DEPARTMENT OF HEALTH AND HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, MD 21244-1850 
CMCS Informational Bulletin 
DATE:  November 2, 2017 
FROM:  Brian Neale, Director 
Center for Medicaid and CHIP Services 
SUBJECT:   Delivery System and Provider Payment Initiatives under Medicaid Managed 
Care Contracts 
The Centers for Medicare & Medicaid Services (CMS) Medicaid managed care rules1 include 
requirements for how states may implement delivery system and provider payment initiatives 
under Medicaid managed care contracts, including those with managed care organizations 
(MCOs), prepaid inpatient health plans (PIHPs), and prepaid ambulatory health plans (PAHPs).  
These types of payment arrangements permit states to direct specific payments made by 
managed care plans to providers under certain circumstances and can assist states in furthering 
the goals and priorities of their Medicaid programs. While CMS continues its review of the 
managed care rule, this informational bulletin provides information for states on strategies to 
implement such payment arrangements within the parameters of the rule.   
Specifically, 42 CFR 438.6(c)(1)(i) through (iii) specify the ways states may set parameters on 
how expenditures under managed care contracts are made by managed care plans to assist states 
in achieving their overall objectives for delivery system and payment reform and performance 
improvement.  These state directed payments must be based on delivery and utilization of 
services to Medicaid beneficiaries covered under the contract, outcomes, and quality of the 
delivered services.2  These permissible state directed payments fall into three categories3:  
1. Directing managed care plans to implement specific value-based purchasing models.
Examples of value-based purchasing could include bundled payments, episode-based
payments, accountable care organizations (ACOs), or other alternative payment models
intended to recognize value or outcomes over the volume of services.
2. Directing managed care plans to implement multi-payer or Medicaid-specific delivery
system reform or performance improvement initiatives.  Examples of delivery system
1 Medicaid and Childrens Health Insurance Program (CHIP) Programs; Medicaid Managed Care, CHIP Delivered 
in Managed Care, and Revisions Related to Third Party Liability; Final Rule, 81 Fed. Reg. 27498 (May 6, 2016) 
(available at: https://www.federalregister.gov/documents/2016/05/06/2016-09581/medicaid-and-childrens-health-
insurance-program-chip-programs-medicaid-managed-care-chip-delivered); and Medicaid Program; The Use of 
New or Increased Pass-Through Payments in Medicaid Managed Care Delivery Systems; Final Rule, 82 Fed. Reg. 
5415 (Jan. 18, 2017) (available at: https://www.gpo.gov/fdsys/pkg/FR-2017-01-18/pdf/2017-00916.pdf). 
2 These state directed managed care payments are in contrast to pass-through payments, which are disconnected 
from the amount, quality, or outcomes of services delivered to Medicaid managed care enrollees under the managed 
care contract; see: https://www.medicaid.gov/federal-policy-guidance/downloads/cib072916.pdf. 
3 These categories are not intended to be mutually exclusive.  CMCS Informational Bulletin  Page 2 
 
 
reform or performance improvement initiatives could include pay for performance 
arrangements, quality-based payments, or population-based payment models.   
3.  Directing managed care plans to adopt specific types of parameters for provider 
payments for providers of a particular service under the contract, including minimum 
fee schedules, a uniform dollar or percentage increase, or maximum fee schedules.  
Approval Criteria for State Directed Payment Arrangements 
All state directed payments included in Medicaid managed care contracts under 438.6(c) must 
be based on the utilization and delivery of services to Medicaid beneficiaries covered under the 
contract in order to be approved by CMS, and these payments must be directed equally, using the 
same terms of performance across a class of providers.  Provider participation in these state 
directed payments cannot be conditioned upon the provider entering into or adhering to 
intergovernmental transfer agreements. 
The directed payments must also advance at least one of the goals and objectives in the states 
Medicaid managed care quality strategy and have an evaluation plan to assess the degree to 
which the directed payment arrangement achieves its objectives.  The basis and scope of the 
evaluation plan should be commensurate with the size and complexity of the payment 
arrangement.  For example, a state implementing a minimum fee schedule to promote access to 
care may be able to utilize existing mechanisms to evaluate the effectiveness of the payment 
arrangement, such as external quality review (EQR) or an existing consumer or provider survey. 
In general, an evaluation plan should include: the identification of performance criteria which 
can be used to assess progress on the specified goal(s) and objective(s); baseline data for 
performance measure(s); and improvement targets for performance measure(s).  States have the 
ability to identify performance measure(s) that are most appropriate for this evaluation and may 
wish to consider using performance measures currently being used by the state or other existing 
measure sets in wide use across the Medicaid, CHIP, and Medicare programs to facilitate 
alignment and reduce administrative burden4.   
In addition, if states elect to direct their managed care plans to implement a value-based or 
delivery system reform payment arrangement, such as those payment arrangements described in 
categories 1 or 2 above, these directed payments will also need to make provider participation 
available using the same terms of performance for a class of providers and use a common set of 
performance measures4 across all payers and providers participating in the reform or 
improvement initiative.  For these value-based or delivery system reform payments, states cannot 
set the amount or frequency of the expenditures, nor can states recoup any unspent funds 
allocated for these payment arrangements from the managed care plans. 
                                                 
4 Examples of measure sets in wide use across Medicaid programs include the Medicaid and CHIP Child Core Set 
(https://www.medicaid.gov/medicaid/quality-of-care/performance-measurement/child-core-set/index.html), the 
Medicaid Adult Core Set (https://www.medicaid.gov/medicaid/quality-of-care/performance-measurement/adult-
core-set/index.html), the Medicaid Health Homes Core Set (https://www.medicaid.gov/state-resource-
center/medicaid-state-technical-assistance/health-homes-technical-assistance/health-home-quality-reporting.html), 
and the Core Quality Measure Collaborative sets (https://www.cms.gov/medicare/quality-initiatives-patient-
assessment-instruments/qualitymeasures/core-measures.html).  CMCS Informational Bulletin  Page 3 
Multi-Year Approval of State Directed Payment Arrangements 
Under 438.6(c), state directed payment arrangements cannot be renewed automatically beyond 
a fixed period of time.  We have generally interpreted this fixed period of time under the 
regulation to be an annual term, as CMS explained in the final rule that we sought to evaluate 
and measure the impacts of these reforms, and we generally believe that this would require an 
annual review of the payment arrangements.  However, we understand that some states are 
specifically pursuing multi-year payment arrangements to transform their healthcare delivery 
systems and believe that states can develop payment arrangements that are intended to pursue 
delivery system reform over a fixed period of time that is longer than one year.  For example, 
states that have multi-year delivery system reform initiatives may want to pursue approval of a 
multi-year managed care directed payment arrangement that is commensurate with the length of 
their delivery system reform initiative.   
In an effort to be mindful of states payment reform efforts, we believe that under certain 
circumstances the regulatory requirements under 438.6(c) can support multi-year payment 
arrangements when the following criteria are met: (1) the state has explicitly identified and 
described the payment arrangement in the preprint as a multi-year payment effort, including a 
description of the payment arrangement by year, to the extent the payment arrangement varies by 
year; (2) the state has developed and described a plan for pursuing a multi-year payment 
arrangement, including the states plan for multi-year evaluation, and the impact of a multi-year 
payment arrangement on the states goal(s) and objective(s) in the states quality strategy; and 
(3) the state will not be making any changes to the payment methodology described in the 
preprint for all years of the multi-year payment effort; and (4) CMS determines approval of a 
multi-year directed payment arrangement is appropriate.   
If the state makes changes to the approved payment methodology during the multi-year payment 
effort, the state would be required to obtain written approval from CMS prior to implementation 
of the new or revised payment methodology.  We believe that this approach under 438.6(c) will 
balance CMS desire to evaluate these payment arrangements in Medicaid managed care with the 
goal of also reducing state administrative burden. 
Payment Arrangements Not Subject to Approval Under 42 CFR 438.6(c) 
Finally, we note the following situations would not constitute a payment arrangement requiring 
approval under 438.6(c): 
1. States contractually implementing a general requirement for managed care plans to
increase provider reimbursement for services provided to Medicaid beneficiaries covered
under the contract, as long as the state is not mandating a specific payment methodology
or amounts and managed care plans retain the discretion for the amount, timing, and
mechanism for making such provider payments.
2. States contractually implementing a general requirement for managed care plans to utilize
value-based purchasing or alternative payment arrangements when the state does not
mandate a specific payment methodology and managed care plans retain the discretion to
negotiate with network providers the specific terms for the amount, timing, and
mechanism of such value-based purchasing or alternative payment arrangements. CMCS Informational Bulletin  Page 4 
To illustrate the aforementioned situations, a state implements a general requirement for 
managed care plans to increase their overall rates for primary care services provided to all 
Medicaid beneficiaries covered under the contract, or for managed care plans to make 20 percent 
of their provider payments as value-based purchasing payments.  These examples would not be 
state directed payments under our interpretation of the regulation as long as the state is not 
mandating a specific payment methodology or amounts under the contract.  In addition, we note 
that when payment is tied to the utilization and delivery of a specific service or benefit provided 
to a specific enrollee under the contract, such payments are not pass-through payments as 
defined in 42 CFR 438.6(a) and not subject to the requirements under 42 CFR 438.6(d). 
Implementing State Directed Payment Arrangements and Technical Assistance 
Contract arrangements that direct the managed care plans expenditures must have written 
approval from CMS prior to implementation and before approval of the corresponding Medicaid 
managed care contract(s) and rate certification(s).  The compliance date for 438.6(c) is the 
rating period for Medicaid managed care contracts beginning on or after July 1, 2017.  To help 
expedite the approval process, CMS has developed the attached 438.6(c) preprint which 
implements the prior approval process and must be submitted and approved by CMS before 
implementing any of the specific payment arrangements described in 438.6(c).  States should 
submit the 438.6(c) preprint via the regional office mailboxes that are currently in use.  To 
ensure a timely review process for states, CMS is committing to process 438.6(c) preprints that 
do not contain significant policy or payment issues within 90 calendar days after receipt of a 
complete submission. 
As part of a pilot program, CMS has already approved state directed payment arrangements in 
several states and found that early discussions with states and technical assistance on completing 
the preprint are beneficial for both states and CMS during the review process.  We are including 
in Appendix A (https://www.medicaid.gov/medicaid/managed-care/downloads/guidance/
appendix-a.pdf) examples of approvable state directed payment arrangements.  We encourage 
states to reach out early for technical assistance to expedite CMS review of state proposals.  
Please contact your regional office representative or John Giles, Technical Director in the 
Division of Managed Care Plans, at (410) 786-1255 or via email at John.Giles@cms.hhs.gov.  
We look forward to continuing our partnership with you to deliver on our shared goals of 
providing high quality, sustainable healthcare to those who need it most.