United States: Looking Forward: Pay For Success In The Medicaid Program

Last Updated: January 4 2017
Article by Thomas Barker

As we noted here last month, Medicaid is a 1960s-era health insurance plan operating in a 21st century world.  As Medicare and commercial payers have started taking steps to move away from payment by volume to paying for value, it's important to recognize that the same innovation needs to occur in Medicaid.  In fact, one could argue that this innovation is even more critical in Medicaid.

Why?  For one, Medicaid is a program for low-income individuals.  It is well documented that poverty breeds greater health care needs.

Fortunately, some innovative thinkers are taking a holistic view and looking at Medicaid through the prism of social determinants of health.  For example:

  • Should a payer consider the effects of homelessness on individual health?
  • Does it make sense for a payer to view an individual's potentially substandard housing as a cause, or at least an exacerbation, of poor health outcomes?
  • How does substance abuse increase overall health care costs, and can early interventions help to ameliorate those costs?

Many of these questions are being addressed today through "Pay For Success" social investment models.  The questions that we are exploring in today's post are the barriers to adopting these models in Medicaid, and finding ways to overcome those obstacles.

Take the case of asthma.  According to the Centers for Disease Control and Prevention, asthma affects 6.3 million children, or 8.6% of the pediatric population in the United States.  In 2012 (the most recent year for which data are available), there were 10.5 million visits to physician offices with asthma as the primary diagnosis, and 1.8 million to emergency departments with asthma as the primary diagnosis.  The total population cost of asthma was over $50 billion in 2007; that number has almost surely grown in the past decade.

According to a 2009 report by the Coalition for Asthma-Free Homes, "there is an undeniable relationship between poor housing conditions and asthma."  Because people living in substandard housing are often Medicaid enrollees, it seems logical that one solution to addressing preventable health care costs would be for state Medicaid plans and Medicaid managed care plans to invest in efforts to eliminate asthma triggers in homes.

But here's the problem.  Under the Medicaid statute, a Medicaid expenditure is only reimbursable when the state or payer incurs an "expenditure for medical assistance."  And the term "medical assistance" in the statute is precisely defined to include 29 things:  inpatient hospital care, home health care services, physicians services, outpatient prescription drugs, diagnostic, screening, preventive and rehabilitative services, and the like.1  Ripping out a carpet, addressing rodent infestation, or mold amelioration do not appear in the definition of "medical assistance."

With creative thinking by Medicaid policymakers, Pay For Success models may offer a solution.  The Green & Health Homes Initiative (GHHI), a 501(c)(3), nonprofit organization in Baltimore, Maryland, has developed such a model.

Under the GHHI model, a Medicaid managed care plan would identify a private investor who would advance the up-front costs to a service provider to address asthma triggers in a Medicaid beneficiary's home.  The service provider would do a full-scale assessment of the home, identify the services needed, craft a solution, and implement the solution.  With the asthma triggers gone, health care costs for the residents of the home should decline; the Medicaid managed care plan then uses a portion of the savings it achieves to repay the up-front investor. 2

Will it work?  A recent amendment to Medicaid's managed care regulations gives some cause for optimism.  Under the new regulation, states are generally prohibited from directing a method or model of reimbursement to a managed care plan.  But a few exceptions apply.  One permits a state to direct a payment model where the payment model is "intended to recognize value or outcomes over volume of services."

The Pay for Success model is unquestionably a methodology designed to recognize value or outcomes (lower medical expenses for asthma treatment) over volume of services (paying endlessly for physician and emergency department visits for asthma).  The model, of course, can be adapted to other social determinants of health, such as homelessness or substance abuse.

Models such as Pay for Success are examples of how Medicaid can move toward a 21st century value and outcomes-based payment system and away from a payer that just processes claims for 1960s-era notions of "medical assistance."


1. Most of these services are optional; no state covers all 29 services.

2. Of course, payers could undertake these investments and repayments as administrative costs of the plan.  But because of the medical loss ratio imposed on all health plans, a Medicaid managed care organization would have little incentive to incur administrative expenses for this purpose.  Any policy solution must recognize payments under these models as medical expenses.

To view Foley Hoag's Medicaid and the Law blog please click here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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