DEPARTMENT OF HEALTH & HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, Maryland 21244-1850 
 
Center for Medicaid and State Operations 
 
                         SMDL #04-002   
 
          February 25, 2004 
 
Dear State Medicaid Director: 
 
Disease management represents an exciting opportunity to significantly improve the care 
delivered to Medicaid beneficiaries with chronic conditions.  It has emerged in both the public 
and private sector as a strategy to bring the benefits of care coordination techniques honed in 
managed care organizations (MCOs) to populations and regions that traditionally have not had 
access to those comprehensive capitated systems.   
 
This letter provides guidance on how states can cover disease management in their Medicaid 
programs.  This letter outlines some of the more common options; states interested in other 
strategies should contact us for assistance. 
 
Background 
 
Disease management is a set of interventions designed to improve the health of individuals, 
especially those with chronic diseases.  Disease management programs usually include: 
 
  identification of patients and matching the intervention with need;  
  support for adherence to evidence-based medical practice guidelines, including providing 
medical treatment guidelines to physicians and other providers, and providing support 
services to assist the physician in monitoring the patient;  
  services designed to enhance patient management, and adherence to an individualized 
treatment plan (e.g., patient education, monitoring and reminders, and behavior 
modification programs aimed at encouraging lifestyle changes);  
  routine reporting and feedback loops (may include communication with patient, 
physician, health plan and ancillary providers, and practice profiling); and 
  collection and analysis of process and outcome measures.  
 
Traditionally, disease management was part of the comprehensive care furnished by MCOs.  
Today, we are seeing a multitude of strategies in order to bring disease management to fee-for-
service (FFS) populations.  States are building comprehensive systems in-house or contracting 
out the function to Disease Management Organizations (DMOs).  This letter outlines some of the 
options available to states with regard to designing and operating disease management programs. 
 
  Page 2  State Medicaid Director 
 
Disease Management as a Medical Service 
 
Disease management programs that focus interventions on the beneficiary may qualify as 
medical services under Medicaid.  In order to qualify as a medical service, disease management 
must include direct services.  Direct services require the use of licensed practitioners such as 
nurses, pharmacists, or physicians who provide services directly to individual beneficiaries in 
order to improve or maintain their health.  Examples include medical assessments, disease and 
dietary education, instruction in health self-management, and medical monitoring.  These 
medical state plan services are eligible for Federal financial participation at the states regular 
Federal Medical Assistance Percentage rate.  Each proposal will be assessed to determine 
whether it qualifies as a medical service or administrative function, which in turn determines the 
Federal matching rate.   There are a number of disease management models that may qualify as 
medical services under Medicaid, and we outline three major ones below. 
 
Disease Management through Contracting With a Disease Management Organization (DMO) 
 
One model is to contract with a DMO.  The DMO manages the overall care of the beneficiary, 
but does not actually prior authorize or otherwise restrict access to other Medicaid services.  In 
this model, the state often requires performance guarantees, including capitating the DMO for 
disease management services, as well as putting the DMO at risk for reducing overall 
expenditures.  Capitated DMOs qualify as Prepaid Ambulatory Health Plans and are subject to a 
limited subset of the managed care regulations at 42 CFR Part 438. 
 
Disease Management through an Enhanced Primary Care Case Management (PCCM) Program 
 
A second model of beneficiary-focused disease management is to enhance a PCCM managed 
care program.  In these programs, the state works with PCCM providers to enhance the care it 
delivers to its enrollees with certain chronic conditions.  The state also may provide additional 
support in the form of case managers for complex cases and furnish ongoing monitoring reports 
on enrollee utilization.  PCCM providers are often paid enhanced case management fees for 
providing disease management, in addition to the regular FFS reimbursement for other state plan 
services they provide.   
 
Disease Management through Individual Providers 
 
States can also offer disease management through individual FFS providers in the community 
(e.g., physicians, pharmacists, or dietitians).  The providers often agree to undergo specified 
training, and bill on an FFS basis for disease management services provided.  States may simply 
offer this option to interested providers, or build a more comprehensive system that provides 
additional support, training, and oversight. 
 
 
 
Operating Authorities 
  Page 3  State Medicaid Director 
 
 
All of the above models can be authorized through state plan amendments (SPAs) or waivers.  
Waiver authority can provide states with greater flexibility to design more focused programs.   
For instance, states that want to limit the number of disease management providers in order to 
achieve better cost and administrative efficiencies may request selective contracting authority 
under section 1915(b)(4) of the Social Security Act (the Act).  Waiver authority also can be used 
to intentionally restrict geographic areas where disease management is available; restrict eligible 
beneficiaries (e.g., exclude Medicare beneficiaries); or mandate beneficiary enrollment.   
 
Additionally, a SPA authorized under section 1932(a) of the Act provides much of the same 
flexibility available under waivers, and also does not require the periodic renewals associated 
with programs operating under waiver authority.  This SPA authority to mandate enrollment was 
created by the Balanced Budget Act of 1997 and applies to PCCM or MCO-model disease 
management programs.  As with waiver authority, section 1932(a) SPA authority provides 
flexibility with respect to limiting providers, eligible populations, and geographic areas that is 
not normally available under traditional SPAs.  In particular, states offering disease management 
delivered as part of an enhanced PCCM program may want to consider this option.   
 
A SPA may authorize disease management activities through expansions of the covered benefits 
for other licensed practitioners or preventive services, as appropriate.  A disease 
management SPA must meet the requirements of section 1902(a) of the Act, including 
statewideness, comparability, and freedom of choice.  These requirements apply to both 
capitated and FFS disease management providers.   
 
Disease Management as an Administrative Function 
 
A disease management program that is limited to administrative activities by the state and its 
contractors would not constitute medical assistance, but could be eligible for Federal matching 
funds for administration of the State plan at the standard administrative matching rate of 50 
percent.  For example, states or their contractors (e.g., a Quality Improvement Organization, 
Pharmacy Benefits Manager, or other outside vendor) may work with providers to:  promote 
adherence to evidence-based guidelines; improve provider-patient communication skills; and 
provide routine feedback on beneficiary utilization of services.  In this model, contact with 
beneficiaries is indirect:  the change in provider practice patterns enhances beneficiary care.  In 
addition, there may be targeted mailings to beneficiaries, but no face-to-face contact.  The 
examples here are generally considered administrative functions, and may be eligible for Federal 
administrative match.  State plan requirements such as statewideness and comparability do not 
apply to administrative functions.   
 
  Page 4  State Medicaid Director 
 
Funding from Outside Sources 
 
Pharmaceutical manufacturers may offer to fund disease management programs for Medicaid 
beneficiaries.  Such funding would be considered a supplemental rebate under section 1927 of 
the Act, and, in accordance with the September 18, 2002, State Medicaid Director letter, the state 
needs to report an offset in the amount of Federal funds claimed based on the value of what the 
state received from the manufacturer. 
 
Dual Eligibles 
 
In general, disease management is not a Medicare-covered service.  As a result, states may 
voluntarily or mandatorily enroll dual eligibles into a Medicaid disease management program. 
This is because in either case, enrollment does not affect their access to Medicare services.  
When enrolling dual eligibles, states must ensure that Medicare is the primary payer with respect 
to the limited Medicare coverage of diabetes self-management training sessions, and when 
disease management is available through a Medicare demonstration (please see the CMS Web 
site at http://cms.hhs.gov/healthplans/research). 
 
For Further Information 
 
We are available to provide technical assistance to states interested in establishing disease 
management programs for their populations.  We encourage states to take advantage of the 
opportunities disease management programs offer to provide coordinated, cost-effective care that 
improves the health of Medicaid beneficiaries.  If you have any questions about providing 
disease management, please call Ms. Jean Sheil, Director of the Family and Childrens Health 
Programs Group at (410) 786-5647, or e-mail her at jsheil@cms.hhs.gov. 
 
          Sincerely, 
 
          /s/   
             
          Dennis G. Smith 
          Director 
 
cc: 
CMS Regional Administrators 
 
CMS Associate Regional Administrators 
   for Medicaid and State Operations 
 
Kathryn Kotula 
Director, Health Policy Unit 
American Public Human Services Association 
 
  Page 5  State Medicaid Director 
 
Joy Wilson 
Director, Health Committee 
National Conference of State Legislatures 
 
Matt Salo 
Director of Health Legislation 
National Governors Association 
 
Brent Ewig 
Senior Director, Access Policy 
Association of State and Territorial Health Officials 
 
Jim Frogue 
Director, Health and Human Services Task Force  
American Legislative Exchange Council 
 
Trudi Matthews 
Senior Health Policy Analyst 
Council of State Governments 
 
Dr. Michael Trujillo 
Director  
Indian Health Service