedicaid benefit spending in FY 2018 (MACPAC 2019a). For this reason, some states excluded certainservices or populations from managed care or sought demonstration waiver authority under Section 1115of the Social Security Act to continue making supplemental payments that are tied to delivery systemreforms or uncompensated care costs.2Prior to 2016, a small number of states offset the loss of FFS supplemental payments by increasingcapitation rates paid to managed care organizations (MCOs) and requiring MCOs to direct these additional

2funds to particular providers. These payments, known as pass-through payments, were typically not tied touse 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 Medicaidmanaged care regulations (CMS 2016).3 As part of this regulatory update, CMS required states to phaseout the use of pass-through payments while also creating a new option for states to direct payments toproviders under certain conditions. Specifically, CMS required that directed payments be tied to utilizationand 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 providerparticipation in intergovernmental transfer (IGT) agreements (42 CFR § 438.6(c)).As noted above, states may also use Section 1115 demonstration waivers to continue makingsupplemental 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 isencouraging states to develop plans to sustain the progress made on delivery system reform goals underDSRIP by increasing the use of value-based payment (VBP) strategies in managed care. Directed paymentsare one mechanism that states can use to require MCOs to use specific VBP models.Directed Payment OptionsIn 2017, CMS issued additional guidance and a pre-print form for states to use when applying for approvalof directed payment arrangements (CMS 2017). The pre-print form includes checkboxes and spaces forstates to indicate the option it is pursuing and describe its program.4 Directed payment arrangements arecategorized into two broad categories: State-directed fee schedules with minimum and maximum amounts for particular services, or uniformdollar or percentage increase in payment above negotiated capitated rates. The state may propose touse an approved state plan fee schedule, a Medicare fee schedule, or an alternative fee scheduleestablished by the state. Value-based purchasing directed payment arrangements require payments to participate in specifiedVBP initiatives, such as pay-for-performance incentives or shared-savings arrangements foraccountable 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 paymentrates or to implement value-based payment arrangements; current regulations allow MCOs to negotiatesuch provider payment policies. For example, in MACPAC’s recent review of hospital payment policies infive states, several MCOs noted that they paid hospitals using state FFS payment rates and methods eventhough it was not required (Marks et al. 2018). Similarly, in MACPAC’s review of value-based payment inmanaged care, several MCOs reported that they were implementing VBP initiatives without a state-directedpayment (Bailit 2020).

3CMS Review ProcessCMS reviews directed payment pre-prints using a process similar to that used to review Medicaid stateplan amendments. After an initial review of the state submission, CMS may send clarifying questions andrequest revisions before official approval. Directed payment arrangements are typically approved for oneyear at a time (to correspond with the length of MCO contracts and capitation rate approvals), but statescan receive multi-year approval in some circumstances. CMS has not made approved directed paymentpre-prints publicly available.After approval, states must incorporate the directed payment arrangement into their managed carecontracts and capitation rates. The portion of the capitation rate that is attributable to directed paymentsis included in the actuarial rate certification that CMS reviews, but information on spending on directedpayment arrangements is not publicly available.Use of Directed PaymentsAs of June 6, 2019, CMS had approved 121 directed payment arrangements in 34 states.5 About threequarters of those were state-directed fee schedules, and about one-quarter were state-directed VBParrangements (Figure 1).FIGURE 1. Distribution of Types of Approved Directed Payment Arrangements, 2019Directedfeeschedules76%Fee schedule typeMinimum fee scheduleUniform dollar orpercentage increaseMaximum feescheduleVBP24%Share of fee schedulearrangements61%34%11%VBP typePay for performancePopulation-basedpaymentBundled paymentOtherShare of VBParrangements52%24%7%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 initiallyapproved (n 57). Totals do not sum because one directed payment arrangement can include multiple types of fee schedules orVBP.Source: MACPAC, 2020, analysis of directed payment pre-prints approved as of June 6, 2019.

4Directed fee schedulesAlmost two-thirds of directed fee schedule directed payment arrangements approved as of June 2019established a minimum fee schedule for a class of providers. Most of these arrangements required MCOsto use the Medicaid state plan fee schedule or the Medicare fee schedule. About one-third of directed feeschedule arrangements required MCOs to increase payments to providers by a uniform dollar amountduring the managed care rate year, similar to a lump sum supplemental payment in FFS which is alsomade 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 (35percent) were financed by provider taxes or IGTs, which was slightly higher than the share that werefinanced by state general funds (32 percent). Other provider types targeted included physicians, mentalhealth providers (institutions and practitioners), and nursing facilities.TABLE 1. Number and Type of State Directed Fee Schedules by Provider Type and Funding Source,2019Program characteristicsTotalProvider typeHospitalsPhysicians and otherprofessional service providersMental health providersNursing facilitiesDental providersHCBS providersTransportation providersOther clinicsFunding sourceState general fundIntergovernmental transferHealth care-related taxOther non-state general fundNot specifiedType of directed fee scheduleMinimum feeUniform dollar orMaximum feeschedulepercentage increaseschedule563110Total uniqueprogramsShare 31011114–912–129181453432%20%15%5%37%Notes: HCBS is home and community-based services. Totals do not sum because a single directed payment arrangementcan 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 Forexample, New Jersey estimated that its program to increase payments for childhood screenings by 10per visit would cost a total of 5.9 million; Michigan estimated that its hospital rate increase program

5would cost a total of 1.7 billion. In state fiscal year (SFY) 2016, directed payments accounted for 40percent of managed care payments to hospitals and were larger than FFS supplemental payments tohospitals in Michigan (Marks et al. 2018).7Value-based purchasingAbout half of the 29 VBP directed payment arrangements approved as of June 2019 were pay-forperformance incentives, and the rest were tied to cost and quality goals, such as bundled payments orshared savings payments to ACOs.8 State-directed VBP programs were often targeted to hospitals. MostVBP directed payment arrangements (62 percent) were financed with state general funds, which is higherthan 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 andFunding Source, 2019ProgramcharacteristicsTotalProvider typeHospitalsPhysicians and otherprofessional serviceprovidersMental healthprovidersNursing facilitiesDental providersHCBS providersTransportationprovidersOther clinicsFunding sourceState general fundIntergovernmentaltransferHealth care-related taxNot specifiedPay forperformance(Category 2APM)15Type of directed VBPBundledPopulationpaymentbased payment(Category 3(Category 4APM)APM)27Total uniqueprogramsOther �––––3––132710%7%24%Notes: APM is alternative payment model. APM categories refer to the categories identified by the Healthcare Payment Learning and ActionNetwork. HCBS is home and community-based services. Totals do not sum because a single directed payment arrangement can targetmultiple 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.