Beneficiaries under age 65 may qualify for Medicare coverage on the basis of disability (such as a physical disability, developmental disability, or disabling mental health condition). Disabled individuals typically enroll in the federal Social Security Disability Insurance program and then have a 24-month waiting period before Medicare benefits begin. During the waiting period, low-income individuals who qualify for the Supplemental Security Income program (SSI) in their state can also qualify for Medicaid coverage. SSI is a means-tested income assistance program that provides cash benefits to individuals who meet certain disability criteria and have low levels of income and assets. After the Medicare waiting period ends, beneficiaries become dually enrolled in both programs. Medicare becomes the primary payer for most services, but Medicaid continues to cover benefits not offered by Medicare. Medicare coverage for dual-eligible beneficiaries includes hospitalizations, physician services, prescription drugs, skilled nursing facility care, home health visits, and hospice care. Under Medicaid, states are required to cover certain items and services for dual-eligible beneficiaries, including nursing facility services and home health services. Although states are required to cover certain populations and services, they have the option to expand coverage beyond these mandatory levels, and accordingly state Medicaid programs vary in scope. Compared with aged dual-eligible beneficiaries, disabled dual-eligible beneficiaries in 2009 were more likely to be male and African-American, and they tended to have a much higher incidence of mental illness. However, they had a far lower incidence of three or more chronic conditions and were less likely to be institutionalized. In terms of relative spending, disabled dual-eligible beneficiaries had lower per capita Medicare spending but higher per capita Medicaid spending in 2009. However, among beneficiaries who did not use LTSS, per capita Medicare and Medicaid spending were both slightly higher for disabled dual-eligible beneficiaries. Disabled dual-eligible beneficiaries were less likely to live in an institution than aged dual eligible beneficiaries; however, among those that did, Medicaid spending was significantly higher than for aged dual-eligible beneficiaries in institutions. See table 1. In addition to requiring SNPs to meet all the requirements of other MA plans, CMS requires SNPs to provide specialized services targeted to the needs of their unique beneficiaries, including beneficiaries with certain severe and disabling chronic conditions, beneficiaries who live in institutions, or beneficiaries dually enrolled in both the Medicare and Medicaid programs. SNPs that provide specialized services, such as case management, for dual-eligible beneficiaries are referred to as D-SNPs. CMS pays D-SNPs the same way that it pays other MA plans, that is, a monthly amount determined by the plan bid—the plan’s estimated cost of providing Medicare Part A and Part B benefits—in relation to a benchmark, which is the maximum amount the Medicare program will pay MA plans in a given locality. CMS then adjusts the monthly payments to MA plans on the basis of beneficiaries’ risk scores. For MA plans that bid below the benchmark, CMS provides a rebate that is modified by an overall assessment of quality at the contract level using a 5-star rating scale based on measures of clinical quality and patients’ reported care experience for Medicare Part C and Part D. CMS designates certain D-SNPs as FIDE-SNPs, which is a designation for plans that integrate Medicare and Medicaid program benefits for dual- eligible beneficiaries through a single MCO. All FIDE-SNPs are financially at risk for enrollees’ nursing facility services for at least 6 months of the year. In 2013, CMS designated 35 FIDE-SNPs that enrolled about 98,000 beneficiaries across seven states. Beginning in contract year 2013, CMS may give certain D-SNPs that meet a high standard of integration and specified performance and quality-based standards the flexibility to offer supplemental benefits beyond those that CMS currently allows for other MA plans if the agency determines these benefits would better integrate care. This benefits flexibility is designed to assist dual-eligible beneficiaries who are at risk of institutionalization to remain in the community and may prevent health status decline and reduce the quantity and cost of health care services. As part of the qualifying criteria that CMS currently applies to benefits flexibility, the agency requires D-SNPs either to be in a contract with a 3 star (or higher) overall rating for the previous contract year or, if the D-SNP is part of a contract that does not have sufficient enrollment to generate a star rating, to score 75 percent or above on five of seven specific SNP plan-level HEDIS measures. For 2013, CMS approved 21 highly integrated D-SNPs for benefits flexibility that enrolled about 75,000 beneficiaries. In 2011, CMS announced a financial alignment demonstration that is intended to align Medicare and Medicaid services and funding to reduce costs and improve the quality of care for dual-eligible beneficiaries. As of June 2014, 12 states have been approved to participate in the demonstration and 4 states have active proposals pending.demonstration is authorized for at least 3 years. Most states participating in the financial alignment demonstration plan to use a capitated model. Under the capitated model, CMS and states provide a single capitated payment to health plans to provide all Medicare and Medicaid benefits to enrolled dual-eligible beneficiaries. Payment rates to health plans will be reduced up front each year based on a predetermined combined Medicare and Medicaid savings estimate by CMS. In general, CMS and states expect the savings percentages to increase during the second and third years of the demonstration. Furthermore, to encourage quality of care improvements, CMS and states will withhold a portion of the payments—starting at 1 percent in the first year and up to 3 percent in the third year—that participating health plans can earn back by meeting a certain threshold of performance on quality measures. CMS expects that the capitated model will result in savings (1) to Medicare by reducing hospital admissions, emergency room visits, and skilled nursing care, and (2) to Medicaid by avoiding costly long-term nursing home care. At the same time, CMS expects that there may be increased use of primary care services, outpatient services, behavioral health services, and community-based LTSS, due to a greater emphasis on care coordination and maintaining beneficiaries in the community. Although CMS projects that approximately 61 to 75 percent of savings will come from reductions in costly Medicare-covered services, the agency requires that—as part of a more integrated approach—both the Medicare and Medicaid programs adjust their payment rates to plans based on aggregate savings percentages. In Massachusetts’s demonstration, only disabled dual-eligible beneficiaries between the ages of 21 and 64 are eligible for enrollment. Voluntary enrollment for the program began on October 1, 2013, and passive enrollment—whereby individuals are automatically enrolled in the program but can opt out—began January 1, 2014. Since 2004, Massachusetts has separately participated in a financial alignment program for dual-eligible beneficiaries age 65 and older known as Senior Care Options. This program provides all of the services covered by Medicare and MassHealth—the Massachusetts Medicaid program—and is funded by a combined capitated payment from both programs. High Medicaid spending for disabled dual-eligible beneficiaries drove high combined (Medicare and Medicaid) program spending for these beneficiaries. Beneficiaries ranked within the top 20 percent—or top quintile—of spending in their respective states accounted for more than 60 percent of national combined program spending for disabled dual- eligible beneficiaries. Furthermore, for these high-expenditure beneficiaries, nearly two-thirds (63 percent) of combined program spending was Medicaid spending and slightly over one-third (37 percent) was Medicare spending. (See fig. 1.) High-expenditure beneficiaries in the top combined spending quintile were also more likely to be in the top Medicaid spending quintile in their states than in the top Medicare spending quintile. Specifically, 72 percent of high-expenditure beneficiaries were in the top Medicaid spending quintile, while 54 percent of these beneficiaries were in the top Medicare spending quintile. Only 26 percent of high-expenditure beneficiaries were in both the top Medicare and the top Medicaid spending quintiles in their states. (See fig. 2.) Just over half (52 percent) of Medicaid spending for high-expenditure disabled dual-eligible beneficiaries was for those who used community- based LTSS, while for low-expenditure beneficiaries (those in the bottom combined spending quintile), community-based LTSS users accounted for only 4 percent of Medicaid spending. Inpatient stays accounted for the largest share (39 percent) of Medicare spending for high-expenditure beneficiaries but accounted for less than 1 percent of Medicare spending for low-expenditure beneficiaries. Because Medicaid benefits differ across states, per capita Medicaid spending for high-expenditure disabled dual-eligible beneficiaries varied more across states than per capita Medicare spending did. Per capita Medicaid spending for these beneficiaries ranged from about $27,000 in Michigan to about $188,000 in New York, while per capita Medicare spending ranged from about $18,000 in North Dakota to about $49,000 in Florida. Largely because of the variation in Medicaid spending, combined program spending ranged from about $68,000 in Alabama to about $220,000 in New York. Although states with greater per capita Medicaid spending for high- expenditure beneficiaries often had less per capita Medicare spending, they were usually among the states with the greatest per capita combined (See fig. 3.) For example, 5 of the 10 states with the greatest spending.per capita Medicaid spending had per capita Medicare spending that was less than the average across states. Nevertheless, all 10 states were among those with the greatest per capita combined spending. In fact, 17 of the 20 states with the greatest per capita Medicaid spending were also among those with the greatest per capita combined spending. Because the majority of spending for high-expenditure disabled dual- eligible beneficiaries was for beneficiaries who used community-based LTSS, and because CMS expects to see an increase in the use of these services under the financial alignment demonstration, we repeated this analysis for only beneficiaries who used community-based LTSS and found similar results.