DEPARTMENT OF HEALTH & HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
200 Independence Ave. SW 
Washington, DC 20201 
 
         
SMD # 20-004 
RE: Value-Based Care 
Opportunities in Medicaid 
 
 
 
September 15, 2020 
 
 
 
Dear State Medicaid Director: 
 
The purpose of this letter is to provide information on how states can advance value-based care 
(VBC) across their healthcare systems, with a particular emphasis on Medicaid populations, and 
to share pathways for adoption of such approaches with interested states.  VBC seeks to hold 
providers accountable for providing high quality care, and can also be a part of the solution to 
reduce health disparities in the healthcare system, to maximize benefits to patients, and to 
eliminate unnecessary procedures.  Under VBC arrangements, providers are rewarded  based on 
specific evidence of performance on quality measures  for helping patients improve their health, 
reduce the effects and incidence of chronic disease, and live healthier lives, as part of a larger 
healthcare system effort.  The Centers for Medicare & Medicaid Services (CMS) believes that 
value-based payment (VBP) is a key driver of VBC.  Value is more likely to improve across the 
larger healthcare system when provider incentives are aligned across payers.  By advancing VBC 
in Medicaid, states have the opportunity to improve beneficiary health while reducing costs.  
This letter discusses pathways, including increased flexibility available under the state plan, 
towards the adoption of VBP models in Medicaid. 
 
Value-based care has particular promise in helping America and its healthcare system handle 
unexpected challenges and disruption, including those recently experienced from the COVID-19 
pandemic.  During this time, providers have faced financial impacts from all directions 
including: delayed elective surgeries, disruption in revenue streams, and new costs from 
increased need for personal protective equipment.  Value-based care may help ensure that our 
healthcare system is better prepared and equipped to handle similarly disruptive events in the 
future.  As Administrator Seema Verma noted on June 3, 2020, ...by accepting value-based or 
capitated payments, providers are better able to weather fluctuations in utilization, and they can 
focus on keeping patients healthy rather than trying to increase the volume of services to ensure 
reimbursement. Value-based payments also provide stable, predictable revenueprotecting 
providers from the financial impact of a pandemic.1 
                                                           
1 New CMS Payment Model Flexibilities for COVID-19, Health Affairs Blog, June 3, 2020. Available at 
https://www.healthaffairs.org/do/10.1377/hblog20200602.80889/full/.  Page 2 - State Medicaid Director 
 
Approaches to the Adoption of Value-Based Payment 
 
CMS understands that states face unique circumstances in their healthcare landscapes, and what 
works for one state may not necessarily work for another state.  The Administration supports 
flexible approaches for states and does not expect a one-size-fits-all approach as states reform 
their delivery systems and move to VBC.  Some states may prefer to join other multi-payer 
initiatives within their state, and others may instead take the lead in developing their own multi-
payer initiatives.  Providers may be more likely to adopt VBC if states promote the use of 
current, active CMS models instead of promoting many different strategies without clear 
coordination of efforts across strategies and other payers.  States may wish to pursue more 
limited, incremental changes that primarily focus on improving specific drivers of costs and 
quality in their Medicaid programs.  Whatever a states circumstance, CMS will work to meet 
states where they are to address and respond to local opportunities and barriers to VBC.   
 
While many states have made progress in moving towards VBP, there is significant room to 
achieve a system that more effectively delivers outcomes commensurate with costs.  For 
example, 2018 data from the Health Care Payment Learning and Action Network (HCP-LAN), a 
public-private learning collaborative (or network) in which CMS participates and which was 
created to drive aligned payment reform, showed that, while 90 percent of traditional Medicare 
payments were made as part of VBP arrangements, only 34 percent of Medicaid payments were 
made under such arrangements.2  States have the opportunity to learn from Medicare and private 
payers in implementing VBC and should strongly consider aligning payment incentives and 
performance measures across their healthcare systems to reduce the burden on providers who 
participate in multiple programs.  Alignment may also serve to improve the healthcare 
experience for individuals across their states, including those covered under Medicaid, Medicare, 
and commercial insurance products.  
 
States have been moving away from less sophisticated fee-for-service (FFS) Medicaid payments 
toward per member per month (PMPM) payments, partly in order to improve the stability of state 
and provider budgets, but also with an interest in moving to VBC.  Additionally, in both FFS and 
managed care delivery systems, states increasingly have included risk-bearing payments and 
opportunities for shared savings.  For the purposes of this guidance and previous guidance 
regarding shared savings in the Medicaid context, the term shared savings is used in a manner 
generally understood by the field, which may differ from how this term is defined for purposes 
of specific initiatives in Medicaid or by other payers. 3  Innovative payment models warranting 
testing will continue to emerge.  Encouraging providers to manage upside and downside 
performance risk through shared financial losses is critical for aligning their financial incentives 
                                                           
2 These rates are calculated by summing HCP-LAN categories 2, 3, and 4 from the CY 2018 payment results tables 
(p.18 and 20) in the HCP-LAN 2019 Methodology and Results Report available at http://hcp-
lan.org/workproducts/apm-methodology-2019.pdf.   
3 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.  For a detailed 
discussion of shared savings in the Medicaid context, please review State Medicaid Director Letter #13-005 on 
Shared Savings Methodologies (Aug. 30, 2013) available at https://www.medicaid.gov/federal-policy-
guidance/downloads/smd-13-005.pdf.  Page 3 - State Medicaid Director 
with those of beneficiaries and payers, including states and managed care plans.  Total cost of 
care approaches prioritize results rather than individual billable services. 
 
Alternative payment methodologies (APM) aim to increase provider accountability for care by 
attributing patients to providers and linking payment to outcomes.  Medicaids use of APM in 
this letter refers to the term as generally understood by the field, rather than the specific defined 
term under the Medicare Quality Payment Program.  The HCP-LAN has created an APM 
framework that arrays models across four categories distinguished by the level of financial risk 
assumed by providers; Category 1 is limited to fee-for-service while Category 4 is designated 
population-based or global APMs, in which providers assume the greatest risk and are 
responsible for population health.4  States frequently reference this categorical framework in 
considering and describing their strategic approach to drive value in healthcare delivery.   
 
Figure 1: HCP-LAN Alternative Payment Methodology Framework 
 
 
                                                           
4 Please review the HCP-LAN APM Framework 2017 Refreshed Report for details regarding each category (p. 23-
29). The report is available at http://hcp-lan.org/workproducts/apm-refresh-whitepaper-final.pdf.  Page 4 - State Medicaid Director 
The HCP-LAN sets ambitious goals for increasing the adoption of VBP across the nation and 
recently released revised adoption targets for different payers going into the future, including 
goals for downside risk or shared accountability.5  HCP-LANs new goals outline the percentage 
of healthcare payments that are tied to two-sided risk APMs; that is, payment arrangements that 
include both opportunities for shared savings and shared losses (i.e. Categories 3 and 4).  HCP-
LANs Medicaid goals include 15 percent of healthcare payments to be tied to two-sided risk 
APMs by 2020, 25 percent by 2022, and 50 percent by 2025.  The survey indicated Medicaid 
was only at 8.3 percent of payments in two-sided risk arrangements in 2018.  HCP-LAN has 
documented the nations current progress in a report released in mid-2019; CMS recommends 
states consult the HCP-LAN survey of APMs for an understanding of its methodology and 
findings.6  States should give careful consideration to their own situational and provider 
landscapes when setting statewide APM adoption goals. 
 
Key Considerations for States Pursuing Value-based Payment 
 
Building on Lessons Learned  
 
CMS, in partnership with states and providers, continues to support and test various payment and 
service delivery models that aim to achieve better care for patients, smarter spending, and 
healthier communities.  Beginning in 2010, CMS committed significant federal investments 
through Delivery System Reform Incentive Payment (DSRIP) demonstration programs 
authorized under section 1115 of the Social Security Act (the Act).  DSRIPs were intended to be 
one-time investments, with states sustaining delivery reforms upon DSRIP completion without 
reliance on additional federal funds.  CMS is phasing out DSRIP funding at each states 
scheduled DSRIP completion date.  DSRIP programs provided states with resources to catalyze 
significant reforms through the development of infrastructure, workforce enhancements, redesign 
of systems and processes, and provider incentives to change behavior.  A recently completed 
federal evaluation of DSRIP demonstrations showed overall mixed results from these programs 
(evaluation report is forthcoming).  The mixed results from this federal evaluation supports 
CMS decision to allow DSRIP demonstrations to end as planned and no longer approve DSRIP 
investments, reinforcing CMS new direction for state approaches to VBC.  Federal rapid cycle 
DSRIP reports focus on topics such as designing incentive programs, implementing measure 
requirements, beneficiary attribution, care coordination, physical and behavioral health 
integration, adopting VBC, infrastructure and capacity, and supplemental payments, which may 
be found at this link.  Findings from these reports inform the critical elements, considerations, 
and expectations listed below.  
 
In addition, the CMS Center for Medicare and Medicaid Innovation (referred to hereafter as the 
Innovation Center) is testing a growing portfolio of various payment and service delivery 
models.  The Innovation Center and the Center for Medicaid and CHIP Services (CMCS) jointly 
launched the Medicaid Innovation Accelerator Program (IAP), a five-year initiative designed to 
                                                           
5 HCP-LAN October 24, 2019 Press Release available at http://hcp-lan.org/workproducts/2019-APM-Progress-
Press-Release.pdf. 
6 HCP-LAN 2019 Methodology and Results Report is available at https://hcp-lan.org/workproducts/apm-
methodology-2019.pdf  Page 5 - State Medicaid Director 
provide technical assistance to support Medicaid agencies delivery system reform activities, 
among other policy areas.7   
 
Another source of information on new model development is the Physician-Focused Payment 
Model Technical Advisory Committee (PTAC), created to review stakeholder-submitted 
payment model proposals and make recommendations to the Secretary of Health and Human 
Services (HHS).  The comments, recommendations, and other information deriving from 
PTACs expert review of these proposals have been useful resources for the Innovation Center 
and other policymakers who are interested in VBP.  Additional information about PTAC, the 
proposals that PTAC has reviewed, and resources that PTAC has developed to assist 
stakeholders can be found here.  
 
Based on experience to date, including federal evaluation and rapid cycle reports, CMS has 
identified critical elements of VBP design and operations:  
 
  Level and scope of financial risk.  CMS models include a broad spectrum of 
accountability for outcomes.  For example, current CMS models include both long-term 
accountability for cost and episode-based models, in which providers are held 
accountable for patient outcomes for a defined period related to a triggering event, such 
as a hospitalization or diagnosis.  Models may also include comprehensive accountability 
for total cost of care or for a more narrowly defined set of services, such as a joint 
replacement.  Finally, models may include varying levels of financial risk.  For example, 
the Direct Contracting Model offers different risk-sharing options in order to attract 
participation by a range of healthcare providers.  The Professional option includes 50 
percent savings/losses and provides a capitated, risk-adjusted monthly payment for 
enhanced primary care services called Primary Care Capitation Payment, while the 
Global option includes 100 percent savings/losses and allows participants to elect to 
receive either Primary Care Capitation Payment or a capitated, risk-adjusted monthly 
payment for all items and services called Total Care Capitation Payment.  In general, 
more comprehensive models incentivize high quality services in the most efficient 
healthcare setting and promote prevention and primary care over more costly acute care.  
Other, less comprehensive VBP models create efficiencies associated with services inside 
of the defined episode (e.g., services associated with joint replacements).    
  Benchmarking.  Many VBP arrangements compare provider financial performance 
against a target price or benchmark.  Benchmarks typically reflect a combination of 
provider-specific historical trends, regional trends, and adjustments (e.g., risk 
adjustment).  Payers may set a discount against a benchmark, which will result in savings 
if the benchmark is accurate.  If benchmarks are not accurate and are set too high, then 
model participants will earn more than anticipated in reconciliation payments and the 
model will not result in program savings.  For example, the results from the first two 
years of CMS Comprehensive Care for Joint Replacement Model (CJR) indicate that 
there was a 3.7 percent reduction in gross Medicare payments; however, after taking into 
account reconciliation payments to participants, there were no significant net savings to 
                                                           
7 The Medicaid IAP website may be found here: https://www.medicaid.gov/resources-for-states/medicaid-
innovation-accelerator-program/index.html. Please note that the Medicaid IAP ends in September 2020.   Page 6 - State Medicaid Director 
Medicare.  Voluntary models exacerbate this challenge.  In voluntary models, providers 
may choose not to participate if they believe that they will not financially benefit, or 
providers may drop out if the model reduces payments.  Additionally, voluntary models 
increase the risk of adverse selection, in which only providers who will benefit from 
benchmark design elect to participate.  Models like CJR, in which provider participation 
is mandatory in selected geographic areas, are intended to reduce adverse selection and 
ensure that providers remain engaged even when the model results in lower payments 
(e.g., due to low quality or high cost relative to the benchmark).  
  Payment operations.  A central component of VBP is provider accountability for cost and 
quality.  Providers need to be able to identify a specific cohort (or panel) of patients for 
whose care they will be accountable.  Patients generally obtain care from multiple 
providers, so payers must determine how beneficiaries will be attributed to providers.  
Many VBP arrangements include capitated and/or shared savings payments.  
Operationally, making these payments typically requires determining which providers are 
participating, which patients are attributed to these providers, and what the providers 
quality score is prior to making payments.   
 
Implementing VBP reflects a significant change to provider business models.  States can 
facilitate successful shifts to VBP through: 
 
  Multi-payer participation.  Multi-payer participation amplifies the impact of new 
innovative models and drives care transformation across the healthcare system.  States 
should consider, when designing their programs, aligning the incentives employed in 
their Medicaid program with those developed by the Innovation Center, as well as those 
available in other public and private programs.  Primary Care First, a new Innovation 
Center model starting in 2021, continues CMS efforts to foster multi-payer participation 
and offers another opportunity for states to align their Medicaid programs with Medicare 
in support of primary care delivery.  States could also consider an incremental approach, 
which might take the form of aligned performance and outcome measures, possibly 
allowing performance on measures used in another public or private program to be 
applied to their Medicaid program (e.g., Medicares Merit-based Incentive Payment 
System (MIPS)), as well as population health performance across payers.  Such 
alignment may ease the administrative burden on providers as they choose to participate 
in multiple programs.  
  Assessment of delivery system readiness.  States should consider the capabilities of their 
delivery systems to drive performance improvement when designing and implementing 
payment methodologies, recognizing their sophistication in influencing up- and 
downstream providers,8 as well as community-based organizations.  Experience has 
shown that safety net providers, in particular, are at varying levels of readiness for 
adopting VBC.  Payers may wish to provide a range of payment incentives to be matched 
to the amount of performance risk the delivery system can manage, where experienced 
providers assume more risk, and less experienced providers assume less risk.  Reformed 
                                                           
8 Upstream and downstream providers in the Medicaid context are, generally, related network partners for providing 
and coordinating services to Medicaid members.  Upstream providers are considered to be the lead entities that 
coordinate with the downstream providers in these network partnerships.   Page 7 - State Medicaid Director 
payment mechanisms that hold healthcare professionals increasingly accountable for cost 
and quality and that allow more flexibility in care delivery are central to any efforts to 
transform care delivery.  Payers may be able to increase provider participation and 
facilitate improved performance by incentivizing greater financial accountability, 
providing data, supporting infrastructure development, and offering continuing 
opportunities for stakeholder engagement.  Payers need to address provider needs, such 
as ensuring providers receive all the necessary data (as permitted by law) to inform 
performance metrics and outcomes, and offer technical assistance that aids willing 
providers in preparing for VBP.  In the development of VBC arrangements, states should 
note they, as well as payers and providers, must comply with all applicable law and 
regulations, including, but not limited to, federal and state fraud and abuse laws.  States 
and providers should ensure systems are prepared to accommodate data needs associated 
with VBP, and systems should be constructed to be helpful and designed not to be 
especially burdensome on any participants. 
  Robust health information exchange and technology.  States are positioned to promote 
health information technology (HIT) implementation through a variety of means, such as 
through support of standardized technologies and data formats, or amending regulations 
to facilitate data-sharing.  Providers need real-time, reliable data in order to support 
APMs, which pay for value over volume.  Having advanced HIT is important for 
knowing the health of patients and being able to track quality measures.  Accordingly, 
providers should also be capable of exchanging data with states, other providers, and 
community-based organizations.  Providers should also be able to report and analyze 
their quality data.  States should consider requesting 90/10 enhanced system funding 
through the Advanced Planning Document process to provide more resources to address 
HIT and other technology needs associated with pursuing VBP. 
  Stakeholder engagement.  States experiences emphasize the importance of transparency 
in setting VBC reform goals and programmatic specifications, and upfront engagement 
with relevant stakeholders.  The goals of any reform should be clearly articulated and 
participation requirements should be transparent and predictable for payers, providers, 
and beneficiaries.  As part of this process, states should consider ongoing structures and 
processes to support the engagement of beneficiaries in designing VBC reform goals.  
States should assess implementing reforms that do not unnecessarily exclude 
beneficiaries with certain health conditions, as appropriate.  To the extent that reforms are 
aimed at addressing individuals in need of long-term services and supports, these 
processes should take into account person-centered planning consistent with requirements 
under 1915(c) waivers and 1915(i), 1915(j), and 1915(k) state plan options for home and 
community-based services.  Finally, the intent behind VBP is for beneficiaries to be 
provided better, more efficient care; the effect of a model on beneficiaries should not be 
considered only as an afterthought in model design.   
  Quality measure selection.  To ease the adoption of VBC arrangements and promote 
multi-payer alignment, we encourage states and payers to pick established metrics to 
reduce provider burden, prioritizing those that are useful across payers and promote 
service integration across care settings.  Measures that are part of broader state VBP 
efforts and that are used in other CMS programs or initiatives (e.g., Medicare Advantage, 
MIPS, or Innovation Center models) are critical to easing provider participation and  Page 8 - State Medicaid Director 
engagement in state-driven VBP, reducing the burden associated with participation in 
models.  In addition, provider incentives may be most impactful on changing clinical 
behaviors when they closely follow the incentivized activity without a significant time 
lag.    
  Sustainability.  Finally, states should proactively plan for a pathway to long-term 
sustainability for VBP as part of the selection of payment models.  For models to 
meaningfully contribute to reducing the cost and improving the quality of care into the 
future, payers and providers should be incentivized to permanently reorient their methods 
and practices from volume to value. 
Examples of Innovative Payment Models to Achieve Value-based Payment 
 
CMS is committed to helping states prepare Medicaid providers for the transition to VBP 
methodologies with an agile, staged approach to sustainable transformation.  To facilitate the 
advancement of APMs and support state efforts, CMS has identified key features, as well as 
applicable Medicaid authorities for VBP models, as described herein and noted in Table 1 
(Innovative Payment Strategies and Key Features).  States should consider the adoption of 
models in the context of the lessons described above, particularly in the areas of delivery system 
readiness and multi-payer alignment.  These models are not mutually exclusive.  The APMs as 
outlined may be applicable to a mixture of payers, provider types, and state goals.  Ultimately, 
states should consider aligning payer and provider incentives as they pursue VBP models.  Each 
payment model links payment changes to quality improvement and introduces better financial 
accountability in a unique way.   
 
The payment models listed below are organized by magnitude of complexity and risk, and states 
should consider their specific circumstances before selecting models for adoption.  States may 
adopt multiple payment strategies noted below in order to promote VBP.  Incorporated in each of 
these payment strategies are shared savings or other similar arrangements.  These arrangements 
may allow providers to share in a portion of savings they generate relative to pre-established 
spending targets, given providers meet or exceed quality targets.   
  Page 9 - State Medicaid Director 
Table 1: Innovative Payment Strategies and Key Features 
Models listed below may (and often do) fit into multiple payment categories. 
 
Social Security Act 
Payment  Authority Necessary  HCP-LAN 
Key Features  Examples of Models9 
Strategy  for Medicaid  Category10 
Implementation 
Payment    State or payer pays   Primary care case  To implement through  Categories 2-3 
models built on  healthcare provider  management (PCCM),  fee-for-service: 1905(t) 
fee-for-service  directly on a fee-for- PCCM-entity (PCCM-E)   primary care case 
architecture  service basis for all   Primary Care Medical  management12 
populations or sub- Homes (PCMH) (e.g. South   
populations for some or  Dakota health home benefit)  To implement through 
all services received,   Shared Savings models (e.g.  managed care: 
either retrospectively,  Arkansas, Maine, Ohio)    1915(a)  
or prospectively based   Massachusetts Model B  voluntary via 
on value-based  (Primary Care Accountable  contract 
advanced payment  Care Organization (ACO))    1932(a)  State 
methodologies.   Home Health Value-Based  Plan option 
  Adjustments (usually  Purchasing (HHVBP)    1915(b)  
retrospective) for the  Model*11  managed care 
cost and quality of  via waiver 
services provided   
relative to benchmarks. 
                                                           
9 Innovation Center models are denoted via asterisk.  Descriptions of Innovation Center models can be found at the following website: 
https://innovation.cms.gov/initiatives/#views=models 
10 Category 1  FFS with no link to quality and value; Category 2  FFS with link to quality and value; Category 3  APMs built on FFS architecture; Category 4 
 Population-based payment. For detailed definitions of HCP-LAN categories, please consult the APM Framework 2017 Refreshed Report (p. 23-29) available at 
https://hcp-lan.org/workproducts/apm-refresh-whitepaper-final.pdf.  
11 The HHVBP Model is a Medicare model. 
12 States may use the authority under section 1905(t) of the Social Security Act to offer coordinating, locating, and monitoring activities broadly and create 
incentive payments for providers who demonstrate improved performance on quality and cost measures, including PCCMs and PCCM entities as defined under 
42 CFR part 438.2. 
  Page 10 - State Medicaid Director 
Social Security Act 
Payment  Authority Necessary  HCP-LAN 
Key Features  Examples of Models9 
Strategy  for Medicaid  Category10 
Implementation 
  Providers may be 
eligible for payments 
based on performance 
for a subset of total care 
(upside risk), for 
example on primary 
care services, if they 
also meet related 
performance and 
quality targets.  
Providers may also owe 
money (downside 
risk) if they do not 
meet performance and 
quality targets. 
Episode of care    States or payers pay   Bundled Payments for Care  To implement through  Categories 2-3 
payments  healthcare providers a  Improvement (BPCI)  fee-for-service: 1905(a) 
bundled payment for  Advanced*13   
some or all services   Oncology Care Model  To implement through 
associated with  (OCM)*14  managed care: 
episodes of care during   Comprehensive Care for    1915(a)  
a defined period of  Joint Replacement (CJR)*15  voluntary via 
time, the amount of   Arkansas Medicaid Health  contract 
which may be  Care Payment Initiative    1932(a)  State 
established by  Episodes of Care  Plan option 
comparing actual 
                                                           
13 BPCI Advanced is a Medicare model. 
14 OCM is a Medicare model. 
15 CJR is a Medicare model. 
  Page 11 - State Medicaid Director 
Social Security Act 
Payment  Authority Necessary  HCP-LAN 
Key Features  Examples of Models9 
Strategy  for Medicaid  Category10 
Implementation 
episode expenditures to   Tennessee Medicaid    1915(b)  
an established  Delivery System  managed care 
benchmark price.  Transformation Episodes of  via waiver, 
  Allows state or payer to  Care Program  specifically for 
use benchmark price to  PCCMs and 
determine savings.  PCCM entities 
  Incentivizes quality   
over volume of 
services.  
  Conducive to multi-
payer alignment. 
  Providers may be 
eligible for payments 
(upside risk) or may 
owe money (downside 
risk) based on 
performance relative to 
the benchmark price for 
the episode of care. 
Payments    Payers may pay    ACO initiatives (e.g.,  To implement through  Categories 3-4 
involving total  providers a number of  Medicare Shared Savings  fee-for-service: 1905(a) 
cost of care  different ways   Program, Next Generation   
accountability  bundled payments, fee- ACO Model*16)  To implement through 
for-service, capitated   Maryland Total Cost of  managed care: 
payments, or global  Care Model*    1915(a)  
payments.  voluntary via 
contract 
                                                           
16 The ACO initiatives within this bullet are specific to Medicare. 
  Page 12 - State Medicaid Director 
Social Security Act 
Payment  Authority Necessary  HCP-LAN 
Key Features  Examples of Models9 
Strategy  for Medicaid  Category10 
Implementation 
  Healthcare providers   MassHealth ACO Model A    1932(a)  State 
are held accountable for  (Accountable Care  Plan option 
all populations or sub- Partnership Plan)    1915(b)  
populations for some or   Vermont All-Payer ACO  managed care 
all services.  Model*  via waiver 
  Healthcare providers     
may be responsible and 
at risk for all aspects of 
a patients care, or just 
specific condition(s). 
  Provides flexibility to 
payers and healthcare 
providers in addressing 
community needs. 
  Healthcare providers 
may be eligible for 
payments (upside 
risk) and/or may owe 
money (downside 
risk) based on their 
performance. 
  Page 13 - State Medicaid Director 
Payment Models Built on Fee-For-Service Architecture 
 
CMS recognizes that a number of states have not adopted capitated managed care, and that even 
those states that have adopted managed care may not have sub-capitated payments (meaning 
payments from managed care plans to providers that are capitated).  As a result, FFS payments 
still remain, even among the portfolio of VBP models that states use.  States may apply more 
advanced models built on FFS architecture for all populations or sub-populations (e.g., people 
with specific conditions) for some or all services received.  While a FFS approach involves 
individual payments for individual services, more sophisticated FFS models permit states to 
introduce elements of value when directly reimbursing providers for services.   
 
The Medicaid state plan allows flexibility for states to draw down federal financial participation 
(FFP) for incentivizing value-based payment in an FFS system.17  As one path towards value-
based care, states have implemented state plan payment methodologies that pay providers for a 
course of treatment or for treating or managing a specific clinical condition, rather than on an 
individual FFS basis.  For example, states have defined episodes associated with medical, 
surgical and behavioral health treatments over a defined length of time.  Using historical 
spending and quality metrics to establish a baseline, states have rewarded providers that meet or 
exceed cost savings and quality targets within a performance period.  Specifically, states have 
established performance periods for an episode of care associated with clinical conditions and 
determined the anticipated costs that would usually be paid for care within the period.  Providers 
that hold care cost below the anticipated cost within the performance period and improve quality 
may be rewarded with incentive payments, while providers that do not improve quality and 
reduce cost may be held at risk.  Arkansas and Ohio have approved state plan payment 
methodologies for episodes of care.    
 
States have also designed quality-based pay for performance methodologies that incentivize 
improved care associated with a Medicaid service rather than increased volume.  Examples of 
these approaches may include: shared savings payment methodologies that reward providers for 
lowering the  cost of care beneath the benchmark through improved quality and care 
coordination, sometimes through Medicaid ACOs; primary care medical homes; and health 
homes for enrollees with chronic conditions.  States have designed these models using upside 
only arrangements for providers that meet performance goals for cost savings and quality 
improvement or as risk-based models involving downside risk for the provider if the provider 
does not meet performance goals.  CMS has approved shared savings methodologies within state 
plans in several states, including: Arkansas, Connecticut, Idaho, Maine, Minnesota, Ohio, and 
Vermont.  
 
Depending on a states goals for value-based payment and the population(s) to be targeted under 
those efforts, existing state plan and waiver options are available for coverage of a wide array of 
services.  Highlighting one example, section 1945 of the Act authorizes states to elect to cover a 
package of case management and care coordination services for individuals with chronic 
                                                           
17 Please note that, like non-VBP payments, any VBP model payment requires an appropriate source of the non-
federal share of the payment, consistent with  all applicable requirements for permissible sources of the non-federal 
share of Medicaid expenditures.   
  Page 14 - State Medicaid Director 
conditions in a Health Home under the state plan.  States have flexibility to identify the chronic 
conditions to target under a Health Home program, and to determine which providers are 
qualified to furnish Health Home services.  For example, South Dakotas health home benefit 
includes four payment acuity tiers and a quality incentive payment to incentivize providers with 
small caseloads, usually in rural and frontier areas, to continue to participate and to reward 
providers performing above the mean on clinical outcome measures. 
 
Two examples of models utilizing FFS payments are listed below. 
 
  Medicaid Model Example: Minnesota ACO 
 
Minnesota received approval in 2012 for ACO-like model services under the states Integrated 
Health Partnership (IHP).  Under the IHP, providers deliver primary care case management 
services as defined in section 1905(t) of the Act, and are paid risk- and complexity-adjusted 
quarterly payments for coordinating, locating, and monitoring healthcare services for attributed 
beneficiaries.  The Minnesota IHPs may also receive shared savings payments when their 
attributed beneficiaries healthcare quality, outcomes, and healthcare expenditures meet state-
specified targets.  
 
  Dually Eligible Model Example: Washington Managed FFS 
 
Washington uses Medicaid health homes to coordinate services for high-cost, high-risk 
beneficiaries, including those who are dually eligible for Medicare and Medicaid.  Equipped with 
a powerful predictive modeling infrastructure, health home care coordinators work with 
beneficiaries to set health action goals and improve self-management skills, while the state pays 
for health home services on a per-person-per-month basis.  In partnership with CMS, the state is 
eligible to share in savings where health home activities improve quality and reduce costs for 
Medicare and Medicaid  total-cost-of-care accountability across both programs  for dually 
eligible beneficiaries.  Preliminary results from the first four demonstration years in Washington 
show gross Medicare Parts A and B savings of approximately 10 percent, with evidence of 
positive beneficiary experience and quality trends. Based on these results, we have already made 
interim performance payments of over $50 million to the state of Washington.18 
  
Managed Care Authorities for Value-based Payment 
 
CMS recognizes that the majority of Medicaid beneficiaries are served in managed care 
arrangements.  More than two thirds of Medicaid beneficiaries, or around 55 million people, are 
enrolled in comprehensive managed care organizations (MCOs) through arrangements that allow 
private health plans to administer state Medicaid benefits.19  In 38 states, at least 50 percent of all 
Medicaid beneficiaries, and in 33 states, about 79 percent of CHIP children, are enrolled in 
comprehensive MCOs, as growth in managed care enrollment has continued.  The Medicaid 
                                                           
18 The Washington model operates through the Medicare-Medicaid Financial Alignment Initiative. Through this 
initiative, CMS is working with states to test models that better align care delivery and financing for individuals 
dually eligible for Medicare and Medicaid. These state-CMS partnerships aim to better integrate primary, acute, 
behavioral health, and long-term services and supports for dually eligible beneficiaries. See SMDL #19-002. 
19 https://www.medicaid.gov/medicaid/managed-care/enrollment-report/index.html 
  Page 15 - State Medicaid Director 
managed care regulations in 42 CFR part 438 permit a variety of mechanisms that states can 
utilize for VBP initiatives through their managed care plan contracts.  Specifically, these 
initiatives may be implemented through states contracting with Managed Care Organizations 
(MCOs), Prepaid Inpatient Health Plans (PIHPs), and Prepaid Ambulatory Health Plans 
(PAHPs), herein referred to as managed care plans.  
 
State Directed Payments (42 CFR 438.6(c))  
 
Federal Medicaid managed care regulations include requirements for how states may implement 
delivery system and provider payment initiatives through Medicaid managed care.  With limited 
exceptions, Medicaid managed care regulations generally prohibit states from directing a 
managed care plans expenditures to providers for services that are covered under contract.  
States must develop actuarially sound rates that cover the costs for delivery of services under the 
contract; managed care plans, as risk-bearing entities, have the responsibility to manage risk for 
delivery of those services.  In order to do that, managed care plans must be able to fully utilize 
the payment under the contract for the delivery of services.  When states direct managed care 
plan expenditures under the contract, doing so can undermine the risk-based nature of the 
contract and distort payments made from the plan to providers in ways that do not relate to 
service utilization or provider performance.  However, 42 CFR 438.6(c) sets forth exceptions to 
the general prohibition on state direction of how much and through what kind of arrangement a 
managed care plan pays providers who furnish covered services.  The exceptions include state 
directed implementation of value-based purchasing models and other service payment models 
intended to recognize value or outcomes over volume of services, participation in delivery 
system reform or performance improvement initiatives, and certain minimum fee schedules.  The 
payment arrangements identified in 42 CFR 438.6(c) permit states to direct specific payments 
made by managed care plans to providers under certain circumstances (state directed 
payments) and can assist states in furthering the goals and priorities of their Medicaid programs, 
including to promote VBP initiatives.  For example, a state may require managed care plans to 
adopt specific VBP models (e.g., Accountable Care Organizations) or provider pay for 
performance or incentive payments (e.g., payments based on reducing potentially preventable 
readmissions).  
State directed payment arrangements under 42 CFR 438.6(c) are required, among other things, 
to be based on the utilization and delivery of services to Medicaid beneficiaries covered under 
the contract rating period; to direct expenditures equally for a defined class of providers using a 
common set of performance measures; and to advance at least one of the goals and objectives in 
the states quality strategy.20  States are required to receive written prior approval from CMS 
using the preprint form posted on the Medicaid.gov website.  In addition, all payment 
arrangements approved under 42 CFR 438.6(c) are required to conform to federal regulatory 
requirements, including that they be incorporated into managed care contracts and rate 
certifications.  Approval of a state directed payment under 42 CFR 438.6(c) does not constitute 
                                                           
20 Approval under 42 CFR  438.6(c) provides authority for states to include contract requirements directing a plans 
expenditures. The payments must tie to the delivery of services that occur during the rating period (e.g., not 
historical utilization). Approval under 438.6(c) does not grant authority to cover services; states must already have 
Medicaid authority for the underlying services either under the Medicaid state plan or through a Medicaid waiver or 
demonstration program. 
  Page 16 - State Medicaid Director 
approval of the financing mechanism for the non-federal share, and states will need to work with 
the appropriate CMCS staff to obtain the necessary approvals of a financing mechanism. 
 
An example of a provider pay for performance or incentive payment arrangement includes states 
that contractually require their managed care plans to pay quality incentive payments to acute 
care hospitals that are network providers rendering services to Medicaid beneficiaries covered 
under the contract in order to reduce potentially preventable readmissions.  The incentive 
payment is determined based on both the incremental improvement of the individual hospital 
from the previous rating period to current rating periods and achievement of a statewide 
benchmark. 
 
States interested in incorporating state directed payments into their managed care programs, 
including those that accelerate VBP, should consult the resources available at 
https://www.medicaid.gov/medicaid/managed-care/guidance/state-directed-payments/index.html 
including the Appendix to our November 2017 CIB on State Directed Payments, which provides 
more detail on the Accountable Care Organization model as well as the incentive payments 
based on reducing potentially preventable readmissions mentioned above.  We encourage states 
to reach out early for technical assistance to expedite CMS review of preprint proposals, 
including to discuss essential parameters such as evaluation and quality metrics.  Please email 
StateDirectedPayment@cms.hhs.gov with questions or requests for technical assistance. 
 
Managed Care Plan Incentive Payments and Withhold Arrangements (42 CFR 438.6(b))  
 
States may also use incentive payments to reward managed care plans that accelerate provider 
adoption of VBP in line with performance targets specified in the managed care plan contract, 
including implementation of a mandatory performance improvement project under 42 CFR 
438.330(d) that focuses on adoption of VBP models and percentage of plans provider 
payments through VBP arrangements.  These incentive payments represent additional funds over 
and above the capitation rates.  Incentive payments must comply with all requirements in 42 
CFR 438.6(b)(2), including that managed care plan contracts incorporating incentive payments 
must not provide for payment in excess of 105 percent of the approved capitation payments 
attributable to the enrollees or services covered by the incentive arrangement.   
 
In the 2016 managed care final rule (81 FR 27498, 27530 (May 6, 2016)), CMS specified that 
incentive payments made to a managed care plan in accordance with 42 CFR 438.6(b)(2) 
should not be included in the denominator of the medical loss ratio (MLR) as such payments are 
in addition to the capitation payments received under the contract.  However, these MLR 
standards can support states and managed care plans in their efforts to design and implement 
comprehensive VBP acceleration strategies by ensuring amounts can be appropriately identified 
and classified within each managed care plans MLR. 
 
States can also implement a withhold arrangement with their managed care plans as well.  For a 
withhold arrangement, a portion of a capitation payment is withheld from the plans, which can 
be earned back by the plan for meeting targets specified in the contract such as meeting quality 
performance targets specified in the managed care plan contract.  This could include 
implementation of a mandatory performance improvement project under 42 CFR 438.330(d) 
  Page 17 - State Medicaid Director 
that focuses on adoption of VBP models and percentage of plans provider payments through 
VBP arrangements.21  Contracts that provide for a withhold arrangement must ensure that the 
capitation payment minus any portion of the withhold that is not reasonably achievable is 
actuarially sound as determined by an actuary in accordance with 42 CFR 438.6(b)(3). 
Withheld amounts that are paid to the managed care plan are included in the MLR denominator.  
For example, Washington State withholds up to two percent of MCO payments until 
MCO/provider VBP contracting goals are met.  
 
Managed Care Plan Contracting Strategies   
 
States may also develop and implement specific managed care plan procurement and contracting 
strategies to promote VBP goals.  For example, states may require managed care plans, through 
their plan contracts, to adopt a specific VBP model that was developed by the Medicaid agency 
or other stakeholders and payers, including requiring participation in a multi-payer VBP 
initiative, provided that applicable requirements in 42 CFR 438.6(c) are met.  Such an approach 
 particularly if aligned with commercial, Medicare, Marketplace, and other payers with longer 
term contracts  may promote consistency, reduce the burden on providers to participate, align 
incentives, and enable the state to accelerate VBP across Medicaid and beyond.  For example, 
the state of Tennessee requires managed care plans to implement the states patient-centered 
medical home and retrospective episode-of-care models. 
 
States also may contractually implement a generic requirement for managed care plans to utilize 
VBP 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 mechanisms of such VBP or alternative care 
arrangements.  While states may design the specific requirements in line with their VBP goals, 
states may consider an approach whereby the proportion of each managed care plans provider 
payments tied to VBP models increases over time (e.g., 5 percent in Year 1; 10 percent in Year 
2; 15 percent in Year 3, etc.).  In addition, or as an alternative to the state defining specific VBP 
goals, states may allow managed care plans to submit proposed VBP arrangements for approval 
and demonstrate achievement of the contracted benchmark by providing supporting data, as 
requested and required by the state.  For example, South Carolina requires managed care plans to 
meet VBP contracting targets with their network providers; originally set at 5 percent of provider 
payments in Year 1, the target increased to 20 percent in Year 3. 
 
States may also require managed care plans, through their plan contracts, to advance VBP along 
with parameters essential to the states broader VBP strategy, such as to achieve aligned 
performance metrics; consistent phasing-in of more sophisticated VBP models; and specific 
provider data analysis.  Similarly, states may require plans to launch VBP pilots and related 
initiatives, subject to state approval, that reflect the states broader VBP strategy, including 
specific goals.  For example, New Mexico approved a subset of complementary VBP projects of 
its choosing based on the submitted proposals of its contracted managed care plans.  To align 
                                                           
21 The targets for a withhold arrangement are distinct from general operational requirements under the contract. 
Arrangements that withhold a portion of a capitation rate for noncompliance with general operational requirements 
are a penalty and not a withhold arrangement. 
  Page 18 - State Medicaid Director 
these selected VBP pilot projects, the state selected uniform quality and cost metrics and created 
a template for managed care plans to use to report quantitative and qualitative results for each 
project. 
 
States also may, as part of their procurement or pre-procurement strategies, help assess managed 
care plan interest in and experience with VBP.  Specifically, a state may inquire, through its 
request for proposals or a pre-procurement request for information (RFI), about plans 
experience with various VBP models, interest in advancing VBP principles in provider contracts, 
and specific proposals for achieving a states VBP goals.  A state may complement such efforts 
by inquiring, including through an RFI, into other essential stakeholders interest in, and ideas 
for, advancing VBP.  Such an approach may be informed by a states broader strategy for 
accelerating VBP, which could inform its procurement and contracting strategies.  For example, 
requirements for capitation rate development to use data from the three most recent complete 
rating periods may reduce incentives for plans that reduce utilization to continue to operate 
efficiently in future years, as they will not be able to retain those earned savings in future rating 
periods.  This is an important principle of actuarial soundness to ensure that rates paid to plans 
are appropriate, reasonable, and attainable.  States may consider strategies to incentivize 
continued efficient plan performance by providing incentive payments to plans that achieve 
certain results, including lower costs and improved health outcomes.  Such strategies could 
provide plans with an incentive for continued improvement.  States establishing strategic VBP 
goals, including having a majority of provider payments in VBP models by a date certain, may 
consider such an approach for sustaining VBP investment over time.  If a state uses multiple 
strategies, an analysis and evaluation of these employed strategies that determine the financial 
and quality impacts may be helpful to the state.  Such an evaluation may be helpful to determine 
both the effectiveness and scalability of the states efforts, with the goal of scaling the most 
successful components of its strategy and evolving others. 
 
Exploring Additional Pathways to Approval of Value-based Payment Strategies 
Outside of a managed care environment, CMS will consider state plan payment methodologies 
that include downside risk for providers through value-based advanced payment strategies, 
where providers receive an advanced payment amount to care for individuals attributed to them 
based on historic Medicaid expenditures as well as care patterns and outcomes of care.22  CMS 
position is that the statute does not prohibit states from articulating advanced payment models in 
the state plan and through a direct relationship with providers.  States will be expected to ensure, 
through an approved reconciliation process, that total payments are consistent with efficiency, 
economy and quality of care, and are also sufficient to enlist enough providers... to meet the 
statutory access requirements of section 1902(a)(30)(A) of the Act.  In reviewing state proposed 
methodologies, CMS will ensure payments are consistent with all requirements in section 
1902(a)(30)(A) of the Act, including efficiency, economy, and quality of care.  CMS is willing 
                                                           
22 Section 1902(bb)(6) allows for states to develop APMs that are agreed to by the state and a Federally-qualified 
health center (FQHC), and that result in payment no less than the FQHC's prospective payment system (PPS) rate. 
States may develop APMs that align with the policies discussed in this letter, but where the APM affects payments 
to FQHCs, the APM must provide for reconciliations to ensure that total payments to each FQHC are not less than 
the payments the FQHC would have received under its PPS rate. 
  Page 19 - State Medicaid Director 
to work with states to develop reconciliation processes that would comport with applicable 
statutory requirements. 
Depending on the model developed by a state and approved by CMS, including an Innovation 
Center model, states potentially could hold providers at risk for losses in the event that actual 
care expenditures for attributed beneficiaries exceeded the monthly payments that were paid over 
a defined period.  States also could reward providers when quality is improved and care 
expenditures fall below the monthly payments made to providers by allowing them to retain 
some or all of the amount identified through reconciliation as exceeding actual care expenditures.  
Importantly, to ensure consistency with section 1902(a)(30)(A), when care expenditures fall 
below monthly payments and quality improvements are not evident, a provider would need to 
return the portion of the monthly payments to the state representing the monthly payments paid 
in excess over actual care expenditures.  States may define reasonable thresholds for what may 
be acceptable provider losses or gains in such arrangements, to ensure that provider gains and 
losses are moderated where appropriate or necessary to satisfy the requirements of section 
1902(a)(30)(A) of the Act.  Moreover, CMS will review state proposals to ensure state defined 
thresholds are consistent with requirements in section 1902(a)(30)(A).   
 
We would like to note that through existing flexibilities under the Act, CMS has approved state 
plan payment methodologies consistent with 1902(a)(30)(A) that make monthly payments to 
providers for delivering Medicaid services and that reward providers for meeting performance 
requirements.  Section 1905(t) of the Act authorizes primary care case management services 
which states have used to implement a medical home concept under Medicaid state plan 
authority.23  Under this authority, states may make monthly payments for case management 
services, as well as hold providers accountable for beneficiary service costs through upside 
(shared savings24) and downside risk arrangements.  In addition, the Health Homes authority of 
section 1945 of the Act permits flexibility in payment, including making monthly payments for 
Health Homes services.25  States may layer incentive payment structures that are funded by state-
budgeted supplemental payment pools upon monthly payments to incentivize and reward 
providers who meet quality and outcomes performance requirements.  We note all federal 
statutory and regulatory requirements on state financing to fund the non-Federal share apply 
under VBP methodologies.  The combination of monthly advanced payments and incentive 
payment pools may be employed by states to develop numerous VBC strategies under existing 
Medicaid state plan authorities.  States should be mindful of how payments made to providers 
work in a complementary manner to improve care and outcomes and to ensure that such 
payments are not duplicative.  Along with the existing flexibilities under the Act, there are a 
number of considerations and expectations of states considering advanced payment 
methodologies that are discussed below. 
                                                           
23 Please see State Medicaid Director Letters #12-001 and #12-002 for a discussion on the use of Section 1905(t) 
authority in state plans (July 10, 2012) available at https://www.medicaid.gov/sites/default/files/Federal-Policy-
Guidance/downloads/SMD-12-001.pdf and https://www.medicaid.gov/sites/default/files/Federal-Policy-
Guidance/downloads/SMD-12-002.pdf.  
24 For a detailed discussion of shared savings in the Medicaid context, please review State Medicaid Director Letter 
#13-005 on Shared Savings Methodologies (Aug. 30, 2013) available at https://www.medicaid.gov/federal-policy-
guidance/downloads/smd-13-005.pdf. 
25 Please find Health Homes information available at https://www.medicaid.gov/medicaid/long-term-services-
supports/health-homes/index.html. 
  Page 20 - State Medicaid Director 
 
Considerations and Expectations for Advanced Payment Methodologies 
 
We encourage states to work closely with CMS when developing advanced payment 
methodologies to achieve their intended goals for VBP reform.  As always, state plan 
amendments must be consistent with federal requirements and should advance improved care for 
beneficiaries, smarter spending, and healthier communities.  Within this letter, we offer states 
planning and methodological considerations that should be factored into any of these proposals, 
as well as technical guidance that CMS expects states will address in their submissions.  We 
expect states to consider each of the methodological components described in this letter to ensure 
consistency with section 1902(a)(30)(A) as states develop a proposal for CMS to review.  We do 
not foresee a one size fits all approach to advanced payment methodologies, 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 address the expectations below.  Importantly, consistent with the VBP strategies discussed 
within this letter, we expect advanced payments to improve quality and health outcomes and for 
states to have meaningful quality strategies in place to ensure the methods are not detrimental to 
quality and access to care, which would be inconsistent with section 1902(a)(30)(A) of the Act.  
Advanced payment methods should not be based only on cost savings or result in harm to 
Medicaid beneficiaries.  
 
We are eager for states to continue pursuing advanced payment opportunities, and CMS 
understands that there is a spectrum of state experience with advanced payment methodologies; 
states less experienced with comparable VBC approaches may feel challenged in designing and 
successfully implementing these valuable reforms.  For these states, CMS may consider 
providing section 1115(a) authority so states may pilot advanced payment strategies under FFS 
as part of a demonstration. 
 
In determining whether to approve a states state plan amendment (SPA) contemplating 
advanced payment methodologies under FFS authority, we will examine how the states request 
addresses the following criteria. 
 
Data, payment and claims tracking, and quality: In order for states to implement an advanced 
payment strategy under state plan FFS authority, states must have the capability to collect, track, 
and analyze all data needed to reconcile advanced payments made with claims and evaluate 
provider quality and outcomes performance.  For example, states should address the following 
question: 
 
  What claims and payment data will be used to determine advanced payments, including 
the data source, the time period of the data, and how the data will account for population 
cost variation?  
 
Overview of advanced payment methodologies:  States must submit and receive CMS approval 
for their advanced payment methodology.  The submission must comprehensively describe the 
advanced payment methodology, including: which providers qualify for the payment, how they 
  Page 21 - State Medicaid Director 
qualify, how the payment amount is calculated, how the payment will be distributed, when the 
payments will be made (e.g., weekly, monthly, or quarterly), how beneficiaries will be attributed 
to providers, and when the total advanced payment revenue will be reconciled with total claims 
from the same period.  Additionally, the methodology must describe the process a state will 
employ to ensure the advanced payment does not result in reductions to quality of care or access.  
We note that advanced payment revenue should include only payments received for the 
Medicaid services that the advanced payment is meant to pay and should not include general 
revenue paid to providers.  Specifically, advanced payment revenue should not include any 
supplemental or bonus payments or payments for other services that are not covered under the 
advanced payment methodology.  We note this because the reconciliation process must compare 
claims for the same services as the advanced payment during the same time period.  CMS will 
review proposed advanced payment methodologies to ensure they comply with all statutory and 
regulatory financing requirements. 
 
Mechanics of advanced payment methodologies:  States may only make advanced payments to 
eligible providers who can be identified at the billing providers claims-paid level in order to be 
able to reconcile claims paid with advanced payments made to the same provider.  Importantly, 
section 1902(a)(32) of the Act requires, with limited exceptions, that no payment under the plan 
for any care or service provided to an individual shall be made to anyone other than such 
individual or the person or institution providing such care or service...  States should be 
mindful of this requirement when determining the providers that are eligible for the advanced 
payment.  CMS notes that while states must make direct payment and may not mandate that 
providers share their advanced payments, providers may enter into voluntary agreements outside 
of the Medicaid state plan to share payments with downstream providers who are part of the 
VBC models health team.   
 
Advanced payments for which FFP will be claimed must be processed through the states 
Medicaid Management Information System (MMIS).  Additionally, in establishing how the 
advanced payments will be determined and processed, states should consider:  
 
  The factors that are used to determine the advanced payment amounts, such as: the 
providers previous period of Medicaid FFS claims and the number of FFS Medicaid 
beneficiaries attributed to providers.  If based on claims, the state must specify the 
timespan of the past period claims and any inflation factors used to estimate current 
period claims amounts.  
  Risk adjustments made to the payments to account for the health and social/demographic 
status of the attributed beneficiaries. States should document how risk adjustment for the 
attributed beneficiaries will occur. 
  The processes in place to ensure the advanced payments processed in MMIS can be 
matched with actual services rendered by a provider receiving advanced payments during 
the payment period.  For example, in order to reconcile advanced payments with provider 
claims, the state could instruct providers receiving advanced payments to submit claims 
to the state for the amounts the providers otherwise would be paid except for their 
participation in an advanced payment methodology, which claims would be recorded in 
MMIS, for the services paid for by the advanced payments during the payment period.  
  Page 22 - State Medicaid Director 
The state would not make payment on these claims for services covered by the advance 
payment, but would retain the claims for reconciliation purposes.  Alternatively, the state 
could instruct providers to submit zero dollar claims, which also could be used as the 
basis for advance payment reconciliation whereby a state would calculate the total 
amount that would have been paid had the claims been paid on an individual basis and 
compare this amount with the advanced payment amount.  
 
States should also address the following questions in their methodology: 
 
  Does the methodology apply to services available statewide to all individuals under the 
state plan or does it limit benefits to geographic regions or to populations residing in 
geographic regions in the state?  If a state intends to add new benefits via this 
methodology and geographically limit their provision, the state may need to obtain 1115 
waiver authority.   
  Are the payments under the methodology available to all Medicaid providers or are they 
limited based on provider eligibility criteria?  What are the provider eligibility criteria?  
  Does the methodology partially or fully align with an Innovation Center model?  What 
are any material differences?  If the methodology aligns with an existing Innovation 
Center model, could the state use existing Medicaid authorities to replicate or simulate 
the model in their program?   
 
Attribution:  At the time of submission of the SPA, states must submit and receive CMS 
approval for their attribution methodology.  States may determine if the advanced payment 
model will align with an Innovation Center models attribution methodology or a state designed 
model and must comprehensively describe the attribution methodology in the state plan. 
 
  If advanced payment will be made based on the number of beneficiaries attributed to a 
provider, the state must specify the attribution methodology.  For example, will 
beneficiaries be attributed based on plurality of claims, most recent visit, geographic 
locality, etc.? 
  States must specify how providers will be notified of the beneficiaries attributed to them, 
how often they will receive beneficiary rosters, and when the rosters will be revised to 
account for any beneficiary eligibility changes.  
  States must specify whether data for attributed beneficiaries will be risk adjusted to 
account for differences in beneficiary health and social/demographic status.  
  States must specify how the attribution methodology avoids duplicate advanced payment 
to multiple providers for the same beneficiary.  States will have to attest to CMS that 
there is no duplication of payments. 
 
Claims tracking:  States must have claims systems that allow them to track individual providers 
who receive advanced payments and those providers individual claims.  For states paying based 
on attributed beneficiaries and reconciling beneficiary claims to provider advanced payments, 
states must be able to track claims at the provider and beneficiary levels, and match the services 
  Page 23 - State Medicaid Director 
provided to a beneficiary to the provider receiving advanced payment for those attributed 
beneficiaries.  If providers are prepaid for certain services, such as for primary care services, 
states must be able to track service-level claims. 
 
Reconciliation process:  At the time of the submission of the SPA, states must submit and 
receive CMS approval for the reconciliation process.  For example, states must describe if 
advanced payments will be reconciled to total provider claims, claims for attributed 
beneficiaries, or claims for specific services (e.g., evaluation and management codes for primary 
care), and if reconciled amounts will be adjusted based on performance on quality and outcomes 
measures.  (Note that if advanced payments exceed the amount of revenue that would have been 
paid based on FFS claims and these overpayments are to be offset by performance on quality and 
outcomes measures, states must submit to CMS a comprehensively described methodology that 
details the way in which performance on these measures will reduce overpayments.)  The 
reconciliation process should be similar to protocols for payment of actual incurred costs and 
cost reporting.  At a minimum, reconciliation protocols must include and identify: 
 
  Source(s) of data related to providers, claims, payment, attributed beneficiaries, and 
quality, as applicable to the states requested advanced payment methodology. 
  Eligible providers. 
  Claims payments, services, or attributed beneficiaries for which advanced payment is 
made. 
  Prior period timespan for claims payment totals used to calculate advanced payment 
amounts, as applicable to the states requested advance payment methodology. 
  Service period during which claims data will be collected for reconciliation. 
  Claims run out period. 
  Which services are included in claims data that will be used to reconcile against advanced 
payments.  (Please note, the state must perform claims reviews to ensure that providers 
are delivering and appropriately coding for necessary care and not restricting their 
provision of care to limit expenditures for attributed beneficiaries.) 
  How quality performance will impact reconciliation of advanced payments to actual 
services furnished.  (Please note, in the case of an excess of advanced payments in 
relation to actual services furnished, states must return the federal share of amounts 
repaid by providers in accordance with 42 CFR Part 433, Subpart F.  Claims for FFP for 
advanced payments and any related reconciliation payments are subject to the two-year 
timely filing requirements described at 45 CFR Part 95, Subpart A.) 
  Timeframes and procedures for conducting reconciliation and returning FFP to CMS, as 
required in regulation. 
Quality:  As discussed above, we expect advanced payment methodologies to promote VBC and 
ensure that quality and access to care are not reduced as a result of the advanced payment.  At the 
time of the submission of the SPA, states should submit their quality strategy for CMS review 
and approval.  In order to ensure that providers are delivering necessary care, states should 
include a quality strategy to assess and improve the quality of care of services paid for using 
  Page 24 - State Medicaid Director 
advanced payment methodologies.  The states request should specify how the quality 
measurement and outcomes strategy is incorporated into the states advanced payment 
methodology.  As part of the quality measurement and outcomes component of the advanced 
payment methodology, a state should: 
 
  Determine which providers and services will be subject to the quality and outcomes 
component. 
  Determine how quality and outcomes performance will impact payment.  For example, 
could providers qualify for incentive payments above and beyond the advanced payment 
amounts? Will performance on quality and outcomes impact any advanced payments 
made to providers that, upon reconciliation, are determined to exceed payment amounts 
attributable to the services actually furnished?  
  States must have a comprehensively described methodology that details how the 
o
performance on quality and outcomes offsets any excess advanced payments.  In 
addition, the quality and outcomes measurement period must align with the time 
period in which advanced payments were made.  
  Quality measures should include person-centered planning and reflect input from 
o
people with disabilities and individuals with chronic conditions.  
  Develop a timeline for implementation of the quality and outcomes strategy.  The 
timeline should include when the measures go into effect, if initial measurement will be 
used to establish baseline performance, and when providers will be held accountable for 
performance.  
  CMS acknowledges that states and providers may need to learn and adapt to a new 
o
quality measurement program.  States should consider how prepared providers are 
and ensure data systems can accommodate collection and evaluation of performance 
data.  As such, states can contemplate ramping up their quality and outcomes strategy 
by including an initial pay for reporting period.  CMS expects the providers to 
transition to full pay for performance over a reasonable time period. 
  Choose quality and outcomes measures that are relevant, non-discriminatory, and 
appropriate to the services provided by practitioners receiving advanced payments and 
that align with the states quality improvement goals.   
  The performance requirements should be set at levels appropriate to achieve 
o
performance improvement goals.  States may select goals that challenge providers to 
improve performance, maintain a minimum level of performance, compare providers 
to their peers or their own prior period performance, etc.  (CMS notes that we have 
approved SPAs that allow providers to select performance measures from a list of 
measures a state has chosen; states could adopt this approach to advanced payments.)  
The selected measures should aim to improve performance and states should guard 
against setting low performance expectations.  States should have a strategy for 
increasing performance expectations and changing measures if providers are meeting 
expectations too easily.  In addition, while the chosen measures can include process 
measures, the majority generally should be outcome measures.  States should also 
  Page 25 - State Medicaid Director 
consider multi-payer alignment when selecting measures, as to incentivize provider 
participation in models and not add unnecessary burdens related to reporting. 
  States should ensure that providers are being held accountable only for their performance 
and, in the case of attributed beneficiaries, only their attributed patients.  The quality and 
outcomes strategy should reasonably align measurement with accountability.  Providers 
should not be held accountable for measures that the provider is unable to affect or 
control.  
 
The quality and outcomes measures that states use should be valid and reliable.  CMS 
encourages states to use the Medicaid Adult and Child Core Sets, but also acknowledges that 
there may be other measures not included in the Core Sets that are part of a states strategy.  
Ideally, the measures that are used should be endorsed by an accrediting body such as the 
National Quality Forum.  
 
As states develop proposed advanced payment methodologies, they should also consider:  
 
  What beneficiary notification and protection processes (e.g. beneficiary complaint lines, 
state Medicaid ombudsman, etc.) are in place to ensure no harm results from the 
advanced payment model, and how program integrity will be ensured (e.g. maintenance 
of free provider choice, no reduction in amount, duration and scope of a medically 
necessary service, etc.)?   
  What will be the state process for claims reviews conducted to prevent up-coding and 
inappropriate restrictions on care (e.g. providers are providing and appropriately coding 
for necessary care, and not restricting their provision of certain expensive procedures to 
limit expenditures for attributed beneficiaries)? 
  What are the quality measures, reporting processes and appropriate incentives to 
maximize the likelihood that the methodology will result in better care and better value? 
  Does the state conduct reviews at least annually and make necessary adjustments to the 
methodology to ensure consistency with economy, efficiency and quality care, as well as 
sufficient access to covered services for beneficiaries? 
 
Payments for Episodes of Care 
 
Many insurers have begun paying providers for a bundle of services associated with a single 
episode of care (also known as bundled payments) or a related package of care (maternity, for 
example).  Through a single, bundled payment or an average target cost per episode, providers 
bear the financial risk of keeping an episodes service costs under the bundled payment amount 
or target.  Bundled payments in Medicaid have not historically been tied to value-based payment; 
instead, they have primarily been an instrument of administrative simplification via bundling 
services without any associated quality or cost adjustments. 
 
Bundled payments are increasingly common in cases of childbirth, joint replacement, and other 
discrete treatment episodes that generally include an expected set of services for treating a 
condition.  However, costs incurred by the payer may substantially vary due to the approach to 
  Page 26 - State Medicaid Director 
delivering those services, without adequate reason for the variance.  Bundled payments may be 
established at the setting level, procedure level, or condition level.26  Payers should consider the 
evidence and available data associated with treating a condition when contemplating the creation 
of a bundled payment.  Payers, especially Medicare, continue to experiment with expanding the 
application of payment bundles to longer episodes that now can also include more than one type 
of provider and/or domain of services (e.g. both physical and behavioral).  The bundle of care is 
typically still focused on the treatment of a particular condition but includes more components of 
that care.  Some payers may be considering using bundled payments for certain sets of 
psychiatric services associated with behavioral health disorders.  Given states interests in 
increasing behavioral health options for beneficiaries, states may look to bundling payments for 
serious mental illness that includes psychotic disorders, such as First Episode Psychosis (FEP) 
programs, Assisted Outpatient Treatment (AOT) programs, and Assertive Community Treatment 
(ACT) programs, in order to effectively promote evidence-based practices through team-based 
services.27  
 
Bundled payments that advance value-based payment allow for the possibility of both upside and 
downside financial risk.  If an episode of care delivered by a provider costs less than the 
estimated bundled payment, and the provider meets the required quality measure targets, the 
provider may keep a portion of the difference or receive a performance payment.  However, if 
the costs exceed the bundled payment amount or the provider fails to meet quality measurement 
goals, the provider may be financially liable for some or all the difference between the payment 
amount and an episodes cost.   
 
Payers are able to construct episodes of care that include only necessary services according to 
evidence based standards of care, to be provided in appropriate settings, and by efficient 
providers.  If the bundles are designed correctly, participation should be mutually beneficial 
across both the payer and providers.  
 
  Bundled Payments for Care Improvement (BPCI) Advanced  
 
The Bundled Payments for Care Improvement Advanced (BPCI Advanced) Model is an 
Innovation Center model continuing efforts in implementing voluntary episode payment models.  
The BPCI Advanced Model aims to support healthcare providers who invest in practice 
innovation and care redesign to better coordinate care and reduce expenditures, while improving 
the quality of care for Medicare beneficiaries.  As of the BPCI Advanced Models third model 
year (calendar year 2020), it includes 35 different inpatient and outpatient clinical episodes.  
Examples of these episodes include treatment of renal failure, bariatric surgery, and transcatheter 
aortic valve replacement.  The Innovation Center is actively assessing the BPCI Advanced 
payment methodology for adjustments to better account for selection effects inherent in 
                                                           
26 Accelerating and Aligning Clinical Episode Payment Models White Paper (p. 6) available at https://hcp-
lan.org/workproducts/cep-whitepaper-final.pdf. 
27 For additional information on these programs administered by the Substance Abuse and Mental Health Services 
Administration (SAMHSA), please visit: https://www.samhsa.gov/ebp-resource-center/mental-health-
treatment/first-episode-psychosis-co-occurring-substance-use; https://www.samhsa.gov/grants/grant-
announcements/sm-16-011; https://www.samhsa.gov/grants/grant-announcements/sm-18-013. 
  Page 27 - State Medicaid Director 
voluntary models.  BPCI Advanced qualifies as an Advanced APM under the Quality Payment 
Program; Advanced APM providers may be eligible for additional incentives for meeting 
applicable criteria.28,29 
   
  Tennessee Episode of Care Program 
 
The state of Tennessee has approached VBP by applying the episodes of care approach to reward 
high quality and cost-effective acute and specialist-driven care. The Episodes of Care program, 
which was first implemented in 2014, continues to align provider incentives with patients 
desired outcomes resulting in maintained or improved quality of care across most episodes while 
achieving savings.30 
 
Payment Models Involving Total Cost of Care Accountability  
 
There is a number of ways in which states, insurers, and providers have endeavored to effectuate 
payment models involving total cost of care (TCOC) accountability.  These payment models 
reflect the TCOC of treating a primary (typically chronic) condition, or for maintaining the 
health and managing the illness of an entire population.31  Both population-based payment 
models and comprehensive payment models, discussed below, involve TCOC accountability.  
 
Population-Based Payment Models 
 
Under population-based payment models, healthcare providers (rather than managed care plans) 
receive some or all of their payment at some periodic basis upfront, in a lump sum payment. This 
is different from managed care capitation payments, which are actuarially sound payments made 
per member per month to a plan to manage the risk associated with delivering services to 
populations as specified under the contract between the state and the managed care plan. 
Population-based payments can be used by managed care plans or states as a method to 
compensate network providers or FFS providers, respectively, and as a vehicle for driving the 
delivery of VBC.   
 
Capitation-like payments32, under population-based payment models, are one of the most 
flexible payment models, and are appropriate for numerous delivery and payment scenarios.  
Capitation-like payment arrangements for healthcare providers may include one or both of 
shared savings (also called upside reward) and shared losses (also called downside risk).  In 
certain capitation-like payment arrangements with shared savings, providers may be eligible to 
                                                           
28 https://innovation.cms.gov/initiatives/bpci-advanced/ 
29 https://qpp.cms.gov/apms/advanced-apms 
30 TennCares Delivery System Transformation Shows Savings and Improved Outcomes. Press Release (p. 2) 
available at 
https://www.tn.gov/content/dam/tn/tenncare/documents2/DeliverySystemTransformationReleaseForAnalyticsReport
.pdf. 
31 Alternative Payment Model Framework Final White Paper (p. 16) available at https://hcp-
lan.org/workproducts/apm-whitepaper.pdf. 
32 CMS use of the term capitation-like payments is meant to refer, in a generic sense, to per-person payments, and 
not to capitation payments as defined in 42 CFR 438.2, to which requirements under 42 CFR part 438 would 
apply. 
  Page 28 - State Medicaid Director 
share in the savings if they reduce spending relative to what the managed care plan and/or state 
calculated as the expected cost of care for a patient.  Providers are thus incentivized to deliver 
cost-effective and high quality care, as they could share savings stemming from such care.  In 
arrangements with shared losses, providers are financially held to account for adverse quality and 
health and wellness outcomes by having their payments reduced by a specified factor.  For 
instance, in downside risk, providers take responsibility for an attributed population of patients 
over a period of time and bear financial liability for costs that exceed a specified threshold.  
Under such an arrangement between a provider and a managed care plan, if care costs more than 
the set amount, the provider may be responsible for reimbursing the difference to the plan. 
 
States and payers need to carefully weigh the level of financial risk introduced to providers 
alongside capitation-like payments, or any risk-bearing payment methodology.  While downside 
risk is an important way to align the incentives of providers with the needs of payers and 
beneficiaries, its use must be measured given the potential to disrupt the financial solvency of 
certain providers or provider types.  For instance, safety net providers are a core part of 
delivering services to the Medicaid population, and may not have the financial resources to 
accept high levels of downside risk.  Smaller provider entities may also not be well positioned to 
accept financial risk.  Other types of providers may not have historically borne risk, and may 
need time to reorient their practices as necessary. 
 
In comparison to comprehensive capitation models, whereby providers deliver or arrange for all 
healthcare services under the relevant authority, partial capitation, where providers deliver or 
arrange for a defined subset of services (e.g., primary care, inpatient care, care coordination, etc.) 
may be a way for providers to participate in value-based payment when the providers are less 
ready to adopt full capitation.  A number of states have partially capitated payments to providers 
as a way to introduce providers to more sophisticated payment strategies.  For instance, certain 
states pay for primary care benefits through traditional managed care capitated payments, but 
still pay for long term services and supports through FFS.  Behavioral health services have often 
been carved out of traditional managed care capitation arrangements.33  While CMS encourages 
providers to utilize more sophisticated payment methodologies, partial capitation-like payments 
may be considered a step during a broader transition to risk-bearing payments. 
 
Payers have two primary tools to manage financial risk among providers compensated through 
capitation-like payment models: risk corridors and risk adjustment.  Risk corridors create 
boundaries around the actual cost experience of the providers patient panel in order to apply the 
payment incentives to the cost of care that providers likely can control rather than to extreme 
costs that likely represent care needs outside of the providers control.  Risk adjustment 
separately adjusts the PMPM amount to be paid to a provider to account for the average 
differences in illness burden across providers patient panels  that is, some providers typically 
have sicker patients who therefore need more costly care compared to the average illness burden 
of other providers patient panels.  Risk adjustment essentially levels the ratio of cost to 
reimbursement across providers.  As risk adjustment models often utilize diagnosis or procedure 
                                                           
33 Please note that behavioral health carve-outs may impact the ability of states to comply with Mental Health Parity 
and Addiction Equity Act (MHPAEA) provisions.  Additionally, current standards of care promote greater 
integration of behavioral health (SUD/MH) into primary care settings. 
  Page 29 - State Medicaid Director 
codes from claims, it is important for payers to account for potential changes in coding practices 
that can potentially cause under- or over-payments.  As coding guidance is updated and 
providers increase their coding sophistication, potential inaccuracies can be mitigated through 
the implementation of mechanisms such as caps on year over year risk score changes, 
normalization of risk scores to an index value, and/or the application coding intensity 
adjustments. 
 
While capitation-like payments encourage the delivery of appropriate care to beneficiaries, it is 
important to monitor the implementation of capitation-like payments to make sure that providers 
provide high-value care, as opposed to cutting corners on the provision of essential care.  As 
such, states should consider how they will ensure that discouraging or delaying appropriate 
utilization of services is not used as a lever for reducing costs at the provider level, and monitor 
for any undesirable reductions to utilization.  For example, states are strongly encouraged to 
avoid fail first approaches that promote less expensive services that may not be the most 
effective treatment option according to evidence-based treatment standards.  States should also 
determine whether their implementation of outcome-based payments would have the potential to 
jeopardize patient access, given that providers potentially could seek to manage the financial risk 
involved in treating sicker patients by inappropriately excluding them from their panels. 
 
Comprehensive Models 
 
Comprehensive payment models are among the most innovative and effective ways to align 
incentives across payers and providers.  These models generally include comprehensive 
population-based payments, often in the form of providers receiving a capitated, flat PMPM 
payment and being responsible for some or all aspects of a members care via a TCOC 
arrangement.  These models encourage providers to deliver well-coordinated, high-quality, 
person-centered care within either a defined scope of practice, a comprehensive collection of 
care, or a highly integrated finance and delivery system.34   
 
The scale of a payment model may be tailored to the needs and capabilities of the payer.  There 
are a number of examples of condition-specific comprehensive payment models, wherein 
providers receive prospective capitated payments for comprehensively treating the needs of a 
patient with a specific condition (e.g. cancer or heart disease).  Some payers have also begun 
using up-front payment for certain primary care services, associated with care delivered to a 
specific and attributed population.  Going further, larger and more sophisticated provider 
networks may be able to accept prospective payments from payers for handling all aspects of 
beneficiaries healthcare needs.  The most advanced way of delivering value-based payment 
involves the integration of the roles of both payers and providers, which jointly manage all 
healthcare needs of attributed beneficiaries.   
 
A subset of comprehensive payment models includes All-Payer models and Multi-Payer models 
that establish a set of alternative payment parameters for Medicare and with which other payers 
in the state or region may align, with the aim of reducing expenditures and improving health 
                                                           
34 HCP-LAN APM Framework 2017 Refreshed Report (p.27) available at https://hcp-lan.org/workproducts/apm-
refresh-whitepaper-final.pdf. 
  Page 30 - State Medicaid Director 
outcomes across populations.  Providers participating in these models may receive stable streams 
of funding from multiple payers, and may be held accountable for performance on a set of 
quality and outcomes measures that are relatively standardized across participating payers.   
Maryland and the Innovation Center operated the Maryland All-Payer Model between 2014 and 
2018, which tested whether an all-payer system for hospital payment that is accountable for the 
total hospital cost of care on a per capita basis and under global budgets is an effective model for 
advancing better care, better health, and reduced costs.  The Model successfully reduced total 
expenditures for Medicare beneficiaries and reduced hospital expenditures for both Medicare 
beneficiaries and commercial plan members.  The model also reduced hospital admissions and 
potentially avoidable hospitalizations for Medicare beneficiaries.35  The Maryland TCOC Model, 
launched in 2019, builds on the success of the Maryland All-Payer Model by creating greater 
incentives for healthcare providers to coordinate with each other and provide patient-centered 
care, and by committing the State to a sustainable growth rate in per capita total cost of care 
spending for Medicare beneficiaries. 
 
Flexibility and aligned incentives are key characteristics that comprehensive payment models 
offer both payers and providers.  When providers receive flat payments for handling all aspects 
of a patients care, they are incentivized to deliver quality care at lower costs, so that they may 
share in resulting savings relative to an expenditure target, and avoid unnecessary utilization.  
Providers are also allowed to depart from traditional billing and service delivery practices, and 
do not depend on continually furnishing services paid on a FFS basis to maintain cash flows.  
With a consistent cash flow, providers are granted additional stability when pursuing reforms 
that might otherwise disrupt existing billing incentives and practices. 
 
Providers may also be financially rewarded for making investments to benefit population health 
that otherwise may have been outside their normal scope of activities  for instance, a hospital 
network that is accountable for the health of significant populations within the community might 
make investments in health-related activities meant to help reduce or avoid inpatient stays.  In 
the absence of a population-based payment model, the hospital system would not have an 
incentive to make these investments because they could run counter to the hospital systems 
financial interest in filling inpatient beds.  Instead, when granted a flat population-based 
payment, accountable systems are rewarded for investing in lower cost ways of delivering 
necessary care and averting unnecessary care.  This often takes the form of community 
investments, such as interventions that address social determinants of health that may not be 
reimbursable by many payers.  As a result of these service delivery flexibilities, the financial 
incentives of providers and payers are even more aligned with one another.  Both parties benefit 
from population health improvements, and are incentivized to make investments that might avert 
costly care that otherwise could be needed.  
 
As in the case of all risk-sharing payment methods, payers should consider creating boundaries 
around the risk they and providers take under such models.  Certain providers may not be able to 
assume significant risk-based payments.  Particularly in the case of high-cost unpredictable 
events like heart transplants or the market entry of an extraordinarily expensive drug, providers 
                                                           
35 Evaluation of the Maryland All-Payer Model Final Report available at https://downloads.cms.gov/files/md-
allpayer-finalevalrpt.pdf. 
  Page 31 - State Medicaid Director 
receiving global payments under a population-based payment model can sometimes be 
financially destabilized without state or other payer intervention.  Providers should also receive 
payments that take into account the health status of their attributed population; sicker populations 
merit higher, risk-adjusted payments from payers.    
 
Comprehensive payment models, especially as states contemplate the most integrated models, 
should not be pursued lightly  they require sophisticated provider-provider and provider-payer 
relationships, and state leadership in convening a wide variety of stakeholders.  For these models 
to succeed, all parties involved must be aligned in vision and goals, as well as in the approach to 
tackling practical concerns, such as governance structure and technology.    
 
While comprehensive payment models certainly involve an enormous amount of work from a 
variety of stakeholders, they bring corresponding opportunities to payers and providers.  CMS is 
eager for states, payers, and providers to work together and pursue sophisticated ways of 
delivering VBC. 
 
One example of a model involving total cost of care accountability is described below. 
 
  Massachusetts Medicaid Model ACO (Partnership Plan) 
 
Massachusetts has enrolled 80% of its Medicaid managed care beneficiaries into its ACO 
program, in which providers take significant two-sided risk for cost, quality, and member 
experience. The program has three different ACO models.  One model, the Partnership Plan 
ACO, is fully integrated between a health plan and delivery system, and provides a full range of 
physical and behavioral health services.  Massachusetts regulates the ACO like a health plan and 
requires the ACO to meet Medicaid network adequacy standards, which it may do by contracting 
with providers not part of an ACO (e.g., local specialists and facilities).  The Commonwealth 
currently has 13 Partnership Plan ACOs operating, which receive prospective risk-adjusted 
capitated payments for beneficiaries enrolled in the ACOs as health plans. 
 
Other Medicaid Regulatory Authorities 
 
Section 1115(a) Demonstration Opportunities 
 
CMS acknowledges that there may be instances when a state requires additional flexibility to 
adopt an Innovation Center model or pursue other delivery system reforms that are not available 
through the Medicaid state plan or waiver authorities under section 1915 of the Act.  These 
instances generally should be limited to when a state wants to pilot a geographically limited 
payment or delivery system model, limit benefits to certain populations, and/or offer benefits not 
available under any other regulatory authority.  In such circumstances, CMS welcomes the 
opportunity to work with states on state-driven proposals that take into account their unique 
needs and capabilities, consistent with the principles and reflecting the lessons outlined above.  If 
a state is interested in pursuing more sophisticated state plan payment methodologies but lacks 
historical experience with value-based care models or the necessary resources for design and 
implementation, CMS may consider providing targeted section 1115(a) authorities to a state to 
pursue this option.  These authorities may permit additional federal technical assistance and 
  Page 32 - State Medicaid Director 
involvement if a state requests CMS involvement, relative to what might be established without 
section 1115(a) authorities. 
 
Under the demonstration authority granted by section 1115(a) of the Act, CMS can waive certain 
federal requirements and authorize federal matching for expenditures that otherwise could not be 
matched so that states can test innovative ways to deliver and pay for healthcare services when 
the demonstration is likely to promote the objectives of the Medicaid program.  Through section 
1115(a) demonstrations, states have an opportunity to explore programmatic flexibilities in 
pursuit of value-based payment.  States may propose section 1115(a) demonstration authority to 
test alternative payment methodologies that may not be implemented under the state plan, for 
example, or to pilot their reform initiatives, targeting particular geographic areas or populations.   
 
Section 1115(a) demonstrations must be budget neutral, meaning that the federal costs associated 
with the proposed reforms cannot exceed the federal Medicaid costs that would be incurred 
absent the demonstration.  States pursuing value-based payments under an 1115(a) 
demonstration will be required to provide the necessary state share of expenditures, consistent 
with all applicable federal statutory and regulatory requirements, in order to draw down federal 
financial participation in authorized spending.    
 
Any federal investments to test value based purchasing as part of section 1115(a) demonstrations 
will be time-limited and, as part of the application, states will be required to provide a plan to 
sustain successful initiatives, after the demonstration period, absent ongoing federal investments.  
In addition, consistent with statutory requirements, states proposing to implement value-based 
payments through section 1115(a) demonstrations will be required to assure robust monitoring 
and evaluation.   
 
CMS has developed a variety of resources to support state monitoring and evaluation, which are 
available at https://www.medicaid.gov/medicaid/section-1115-demo/evaluation-
reports/evaluation-designs-and-reports/index.html.  States undertaking value-based payment 
models through section 1115 demonstrations will be expected to consider how they will track 
whether state interventions are achieving their proposed objectives.  States should ensure 
mechanisms exist for rapid cycle feedback and monitoring of value-based payment initiatives.  
 
Next Steps 
 
CMS looks forward to continuing to work with states in making sustainable, transformational 
improvement in their Medicaid programs.  We have described a variety of potential pathways - 
partnering with the Innovation Center in a multi-payer model, adopting options available through 
the state plan and managed care authorities, and testing innovative approaches through section 
1115 demonstrations.  In addition, we encourage states to visit the Medicaid IAP website to 
access various tools, resources, and webinar slides related to Medicaid payment and service 
delivery models.  CMS will work with states interested in pursuing value-based payment 
methods and will offer assistance in identifying the pathways to best meet their unique needs.   
 
 
  Page 33 - State Medicaid Director 
For more information, please contact Ms. Judith Cash, Director, State Demonstrations Group at 
410-786-9686.   
     
Sincerely, 
 
/s/ 
 
Anne Marie Costello         
Acting Deputy Administrator and Director 
Center for Medicaid and CHIP Services 
 
 
/s/ 
 
Brad Smith   
Deputy Administrator and Director        
Center for Medicare and Medicaid Innovation 
 
cc: 
 
National Association of Medicaid Directors  
National Academy for State Health Policy  
National Governors Association 
American Public Human Services Association  
Association of State and Territorial Health Officials  
Council of State Governments 
National Conference of State Legislatures  
Academy Health 
Health Care Payment and Learning Action Network 
Health Affairs 
Inside Health Policy 
The contents of this document do not have the force and effect of law and are not meant to bind 
the public in any way, unless specifically incorporated into a contract.  This document is 
intended only to provide clarity to the public regarding existing requirements under the law.