DEPARTMENT OF HEALTH & HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, Maryland   21244-1850 
 
 
            SMDL# 13-005 
            ICM# 3 
August 30, 2013 
 
       
            RE: Shared Savings Methodologies  
 
Dear State Medicaid Director:  
 
This letter is the third in a series that provides states with guidance on designing and 
implementing care delivery and payment models that improve health, improve care, and reduce 
costs within state Medicaid programs.  The first two letters are SMD #12-001 and 12-002.  In 
those letters, we described the framework for Integrated Care Models (ICMs) and pathways that 
states may use to implement ICMs in the Medicaid state plan or, as needed, through appropriate 
program waivers and demonstrations.  This letter focuses specifically on reimbursement 
methodologies that can be adopted in the context of ICMs to incentivize improved quality and 
outcomes and reduce costs by sharing program savings with high performing providers.    
SHARED SAVINGS IN MEDICAID 
 
Many states are interested in testing shared savings methodologies in the Medicaid program as a 
means to promote higher quality at an overall lower cost.  CMS has had a series of discussions 
with states as part of the Medicaid and CHIP Value Based Purchasing Learning Collaborative 
about these issues.  States and CMS share the goal of ensuring effective delivery system models 
that properly reward providers for efficiency and quality.  Since shared savings methods are new 
and evolving, this guidance is intended to inform states thinking as they consider developing 
performance incentives reimbursed through program savings, and not to prescribe just one 
approach to designing such incentives.  Over time, we intend to offer examples of approved 
shared savings methodologies to share state experiences with the models and to describe 
practices that have proven to be effective.  We will work with states to collect and make this 
information available.  We ask that states share the results of evaluations, reports and other data 
that can help all interested parties understand how shared savings methodologies work to 
improve care and lower costs.  Work along these lines is proceeding in a few states. 
 
BACKGROUND 
 
In previous letters we have discussed how the structure of a states coordination and care 
transformation efforts will affect whether activities are implemented under a Medicaid state plan 
benefit or through a waiver authority.  For instance, states may be interested in targeting efforts 
at specific populations with complex care needs or testing delivery models in targeted regions 
before implementing initiatives statewide.  All of these decisions will affect which Medicaid 
authority a state uses to implement shared savings and components of the payment methodology.   Page 2  State Medicaid Director 
 
We refer specifically to the second letter within this series Policy Considerations for Integrated 
Care Models (SMDL #12-002) for states that seek additional guidance on structuring ICMs.    
 
Several states are at the forefront of driving quality improvement incentives in Medicaid fee-for-
service and managed care delivery systems.   Their approaches to rewarding providers that better 
coordinate care and improve quality through payment incentives align with similar efforts in the 
Medicare program as well as the private health insurance market.  As state Medicaid agencies 
develop new incentive models that calculate payments based on Medicaid savings, they have 
sought guidance from CMS on Medicaid authorities and federal expectations for designing and 
implementing the models.   
 
Within this letter we offer states methodological considerations that factor into any shared 
savings proposals, as well as technical guidance and a series of questions that CMS will expect 
states to answer as part of their proposals.  Importantly, we expect shared savings methodologies 
to encourage care coordination and practice transformation activities, such as those discussed in 
SMDL #12-002, that improve quality and health outcomes.  CMS is not interested, at this time, 
in partnering with states on shared savings proposals that are based only on cost savings and that 
do not improve quality and health outcomes or limit access to eligible beneficiaries.  The 
services and/or activities to coordinate and transform care delivery for Medicaid beneficiaries 
and the quality metrics that are the basis for the shared savings payments will be defined in either 
the state plan or waiver documentation under a Medicaid benefit category.   
 
METHODOLOGICAL CONSIDERATIONS  
 
Shared savings calculations can be complex and potentially place states and CMS at risk if the 
calculations and trends are inaccurate or if the calculations are not routinely rebased to reflect 
changes to Medicaid programs and the efficiencies that have been gained through better 
coordination and improved quality.  The analyses that informed the Medicare Physician Group 
Practice Demonstration, the Pioneer Accountable Care Organizations (ACO) model, and the 
Medicare Shared Savings Program ACOs are potential resources to help states develop similar 
shared savings initiatives under Medicaid programs.  However, we recognize that Medicaid 
enrollees are often different from Medicare enrollees and states are not required to develop 
methodologies that mirror any of these programs.  With that in mind, this letter provides 
information on the key structural components of a shared savings payment methodology and, as 
enclosures to the letter, technical design considerations and questions that states should review 
prior to submitting a proposal to CMS.  We expect states to consider each of the methodological 
components described this letter as they develop a proposal for CMS to review, but we are not 
defining approval criteria or requiring specific standards that states will need to meet for 
approval.  We do not foresee a one size fits all approach to shared savings and at this time 
believe it is too early to determine if there are criteria and universal standards that can apply to 
all Medicaid models.  Our goal is to work in partnership with states to develop methodologies 
that mitigate risk, realize potential rewards associated with shared savings methodologies, and 
may be replicated nationally.       
 
 
 
 
  Page 3  State Medicaid Director 
 
Essential Concepts of Shared Savings  
 
A shared savings methodology typically comprises four important concepts: a total cost of care 
benchmark, provider payment incentives to improve care quality and lower total cost of care, a 
performance period that tests the changes, and an evaluation to determine the program cost 
savings during the performance period compared to the benchmark cost of care and to identify 
the improvements in care quality.  In some instances the provider payment incentives in the 
second step will be determined through the evaluation step.  We have discussed changes in care 
delivery at length in this and in other letters, and below we provide information on the baseline 
benchmark, the performance period and the evaluation components.  As states design shared 
savings methodologies, key goals should be to ensure that: 
 
  data analysis is used to determine that benchmark cost, performance period cost and the 
associated trend rates are accurate; and  
  shared savings policies, such as saving thresholds, minimum savings rates, and target 
populations (as discussed in the attached Technical Considerations for Shared Savings) 
work cohesively to help ensure that shared savings payments are made only for true 
savings attributable to the program and not for random variations in total cost of care. 
  Beneficiary access shall not be reduced and quality of care shall be improved.       
 
Distribution of Payments  
 
As with any Medicaid incentive payment, a state shared savings reimbursement methodology 
must clearly describe:  
 
1.  the criteria that providers must meet to receive incentive payments,  
2.  the actual payment calculation, including any caps on shared savings or risks, and  
3.  the methodology for distributing shared savings payments (including all of the applicable 
variables described within this letter).   
 
The methodology must be comprehensive, meaning that an individual could reasonably calculate 
provider payments based on the information in the Medicaid state plan, waiver documentation, 
or contracts.  Shared savings typically include the percentage of the savings (or risk) that a 
provider is eligible to receive and, as applicable, any tiers associated with meeting quality 
measures.  The eligible percentage of savings that may be shared should directly link to the 
population attributed within the methodology and the savings and risk thresholds, which we 
describe in more detail below.    
 
Actuarial Analysis 
 
Generally, the development of a shared savings methodology will require an analysis at least as 
thorough as the analysis for developing capitation rates.  We strongly encourage states to 
conduct an actuarial analysis to ensure the proposed methodologies are sound and forecast to 
continually improve quality and lower costs.  CMS, in collaboration with our Office of the 
Actuary (OACT), has provided a list of considerations as an enclosure to this letter that should 
help position states to think through critical policy decisions.  States should fully consider the  Page 4  State Medicaid Director 
 
questions within this list and be prepared to provide CMS with supporting data and 
documentation on the benchmark calculation, trending assumptions and all other methodological 
components described in the enclosure.  Providing this information with the submission of a 
shared saving methodology proposal will help expedite the review process.    
 
Risk and Gain-sharing Arrangements  
 
The term shared-savings implies that providers will receive incentive rewards for care 
improvements that result in Medicaid program savings.  The Medicare Physician Group Practice 
Demonstration is an example of a program that recognized bonus payments when providers 
presented savings above a certain threshold and also met specific quality goals.  Under the 
Demonstration, providers that did not achieve savings above the threshold were not penalized or 
placed at risk for their efforts (other than for the costs they incurred to improve care).  This 
arrangement proved valuable even though the majority of providers within the demonstration did 
not demonstrate enough savings to receive a shared savings incentive because there were still 
measurable improvements in the quality of care provided by the demonstration providers.  In the 
initial stages of state reform efforts, CMS supports gain-sharing arrangements that do not place 
providers at risk but that strive to achieve quality improvement and lower cost.   
 
Some states may be positioned to place ICM providers at risk for some portion of the total cost 
of care for attributed beneficiaries if the Medicaid costs associated with the beneficiaries 
continue to rise beyond expectations.  These types of arrangements are described within the 
Medicare Pioneer ACO model and the Medicare Shared Savings Program regulation.  A 
methodology that allows for gain-sharing and risk offers states and CMS some confidence that 
the program will not result in unanticipated costs.  Generally, risk-based provider payment 
arrangements may be approved in the Medicaid state plan under the conditions that: providers 
are not compelled to enter into a risk arrangement as a condition of delivering care coordination 
services, providers are made aware that they are participating in the risk arrangement, the state 
plan clearly articulates the basis of the risk calculation, and no provider is at risk for costs over 
which the provider has no affect or control.1  To ensure that a provider is not at risk for costs that 
are not affected by, or over which the provider has no control, states should employ an 
attribution methodology that appropriately links a providers actions to the payment 
methodology.2  Additional details on attribution are described below.           
 
Targeting Providers and Populations 
 
As states contemplate shared savings payment methodologies within the context of their overall 
health reform agendas, they will need to consider the providers that will be eligible to receive 
incentive payments and the populations that these providers serve.  We have discussed in 
                                                           
1 Risk-based arrangements can also be authorized under the state plan in conjunction with section 1932(a) 
authority. The conditions listed here do not apply to that authority. 
2 We note that Medicare ACO models allow groups of providers to share risk.  Such arrangements are also 
allowable under certain Medicaid Integrated Care Models as described in SMD #12-002.   In those instances, the 
qualified provider may be a network or organization of Medicaid providers that is responsible with providing 
coordinating, locating and monitoring services.   Individual providers within the network or organization may share 
risk through agreements that are outside of the Medicaid authorized payment methodology paid directly to the 
network or organization (the Medicaid ICM provider).  However, one network or organization may not be held at 
risk for the inefficiencies or another network or organization.  Page 5  State Medicaid Director 
 
previous letters that states must ensure that value-based purchasing efforts do not infringe upon 
regulations defining free choice of providers and amount, duration and scope of services 
provided.  We have also noted that states should ensure that there are no duplicate payments 
made under the Medicaid program and other federal initiatives such as the Financial Alignment 
Models to Integrate Care for Medicare-Medicaid Enrollees.3  These are basic Medicaid 
principles that must be considered in the context of shared savings incentives and covered 
benefits. 
 
The methodology for calculating shared savings incentive payments does not need to consider all 
of the individuals who receive care coordination or other care improvements from the providers.  
There is significant flexibility in how states design the incentive payment calculations in order to 
focus the goals of the purchasing effort and maximize value.  For instance, a state could cover 
coordinating, locating, and monitoring services to all individuals eligible under the Medicaid 
state plan as an integrated care model but only calculate the shared savings incentives based on 
individuals with high cost and complex care needs.  Note that this flexibility assumes that a state 
has a base methodology in the state plan to pay for care coordination with the shared savings 
payments functioning as a performance bonus.  States should also assure that individuals who are 
not considered within the shared savings calculation nevertheless have sufficient access to care 
coordination services.   
 
Similarly, shared savings incentive payments may be limited to providers with higher levels of 
qualification (such as an enhanced ability to report quality measures or an organizational 
capacity that coordinates care across the delivery system) that have the capability to meet care 
coordination or improvement goals.  States will need to carefully consider and articulate the 
qualification of providers that are eligible to participate in shared savings payments to ensure that 
they can provide the accompanying care coordination or other care improvements.  At this time, 
we anticipate that states will be interested in rewarding individual primary care practices directly, 
or recognizing networks of providers that are organized through a single provider entity, which 
will pass down savings to individual providers within the network.  Either model is supportable 
through one or more of the implementation options described above.  
 
State Share Requirements 
 
Payments associated with shared savings require an appropriate source of the state share 
consistent with the financial partnership rules set forth in sections 1903(a) and 1905(b) of the 
Social Security Act.  Although provider payments under a shared savings model are calculated 
based on achieving reductions in estimated payments that would otherwise have been made, this 
does not change the fact that those provider payments (whether base payments or incentive 
payments) are made from both state and federal funds.  In order to draw down federal matching 
funds, the state must contribute a recognized non-federal share of state or local funds.  The 
calculation of savings may not be counted as a virtual state funding source and used to draw 
federal financial participation (FFP).  Further, the source of the state share may not be derived 
from other federal grant sources, so states will need to ensure that federal grant awards are 
                                                           
3 CMS announced the Financial Alignment Models to Integrate Care for Medicare-Medicaid Enrollees on July 8, 
2011 (SMDL 11-008), which offered states the opportunity to partner with CMS to test models for improving care 
and lowering cost between Medicare and Medicaid.    Page 6  State Medicaid Director 
 
delinked from the permissible state or local funds that are used to draw down FFP for Medicaid 
expenditures.     
 
CONCLUSION 
 
We look forward to working with states to develop and learn from shared savings quality 
incentive payments within the Medicaid program.  As you continue to consider and implement 
transformational efforts, we are available to provide assistance in navigating the policy options 
and the tools available to you.  If you have any questions, please contact Kristin Fan, Acting 
Director of the Financial Management Group at: 410-786-4581.     
Sincerely, 
 
/s/ 
 
            Cindy Mann 
            Director 
 
Enclosures
 
cc:   
 
CMS Regional Administrators 
 
CMS Associate Regional Administrators 
Division of Medicaid and Childrens Health Operations 
 
Matt Salo 
Executive Director 
National Association of Medicaid Directors 
 
Alan R. Weil, J.D., M.P.P. 
Executive Director 
National Academy for State Health Policy 
 
Ron Smith 
Director of Legislative Affairs 
American Public Human Services Association 
 
Joy Wilson 
Director, Health Committee 
National Conference of State Legislatures 
 
Heather E. Hogsett 
Director, Committee on Health & Homeland Security 
National Governors Association 
 
  Page 7  State Medicaid Director 
 
Debra Miller 
Director for Health Policy 
Council of State Governments 
 
Christopher Gould 
Director, Government Relations 
Association of State and Territorial Health Officials 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Attachment A 
 
Shared Savings Resource Materials 
 
Information on the Medicare Shared Savings: Accountable Care Organization 
Program: http://innovations.cms.gov/initiatives/ACO/index.html 
Pioneer Accountable Care Organization Model: http://innovation.cms.gov/initiatives/Pioneer-
ACO-Model/ 
Medicare Physician Group Practice Demonstration Design: Quality and Efficiency Pay-for-
Performance:  http://www.cms.gov/DemoProjectsEvalRpts/downloads/PGP_Demo_Design.pdf 
Physician Group Practice Demonstration Bonus Methodology 
Specifications: http://www.cms.gov/DemoProjectsEvalRpts/downloads/PGP_Payment.pdf 
Physician Group Practice Demonstration Evaluation Report to 
Congress: http://www.cms.gov/DemoProjectsEvalRpts/downloads/PGP_RTC_Sept.pdf 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Attachment B  Technical Considerations for Shared Savings Methodologies  
 
Considerations for the Benchmark 
 
The Medicaid total cost of care benchmark is established using historical data to calculate 
expected Medicaid expenditures for the covered populations attributed in a baseline period and 
then trending them into the performance period to establish a benchmark.  For each Medicaid 
beneficiary that is counted within the methodology for a given performance period, a state 
should consider all of the comparable Medicaid service expenditures for those individuals from 
the baseline year.  Typically, to establish the baseline, a state should use complete data from the 
year prior to the start of the performance period since prior year data reflects the most recent 
state Medicaid policies.  The baseline data are trended forward and may be risk-adjusted to 
establish the benchmark.  States will likely find it appropriate to segment baselines and trends 
based on specified population characteristics in order to account for variations in expenditures 
associated with each population.  The resulting calculations are the benchmarks against which 
the performance period will be measured.  The baseline should assume costs associated with the 
care coordination activities (or other projected new service costs) that are expected to result in 
savings.  
 
Data sources:  It is crucial that the baseline accurately reflect the total cost of Medicaid care and 
trend those costs forward using valid data sources.  If the baseline or benchmark is inaccurate or 
founded on flawed data, the shared saving performance period may not reflect true costs savings 
(or risk) associated with the care model.  We advise states to use paid claims data from the 
Medicaid Management Information System (MMIS) as the data source for the total cost of care.  
The MMIS paid claims data should capture all Medicaid payments for the baseline year for each 
beneficiary.  If the MMIS does not include all necessary data, states may need to draw on other 
supplemental resources to calculate the full range of cost.  CMS will need to understand all of 
data resources that states use in the baseline and benchmark calculations.      
 
Risk Mitigation:  To minimize risk avoidance based on selection bias, we advise states to 
incorporate appropriate risk mitigation strategies to the total cost of care to account for outliers, 
minimize incentives for patient selection and diagnosis or procedure up-coding, and otherwise 
adjust for risk between the baseline and benchmark to achieve a more confident savings 
measurement.  This is necessary when the population used to establish the baseline is different 
from the population that will be in the performance period.  Risk mitigation strategies could 
include the application of risk corridors, or adjustments to high cost and/or low cost outliers and 
be applied at the state or local level.  We do not mandate the use of specific risk strategies as 
these are likely to be program specific and the adjustments may be appropriate to apply at the 
state or local level.  
 
Excluded Cost:  States may be interested in excluding certain costs from consideration in the 
payment methodology based on the design of the care coordination incentive effort.  This may 
make sense if states are targeting improvements within certain delivery systems, in specific care 
settings or for certain populations.  For example, if a state focuses on improving coordination in 
primary care with a goal of reducing higher cost inpatient admissions or emergency visits, it may 
not make sense to include costs related to long-term home and community based care as part of 
the payment incentive calculation.  
 
1 
  Attachment B  Technical Considerations for Shared Savings Methodologies  
Where costs are excluded from the payment calculation, there may be some risk of artificial 
savings due to shifts in cost to the excluded services or delivery systems.  To understand this 
potential, we expect that states will calculate the benchmark and performance periods to include 
the actual total cost of care rather than only those costs that are measured and reimbursed as part 
of the shared savings payment methodology.  States should also have an action plan to address 
cost-shifting through, for example, suspension of the payment methodology or adjustments to the 
care incentive.    
 
Comparison Population  To best understand whether the care coordination activities are driving 
program savings, states may consider monitoring comparison groups that have similar 
characteristics to the attributed populations in the shared savings methodologies.  Such an 
approach may be optimal if the methodology limits attribution to a particularly high-cost cohort 
instead of the states general Medicaid population.  For example, if assignment is triggered at 
discharge from a specific acute care episode or diagnosis, a comparison population may be the 
best available method to accurately project the cohorts expected expenditures absent the 
intervention.  If the comparison population is an appropriate proxy for the attributed population, 
this measure should guard against asymmetry and anti-selection, simply stated:  poor results 
based on incomplete information.  In this regard, the comparison group, which would not receive 
care coordination services, provides a reasonable basis to understand whether program savings 
within the performance period are the result of the new care coordination effort or based on other 
factors.    
 
Some states may implement care coordination on a statewide basis or with respect to individuals 
with chronic conditions and there may be challenges in finding comparable, non-participating 
populations.  In those instances, states could consider the pre/post total cost of care of the 
attributed populations within the methodology as a suitable basis to determine that savings and 
quality improvement resulted from changes in care delivery that are provided to the attributed 
populations and that are incentivized through the model.  
 
Trend Projections and Retrospective Analysis:  Once a state establishes the total cost of care 
baseline, trend factors should be applied to project the cost growth that would have occurred in 
the absence of the new care model that the state is incentivizing.  This establishes the benchmark.  
Considering the dynamic nature of Medicaid programs, the baseline cost data should be rebased 
to integrate changes associated with reform efforts or other state Medicaid program changes, 
such as rate increases or decreases, which were not in effect during the baseline period.  If such 
changes are not considered within the states methodology, the benchmark will no longer align 
with the performance data.  A states shared savings methodology should clearly describe the 
timing and basis that the state will use to rebase during the performance periods. 
 
One approach to calculating shared savings is to rely on a retrospective analysis of the savings 
data.  This is the preferred but not required approach.  This method would likely eliminate issues 
related to projection errors that states may encounter in the above model, which projects the 
benchmark through trend data to establish a savings target, but makes no adjustments based on 
actual experience to calculate savings.  Similar to the Medicare ACO Shared Savings Program, a 
state could retrospectively review the savings experience of the attributed population to a 
comparison population and other relevant information that may impact the performance period 
and make necessary adjustments to the benchmark at the end of the performance year.  Since the 
2 
  Attachment B  Technical Considerations for Shared Savings Methodologies  
information is based upon actual experience, rather than projected, a more accurate benchmark 
can be established.   
 
States may also opt to take a prospective approach to calculating shared savings using 
appropriate trends.  Generally, states will be expected to develop trends that are population 
specific and service specific and based on actual, historic Medicaid expenditure data.  The 
trends, in combination with targeted savings projections in the performance period, will provide 
states with a reasonable understanding of the cost savings target (and anticipated expenditures) 
related to the methodology.  These trends and the benchmark should be rebased annually to 
consider all adjustments to the state Medicaid program that occur throughout the year.  Examples 
of adjustments that may impact the total cost of care include: modifications to program rates and 
benefits and other delivery systems improvements or program expansions.  In addition, states 
should retrospectively review the trends at a regular interval, such as annually, to determine 
whether the projections were in line with real cost growth.  As states rebase the benchmark, the 
retrospective review will help determine any necessary adjustments to the trending data to 
account for flaws in the original projections. 
 
Considerations for the Performance Periods  
 
The performance period measures the impact of the new care coordination efforts against the 
total cost of care benchmark.  To ensure that program savings are accurate, it is important that 
the performance period calculation include the same service package and beneficiaries that were 
included to establish the benchmark.  States should use data to project the potential cost savings 
associated with the care coordination and quality efforts that are measured through the 
methodology, ideally incorporating such information in the design phase as the various policy 
options (e.g. risk adjustment, minimum savings requirements, group size requirements, sharing 
percentages, etc.) are modeled and chosen to maximize the probability the program will result in 
net savings for the state.  Adjustments to the baseline, benchmark and actual performance should 
also be consistent to account for any program changes that impact the total cost of care.     
 
Attribution Methodology: Attribution is the method by which a state can reasonably credit the 
activities of a care coordination provider to beneficiary care outcomes and program cost.  States 
may face challenges in determining an appropriate attribution methodology because beneficiaries 
may lose coverage throughout the baseline and performance years or may not have consistent 
access to a particular care provider.  Some of these issues may be addressed through a 
retrospective attribution methodology (required of participants in the Medicare ACO shared 
savings program) where final attribution is determined after each performance year.  The 
retrospective method will likely result in more accurate beneficiary attribution and savings 
calculations.  Retrospective attribution will also reduce risks to states because the final 
calculation is based on actual data instead of projections.  This does create a measure of 
uncertainty for providers because they will be less certain of the beneficiaries attributed to them 
in the performance period.  An alternative to retrospective attribution is a prospective approach 
where attribution is based on prior year data and established prior to a performance year.  This 
method reduces risk to some providers because they know the extent of patients attributed to 
them and can target interventions to particular patients, but it may not result in as accurate a 
savings calculation and associated payments and could have unintended adverse effects on 
patient care.    
 
3 
  Attachment B  Technical Considerations for Shared Savings Methodologies  
We are not prescribing a methodology for attribution as part of this guidance.  However, 
attribution methodologies should be statistically valid and consider a consistent set of data.  CMS 
expects states to define the method for attribution, describe the data that will be used for the 
determination and the basis for evaluating the methodology.  As discussed in the various 
Medicare shared savings initiatives, states could use a utilization statistic, such as a proportion of 
primary care codes rendered within the year by a particular provider, as the basis for attribution.   
 
Minimum Savings Requirements  States may wish to implement symmetrical risk and gain-
sharing thresholds to minimize the risk associated with the methodologies to both states and 
providers.  While the objective of a shared savings methodology is to incentivize better care at 
lower cost, the reality is that not every provider may achieve program savings.  This is 
particularly true when the attributed populations within a methodology are of limited size, as 
statistical variation in annual expenditures will generally grow as group size decreases.  
Minimum savings thresholds allow states to offset some of the risk associated with population 
variability and the difficulty states may have in accurately projecting service expenditures in the 
performance year.  For instance, a states methodology may not allow for shared savings (or risk) 
unless a provider demonstrates savings (or losses) exceeding an established percentage of the 
projected targeted expenditures.  Generally, it is advisable that the thresholds grow as the 
attributed population decreases in number or as variability otherwise increasingly effects the 
confidence of measuring savings within the attributed population.  CMS will be interested in 
understanding how states make this determination.  
 
Quality Metrics  
 
We plan to release additional guidance on quality metrics as part of this State Medicaid 
Directors Letter series on new Medicaid care models and payment reform initiatives.  We 
emphasize that shared savings payment methodologies must include a quality component that 
ensures that savings are the result of care improvements and not due to restrictions on necessary 
care or some other unintended result.  The quality metrics that a state includes as part of a shared 
savings methodology should be appropriate for the attributed populations, vigorous enough to 
demonstrate incremental or sustainable improvements in care, and consistent with the states 
Medicaid program quality strategy.  The state plan methodology should describe how the quality 
metrics impact the ability of providers to share in savings, such as through a tiered structure that 
considers quality targets to adjust the savings percentages a provider is eligible to receive.   
 
Program Evaluation 
 
CMS expects that all states will evaluate the effectiveness of shared savings methodologies and 
make any necessary adjustments to improve programs based on the result of the evaluations.  
Before approving the shared savings methodology, CMS is interested in understanding the 
criteria that states will use to measure program success, the time-frame for evaluations, and how 
states will use the evaluations to improve shared savings incentives.  We are interested in 
learning from the results of evaluations so that we may help other states design effective models 
and develop national policy on care delivery improvements.  Of particular interest to CMS are:  
 
4 
  Attachment B  Technical Considerations for Shared Savings Methodologies  
  whether the performance and savings determinations within the model were sufficiently 
accurate to result in actual net savings for the state, and description of populations for 
whom it was found particularly difficult to accurately measure savings,  
  whether the methodology incentivized providers to alter care practices or to introduce 
new care practices that appear related to better quality and lower cost in order to meet 
savings thresholds and improve quality, 
  the sustainability of shared savings models and continued quality improvement,  
  the particular effects of one care coordination model as compared to another, 
  the impact of poor performers on a states overall delivery systems and strategies to 
address the poor performers,  
  states potential program changes if all providers achieve the quality and savings targets, 
  the sufficiency of data to evaluate the incentives and quality measures, 
  best practices and lessons that may help in developing replicable models.    
 
Because of shared saving methodologies are relatively new, states must include an end date 
within the approved payment methodology to allow states to evaluate the success of the incentive 
payment based on data that has been collected on quality improvements and cost savings that 
have been achieved.  While we expect states to provide ongoing quality, cost of care and other 
relevant data that demonstrates the effectiveness of their shared savings incentives, a 
methodology sunset will provide an opportunity for CMS and states to work through a formal 
review process to make adjustments or end programs that are not achieving desired results.  
States are expected to share the outcome data with CMS and explain how the findings 
demonstrate success or a decision to modify or discontinue the payment incentive.  A sunset 
does not preclude a state from continuing to reimburse for shared saving incentives that are 
effective; rather, a state will simply need submit a new state plan amendment (SPA) to modify 
the sunset to a future date if the review results in the conclusion that the model is achieving the 
desired effect.     
 
 
 
 
 
 
 
 
 
 
 
5 
  Attachment C  Questions States Should Consider for Medicaid Shared Savings Methodologies  
Questions States Should Consider for Medicaid Shared Savings Methodologies 
Basic Program Design 
1.  How does the model promote better care for individuals, better health for populations, 
and lower costs through improved care delivery? 
 
2.  Describe how, if relevant, the model will consider Medicaid changes related to the 
Affordable Care Act, including the Medicaid eligibility expansion in 2014? 
 
3.  Does the model align with other changes to the states Medicaid program? This could 
include modifications to payment for Medicaid providers, additional efforts to coordinate 
care, transform practices and/or promote quality. 
 
4.  A description of covered Medicaid services that are paid (all or in part) through the 
shared savings methodology is required to authorize FFP for shared savings payments 
under the Medicaid program.    
 
a.  Under which Medicaid authority will the state reimburse shared savings?  For 
guidance related to options for integrated care model implementation, see: SMDL 
12-002 Policy Considerations for Integrated Care Models.    
 
b.  Which services or activities is the proposal requesting to be matched? (e.g. care 
coordination through an Integrated Care Model (ICM), Health Homes for 
Enrollees with Chronic Conditions, Primary Care Case Management Contracts, 
etc.)     
 
5.  Does the proposal describe an allowable funding source for the non-federal share of the 
payments per the statutory requirements of 1903(w)(6)(A) as implemented in 42 CFR 
431.51? 
 
Participating Providers 
 
6.  Which providers are eligible to receive payment under the shared savings methodology?  
Are certain providers within these designations targeted?  (e.g. primary care practices, 
mental health and substance abuse providers, long-term care service and support 
providers, patient-centered medical homes, accountable care organizations).   
 
7.  How does a provider qualify for a payment? 
 
8.  Which activities must a provider conduct to receive payments? 
 
9.  Which quality measures will the state use as a basis to determine payment? 
1 
  Attachment C  Questions States Should Consider for Medicaid Shared Savings Methodologies  
 
10. If providers are targeted:  
 
a.  Are they targeted through provider qualifications or contracts?  
 
b.  How will a state define eligible providers? 
 
c.  How does the proposal address freedom of choice? 
 
11. If there is a hierarchical structure, such as a network or ACO relationship and are the 
roles clearly defined to describe each entity's responsibilities and how the levels work 
together to coordinate care and improve quality? 
 
12. Is provider participation mandatory or optional?  If participation is mandatory, are the 
risk-sharing arrangements consistent with statutory requirements on reimbursement for 
specific provider types?  (For example, the statute requires that total reimbursement to 
FQHCs and RHCs under an Alternative Payment Methodology may not be less than 
these providers would have received under the Prospective Payment System.) 
 
13. Are participating providers required to participate in a risk sharing arrangement in order 
to qualify for payment?  Risk sharing arrangements should be described in the proposal, 
along with the authority under which the state will implement the arrangement. 
 
14. Will shareable savings or risk be determined at the statewide, carrier/network, or provider 
practice level (or some combination of the above)? 
 
Populations within the Model 
 
15. Are all Medicaid eligible beneficiaries included in the shared savings calculation? 
 
a.  Is beneficiary participation mandatory? 
 
b.  What is the process to inform beneficiaries that their health costs and information 
will be used in the shared savings methodology? 
 
16. Does the shared savings methodology target specific populations? 
 
17. How does the proposal address state-wideness when populations are targeted?  Note  
state plan services described under a benefit category must be available state-wide, 
however, as long as all eligible individuals may receive services under the benefit 
category, the shared savings calculation may target specific populations. 
 
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  Attachment C  Questions States Should Consider for Medicaid Shared Savings Methodologies  
18. If the shared savings methodology accounts for costs of targeted populations, how are 
beneficiaries selected (e.g., by age, by condition, by event)? 
 
Methodological Considerations 
 
  Actuarial Analysis 
 
19. Did the state conduct an actuarial analysis to assess the validity of the shared savings 
structure and explain the data, assumptions, and methodology used to develop its 
analysis?  Generally, it should be expected that the development of a shared savings 
methodology will require analysis at least as thorough as the analysis for developing 
capitation rates. 
 
Mechanics of the Payment 
 
20. What method will the state use to determine the shared savings amount and distribute 
payments to providers?  
 
a.  How often are payments made to providers? When are these payments made 
(within 30 days after the end of the fiscal year, etc.)?  
 
b.  Will provider risk be one-sided, two-sided, or both (e.g. one-sided in initial years, 
transitioning to two-sided in later years)? 
 
c.  What percentage of the savings are providers and provider organizations eligible 
to receive? 
 
d.  Are there limits on the amount of additional costs a provider may incur as a result 
of participation? 
 
e.  How does the state plan to calculate that percentage? For instance, is the 
percentage tiered based on quality performance or some other factor? 
 
f.  Will there be a minimum savings percentage that must be met in order to prevent 
payment due to random variation?  
 
g.  How are the claims for the shared savings payments made? Is the MMIS or some 
other system used to adjudicate claims?  
 
h.  What are the state requirements to hold providers accountable for the required 
activities and/or interventions paid through the shared savings methodology? 
 
i.  On which line of the CMS-64 will the state report shared savings expenditures? 
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  Attachment C  Questions States Should Consider for Medicaid Shared Savings Methodologies  
Attribution Methodology 
21. What processes will be used to assign, enroll, or otherwise attribute beneficiaries to 
providers under the program? 
 
a.  How many beneficiaries must be attributed, enrolled, or assigned in the program 
to determine statistical validity of the data and outcomes?   
 
b.  How will the program account for beneficiaries who enter or leave Medicaid 
during the year? (Please note: the actuarial estimates should address this question 
as well.) 
 
c.  What is the minimum number of beneficiaries required to be attributed, enrolled, 
or assigned per provider to determine statistical validity of the data and outcomes? 
 
Comparison Population 
 
22. Will the shared savings methodology compare performance to a comparable population 
that is not included within the methodology in order to assess whether the activities 
reimbursed through the model result in program savings?   
 
a.  If so, how is this population selected? 
 
b.  Are there potential differences in the populations that need to be considered when 
developing comparisons? 
 
c.  Are there any potential anti-selection issues to consider? 
 
Baseline Data  
 
23. Is prior year data used as a baseline to measure the effectiveness of care coordination and 
practice transformation activities rewarded through the payments? 
 
a.  With what level of confidence are the retained measured savings projected to 
outweigh costs from uncertainties (such as claim variation; selective participation; 
trend bias; etc.)? 
 
b.  Has the data been risk adjusted for valid comparison with current performance?  
 
24. Is the state measuring total cost of care for individuals in the delivery system or is it only 
measuring cost in a specific setting, such as in the PCP setting? 
 
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  Attachment C  Questions States Should Consider for Medicaid Shared Savings Methodologies  
25. Does the baseline calculation include all program health costs within or exclude certain 
claims or services? 
 
26. Does the baseline calculation account for supplemental provider payments that are made 
in addition to fee for services payments?   How are the supplemental payments accounted 
for in the calculation? 
 
27. How does the calculation treat and consider long-term services and supports? 
 
28. What is the basis for excluding claims or services?  
 
29. Has risk adjustment been designed to minimize the incentive for diagnosis upcoding by 
providers who might otherwise seek to influence the measurement of shared savings by 
adjusting their diagnosis coding practices? 
 
30. Should the baseline data be segmented to reflect specified population characteristics? 
 
Data Trending 
31. What trending factors does the state propose to use to adjust the baseline expenditures 
and what underlying data were used as the basis of the trend? 
 
a.  Will there be different trending rates based on eligibility categories? 
 
b.  Will there be different trending rates based on service categories? 
 
32. Should the trend data be segmented to reflect specified population characteristics? 
 
Performance Period 
 
33. Does the performance period calculation include all program health costs within or 
exclude certain claims or services?  Do the included claims and services align with the 
benchmark calculation? 
 
34. What is the basis for excluding claims or services? (Generally, the shared savings 
measurement should adjust or otherwise account for changes in covered services from the 
base to performance period.) 
 
35. For the purpose of calculating program savings, would the proposal limit the inclusion of 
high cost claims above a certain dollar amount? Is this accounted for in the actuarial 
estimate of savings? 
 
36. How does the plan account for other plan changes? 
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  Attachment C  Questions States Should Consider for Medicaid Shared Savings Methodologies  
 
37. Are shared savings payments reconciled to the other payments made to participating 
providers? 
 
a.  Are shared savings payments net of care coordination PMPMs or any other 
payments?  
 
b.  How are risk sharing adjustments made in the payment to providers?   
 
38. What strategies will the state use to minimize incentives for providers to select less costly 
patients?  
 
39.  What strategies will the state put in place to account for outlier patients?  
 
Rebasing the Baseline Calculation 
 
40. How will the baseline data be rebased after an appropriate period of time to account for 
any delivery system reforms that have been fully integrated? 
 
41. How often and when will the baseline data be rebased? 
 
Measuring Success: Components of an Evaluation 
 
42. What evaluative measures other than cost savings will the state use to determine program 
success?   
 
43. What process will the state have to evaluate the effectiveness of the shared savings 
payments? 
 
44. What program modifications or corrective actions will the state implement if the program 
is not functioning as expected? When will the state take action to modify the program? 
 
45. What evidence, research, or theory is the state employing to ensure that chosen quality 
measures are indicators of program effectiveness? 
 
46. How is the state ensuring that costs are not being shifted to other health care 
settings/programs? 
 
47. If process measures are included as performance metrics, what positive contributions to 
program effectiveness will the process measures indicate? 
 
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  Attachment C  Questions States Should Consider for Medicaid Shared Savings Methodologies  
48. What data measures will be used to ensure that providers are actually transforming their 
method of care delivery?   
 
49. What thresholds or other criteria are considered successful transformation? 
 
50. How will the state address poor performers? 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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