Programs of All-Inclusive Care for the 
Elderly (PACE) 
 
Chapter 1  Introduction to PACE 
Table of Contents 
(Rev. 2, Issued: 06-09-11) 
 
 
Transmittals for Chapter 1 
 
10 - Introduction to PACE 
 
10.1 - Demonstration Project History 
 
10.2 - Legislative History 
 
20 - Statutory and Regulatory Overview 
 
20.1 - State Medicaid Plan Requirement 
 
20.2 - Consultations with State Agency on Aging 
 
20.3 - Interaction with Medicare Advantage 
 
20.4 - Interaction with Medicare Part D 
 
20.5 - Flexibility 
 
30 - Overall Objective of PACE Model 
 
30.1 - Overview of the PACE Program 
 
30.2 - PACE Organizations 
 
30.3 - Eligibility and Benefits 
 
30.4 - Payments to PACE Organizations 
 
30.5 - Quality of Care  10 - Introduction to PACE 
(Rev. 2, Issued: 06-09-11; Effective: 06-03-11; Implementation: 06-03-11) 
 
In the 1970's the federal and state governments became increasingly interested in the 
development of community-based services. As a result, waivers of federal Medicaid 
requirements allowed state governments to experiment with fee-for-service programs for 
frail elderly and disabled beneficiaries. One such program was the Programs of All-
Inclusive Care for the Elderly (PACE), which was developed at On Lok Senior Health 
Services in San Francisco through a series of demonstration projects. On Lok enrollees 
were among the frailest elderly in the community, those considered most at risk or 
otherwise needing institutional placement to receive long-term care services. With a one-
year grant from The Robert Wood Johnson Foundation (RWJF), On Lok initiated a 
project to determine the feasibility of replicating the model in other parts of the country. 
In 1986, Congress authorized waivers for ten replication sites. In 1987, the RWJF 
authorized start-up grants for replication sites and a grant to On Lok to provide technical 
assistance. The first replication sites initiated three-waiver demonstrations in 1990 and by 
1994 there were ten replication sites operating under waivers. The PACE demonstration 
operated until PACE was established as a permanent Medicare program by the Balanced 
Budget Act of 1997 (BBA). 
 
The PACE Protocol was first developed in 1990 as part of a cooperative effort involving 
staff from CMS, then the Health Care Financing Administration Office of Research 
Development and Information, States participating in the PACE replication, and PACE 
sites, including On Lok Senior Health Services. Most of the features of PACE continued 
from the demonstration into the permanent program, including the focus on the targeted 
population, the frail elderly, and the capitated funding mechanism. 
 
In September 2006, CMS awarded $7.5 million in grant funds to organizations 
developing PACE in rural service areas. Fourteen organizations each received over 
$500,000 for the establishment of a PACE program in their area. This grant program was 
initiated through the Deficit Reduction Act of 2005. The funding was available through 
September 30, 2008, and was provided to all fourteen grantees that met the requirements 
as a PACE provider as demonstrated through the PACE provider application approval 
process. 
 
10.1 - Demonstration Project History 
(Rev. 2, Issued: 06-09-11; Effective: 06-03-11; Implementation: 06-03-11) 
 
Section 603(c) of the Social Security Amendments of 1983 (Pub. L 9821), as extended 
by Section 9220 of the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 
1985 (Pub. L. 99272), authorized the original demonstration waiver for On Lok Senior 
Health Services in San Francisco. Section 9412(b) of the Omnibus Budget Reconciliation 
Act (OBRA) of 1986, Pub. Law 99509, as amended by Section 4118 of the OBRA of 
1987 (Pub. L. 100-203, authorized the Secretary of HHS to grant waivers to organizations 
under a PACE demonstration project to determine whether the model of care developed 
by On Lok Senior Health Services could be replicated across the country (the number of  sites was originally limited to 10, but Section 4744(a)(1) of OBRA of 1990 (Pub. L. 101-
508) authorized an increase to 15 demonstration sites). The PACE demonstration 
replicated a unique model of managed care service delivery for a small number of very 
frail community-dwelling elderly, most of whom were dually eligible for Medicare and 
Medicaid coverage and all of whom were assessed as being eligible for nursing home 
placement according to the standards established by their respective States. The model of 
care included as core services the provision of adult day health care and interdisciplinary 
team case management, through which access to and allocation of all health services was 
controlled. Physician, therapeutic, ancillary and social support services were furnished in 
the participants residence or on-site at the adult day health center, unless those locations 
were not feasible. Hospital, nursing home, home health, and other specialized services 
were furnished under contract. Financing of this model was accomplished through 
prospective capitation of both Medicare and Medicaid payments. Demonstration sites had 
been permitted by Section 4118(g) of OBRA of 1987 (Pub. Law 100203) to assume full 
financial risk progressively over the initial three years, but that authority was removed by 
Section 4803(b)(1)(B) of the BBA. 
 
10.2 - Legislative History 
(Rev. 2, Issued: 06-09-11; Effective: 06-03-11; Implementation: 06-03-11) 
 
Section 4801 of the BBA (Pub. L. 10533) authorized the establishment of PACE under 
the Medicare program by adding Section 1894 to Title XVIII of the Social Security Act 
(the Act) which addresses Medicare payments to, and coverage of benefits under, PACE. 
Section 4802 of the BBA authorized the establishment of PACE as a State option under 
Medicaid by adding Section 1934 to Title XIX of the Act, which directly parallels the 
provisions of Section 1894 and addresses Medicaid payments to, and coverage of benefits 
under, PACE. Section 4803 of the BBA addresses the timely issuance of regulations, 
expansion and transition for PACE demonstration project waivers, priority and special 
consideration in processing applications, and repeal of current PACE demonstration 
project waiver authority. 
 
In addition, Sections 1894(a)(3)(B) and 1934(a)(3)(B) of the Act allowed private, for-
profit entities to participate in PACE, subject to a demonstration waiver described in 
Sections 1894(h) and 1934(h) of the Act. For-profit entities wishing to participate in 
PACE applied for a demonstration waiver under Section 1894(h) and 1934(h) of the Act. 
While participating in the PACE for-profit demonstration, they must meet all 
requirements set forth in PACE regulations. The PACE organization is expected to retain 
all key administrative functions including marketing and enrollment, quality assurance 
and program improvement, and contracting for institutional providers and other key staff. 
On July 24, 2009, CMS issued a Federal Register Notice announcing a closing date of 
July 26, 2010 for submission of proposals for the PACE for-profit demonstration project. 
 
20 - Statutory and Regulatory Overview 
(Rev. 2, Issued: 06-09-11; Effective: 06-03-11; Implementation: 06-03-11) 
  As discussed previously, Section 1894 of the Act addresses Medicare payments to, and 
coverage of benefits under, PACE. Section 1934 of the Act addresses PACE as a State 
option under Medicaid for States electing PACE as an optional Medicaid benefit under 
Section 1905(a)(26) of the Act. The regulations implementing these PACE statutory 
requirements are set forth in 42 CFR Part 460. This manual provides further guidance on 
the PACE program.  
 
[42 CFR  460.2] 
 
20.1 - State Medicaid Plan Requirement 
(Rev. 2, Issued: 06-09-11; Effective: 06-03-11; Implementation: 06-03-11) 
 
The State Medicaid plan is the contract between the States and the Federal government 
under which States agree to administer the Medicaid program in accordance with Federal 
law and policy. The State plan preprint sets forth the scope of the Medicaid program, 
including groups covered, services furnished, and payment policy. When a State wants to 
change its State Medicaid plan, the State submits a State Plan Amendment (SPA), 
which must be approved by CMS in order for the State to receive Federal matching funds 
for the amended plan. 
 
Section 1905(a)(26) of the Act, as added by Section 4802(a)(1) of the Balanced Budget 
Act (BBA), provides authority for States to elect PACE as an optional Medicaid benefit. 
The State plan electing the optional PACE program must be approved before CMS can 
approve an application for a PACE organization in that State. 
 
To aid States in modifying their State plans, the CMS Center for Medicaid and State 
Operations developed an interim State plan preprint for PACE. A State Medicaid letter 
dated March 23, 1998, provided information and guidance to State Medicaid agencies on 
how to satisfy the SPA requirement. Additional directions for completing the SPA were 
provided in a State Medicaid Director letter that was issued November 9, 2000. The most 
current version 
of the State Plan preprint is available on the CMS PACE 
homepage: http://www.cms.hhs.gov/PACE/04_InformationforStateAgencies.asp. 
 
20.2 - Consultations with State Agency on Aging 
(Rev. 2, Issued: 06-09-11; Effective: 06-03-11; Implementation: 06-03-11) 
 
Under the Older Americans Act, State Agencies on Aging were charged with the 
responsibility of promoting comprehensive, coordinated services and systems for older 
persons in their States. Consistent with this responsibility, State Agencies on Aging 
oversee important programs for home and community-based services, which are funded 
through Title III of the Older Americans Act, State revenues, and the Medicaid home and 
community-based waiver program. The State agencies also implement and oversee 
important planning, referral, case management, and quality assurance functions. In 
addition, State agencies are responsible for administering the State Long Term Care 
Ombudsman Program through which service quality in nursing homes and board and care  homes are monitored in every State. Each State agency that administers the PACE 
program should regularly consult with their respective State Agency on Aging in order to 
avoid service duplication in the PACE service areas and to assure the delivery and quality 
of services to PACE participants. 
 
20.3 - Interaction with Medicare Advantage 
(Rev. 2, Issued: 06-09-11; Effective: 06-03-11; Implementation: 06-03-11) 
 
Although the PACE program has certain fundamental similarities to Medicare Advantage 
and managed care organizations, PACE is not a Medicare Advantage plan. The Balanced 
Budget Act (BBA) established distinct requirements for the PACE program. PACE is 
similar to some Medicare Advantage options in these ways: it is capitated; it is risk-
based; it provides managed care; and it is an elective option. However, PACE differs 
significantly from a Medicare Advantage plan in other ways such as: it is not available 
nationwide (only in a limited number of states); it includes statutory waivers that expand 
the scope of Medicare covered services; it is not available to all beneficiaries (only to a 
defined subset of frail elderly); and it is a joint Medicare/Medicaid program. The BBA in 
sections 1894(f)(3)(A) and 1934(f)(3)(A) of the Act directed CMS to consider some of 
the requirements established for Medicare Advantage programs while developing 
regulations for the PACE program relating beneficiary protections and program integrity. 
 
20.4 - Interaction with Medicare Part D 
(Rev. 2, Issued: 06-09-11; Effective: 06-03-11; Implementation: 06-03-11) 
 
PACE organizations offer Medicare Part D prescription drug coverage. Persons who join 
a PACE program will get Part D-covered drugs and all other necessary medication from 
the PACE program. Persons in a PACE program do not need to join a separate Medicare 
Part D prescription drug plan. Joining a separate Medicare drug plan will cause a person 
to be disenrolled from the PACE program. For more information, refer 
to: http://www.cms.gov/PrescriptionDrugCovContra/Downloads/PACEApplication.pdf. 
 
20.5 - Flexibility 
(Rev. 2, Issued: 06-09-11; Effective: 06-03-11; Implementation: 06-03-11) 
 
The PACE regulation which established the requirements for PACE organizations is 
based on the On Lok, Inc. Protocol. The Protocol provided authority for CMS and the 
State Administering Agency (the State Agency designated to administer the PACE 
program), to waive specific requirements of the Protocol, if, in their judgment, the 
following criteria were met: 
 
  The intent of the requirements were met by the proposed alternative and safe 
and quality care would be provided; 
 
  Written requests for waivers were required to be approved by CMS and the 
State Administering Agency before implementation of the proposed 
alternative.   
CMS incorporated the requirement under the Protocol in the PACE regulations to the 
extent consistent with the BBA provisions in Sections 1894 and 1934 of the Act. The 
intention was to allow some flexibility to promote PACE in rural and Tribal areas while 
maintaining consistency with the requirements for other PACE programs. The rationale 
for limited view of the flexibility provisions was based on our belief that all PACE 
demonstration programs were in compliance with the PACE protocol and, therefore, 
would need to make only minor changes in their operations to meet the PACE regulatory 
requirements. CMS intended to provide more flexibility to all PACE organizations once 
sufficient experience in administering the PACE program was achieved. However, CMS 
learned that although the early PACE demonstration programs initially complied with the 
Protocol, most of them modified the Protocol requirements as they expanded, using the 
flexibility authorized in the Protocol. While many of these modifications were related to 
the allowable areas of service coverage and arrangement provisions, many others were 
not authorized by the flexibility clause in the Protocol. Furthermore, many of the later 
PACE demonstration programs also inappropriately exercised the flexibility clause in the 
Protocol, especially with regard to direct employment of staff. Finally, very few of the 
waivers were requested in writing or approved by CMS or the State Administering 
Agency before implementation. Subsequently CMS revised regulations on the waiver 
process in accordance with the requirements of the Medicare, Medicaid, and SCHIP 
Benefits Improvement and Protection Act of 2000 (BIPA) (Pub. L. 106-554). 
 
[64 FR 66302 (Nov. 24, 1999) and 67 FR 61496 (Oct. 1, 2002)] 
 
30 - Overall Objective of PACE Model 
(Rev. 2, Issued: 06-09-11; Effective: 06-03-11; Implementation: 06-03-11) 
 
The Programs of All-Inclusive Care for the Elderly (PACE) is an innovative model that 
provides a range of integrated preventative, acute care, and long-term care services to 
manage the often complex medical, functional, and social needs of the frail elderly. 
PACE was created as a way to provide clients, family, caregivers and professional health 
care providers the flexibility to meet a persons health care needs while continuing to live 
safely in the community. 
 
The purpose of a PACE program is to provide pre-paid, capitated, comprehensive health 
care services that are designed to: 
 
  Enhance the quality of life and autonomy for frail, older adults; 
  Maximize dignity of and respect for older adults; 
  Enable frail, older adults to live in their homes and in the community as long as 
medically and socially feasible; and 
  Preserve and support the older adults family unit.   
30.1 - Overview of the PACE Program 
(Rev. 2, Issued: 06-09-11; Effective: 06-03-11; Implementation: 06-03-11) 
 
PACE is a capitated benefit for frail elders authorized by the Balanced Budget Act of 
1997 (BBA) that features a comprehensive service delivery system and integrated 
Medicare and Medicaid financing. The program is modeled on the system of care 
developed by On Lok Senior Health Services in San Francisco, California and was tested 
through demonstration projects that began in the mid-1980s. The BBA established PACE 
as a permanent entity within the Medicare program and enables states to provide PACE 
services to Medicaid beneficiaries as a state plan option. Operationally, the PACE 
program is unique as a three-way partnership between the Federal government, the State, 
and the PACE organization. 
 
30.2 - PACE Organizations 
(Rev. 2, Issued: 06-09-11; Effective: 06-03-11; Implementation: 06-03-11) 
 
A PACE organization is a not-for-profit, for-profit private or public entity that is 
primarily engaged in providing PACE services. For-profit entities operating PACE 
organizations do so under demonstration authority. The following characteristics also 
apply to a PACE organization. It must: 
 
  Have a governing body or a designated person functioning as a governing 
body that includes participant representation; 
 
  Be able to provide the complete service package regardless of frequency or 
duration of services; 
 
  Have a physical site and staff to provide primary care, social services, 
restorative therapies, personal care and supportive services, nutritional 
counseling, recreational therapy, and meals; 
 
  Have a defined service area; 
 
  Have safeguards against conflict of interest; 
 
  Have demonstrated fiscal soundness;  
 
  Have a formal Participant Bill of Rights; and 
 
  Have a process to address grievances and appeals. 
 
The PACE organization must not discriminate against any participant in the delivery of 
required PACE services based on race, ethnicity, national origin, religion, sex, age, 
mental or physical disability, sexual orientation, or source of payment. 
  30.3 - Eligibility and Benefits 
(Rev. 2, Issued: 06-09-11; Effective: 06-03-11; Implementation: 06-03-11) 
 
Participants must be age 55 or older; reside in the PACE organizations service area; be 
certified as eligible for nursing home care by their state and be able to live safely in a 
community setting at the time of enrollment. Eligible beneficiaries who choose to enroll 
in PACE agree to forgo their usual sources of care and receive all their services through 
the PACE organization. (Additional information on Eligibility and Enrollment can be 
found in Chapter 4 of the PACE Manual). 
 
PACE provides participants all the care and services covered by Medicare and Medicaid, 
as authorized by the interdisciplinary team (IDT), as well as additional medically-
necessary care and services not covered by Medicare and Medicaid. There are no 
limitations or condition as to amount, duration or scope of services and there are no 
deductibles, copayments, coinsurance, or other cost sharing that would otherwise apply 
under Medicare or Medicaid. The IDT assesses the participants needs and develops a 
comprehensive care plan that meets the needs of its participants across all care settings on 
a 24 hour basis, each day of the year. Social and medical services are provided primarily 
in an adult day health care center, but are supplemented by in-home and referral services 
as needed. 
 
The benefit package for all PACE participants includes: Primary Care, Hospital Care, 
Medical Specialty Services, Prescription Drugs (including Medicare Part D drugs), 
Nursing Home Services, Nursing Services, Personal Care Services, Emergency Services, 
Home Care, Physical Therapy, Occupational Therapy, Adult Day Health Care, 
Recreational Therapy, Meals, Dental Care, Nutritional Counseling, Social Services, 
Laboratory/X-Ray, Social Work Counseling, End of Life Care and Transportation. 
Hospital, Nursing Home, Home Health, and other specialized services are generally 
furnished under contract. In most cases, the comprehensive service package permits 
participants to continue living at home rather than be institutionalized. 
 
30.4 - Payments to PACE Organizations 
(Rev. 2, Issued: 06-09-11; Effective: 06-03-11; Implementation: 06-03-11) 
 
PACE services are financed by combined Medicare and Medicaid prospective capitation 
payments, and, in some instances, through private premiums. PACE organizations 
receive a monthly capitation payment for each eligible enrollee, and combine these funds 
into a common pool from which providers pay health care expenses. This capitated 
financing allows PACE organizations to deliver all services participants need rather than 
be limited to those reimbursable under the Medicare and Medicaid fee-for-service 
systems. In exchange, PACE organizations assume full financial risk for all the health 
care services enrollees need. 
 
As a Medicare program and a Medicaid state plan option, PACE organizations receive 
two capitation payments per month for dually eligible participants. 
  Medicare eligible participants who are not eligible for Medicaid pay monthly premiums 
equal to the Medicaid capitation amount and a premium for Medicare Part D drugs, but 
no deductibles, coinsurance, or other type of Medicare or Medicaid cost-sharing applies. 
For those participants eligible for Medicaid, but not Medicare, the state will pay the full 
cost to the PACE organizations. PACE providers assume full financial risk for 
participants' care without limits on amount, duration, or scope of services. 
 
30.5 - Quality of Care 
(Rev. 2, Issued: 06-09-11; Effective: 06-03-11; Implementation: 06-03-11) 
 
The PACE organization is required to develop, implement, maintain, and evaluate an 
effective data-driven quality assessment and performance improvement (QAPI) program. 
It is important that the QAPI program take into consideration the wide range of services 
furnished by the PACE organization. PACE organizations have the flexibility to develop 
the QAPI program that best meets their needs in order that they may fully meet the 
obligations of care for its participants. It is CMS expectation that PACE organizations 
will operate a continuous QAPI program that does not limit activity to only selected kinds 
of services or types of patients. The desired outcome of the QAPI requirement is that 
data-driven quality assessment serves as the engine that drives and prioritizes continuous 
improvements for all PACE organizations services.  Transmittals Issued for this Chapter 
 
Rev #  Issue Date  Subject  Impl Date  CR# 
R2PACE 06/09/2011  Initial Publication of Manual  06/03/2011 NA 
06/03/2011  Initial Publication of Manual - Rescinded and  06/03/2011 NA 
R1SO 
replaced by Transmittal 2 
 
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