HealthManagement.com HMA 

Dual Eligible Financial Alignment Demonstrations: 

Rate Setting for Plans and Providers 

JoAnn Lamphere and Tony Rogers, 11/19/2014 

ACL Learning Collaborative
HMA 

Presentation Overview 

 Overview of Medicare and Medicaid 

Payment and Rate-Setting 

 Financial Alignment (“duals 

demonstrations”) Models

 Rate-Setting for Duals Capitated Model 

 Baselines, Adjustments, Plan Variation, etc. 

 How Payments Flow to Providers 

 Implementation Challenges / Rate Impact 

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Medicare Payment Options 

 Fee-for-service Medicare -- original 

 Traditional Medicare, administered by the federal 

government (CMS) 

 Covers Part A (inpatient), Part B (outpatient) services, and 

Part D prescription drug plan 

 Government pays providers for services (e.g. DRGs, 

physician fee schedules, etc.) 

 Medicare Advantage (MA) – voluntary Part C 

 Medicare Part A and B from a private insurance company 

that contracts with the government (HMOs and PPOs) 

 Plans are paid a certain amount per enrollee by Medicare 

 Plans contract with and pay providers 

 Can include Part D drug coverage and other benefits (such 

as dental and vision) 

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State Medicaid Rate Setting 

 It is a State’s responsibility to set Medicaid rates, with 

CMS approval 

 Traditionally set for hospitals, physicians, nursing facilities, 

group homes, etc. (fee schedules), now managed care 

 Each state’s method is unique & reflects policy objectives

 State receives federal match for approved spending 

 Payment rates may be negotiated, competitively bid, or 

administratively set 

 Standard of “reasonableness” with sufficient 

documentation, actuarially sound, and appropriate for 

populations covered and services provided 

 Capitation rate development for plans 

 Blended rates provide a single rates for all Medicaid services 

 Separate capitation rates cells for each category of service 

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Goal of the Financial Alignment / 

Duals Demonstrations 

The goal of the Financial Alignment Initiative 

is to increase access to seamless, quality 

programs that integrate primary, acute, 

behavioral, prescription drugs and long-term 

care supports and services for the beneficiary 

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Financial Alignment / Duals 

Demonstration Models 

 Now 13 demonstrations in 12 states, aimed at improving care coordination 

and lowering healthcare costs for duals, eligible for Medicare and Medicaid 

 Two demonstration models 

 Capitated Model: A State, CMS, and a health plan enter into a threeway contract, and the plan receives a prospective blended payment to 

provide comprehensive, coordinated care (10/12 states) 

 Managed Fee-for-Service (FFS) Model: A State and CMS enter into an 

agreement by which the state would be eligible to benefit from a 

portion of savings from initiatives designed to improve quality and 

reduce costs for both Medicare and Medicaid (2/12 states, CO and WA) 

 Washington is implementing both (a hybrid model) -- capitated model in 

two urban counties and managed FFS in the rest of the state 

 Minnesota is doing neither -- participating in the demonstration, but is only 

doing administrative alignment not financial alignment 

Source. Kaiser Family Foundation. Financial and Administrative Alignment Demonstrations for Dual Eligible Beneficiaries Compared: States with Memoranda of Understanding Approved by 

CMS, July 2014.

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Principles of Managed Care Rate 

Setting for the Dual Demonstrations 

 CMS and a State enter into a three-way contract with health plans 

participating in the Dual Demonstration 

 States have discretion regarding the structure of capitation for Medicaid 

services 

 States can use a blended rate methodology 

 Individual rate cell methodology 

 CMS has adopted the same approach generally it uses to set Medicare 

Advance health plan rates 

 Dual demonstration rate setting principles 

 Rates are risk adjusted 

 Rate provide incentives for using home- and community-based services 

to reduce institutionalization 

 Rules established for assigning beneficiaries to various plans 

 Rates must be budget neutral, in total, for Medicare and Medicaid 

dollars paid 

 Managed care plans must be Medicare Advantage plans with at least 3 

star rating 

 Rates must be actuarially sound 

 Rates must reflect geographic variations 

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Capitation Rate Setting Components 

1. Base rate is determined by claims and encounter data 

2. Adjustment for state program policy changes 

3. Service utilization and cost trends factors 

4. Delivery system differences (e.g. requirements to use 

of safety net providers, county behavioral health etc.) 

5. Health risk adjustments 

6. Geographic adjustments 

7. Administrative load, care management, risk 

contingency, or pass through requirements 

8. Reinsurance allocation 

9. Savings adjustment 

10. Quality withhold 

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Capitated Model: Basic Methodology 

(1.) 

Determine 

baseline 

CMS calculates 

baseline 

Medicare 

payment and 

states calculates

baseline 

Medicaid 

payment 

(2.) Apply 

savings 

CMS applies 

pre-determined

savings 

percentage to 

both the 

Medicare and 

Medicaid 

baselines to 

determine the 

rates 

(3.) Make 

adjustment

Adjustments are

made to both 

Medicare and 

Medicaid 

rates (e.g. risk 

adjustments, 

certain amount 

withheld as a 

quality 

incentive) 

(4.) Make 

payment to 

plan 

Plan receives 

separate 

Medicare and 

Medicaid 

capitated 

payments (a 

prospective 

“blended” rate) 

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1. Determine 

baseline 

2. Apply 

savings 

3. Make 

adjustments 4. Payment MA 

Capitated Model: 

Joint Rate-Setting Process 

Baseline spending is determined for the target population in 

the demonstration area 

 Baseline spending: An estimate of what would have been 

spent in the payment year (for Medicare and Medicaid) in 

absence of the demonstration 

 Established prospectively, annually 

 Medicare methodology to determine baseline is consistent 

across all states participating in the capitated duals 

 Medicaid methodology to determine baseline varies by 

state 

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How Medicare Baseline is Determined 

 CMS develops baseline cost estimates for Part A and B by 

demonstration county 

 Spending assumptions are calculated for Medicare Advantage (MA) 

and FFS Medicare, then a weighted average is determined based on 

expected enrollment 

 For beneficiaries coming from FFS Medicare: The baseline is based on 

Medicare standardized FFS county rates (reflecting historical Medicare 

FFS expenditures); these are adjusted for the current hospital wage 

index and physician geographic practice cost index; and in some states 

adjusted for DSH payments that would have been received 

 For beneficiaries coming from MA: The baseline is based on 

estimated amounts that would have been paid to MA plans (including 

Part C rebates) 

• Baselines also include plan-specific assumptions about bids, quality 

bonus payment-adjusted benchmarks, and rebate amounts for each 

county 

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Medicare Part D Baseline 

 The Part D projected baseline is set at the 

Part D national average monthly bid 

amount for the payment year (set every 

August) 

 CMS also estimates the average monthly 

payment for LIS (Low-Income Subsidy) 

cost-sharing and Federal reinsurance 

subsidy amounts and these payments are 

100% reconciled after the payment year has 

ended 

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How Medicaid Baseline is Determined

 Medicaid baseline methodology varies from state to 

state 

 All states must provide data to support their baseline 

projections to CMS actuaries – who validate the data 

and projected baseline costs 

 Medicaid baseline takes into account historic costs and 

must consider: 

 FFS Medicaid, and 

 Medicaid managed care plan payment (if the state currently 

serves duals through capitated managed care) 

 Historic spending is used to reflect costs for services to 

be included in capitation rates for the target 

population, incorporating data for the most recent 

years available 

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Rate Setting Example – California 

 Medicaid beneficiaries shall receive Medi-Cal and LTSS through coordinated 

health care systems offered by Medi-Cal managed care plans 

 Such coordinated systems shall promote beneficiary independence and use of 

home- and community-based services and reduce unnecessary use of emergency 

and hospital services 

 Managed care plans shall develop and expand their care management and 

coordination practices with nursing facilities and other home- and communitybased services 

 Medicaid managed care plans shall expand enrollment for the 3 year period of 

the demonstration 

 To the extent possible, for Medicaid beneficiaries enrolled in the federal 

Medicare program, the state shall work with the federal government to 

coordinate financing and incentives to allow managed care plans to deliver and 

coordinate the full scope of Medicare and Medi-Cal benefits, including long-term 

services and supports 

 The state, in a coordinated effort with the federal government, shall ensure 

continued strong beneficiary protections, choice of providers, and beneficiaries’ 

ability to self-direct their care, as well as robust monitoring and oversight of 

managed care plans 

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Dual Eligible Medicare and Medicaid 

Rate Setting 

Medicare Base Rate Distribution 

Rate 

Component

1

st

Year

2nd 

Year 

3rd Year

Base Rate 97% 96% 94%

Administrat

ive Load 

5.5% 5.5% 5.55 

Profit Margin 2.0% 2.0% 2.0% 

Medical Costs Distributions 

Part A 51.5

% 

47.1% 45.3% 

Part B 48.5

% 

52.9% 54.7% 

Part D 2.0% 2.0% 2.0% 

Medicaid Blended Rate Setting 

Rate 

ComponEnt

1

st Year 2cd 

Year

3

rd

 Year 

Institution

al

8.8% 7.4% 6.3% 

HCBS High 11.2% 12.5% 13.6% 

HCBS Low 22.4% 22.6% 23.4% 

Healthy 57.4% 57.5% 56.7% 

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1. Determine 

baseline 

2. Apply 

savings 

3. Make 

adjustments 4. Payment 

How Expected Savings Are Estimated 

 CMS determines an aggregate savings percentage for the 

demonstration based on modeling of expected changes in 

utilization 

 Savings percentages vary by state and by year (specified in 

each state’s MOU) 

 Savings are prospectively applied to baseline amounts to 

determine rates paid to plans 

 The savings % is then applied to the Medicare A/B and 

Medicaid components of the rate 

 In other words, CMS and the state reduce the amount they pay to plans to realize these 

savings 

 Both payers proportionally share in savings regardless of underlying utilization patterns 

 Savings are not applied to Part D component 

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Blending Payment Rates for Savings 

Source. Kaiser Commission on Medicaid and the Uninsured, Policy Brief: An Update on CMS’s Capitated Financial Alignment Demonstration Model for 

Medicare-Medicaid Enrollees, April 2012. Link: http://kaiserfamilyfoundation.files.wordpress.com/2013/01/8290.pdf 

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1. Determine 

baseline 

2. Apply 

savings 

3. Make 

adjustments 4. Payment 

Rate Adjustments 

1. Rates are risk adjusted by both Medicare and 

 Medicaid

 Intended to account for differences in expected costs based on 

individual enrollee health status and demographics 

 CMS risk adjusts the standardized county rates at the enrollee level

2. There is also a quality incentive withhold 

 CMS and the state withhold a % of the capitated payments that 

health plans can earn back if they meet quality targets 

 Aims to ensure that cost savings are not at the expense of quality 

 1% in Year 1: Based on encounter reporting and process measures 

 2% in Year 2 and 3% in Year 3: Based on performance 

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1. Determine 

baseline 

2. Apply 

savings 

3. Make 

adjustments 4. Payment 

Additional Adjustments

3. CMS applies a coding intensity adjustment 

 Accounts for differences in diagnosis coding patterns between 

MA and FFS Medicare 

 Already applied to MA plans – in 2014, it’s 4.91%

 At the start of the demo, CMS applied a coding intensity 

adjustment based on the proportion of enrollees with prior MA 

experience, on a county-specific basis 

 After Year 1, CMS applies the prevailing MA coding intensity 

adjustment for all enrollees 
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Medicaid Risk Adjustment Parameters 

 The Medicaid component of the rate is 

adjusted according to methodologies proposed 

by the states, subject to CMS approval 

 CMS allow states to use different methods, as 

long as they incentivize community 

alternatives to institutional placement, have 

clear operational rules and processes for 

assigning beneficiaries into a rate category 

that are compatible with an individual’s risk 

level/profile, and are budget neutral across 

the Medicaid program, as a whole, after the 

application of savings percentages 

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Impact of Reducing Service Utilization 

 

Reduction in Acute Care Utilization 

Service

Utilization

1

st Year 2nd Year 3rd Year 4th Year 

Inpatient 

Hospital

-15% -20% -20% -20%

Skilled Nursing 

Facility

-5% -5% -5% -5%

Physician +4% +5% +5% +5%

Pharmaceutical +2% +2% +2% +2%

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Summary -- Dual Demo Adjustments 

Medicare Dual Adjustments 

Adjustment Components 

Sequester Applied to the total capitation 

Savings 

Adjustment

Required saving reduction go up 

annually

Risk 

Adjustment 

Factor

A percent increase of decrease 

based on enrollment of high 

risk individuals

Coding 

Intensity

Adjustment

Quality 

Withhold

Reduction for quality 

performance 

ACA Tax Payment ACA Tax

State Fees ( if 

applied)

Payment of state applied tax 

State Medicaid Rate Adjustments 

Adjustment Components

Savings 

Adjustment

Applied to total Medicaid 

capitation

Program or 

Policy 

Adjustments

State specific Medicaid 

program changes

Reinsurance State reinsurance charge 

(if applicable)

Geographic

Factors

State geographic 

adjustment factors

Pass Through Adjustment for state 

required pass through

Quality 

Withhold

Reduction for quality 

performance 

ACA Tax/State

MCO Fee

Payment of federal ACA 

and any state MCO tax 22
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1. Determine 

baseline 

2. Apply 

savings 

3. Make 

adjustments 4. Payment 

How Payment Rates Vary by Plan 

 For the Medicare component of the payment, base 

rates are developed at a county level using 

standardized FFS county rates and MA benchmarks 

 Medicare base rates don’t vary from plan to plan –

the same county baseline applies to all plans 

operating in that county 

 But Medicare rates are risk-adjusted by enrollee. 

Thus, actual payment may differ 

 States have discretion, subject to CMS approval, to 

develop the Medicaid component of the payment 

and may choose to develop rates on a county, 

regional, or statewide basis, and customize risk 

adjustment methods 

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Payment to Plans Under Dual Demo 

 When payment is made to plans, Medicare and 

Medicaid funds are not co-mingled 

 CMS makes separate payments to participating health 

plans for (1) Medicare A/B and (2) Part D components 

of the rate 

 The state makes a payment to participating health 

plans for (3) the Medicaid component of the rate 

 For the capitated model, Medicare and Medicaid 

coordinate in rate setting 

– Both prospectively share in achievable demonstration 

savings 

 Unlike Medicare Advantage, plans do not submit bids. 

Demonstration rates are jointly set by CMS and the 

state. 

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MCO Negotiate Provider Rates 

Medicare Provider Payment Options 

Medicare FFS Rates Part A/B

Partial Risk Based 

Capitation

Professional Only (Primary 

Care and Specialty Care 

Full Risk Capitation Inpatient and Professional

End Stage Renal 

Dialysis 

Case rate 

Care Management

Fee

Patient centered medical

home Team 

Durable Medical 

Equipment

Vendor contract rate 

Quality Performance 

Withhold

Pass through to providers

Risk Adjustment Based on Medicare Risk 

Adjustment Factor 

Risk Pools To incentivize low acute 

care and/or ER utilization

Medicaid Provider Payments

Institutional Per diem for skilled nursing 

based on acuity level

Home and 

Community Based 

Services 

Adult Day Care: Day Rate

Home Health: Per hour plus 

mileage

Behavioral health capitation 

or FFS

Home maker services: Per 

hour plus mileage

Case management FFS or 

PMPM

Group home or Assisted Living

Regional center services

Other Medicaid Part A/B Deductible and CoPays

Medicaid Wrap Services
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Community-based Support Services 

(LTSS) Examples 

 Functional and home assessments 

 Chore and personal care assistance 

 Housing assistance 

 Protective supervision 

 Case management 

 Respite

 Transportation 

 Meal services 

 Social services and recreation services 

 Social service support 

 Communication services 

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Provider Negotiation 

Medicare Negotiation Considerations Medicaid Negotiation Consideration

Capitation Split (Inpatient vs. Professional) Beneficiary Assignment: Service Distribution 

and Workload

Quality Withhold Payment Reconciliation 

Delay

Case Management workload: Payment 

Approach PMPM or Case Rate

Risk Adjustment Payment for other HCBS all inclusive or 

service rates

Risk Pools Reporting Requirements

Tax or Fee Pass Through Care Team Coordination 

Care Management Fee Transportation

Care Coordination with other Services Community Care Transition 

Health Information Exchange Commination Requirement 

Health Information Exchange 27
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Unique Issues with the Duals Demo 

and Impact on Future Rate Setting 

 High opt-out rates for beneficiaries 

 Low enrollment and membership up-take 

 Poor adherence to providing health risk 

assessment 

 Beneficiary confusion 

 Lower level of medical risk than expected 

higher risk opting to stay in FFS 

 Star rating issues for some health plans 

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Conclusion 

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Resources 

Jenna Libersky and James Verdier. Medicare Basics: An Overview for States Seeking 

to Integrate Care for Medicare-Medicaid Enrollees. Washington, DC: Integrated Care 

Resource Center Technical Assistance Brief. July 2013. 

 

Centers for Medicare and Medicaid Services (CMS). Joint Rate-Setting Process 

for the Capitated Financial Alignment Model (FAQs). Updated August 9, 2013 

http://www.cms.gov/Medicare-Medicaid-Coordination/Medicare-andMedicaid-Coordination/Medicare-Medicaid-CoordinationOffice/Downloads/JointRateSettingProcess.pdf 

CMS Financial Alignment Incentive resources and guidance (MedicareMedicaid Coordination Office): 

ttp://www.cms.gov/Medicare-Medicaid-Coordination/Medicare-andMedicaid-Coordination/Medicare-Medicaid-CoordinationOffice/FinancialAlignmentInitiative/FinancialModelstoSupportStatesEffortsin

CareCoordination.html

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