DEPARTMENT OF HEALTH AND HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, MD 21244-1850 
 
 
CMCS Informational Bulletin 
DATE:  July 29, 2016  
FROM:   Vikki Wachino  
Director, Center for Medicaid and CHIP Services  
SUBJECT:   The Use of New or Increased Pass-Through Payments in Medicaid Managed 
Care Delivery Systems 
 
The purpose of this Informational Bulletin is to address questions regarding the ability of states 
to increase or add new pass-through payments under Medicaid managed care plan contracts and 
capitation rates, and to describe CMS plan for monitoring the transition of pass-through 
payments to approaches for provider payment under Medicaid managed care programs that are 
based on the delivery of services, utilization, and the outcomes and quality of the delivered 
services.  
Background 
The Centers for Medicare and Medicaid Services (CMS) recent Medicaid managed care 
regulations1 strengthen existing policy that prohibit states from directing managed care plans 
expenditures under the contract.  The regulations also provide exceptions to this general rule and 
permit states to direct managed care plans expenditures for provider payment through the 
managed care contracts in a manner based on the delivery of services, utilization, and the 
outcomes and quality of the delivered services.  The exceptions are for value-based purchasing 
models, to implement delivery system reform, or to adopt parameters for provider payments.  
Specifically, 438.6(c)(2)(i) requires that any state direction of managed care plan expenditures 
for provider payments: 
1.  Be based on the utilization and delivery of services; 
2.  Directs expenditures equally, and using the same terms of performance, for a class of 
providers providing the service under the contract; 
3.  Expects to advance at least one of the goals and objectives in the managed care quality 
strategy; 
4.  Has an evaluation plan that measures the degree to which the arrangement advances at 
least one of the goals and objectives in the managed care quality strategy; 
5.  Does not condition provider participation in the arrangements on the provider entering 
into or adhering to intergovernmental transfer agreements; and 
                                                           
1 Medicaid and Childrens Health Insurance Program (CHIP) Programs; Medicaid Managed Care, CHIP Delivered 
in Managed Care, and Revisions Related to Third Party Liability; Final Rule, 81 Fed. Reg. 27498 (May 6, 2016).  CMCS Informational Bulletin  Page 2 
6.  May not be renewed automatically. 
Additional conditions are also applicable for specific types of state direction under 
438.6(c)(2)(ii).  States are required to demonstrate in writing that these conditions are met and 
obtain CMS approval prior to implementing arrangements that direct managed care plan 
expenditures to providers. 
In the Medicaid managed care regulations, CMS acknowledged that despite its policy that states 
should not direct managed care plans expenditures under the contract, a number of states have 
integrated some form of additional payment to providers, defined in the final rule as pass-
through payments,2 into their managed care contracts for hospitals, nursing facilities, and 
physicians.  Two common reasons for these pass-through payments are that states that have 
moved from fee-for-service (FFS) to managed care sought to ensure a consistent payment stream 
for certain critical safety-net hospitals and providers and to avoid disruption of existing IGT, 
CPE, or provider tax mechanisms associated with supplemental payments under a UPL program.  
These pass-through payments as currently structured do not meet the conditions in 438.6(c)(2).   
In the final rule, CMS recognized the challenges associated with transitioning existing pass-
through payments into payments for the delivery of services covered under the contract to 
enrollees or value-based payment structures for such services.  The transition from one payment 
structure to another may require robust provider and stakeholder engagement, agreement on 
approaches to care delivery and payment, establishing systems for measuring outcomes and 
quality, planning, and evaluating the potential impact of change on Medicaid financing 
mechanisms.  In an effort to provide a smooth transition for providers, to support access for 
beneficiaries, and to provide states and managed care plans with adequate time to design and 
implement payment systems and renegotiate provider contracts that link provider reimbursement 
with services covered under the contract or associated quality outcomes, the Medicaid managed 
care regulations provide for transition periods related to pass-through payments for specified 
providers.  The regulations provide a 10-year transition period for hospitals, subject to certain 
limitations on the maximum amount of pass-through payments permitted.3  The regulations also 
provide a 5-year transition period for pass-through payments to physicians and nursing facilities. 
The purpose and intention of these transition periods is to acknowledge that pass-through 
payments existed prior to the final rule and to provide states, network providers, and managed 
care plans time and flexibility to integrate pass-through payment arrangements into different 
payment structures4.  These payment structures could include value-based purchasing, 
performance improvement initiatives, and enhanced fee schedules or other approaches linking 
payments to delivered services or the outcome and quality of those services. 
 
                                                           
2 Section 438.6(a) defines a pass-through payment as any amount required by the state to be added to the contracted 
payment rates between the managed care plan and hospitals, physicians, or nursing facilities that is not for the 
following purposes: a specific service or benefit covered under the contract and provided to a specific enrollee; a 
provider payment methodology permitted under 438.6(c)(1)(i) through (c)(1)(iii) for services and enrollees covered 
under the contract; a subcapitated payment arrangement for a specific set of services and enrollees covered under the 
contract; GME payments; or FQHC or RHC wrap around payments. 
3 See 438.6(d)(2) through (3) for limitations on the maximum amount of hospital pass-through payments allowed. 
4 See 438.6(c)(1)(i) through (c)(1)(iii) for some examples of allowed payment models.   CMCS Informational Bulletin  Page 3 
Adding New or Increased Pass-Through Payments to Managed Care Contracts 
Since publication of the Medicaid managed care regulations, CMS has received inquiries about 
states ability to integrate new or increased pass-through payments into Medicaid managed care 
contracts.  CMS believes that adding new or increased pass-through payments into Medicaid 
managed care contracts is inconsistent with the goals and objectives associated with the 
transition periods under the Medicaid managed care regulations.  As stated in the final rule, pass-
through payments are not consistent with statutory requirements in section 1903(m) of the Social 
Security Act and regulations for actuarially sound capitation rates, nor do pass-through payments 
tie provider payments with the provision of services.  The final rule maintains existing policy 
that states may not direct managed care plans expenditures under the contract except as 
otherwise specified in 438.6(c).  However, CMS did not require the immediate transitioning of 
pass-through payments for specified providers into other payment structures due to concerns that 
an abrupt end to pass-through payments for hospitals, physicians, and nursing facilities could 
create significant disruptions for some safety-net providers who serve Medicaid managed care 
enrollees.  Adding new or increased pass-through payments for hospitals, physicians, and 
nursing facilities, beyond what was included as of July 5, 2016, into Medicaid managed care 
contracts would exacerbate a problematic practice that is inconsistent with statutory and 
regulatory requirements, complicates the required transition of these pass-through payments to 
permissible provider payment models, and reduces managed care plans ability to effectively use 
value-based purchasing strategies and implement provider-based quality initiatives. 
CMS intends to further address this policy in future rulemaking, linking pass-through payments 
through the transition period to amounts in place at the time the Medicaid managed care rule was 
effective on July 5, 2016. 
Monitoring Pass-Through Payments 
Questions have also arisen about the implementation of the policy on pass-through payments.  
CMS will use its contract and rate certification approval processes to closely monitor pass-
through payments.  Under 438.7(d), CMS will require the state to provide detail on any pass-
through payments that the state requires of managed care plans in order to ensure that the 
capitation rates have been developed consistent with applicable rules and are actuarially sound.  
This can be done in the contract, the actuarial certification, or supplementary materials until such 
time as states must comply fully with 438.6(c) and (d) and explicitly detail any pass-through 
payments in the Medicaid managed care contract.  CMS will request detailed information during 
the review of the rate certification that describes all existing pass-through payments included in 
the rates for the rating period, including: 
1.  A description of the pass-through payment; 
2.  The amount of the pass-through payments, both in total and on a per member per month 
basis; 
3.  The network providers receiving the pass-through payments; 
4.  The financing mechanism for the pass-through payment; and 
5.  The amount of pass-through payments made to providers in previous years.  
As part of its review and approval processes, CMS intends to ensure that the pass-through 
payments comply with:  CMCS Informational Bulletin  Page 4 
1.  Section 438.4(a) in that the capitation rates with the pass-through payments are projected 
to provide for all reasonable, appropriate, and attainable costs that are required under 
the terms of the contract; 
2.  For rating periods for Medicaid managed care contracts beginning on or after July 1, 
2017, Section 438.6(d) in that the pass-through payments do not exceed the maximum 
amount allowed; 
3.  Section 1902(a)(2) of the Act and 433.53(c)(2) in that the providers receipt of the pass-
through payment is not conditioned on the provider entering into or adhering to 
intergovernmental transfer agreements. 
Technical Assistance 
CMS is available to provide technical assistance to states with transitioning pass-through 
payments to payment models consistent with 438.6(c), as well as to assist states in properly 
integrating and documenting existing pass-through payments into contracts and rate 
certifications.  For additional information on this Informational Bulletin, please contact James 
Golden at james.golden@cms.hhs.gov or 410-786-7111.