Across the country, many states are redoubling their efforts to encourage and accelerate improvements in their Medicaid managed care programs, driven by rising Medicaid expenditures, persistent and sometimes worsening health disparities, and overutilization of services that are ineffective, of low value, or potentially harmful. A growing number of state Medicaid programs are holding their contracted health plans financially accountable for assuring the provision of high-quality, cost-effective care that improves beneficiary outcomes. Financial incentives are one of many options available to states to focus health plan and provider investment and attention on quality improvement and cost management. There are also nonfinancial levers states can apply, including reporting and publicizing performance on quality, public recognition of health plans and providers that achieve high performance, autoassignment of Medicaid members to higher-performing health plans, and a reduction of administrative requirements for top performers. The California Department of Health Care Services (DHCS) has historically adopted a number of these nonfinancial strategies with its plans, or managed care plans (MCPs). Medi-Cal MCPs currently collect data and report on a robust set of access, quality, and patient experience measures, and competitively superior performance on select quality measures is rewarded through increased volume of auto-assignment of Medi-Cal beneficiaries to that plan. Performance is also reported on a public dashboard by DHCS. Notably, the June 2018 dashboard showed wide variation in quality across health plans. There is an opportunity to build on these DHCS incentive programs and further accelerate quality improvements in Medi-Cal through the use of financial incentives. One approach worth considering is to implement a performance-based incentive program that creates new financial accountability in the form of rewards or penalties. This report examines different options for financing and designing an incentive program for MCPs that will either reward or penalize them for performance. It follows the California Health Care Foundation report Intended Consequences: Modernizing Medi-Cal Rate Setting to Improve Health and Manage Costs, which offers recommendations informed by a workgroup of Medi-Cal health plan leaders to mitigate the negative financial impact to Medi-Cal plans when they invest in initiatives that may result in Medicaid program cost savings. Under the state's current rate-setting method, plan-generated savings could lead to lower capitation payments for future years. This saves the state money, but creates a financial disincentive for Medi-Cal plans to focus on activities and improvements that could achieve savings. The workgroup proposed a method that would not reduce future capitation payments if a plan invested in health-related or flexible services that led to cost savings, so long as certain conditions are met, including strong quality performance. The workgroup's recommendation represents one approach to structuring a financial performance incentive program and was developed such that it would not result in additional state spending (MCPs benefit only when their actual costs are below the state's expected trends), and it would not require the plans to fund the financial incentives out of their capitation rates. However, there are a variety of other options that California can draw from. This report describes other approaches that states across the country are taking to using financial incentives with Medicaid MCPs.
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