Intended Consequences: Modernizing Medi-Cal Rate Setting to Improve Health and Manage Costs MARCH 2018 Contents About the Authors 3Executive Summary Manatt Health, a division of Manatt, Phelps & Overview and Purpose Phillips, LLP, is a fully integrated, multidisciplinary Recommended Approach for Moving Forward legal, regulatory, advocacy, and strategic business advisory health care practice. Manatt Health’s exten- Key Takeaways sive experience spans the major issues re-inventing health care, including payment and delivery sys- 6Introduction and Background tem transformation; health IT strategy; health Overview of Current Medi-Cal MCO Rate-Setting Process reform implementation; Medicaid re-design and innovation; health care mergers and acquisitions; Work Group Process and Principles for Evolving regulatory compliance; privacy and security; corpo- Medi-Cal’s Rate-Setting Methodology rate governance and restructuring; pharmaceutical market access, coverage and reimbursement; and 9Recommended Approach game-changing litigation shaping emerging law. COMPONENT 1 Implementing a Rate Adjustment For more information, visit www.manatt.com/health. COMPONENT 2 The Optumas Healthcare consulting team works Enhancing Financing for Health-Related Investments with clients to design appropriate, efficient, and COMPONENT 3 effective health care reform initiatives to achieve Adding a Social Determinants of Health Risk Adjustment clients’ policy goals of improving health care to the Rate-Setting Methodology access, health care quality, and health care cover- age. Through strategic actuarial analysis, Optumas 21Conclusion develops coverage, cost, and affordability estimates and strategies to meet client’s program needs and 22Appendices health reform goals. The Optumas team’s goal is to A. Status Quo Model, Year by Year ensure all people have equal access to the timely, B. Rate-Adjustment Scenarios, Year by Year cost-effective quality health care they need to be productive members of our society. C. Other Options Considered D. alifornia Health-Related Investments and C About the Foundation HCBS Crosswalk The California Health Care Foundation is dedicated to advancing meaningful, measurable improve- 30Endnotes ments in the way the health care delivery system provides care to the people of California, particu- larly those with low incomes and those whose needs are not well served by the status quo. We work to ensure that people have access to the care they need, when they need it, at a price they can afford. CHCF informs policymakers and industry leaders, invests in ideas and innovations, and connects with changemakers to create a more responsive, patient- centered health care system. For more information, visit www.chcf.org. California Health Care Foundation 2 Executive Summary To seek possible solutions to the unintended conse- quences of rate-setting methods, the California Health Overview and Purpose Care Foundation, with support from Manatt and Optumas, convened a work group to explore options The Medi-Cal program plays a critical role in California, for addressing this issue and encouraging joint state and providing health coverage for a third of all residents, plan investments in innovative health-related initiatives. including those with complex health care needs and sig- The work group comprised leaders of several Medi-Cal nificant economic and social challenges. Like other states MCOs, and the Medi-Cal director served as an advisor facing federal and other budgetary pressures on their to the group. Medicaid spending, California is eager to identify and support innovative models of care that have the potential This report presents the output of that work group pro- to both improve member health outcomes and reduce cess. Specifically, it: cost trends over the long term. $$ Provides an overview of the current rate-setting With 81% of Medi-Cal beneficiaries enrolled in managed process, highlighting challenges and unintended care, Medi-Cal managed care organizations (MCOs) are consequences central to achieving these objectives. Several plans are $$ Describes the work group process and principles already investing in innovative models that go above and that guided the evaluation of new options beyond the required benefits; examples include enhanc- ing case management, providing housing supports to $$ Offers a recommended approach for updating give older disabled members an alternative to living in the current rate-setting methodology to advance a nursing home, and integrating physical and behavioral Medi-Cal’s goals of improving member health health. However, these plans have been hampered in outcomes and promoting efficient resource use. their efforts to bring such initiatives to scale and maintain them over time by disincentives built into the Medi-Cal One of the parameters of the work group was to work MCO rate structures. What is needed is an approach within current Medi-Cal funding constraints — designing that aligns health plan incentives with the state’s goal to approaches that would not require any net investments reduce the long-term cost trend. by the state. Additional state investments, however, to improve Medi-Cal access and quality would augment An unintended consequence of the current rate-setting the impact of these recommendations and yield health methodology is that plans are negatively impacted when improvements for members. they invest in initiatives that result in lower costs. This can occur when an MCO seeks to improve care by invest- ing in services or other initiatives that are not traditional Medi-Cal 2020 Medicaid benefits, such as improved care coordination KEY CONCEPTS FOR RENEWAL or housing supports; such efforts can result in a decline in inpatient hospital use, emergency department use, or “ he current managed care capitation T other high-cost utilization. In such cases, the cost basis for the plan’s future rates declines and the plan receives a rate-setting process has limited long- lower rate than it would have received without the inter- term ability to incentivize widespread vention. The state recognized this dilemma in its 1115 waiver renewal and proposed a program where plans adoption of payment reforms that could receive some of the savings generated through improvements in care. (This initiative was ultimately not promote investments in strategies that part of the approved waiver, although a waiver is not nec- incent efficiencies such as appropriate essary to implement such a program.) reduction in costs and utilization.” — California Department of Health Care Services (DHCS), March 2015 Intended Consequences: Modernizing Medi-Cal Rate Setting to Improve Health and Manage Costs 3 Recommended Approach for would qualify and to establish the types of invest- Moving Forward ment that would be recognized. While the work group considered a variety of options The work group, with the support of Manatt and Optumas, and complementary strategies, the primary component reviewed a variety of scenarios modeled for a hypotheti- of the recommended approach is to devise a rate adjust- cal Medi-Cal population. The modeling provided insight ment that would encourage plans to consistently invest into the size of potential savings and the impacts of vary- significant dollars in care improvements and health- ing these policy levers. Those observations are detailed related services that can generate program savings. The in the report. rate adjustment is discussed below, followed by a brief review of two complementary strategies recommended The second criterion of the rate-adjustment approach by the work group. is that for a plan to receive the rate adjustment, it must not only bend the cost curve but must also attain qual- Implementing a rate adjustment. The recommended ity metrics. The quality criterion helps ensure that the approach is to update the rate-setting process so that it recommended approach actively advances the state’s supports the state’s desire to improve health outcomes quality objectives, and that cost savings do not come at and reduce the growth of health care spending. This the expense of quality and access. The work group rec- concept was first proposed in Oregon and is currently ommended the development of a balanced scorecard being refined for implementation there. As envisioned that includes social determinants of health metrics, and for California, a plan-specific rate adjustment would be indicators of data-reporting completeness and quality, triggered if a plan meets three criteria: (1) it generates in addition to more traditional quality measures, such savings above a certain threshold, (2) it meets specified as the Healthcare Effectiveness Data and Information quality targets, and (3) it makes an investment in approved Set (HEDIS). The objective is to encourage innovative health-related initiatives at a level set by the state. and promising interventions as well as to strengthen the reporting capabilities of plans and their delegated These three criteria are described in detail below. The entities. size of the adjustment for any plan meeting the criteria depends on how much savings are generated (i.e., the The third criterion is a requirement that plans make return on investment for health-related initiatives) as well health-related investments as a condition of qualifying as certain design decisions  — or state policy levers  — for the rate adjustment. Like the quality component, relating to the overall approach, including: the investment component is aimed at ensuring that $$ The shared-savings split. The state and a quali- this approach is anchored in achieving health improve- fied plan would share the savings and, as such, ments, not just savings. Investments may be targeted the size of the rate adjustment would depend to help address social and economic conditions that not only on the level of savings but on how the affect health, improve or maintain member health, and/ savings are split between the state and plans or support delivery system reform efforts. Specific plan (e.g., on a 50/50 basis). investments can take many forms, such as helping mem- bers obtain and remain in stable housing, providing home $$ The minimum-savings rate. The rate adjustment equipment or modifications, funding a local opioid coali- is triggered if a plan achieves savings above a tion, building telehealth capacity, and implementing or minimum level; the level selected will influence expanding provider quality-improvement initiatives. The whether a plan qualifies for an adjustment (e.g., state currently provides coverage for some of these types if the minimum-savings rate is set at 0.5%, a plan of investments to certain populations under home and has to achieve savings above that level to qualify community-based services waivers and other programs. for any adjustment). However, these populations are carved out of managed $$ The threshold for the health-related investment. care and therefore MCOs are generally not required to The adjustment is only made if a plan makes provide these benefits. Some investments in these types an investment in approved initiatives. The state of initiatives are part of the “whole-person” pilots autho- would need to set the level of investment that rized by the current Medi-Cal waiver. California Health Care Foundation 4 The state, in consultation with the plans, will need to set distribution across plans to ensure that resources are the level of investment required and identify the types of being directed to plans serving the most vulnerable pop- investments that would qualify. Once in place, the state ulations. Incorporating social determinants of health in and the plans would need to develop a way to account risk adjustment is a fairly new concept now being tested for the plans’ level of investment, while minimizing in Massachusetts. While there may be challenges with the administrative burden to both. Plans would not be execution  — such as robustness of data and avoiding required to show causation between savings and invest- duplication with the existing risk-adjustment methodol- ments, but would be expected to evaluate the impact ogy — the work group found merit to further considering of their investments, get smarter, and refine their invest- this refinement of Medi-Cal’s rate-setting methodology. ment strategies over time. They would have an incentive to do so under this approach, as the return on investment has a large impact on the size of the rate adjustment. Key Takeaways The analyses undertaken by the work group led to the Enhancing financing for health-related investments. following key takeaways: The work group also recommended a complementary strategy that would support and enhance the invest- $$ Relative to the status quo, the rate-adjustment ments that plans would make under the rate-adjustment approach would better align plans’ incentives approach. Specifically, plans expressed a strong interest with state goals. The approach is aimed at improv- in both clarifying what types of investments can count ing health and health outcomes and doing so in a within the current plan expense base and exploring addi- way that reduces costs. The modeling shows that tional avenues for financing these investments. The state the approach can generate savings for the state and has a variety of ways to recognize some of the invest- avoid the disincentives in the current rate-setting ments that plans would be making when it calculates the methodology that discourage plans from making MCO rates. Certain investments may be counted in the ongoing, substantial cost-effective investments. medical load when setting rates. For example, enhanced care management can be incorporated as a Medi-Cal $$ The design can be dynamic to encourage contin- benefit through a state plan option, and other types of ued investments and to balance risks and benefits investments can be financed through the capitated pay- for state and plans. How the policy levers are set ments made to the plans at the discretion of the plan plays a critical role in ensuring impact for all stake- and as approved by the state, with the cost built into the holders. If all of the savings accrue to the state — as medical load when managed care rates are developed is the current situation — plans would not invest (these are called “in-lieu-of services”). Other investments as aggressively or in a sustained manner, and state may be deemed quality-improvement activities by the savings would not materialize. And if the plans reap state and can be counted in the nonmedical load when all the savings, the state has no reason to revise its setting capitation rates. Investments that do not qualify rate-setting methodology. Further, the levers could for inclusion in the medical or nonmedical loads can be be adjusted over time to reflect experience and to paid for through other plan resources. ensure that ongoing investments and cost savings are sustainable. Establishing a social determinants of health risk adjustment. An additional complementary strategy that $$ Downside risks for all parties are limited. If the the work group recommended is to further explore add- investments fail to generate meaningful savings, the ing a social determinants of health risk adjustment to the state may have incurred some expense (by recog- Medi-Cal rate-setting methodology. California’s current nizing some of the investment in the medical and risk-adjustment model is driven by medical diagnoses; nonmedical loads of plan rates), as will have the a risk adjustment that reflects member socioeconomic plans. However, other than those early investment status could help identify subpopulations that would losses, not much would change if the approach does benefit from targeted interventions. Additionally, lay- not generate meaningful savings, because behaviors ering in social determinants into the risk-adjustment would regress to being very similar to the status quo. methodology could enhance the equity of resource The state could mitigate its exposure by requiring Intended Consequences: Modernizing Medi-Cal Rate Setting to Improve Health and Manage Costs 5 plans to bear more of, or even the entirety of, their Introduction and investments, perhaps until the efficacy of the inter- ventions becomes apparent. Background The Medi-Cal program plays a critical role in California, $$ Beneficiaries would see improvements in care. providing health coverage for a third of all residents, While the state and plans both benefit through better including those with complex health care needs and sig- alignment of Medi-Cal’s rate-setting methodology nificant economic and social challenges. Like other states with quality and cost goals, beneficiaries potentially facing federal and other budgetary pressures on their stand to gain the most from the recommended Medicaid spending, California is eager to identify and approach. The investments in health-related initia- support innovative models of care that have the potential tives are aimed at making the care delivery system to both improve member health outcomes and reduce more responsive to beneficiary needs, more preven- cost trends over the long term. tive and outpatient-oriented, and more attuned to the whole person’s situation — not simply their Medi-Cal managed care organizations (MCOs) are cen- medical ailments. tral to achieving these objectives, and some are investing in innovative models that go above and beyond the While states are facing increased economic and federal required benefits. However, these plans have been ham- government pressure to slow the growth of Medicaid pered in their efforts to bring such initiatives to scale spending, there is broad agreement that cost contain- and maintain them over time by disincentives built into ment should not come at the expense of quality, access, the Medi-Cal MCO rate structures. What is needed is and innovation. California has an opportunity to be on an approach that aligns health plan incentives with the the leading edge of advancing models of care and inter- state’s goals to improve member health outcomes and ventions with the potential to improve member health reduce the long-term cost trend. and reduce costs. This report provides ideas that can help the state evolve the Medi-Cal rate setting method- The California Health Care Foundation, with support ology and advance those goals. These ideas have been from Manatt, convened a work group to consider how discussed with and carefully examined by a work group the state’s rate-setting methodology might be revised of Medi-Cal MCO executives, with the Medi-Cal director to address these unintended consequences, within the serving in an advisory role. With little downside risk, the constraints of the current Medi-Cal budget. Work group recommended approach could be expected to generate members included high-level representatives from six savings while promoting plan investments to address the Medi-Cal MCOs representing over 50% of covered lives; complex and interrelated medical and socioeconomic the Medi-Cal director served as an advisor (see sidebar). needs of Medi-Cal beneficiaries. The recommended approach also could help the state evolve and continue successful 1115 waiver pilot initiatives after the waiver Work Group Participants ends. Finally, although one of the parameters for this project was that the initiative would not result in any new Members investment by the state, additional state investment to Maya Altman, CEO, Health Plan of San Mateo improve Medi-Cal access and quality could augment Patricia Clarey, Chief State Health Programs and the impact of these recommendations and yield health Regulatory Relations Officer, Health Net, Inc. improvements for members. Brad Gilbert, CEO, Inland Empire Health Plan Patti McFarland, CFO, Partnership HealthPlan of CA Marie Montgomery, CFO, L.A. Care Health Plan Matthew Schueren, CFO, Molina Healthcare of CA Advisor Mari Cantwell, Chief Deputy Director, Health Care Programs, Department of Health Care Services California Health Care Foundation 6 This report reflects their analyses and recommendations and profit load. The administrative load is model-spe- for improving the state’s rate-setting methodology. cific, not MCO-specific. Overview of Current Medi-Cal MCO Figure 1. Rate Development Process Flowchart Rate-Setting Process Of Medi-Cal’s 13.3 million enrollees, four of five (81%) are Trend Efficiency Adjustments served through managed care, the majority through one of three models: the two-plan model, County Organized Health Systems (COHS), and Geographic Managed Care Historical/ Future (GMC). In the two-plan model  — the most common in Adjusted Contract Base Data Period terms of number of lives covered  — DHCS contracts with one county-developed plan called a local initiative and one commercial plan. In COHS counties, the county Program Nonmedical operates a single managed care plan with which DHCS Changes Load contracts directly. In GMC counties, DHCS contracts with several commercial plans. A variety of other managed Source: Mercer (Medi-Cal actuary). care contract models are in use in California as well. Medi-Cal’s managed care system typically involves addi- tional layers of delegation and subdelegation of risk and Current Challenges and Unintended responsibilities for the coordination and provision of Consequences patient care. In some areas, the plan or county subcon- While California’s current rate-setting methodology is tracts to other plans; in many areas, the plans (the primary actuarially sound and similar to the methodologies in plan and/or the subcontracted plan) delegate risk to other states, it does not encourage plans to improve independent practice associations, medical groups, and health care access and quality or to address socioeco- sometimes hospitals. California is somewhat unique in its nomic issues that impact member health. In fact, the use of delegation of risk from plans to providers, not just rate-setting methodology discourages plans from invest- in Medi-Cal but across business lines, including Medicare ing in a significant and sustained way in initiatives that Advantage and commercial products. can reduce costs while helping members gain or main- tain better health. Because rates are based on prior Regardless of the model, the state’s Medi-Cal program utilization, if a plan invests in initiatives that result in establishes the methodology used to develop the rates lower use of expensive inpatient, emergency, or other paid to Medi-Cal managed care organizations. In gen- services, the cost basis for its rates in future years will eral, for any given rate-setting year, DHCS and its actuary decline. This phenomenon is sometimes referred to as employ a combination of plan-specific utilization and risk- “premium slide.” Similarly, the efficiency adjustments adjusted county average utilization to inform each plan’s are one-sided, meaning that they are used to lower rates rates (see Figure 1). There is a significant lag involved in rather than reward or encourage successes in providing the process; the rates are based on data from about 33 efficient care. months prior to the beginning of the rate year. Another challenge is a lack of clarity regarding what non- Information used in rate setting includes plan-specific medical investments and activities plans can get credit encounter data and supplemental utilization and cost for in the rate-setting process. As part of rate setting data. Various adjustments are made — for example, to and medical loss ratio (MLR) calculations, plans can get account for program changes that took place during credit for quality-improvement initiatives. However, the or after the base data period. Efficiency adjustments current definition of what counts as quality improvement are then applied at the health plan level, including two is vague; plans may be hesitant to make certain health- related to pharmacy cost management and one related related investments out of concern that they may not to potentially preventable admissions. The last step in the count and would therefore be viewed as administrative rate-setting methodology is applying an administrative expenses. Intended Consequences: Modernizing Medi-Cal Rate Setting to Improve Health and Manage Costs 7 Currently, the rate-setting methodology also limits the These features of the Medi-Cal rate-setting process are state’s ability to recognize an MCO’s specific business not unique to California; other states have similarly con- model when applying policy change adjustments and sidered how their rate-setting methodology might be nonmedical load assumptions. For instance, if an MCO modernized to achieve greater efficiency and improved invests in an intervention that increases its administration health outcomes. expenses but lowers use of services, the current meth- odology would recognize the lower utilization (resulting Optumas developed a model to illustrate the current in lower base data as discussed above) but would not rate-setting methodology and to help explain the associ- adjust the administration expenses for that MCO. Lastly, ated challenges (see box). This model was also used as a the 33-month rate-setting lag means capitation rates basis to compare how the recommended rate adjustment may not be well matched to current expense levels. would work. It demonstrates the current disincentives Medi-Cal Rate-Setting Status Quo Using data for a hypothetical Medi-Cal population The table below summarizes the outcomes of the with 155,000 member months, Optumas developed model over the 10-year projection period for the follow- a “status quo” model with a time horizon of 10 years ing statistics: to illustrate the current rate-setting methodology and $$ 10th-year premium PMPM. The capitation rate how a health plan investment that achieves a reduction for the 10th year. in use of health care services affects state savings. The $$ Total health-related investment (HRI). Sum of model assumes that: plan expenditures on health-related investments $$ The hypothetical plan invests minimally ($100,000 for years 1 to 10. total, or $0.65 per member per month) every other $$ State portion of HRI. The 10-year aggregate year in interventions that improve care and lower costs. amount the state contributes to plan investments via capitation rates, by giving plans credit for $$ These interventions do not receive credit in rate investments in medical and/or nonmedical load setting — either in the medical or nonmedical of rates. load. $$ Plan portion of HRI. The 10-year aggregate $$ The cost-savings rate from the intervention is low amount of plan intervention costs that do not (0.5% to 1%). receive state financing support. $$ The nonmedical load of the total per member per $$ State savings. Savings associated with reductions month (PMPM) rate (i.e., administrative expenses in utilization for years 1 to 10. Savings represent and profit margin) is 7%. cost avoidance and are realized by lowering the $$ Thetotal starting PMPM rate in year one (including base rate in future rate-setting cycles. The savings medical and nonmedical load) is $497.90. are net of state funding for HRI. $$ There is no change to how the state currently sets $$ Plan rate adjustment. The amount of savings its cost trend, and the model uses a 5% cost trend shared with a plan in the form of an addition to as a placeholder assumption. their nonmedical load for future rates; the amount is dependent on savings generated by the plan’s investment. Status Quo Model 10TH-YEAR STATE PORTION PLAN PORTION PLAN RATE PREMIUM PMPM TOTAL HRI OF HRI OF HRI STATE SAVINGS ADJUSTMENT $768.55 $1.0 million $0 $1.0 million $1.6 million $0* *Because there is no incentive for investments in the current rate-setting methodology. Notes: Please see Appendix A for a year-by-year view of the status quo model. For ease of modeling, the rate-setting lag is assumed to be 36 months instead of 33 months. California Health Care Foundation 8 for plans to make substantial, ongoing investments in health-related initiatives. The model shows that when Recommended Approach plans do make investments, they bear the cost. When The work group recommended an approach with three those investments are successful, they negatively impact components: future rates, with the state reaping all the savings, except 1.Implementing a rate adjustment in the first three years, due to the rate-setting lag. As such, it is unlikely that plans will make these investments, 2.Enhancing financing for health-related or sustain them over the long term, or that the state will investments realize these savings. 3.Adding a social determinants of health risk adjustment to the rate-setting methodology Work Group Process and Principles Only component 1 — implementing a rate adjustment — for Evolving Medi-Cal’s Rate-Setting directly reduces the current disincentive for plans to Methodology invest in health-related initiatives. Components 2 and 3 The work group met five times between May and enhance the impact of the first component, but would December 2017, starting with an articulation of principles not on their own address the disincentive; as such, they for the rate-setting method (see sidebar). Optumas pro- are not essential to the integrity of the approach but vided actuarial expertise and modeling to examine the are proposed as complementary strategies. The work options considered by the work group. group also considered other options, including one in which there would be shared savings between the state and the plans and another for state direction to plans regarding adoption of value-based purchasing strate- Work Group Principles for Evolving the gies with their providers. For various reasons, the work Medi-Cal Rate-Setting Methodology group chose not to incorporate these options into the $$ Encourages health plans to work with providers recommended approach (see Appendix C). Additionally, to promote care “with the right provider, in the a critical assumption of the work group was that it would right place, at the right time” not consider carving in additional populations or services $$ Encourages health-related investments that yield or increasing the level at which rates are set. For this rea- better health outcomes and lower costs son, a pay-for-performance initiative was not considered. $$ Encourages innovation for care transformation activities After identifying the basic approach, the work group $$ Allows health plans to reinvest cost-savings focused on identifying key design elements, ways in into the care delivery system, in alignment with which those elements might be structured, how they may Medi-Cal’s objectives impact plans’ decision to make investments, and their $$ Alignswith the state’s vision for the future of impact on overall savings. These issues are discussed Medi-Cal below following a basic description of each of the com- ponents of the recommended approach. Intended Consequences: Modernizing Medi-Cal Rate Setting to Improve Health and Manage Costs 9 (Mechanics and Critical Design Elements on page 12), COMPONENT 1 and the quality and threshold level of investment criteria Implementing a Rate Adjustment are described in the following paragraphs. The primary component of the recommended approach is to devise a rate adjustment that would address the dis- The quality criterion helps ensure that the recommended incentives for plans to invest in initiatives that improve approach actively advances the state’s quality objec- care and generate savings. In this approach, the state tives, and that cost savings do not come at the expense and plans each benefit if the plans’ investments achieve of quality or access. The work group was supportive of savings. The concept, which is similar to shared savings, developing a balanced scorecard approach that includes was first generated in Oregon and a version is currently metrics focused on data quality and social determinants under design and implementation in that state. of health in addition to more traditional quality measures, such as the Healthcare Effectiveness Data and Information Overview Set (HEDIS). The group recommended that plans be As envisioned for California, a plan-specific rate adjust- expected to both meet an absolute threshold level of ment is triggered if a plan meets each of the following performance on important indicators and to achieve three criteria: (1) generates savings above a threshold, improvement over prior performance. Given the high (2) meets quality targets, and (3) demonstrates that it is variation in performance across rural and urban coun- investing at least a specified amount into health-related ties, the quality targets should take into consideration initiatives as defined by the state (see Figure 2). The rate California’s geographic realities. The work group also adjustment would be incorporated into the nonmedi- considered ways to further encourage improvements in cal load of a plan’s rate  — the size of which primarily quality performance by linking the size of the rate adjust- depends on how much savings are generated, and how ment to quality scores. For example, the rate adjustment those savings are split between the state and plans. A for plans that achieve high quality scores could reflect a major objective is to encourage different kinds of invest- plan-state savings split that directs a higher portion of the ments — ones that plans typically have not made — that savings to the plan. have high potential to benefit member health and cost. The third criterion, the threshold level of health-related The cost-savings criterion ensures that no rate adjustment investments, is aimed at ensuring that plans are not ben- is made unless the plan is successful in achieving savings efiting from the rate adjustment unless they are investing above a minimum level. This makes certain that there is in health-related initiatives at a minimum level, which not a net increase in Medi-Cal rates. The cost-savings could be proportional to the number of lives and defined criterion is described in detail in the following section as a per member per month amount. Allowable initiatives Figure 2. Rate-Adjustment Criteria California Health Care Foundation 10 would be determined by the state in consultation with show causation between savings and investments but plans and other stakeholders and could evolve over time would be expected to evaluate the impact of their invest- with experience on efficacy. Investments may be tar- ments, get smarter, and refine their investment strategies geted to help address social and economic conditions over time. that affect health, improve or maintain member health, and/or support delivery system reform efforts. Plans have The sidebar on page 12 provides examples of how two identified several areas of interest (see box), which can plans are currently making some health-related invest- serve as a starting point for further discussion. The state ments; implementing the proposed rate adjustment and plans would need to determine a way to account for could help plans to bring these types of initiatives to the plans’ level of investment while minimizing adminis- scale and sustain them over time. trative burden to both. Plans would not be required to Work Group-Generated List of Health-Related Services and Interventions for Coverage Consideration Work group members reported interest in securing coverage or at least credit in the rate-setting process for the following health-related services and interventions: $$ Residential care facilities for the elderly and adult $$ Drug Medi-Cal flexibility residential facilities in lieu of long-term care (LTC) or $$ Medication education and delivery psychiatric inpatients stays $$ Medication-assisted treatment drugs added to $$ Personal care service (PCS) in lieu of LTC for those managed care toolbox (e.g., Suboxone) who live alone and cannot self-direct $$ Long-term injectable medications $$ Recuperative care / medical respite care in lieu of $$ Financialaid on high-cost medications that the inpatient or skilled nursing facility (SNF) stay state mandates coverage for $$ SNF in lieu of inpatient stay $$ Home modifications $$ Medical care in the home in lieu of office visit $$ Technology (e.g., iPads or other for use in rural areas) $$ Housing in lieu of post-acute care facilities $$ Housing supports — security deposits, short-term motel stays, bridge housing, vouchers for short- $$ As part of a cost-effective community living arrange- and long-term room/board, board and care, and ment, a care plan with the following services in lieu of recuperative care centers custodial LTC or psychiatric inpatient stay: $$ Socialization/peer supports $$ Medically tailored meals $$ Onsite residential support $$ Support with the opioid crisis $$ Fiduciary services $$ Additional PCS $$ Transitional medically tailored meals $$ Scope-of-practice issues (i.e., ability for nurse $$ Behavioral health services — sobering stations, practitioners and others to deliver services) crisis stabilization/centers Intended Consequences: Modernizing Medi-Cal Rate Setting to Improve Health and Manage Costs 11 Mechanics and Critical Design Elements Two Examples of Plans Testing Novel Health- The outcomes of the rate adjustment  — state savings Related Investments and the size of the rate adjustment for any plan that qual- ifies — are highly dependent on certain design decisions Health Plan of San Mateo (HPSM) Community Care Settings Pilot or policy levers relating to the overall approach, includ- ing the following: In 2014, HPSM started the Community Care Set- tings Pilot, which gives older and disabled members living in nursing homes options to live in the com- Shared-savings split. The size of the rate adjustment munity with extensive but less costly services. The depends not only on the level of savings generated program includes two components: (1) intensive but on how the savings are split between the state and transitional case management designed to aid plans (e.g., on a 50/50 basis). The goal is to achieve state nursing home residents to return to the community savings, but also to use a portion of savings to provide or helping those at risk of long-term care maintain the rate adjustment to plans, which is integral to achiev- community living and (2) housing services including ing the savings. The higher the percentage of savings housing search, unit repairs and modifications, lease directed to MCOs, the greater their incentive to make arrangements, owner-resident liaising, and ongoing investments. service supports. To date, HPSM has transitioned more than 200 people. Program evaluations show Minimum-savings rate (MSR). The MSR is the level of greater member satisfaction and 50% lower health savings necessary to trigger an incentive payment; it care costs in the six months after the move than in the previous six months. is designed to ensure that plan savings are not due to chance. For example, if the state had projected a plan’s Inland Empire Health Plan (IEHP) PMPM expenditures to increase by 3% but they rose by Integrating Physical and Behavioral Health only 2%, then the plan’s savings rate is 1%. If the state IEHP has created an in-house behavioral health set the MSR at 0.5%, then that plan would meet the MSR program to address the mild-to-moderate mental requirement. The higher the MSR, the more savings that health needs of its members, integrated behavioral plans will have to generate before being eligible for the health into every department, trained staff, and rate adjustment. Also, as modeled, if the MSR is met, expanded its behavioral health provider network to total savings — not just those above the MSR — are split ensure timely access. Additionally, IEHP created a web-based coordination-of-care system to facilitate between the state and plans; however, the model could communication and collaboration among behav- be constructed such that only savings above the MSR will ioral health providers, the member’s primary care be shared with plans. physician, and IEHP behavioral health care manag- ers. IEHP reports that, as a result of these and other Credit for health-related investments in plans’ rate. It changes, the number of outpatient behavioral visits is possible to recognize some portion of the plan’s invest- has increased while inpatient behavioral health bed ments in the rate-setting process through inclusion as part days have dropped significantly. of the medical or nonmedical load. (See component 2 on IEHP is investing in a $20 million initiative to revamp page 18 for a discussion of how such investments might how care is delivered by integrating behavioral be included in the computations of the plan’s rates.) health care at the point of care with 13 entities across 34 sites (including county-operated primary The outcomes of the rate adjustment are also highly care clinics, FQHCs, a community-based adult ser- dependent on assumptions about intervention return on vices center, an assisted living facility, and behavioral investment (ROI) — which typically is not fully known at health clinics). The initiative is aimed at improving the launch of a program and is dependent on interven- care and addressing the high cost of caring for tion effectiveness. people with comorbidities in siloed settings. California Health Care Foundation 12 Optumas developed a model using hypothetical plan lever but rather to demonstrate the sensitivity of the data to examine the extent to which updating the rate- approach to different design features and assumptions. setting methodology to include a rate adjustment could The box below indicates the features modeled for the promote plan and state investments in health-related various scenarios. initiatives and illustrate the range of performance out- comes under different policies (i.e., the design levers) Similar to the status quo model, each scenario was mod- and assumptions relating to ROI. The goal of the model- eled to determine the expected impact on the 10th-year ing was not to determine the optimal setting for each premium, total health-related investment, state portion Features Modeled Scenario 1, or the “rate-adjustment baseline model,” and the nonmedical load (which leaves 33.3% uncred- incorporates the following features: ited). This tests the impact of when the state partners $$ MSR at 0.5%, meaning no savings are split unless at with plans in bearing more of the up-front cost of the least this level of savings is achieved intervention investment. At the same time, it recognizes that some plan investments — for instance, direct pay- $$ Shared-savings split (plan/state): 50%/50% for ment for housing — will never qualify as a coverable years 1 to 10 expense. $$ Creditthat plans receive for their investments in rate setting (medical load/nonmedical load/not credited): Scenario 4, or “combined,” represents a blend of 25%/25%/50% for years 1 to 10 scenarios 1, 2, and 3 to consider the interaction of the modified design elements. $$ Interventionexpense: $600,000 annually for $$ Shared-savings split (plan/state): 50%/50% in years years 1 to 10 1 to 6, 75%/25% years 7 to 10 (same as Scenario 2) $$ Cumulative savings rate: tops out at 4% for $$ Credit that plans receive for their investments years 6 to 10* in rate setting (medical load/nonmedical load/ Scenario 2, or “increased shared-savings rate,” main- uncredited): tains all the features of Scenario 1/Baseline, except for $$ Years1 to 5: 25%/25%/50% the shared-savings rate, which is modified as follows: (same as Scenario 1) $$ Years 1 to 6: 50%/50% $$ Year6 to 10: 33.3%/33.3%/33.3% $$ Years 7 to 10: 75%/25% (same as Scenario 3) The rationale for this change is that over time, it may be All scenarios assume the same level of plan investment challenging for plans to generate incremental savings: and the same cumulative savings rate* and maintain as plans generate savings, they need to not only main- the MSR at 0.5%. The following simplifying assumptions tain the savings from prior years but also exceed it in were made for the purposes of the modeling exercise: order to generate incremental savings and a rate adjust- the model assumes investments result in savings within ment. Implementing this change at year 7 was selected the same year, but in reality, there will likely be a lag based on the rate-setting lag: year 7 represents two in when the impact of an investment manifests in a cycles of experience with rate adjustments and savings change in plan members’ use of services and in the being built into capitation rates. Therefore, year 7 is a utilization data reported to DHCS. Similarly, an average reasonable time to change savings to encourage con- ongoing investment of $4 PMPM has been modeled tinued incremental savings. Optumas chose 75% as a out, but in reality, the experience may be less even method of limit-testing the impact of this modification. year over year, depending on whether investments are Scenario 3, or “increased credit for plan investment capital-intensive or programmatic. in medical and nonmedical load,” maintains all the *Cumulative savings rate refers to the total savings associated with assumptions of Scenario 1/Baseline except for the level health-related investments from the beginning of the intervention. of credit that plans receive as part of the rate-setting For example, based on the rate-setting lag, beginning in rate-setting year 4, the savings generated from health-related investments in methodology for their investments. The modification year 1 are factored into the base rate. To generate incremental boosts level of credit to 33.3% in both the medical load savings, the plan must maintain original savings and generate more. Intended Consequences: Modernizing Medi-Cal Rate Setting to Improve Health and Manage Costs 13 of health-related investments, plan portion of health- as a result of increased and high-value health-related related investments, state savings, and the plan rate investments by the plans (Scenario 1). adjustment. The box below summarizes the quantitative outcomes from the model and shows that: $$ Increasing the shared-savings rate in favor of plans in the out years could help to sustain investments as $$ When compared to the status quo, implementing a savings become harder to achieve over time. It would rate adjustment would result in lower PMPM pre- result in a modest shift of savings from the state to mium for plans at the end of 10 years — 2.8% lower. the plans of about $0.5 million (Scenario 2). It would also result in savings for the state ($4.3 million) and rate adjustments for plans ($4.4 million) Results of Rate-Adjustment Scenario Modeling The table below summarizes the outcomes of all scenarios over a 10-year projection. 10TH-YEAR PREMIUM PMPM TOTAL STATE PORTION PLAN PORTION STATE PLAN RATE (% CHANGE RELATIVE HRI OF HRI OF HRI SAVINGS ADJUSTMENT* TO STATUS QUO) (MILLIONS) (MILLIONS) (MILLIONS) (MILLIONS) (MILLIONS) Status Quo $768.55 $1.0 $0 $1.0 $1.6 $0 Scenario 1. Baseline $747.02 $6.0 $2.1 $3.9 $4.3 $4.4 (–2.8%) Scenario 2. Increased shared- $748.18 $6.0 $2.1 $3.9 $3.8 $4.8 savings rate (–2.7%) Scenario 3. Increased credit $746.47 $6.0 $2.8 $3.2 $4.3 $3.3 for plan investment in medical (–2.9%) and nonmedical load of base Scenario 4. Combined $745.45 $6.0 $2.3 $3.7 $4.6 $3.8 increase in shared savings and (–3.0%) in credit for plan investment DEFINITIONS 10th-year premium PMPM. The capitation rate for the 10th year. Total health-related investment (HRI). Sum of plan expenditures on health-related investments for years 1 to 10. State portion of HRI. The 10-year aggregate amount the state contributes to plan investments via capitation rates, by giving plans credit for investments in medical and/or nonmedical load of rates. Plan portion of HRI. The 10-year aggregate amount of plan intervention costs that do not receive state financing support. State savings. Savings associated with reductions in utilization for years 1 to 10. Savings represent cost avoidance and are realized by lowering the base rate in future rate-setting cycles. The savings are net of state funding for HRI. Plan rate adjustment. The savings shared with a plan in the form of an addition to its nonmedical load for future rates; the amount is dependent on savings generated by the plan’s investment. *Plans also retain any savings generated by investments in the first three years, before utilization reductions get factored into their rates. Note that the model employs a simplifying assumption that savings are generated in the first year of implementation. In reality, it is likely that there will be a delay in when interventions demonstrate impact. Note: See Appendix B for year-by-year results for each scenario. California Health Care Foundation 14 $$ Increasing credit for plan investments would reduce In all of the scenarios modeled above, the same level of the risk for plans. Of the total $6 million health- ROI is assumed, but of course, the efficacy of the invest- related investment, the plan would contribute $3.2 ments may vary from year to year or plan to plan. This is million (down from $3.9 million in Scenario 1). The not a policy lever per se, since neither the state nor the portion covered by the state would increase from plan can set an ROI. However, as plans test new types of $2.1 million in Scenario 1 to $2.8 million. However, it interventions and as the plans and the state gain more would also reduce the plan rate adjustment by over insight into the efficacy of investments, it is reasonable to $1 million, from $4.4 million in Scenario 1 to $3.3 assume the rate of return will vary. Optumas conducted million. In this scenario, the plan takes on less risk by a sensitivity analysis to provide insight into the range having more intervention funding included in capita- of possible outcomes if return is higher or lower than tion rates, and sees lower rewards (Scenario 3). assumed in the scenarios modeled above. The sensitiv- ity analysis demonstrates that savings for the state and $$ Combining the increased shared-savings rate in favor plans is highly dependent on ROI but that even a less- of plans and the increased credit for plan invest- effective intervention, with a lower ROI (Sensitivity A in ments would achieve the greatest drop in the PMPM box below), still generates savings and reduces the 10th- (3% relative to status quo) and the largest amount year PMPM relative to the status quo. of state savings ($4.6 million). It would decrease the plan’s rate adjustment by $0.6 million relative to Scenario 1 — although it’s still sizable at $3.8 million (Scenario 4). Sensitivity Analysis TOTAL STATE PORTION PLAN PORTION STATE PLAN RATE 10TH-YEAR HRI OF HRI OF HRI SAVINGS ADJUSTMENT PREMIUM PMPM (MILLIONS) (MILLIONS) (MILLIONS) (MILLIONS) (MILLIONS) Status Quo $768.55 $1.0 $0 $1.0 $1.6 $0 Scenario 4. Combined $745.45 $6.0 $2.3 $3.7 $4.6 $3.8 increase in shared savings and in credit for plan investment Sensitivity A. Scenario 4 with $753.57 $6.0 $2.3 $3.7 $2.1 $3.5 a decreased investment ROI Sensitivity B. Scenario 4 with $748.15 $5.0 $2.0 $3.0 $3.8 $4.9 an increased investment ROI DEFINITIONS Sensitivity A. Assumes a lower ROI by decreasing the cumulative savings for interventions over time to max out at 3% instead of 4%. The rationale for this test is that 4% savings may be hard for plans to achieve, and a more probable outcome is 3%. Sensitivity B. Assumes a higher ROI by decreasing the cost of the intervention (from $600,000 annually to $400,000 in years 6 to 10) while maintaining the same savings percentage. The rationale for this change is that as plans develop greater expertise implementing and evaluating certain interventions, they become more effective and can achieve the same results with lower investment. Intended Consequences: Modernizing Medi-Cal Rate Setting to Improve Health and Manage Costs 15 Implications Another important finding from the modeling exer- The analyses undertaken by the work group, including cise is that increasing the percentage of health-related the modeling, pointed to the following key takeaways: investment expenses accounted for in rate setting — either in the medical or nonmedical load — provides a 1.Relative to the status quo, implementing a rate plan with more financial support for interventions but adjustment into the current rate-setting methodol- less potential for the rate adjustment. The converse is ogy better aligns plans’ incentives with state goals. also true. As modeled, the rate adjustment can generate sav- ings for the state and reward plans for bending the 3.The downside risks for all parties are limited. cost curve; in this way, the recommended approach If the investments fail to generate meaningful savings, aligns incentives for plans to support the state’s cost, the state may have incurred some expense (by rec- quality, and investment objectives. ognizing some of the investment in the medical and nonmedical loads of plan rates), as will have the plans. 2.The model can be dynamic to encourage continued However, other than those early investment losses, investments and balance risks and benefits for the not much would change if the approach does not state and plans. generate meaningful savings; this is because behav- iors would regress to being very similar to the status Overall, the risks and rewards are tilted toward the quo — with plans scaling back on investments, gener- plans. If there are fewer savings than anticipated, it ating limited savings, and therefore not being eligible predominantly impacts plan experience, and if there for a rate adjustment. The state could mitigate its are additional savings the plan benefits. This is partly exposure by requiring plans to bear more of, or even due to the model parameter settings, including the the entirety of, their investments, perhaps until the shared-savings split and MSR, but it is also caused efficacy of the interventions becomes apparent. by the rate-setting lag, which allows plans to bear the risk and benefit of early investments before they In the event of an extremely successful outcome, it may get incorporated into the base data for rate updates. become necessary to monitor whether the rate adjust- Over time, however, it can become increasingly chal- ment trips the 5% incentive cap set by the Centers lenging for plans to maintain savings and generate for Medicare & Medicaid Services (see sidebar) or new savings  — creating the risk of reverting to the the 85% MLR threshold. The scenarios modeled by status quo. To mitigate this challenge, the design can Optumas suggested this was a low risk. be dynamic; for instance, the state can increase plan incentives in the out years (e.g., with a greater share of savings going to the plans) to encourage continued Federal Considerations for Implementing a investments. Rate Adjustment Policy levers, such as the shared-savings split, and There are different ways a state can structure some credit for health-related investments in rate setting, sort of rate-adjustment approach consistent with as well as the MSR level, can be adjusted to balance federal managed care regulations. One way is to con- risk and reward for the state and plans. The key is to sider the portion of the savings shared with plans as ensure not just a “fair” balance but that the mix is such an incentive payment. The Medicaid Managed Care that the approach is successful in generating savings Final Rule (42 CFR 438.6 [b] [2]) explains that MCOs may receive an incentive arrangement payment of in the first place (with no negative impact on quality). up to 5% of capitation rates. Incentive arrangements That requires mitigating premium slide for plans and are defined as any payment mechanism under which promoting effective investments. If all of the savings a contractor may receive additional funds over and accrue to the state — as is the current situation — the above the capitation rates it was paid for meeting plans will likely not invest and the state savings likely targets specified in the contract. Assuming the state will not materialize or continue. And of course, if the builds an actuarially sound rate and the incentive plans reap all the savings, the state has no reason to payments do not exceed 5% of that rate, the state revise its rate-setting methodology in these ways. will be able to claim federal matching dollars for rates developed using this new methodology. California Health Care Foundation 16 4. Beneficiaries stand to gain the most. The group did not fully explore the implications of While the state and plans both benefit through bet- regional rate setting but did conclude that shifting to ter alignment of Medi-Cal’s rate-setting methodology regional rate setting would neither obviate the need with quality and cost goals, beneficiaries potentially for, nor materially affect, the rate adjustment. It would stand to gain the most from the recommended also likely require a fundamental restructuring of the approach. The investments in health-related initiatives Medi-Cal program. The group recommended it be are aimed at making the care delivery system more considered separately. responsive to beneficiary needs, more preventive and outpatient-oriented, and more attuned to the whole $$ Pilot versus full launch person’s situation — not simply their medical ailments. The work group recommended that the rate adjust- ment be implemented as an update to the rate-setting Design and Implementation Considerations process applicable to all plans. While conducting a Should the state choose to update the current rate-setting pilot could provide insightful information, at least methodology with the recommended rate-adjustment four years would need to elapse to see results due to approach, the following are important implementation the rate-setting lag. The group thought that a broad considerations: launch that includes all plans would accelerate the $$ Complementarity with current rate-setting process pace of reform and maximize the potential for savings. Note that plan participation in the broad launch could The rate adjustment could be layered on top of the in theory be voluntary, but plans in multiplan counties current rate-setting process, described earlier. In the that opt not to participate may feel downward pres- event of significant program changes, such as the sure on their rates if other plans participate and are addition of a relatively costly new benefit or popu- successful at bending the cost curve. This is because lation, the state could apply the rate-adjustment the majority of their rate is determined through county calculations to the preexisting populations and ben- averaging. efits and essentially carve out the program change for the first year(s) of its implementation. This could allow A broad launch would not preclude the state from MCOs time to adjust, and give the state sufficient making refinements to the model  —  including the experience with the program changes to develop quality and investment criteria — over time. trend projections. Alternatively, the program change The recommended rate-adjustment approach requires could be included in the rate-adjustment calculations a medium- to long-term view (3 to 5 years) of perfor- as long as the state is able to accurately model the mance for health plans as a result of both the time it projected costs associated with the program change. takes for investments to demonstrate impact, and the Implementing the quality targets and establishing a almost-three-year rate-setting schedule. This could threshold level of health-related investment will not require a shift in strategy for those plans focused pri- require updates to the rate-setting methodology, but marily on annual or quarterly performance results. will require processes for target setting and evaluating whether a plan has met the criteria to receive a rate $$ Refinements to model parameters adjustment when it generates cost savings. To move the recommended approach into implemen- The work group briefly explored whether shifting to tation, the following steps would need to be taken: regional rate setting could complement and enhance $$ Determining the settings for policy levers. This the impact of a rate adjustment. Regional rate setting includes determining the MSR, shared-savings would essentially enlarge the (currently county-based) split, and level of credit for health-related invest- pools that get used for averaging plan utilization expe- ments in rate setting. The values used in the rience, which could provide more incentive for plans modeling provide a starting point for refining to achieve lower utilization than the regional trend. the policy levers. On its own, however, regional rate setting would not necessarily encourage or support the types of non- traditional, innovative health-related investments intended through the rate-adjustment approach. Intended Consequences: Modernizing Medi-Cal Rate Setting to Improve Health and Manage Costs 17 $$ Defining the quality requirement. The work group COMPONENT 2 recommended that the quality component include a balanced scorecard of metrics focused on data Enhancing Financing for Health- quality, social determinants of health, as well Related Investments as traditional health care quality metrics. It also As a complementary strategy to the rate adjustment, the recommended that plans be offered incentives for work group expressed a strong interest in both clarifying both absolute performance as well as improve- what types of investments can count within the current ment. More work will need to be done to develop plan expense base and exploring additional avenues for a preliminary dashboard, and the state could financing these investments. Doing so would encourage integrate it into existing quality initiatives. the state to share in some of the investment risk with plans, since the investments are expected to be nontra- $$ Establishing the threshold and process for report- ditional, innovative approaches for addressing members ing health-related investments. A process would with complex medical and social needs that could yield need to be developed for defining allowable savings down the road. The state is eager to encourage investments and determining how to set and such savings (see sidebar). The savings associated with report the health-related investment spending the rate-adjustment approach is expected to offset state threshold. It also recommended that plans be funding for investments, thus ensuring the Medi-Cal encouraged to meet an absolute threshold level program does not increase its aggregate PMPM expen- of performance on important indicators and to ditures. Additional state funding for such investments or achieve improvement over prior performance. tied to health plan performance would augment improve- Plans and the state may also need to develop ments in access, quality, and outcomes. accounting systems to track health-related investments, both for calculating whether the investment threshold is met and for credit in rate setting. This information is not currently captured The Role of Social Determinants of Health in in encounter data. Arizona might serve as an Health Outcomes example in that respect. A growing body of evidence indicates that social factors, such as income, education, access to food and housing, and employment status play an equal, if not more important role, than medical care in influ- encing health outcomes, particularly in lower-income populations.9 According to Booske and colleagues, up to 40% of health outcomes are driven by non- medical factors such as income, education, and occupation, compared to only 20% driven by clinical care.10 State Medicaid agencies and MCOs are uniquely positioned to work together and with other key partners — including local government and community-based organizations — to address the social determinants of health as a means to improve member health status and to drive down use of high-cost emergency and acute care services. California Health Care Foundation 18 The state has a variety of ways to recognize some of a modification is consistent with federal law, no waiver is plan’s health-related investments when it calculates the required. While the state may choose to make such ben- MCO rates. Some investments can be counted in the efits broadly available to beneficiaries who need them, medical load when setting capitation rates. For example, states have authority under Section 1937 of the Social making effective linkages to social service programs and Security Act to design benefits under its state plan (no services that help people secure housing can be classi- waiver required) for a targeted group of adults through fied by a state as Medicaid benefits under existing federal what is referred to as an Alternative Benefit Plan. To limit legal authorities.11 In some cases, the state may be able financial exposure and align benefit enhancement with to rely on its existing authority to cover these services, the rate-adjustment approach, California could target and in other cases, it may need to modify its state plan, enhanced services to beneficiaries enrolled in managed as permitted by federal law. Other types of investments care. can be financed through the capitated payments made to the plans at the discretion of the plan and as approved In-lieu-of services. Medicaid managed care plans by the state, with the cost built into the managed care can also cover certain services or investments with the rates. These are called “in-lieu-of services.” Examples Medicaid payments they receive from the state if they of in-lieu-of services include care in a SNF rather than are considered “in-lieu-of services” under federal rules. an acute inpatient facility for recovery, and recuperative These are services covered under the state plan but are care / medical respite care in lieu of an inpatient or SNF delivered by a different provider or in a different setting stay. Some investments, such as those deemed quality- than is described in the state plan; for example, providing improvement activities by the state, can be counted in a service in an ambulatory surgical center rather than an the nonmedical load when setting rates. Investments that inpatient hospital setting. The costs of in-lieu-of services cannot be included in the calculation of an MCO’s rate can generally be built into the medical load when setting can be paid for through other plan resources. As noted capitation rates.12 An in-lieu-of service or setting can only above, credit for investments in rate setting, either under be covered if (1) the state determines it is a medically the medical or nonmedical load, has implications under appropriate and cost-effective substitute or setting for the rate-adjustment approach; it increases plans’ cer- the state plan service, (2) beneficiaries are not required tainty of state financial support for some investments but to use the in-lieu-of service, and (3) the in-lieu-of service reduces the size of the potential rate adjustment. It also is authorized and identified in the contract with plans. has implications for the MLR; investments that qualify as benefits, in-lieu-of services, and even quality-improve- Quality improvement. Investment expenses deemed ment activities in the nonmedical load will count in the quality-improvement activities by the state can also be numerator of the MLR. counted in the nonmedical load when setting capitation rates. Federal regulations set out broad parameters for Below is a list of ways that states can finance these invest- what counts as quality improvement.13 ments with Medicaid funds: Waivers. The state may also pursue different waiver State plan amendment (SPA). While some services are options: 1115 demonstration waiver, 1915(b) man- required to be provided under federal Medicaid rules, aged care delivery system waiver, or 1915(c) Home and states have discretion to shape the scope of their bene- Community-Based Services (HCBS). Of particular rele- fits for adults. For example, under the case management vance to the rate-adjustment approach is the 1115 waiver and targeted case management benefit, states may authority, as California no longer relies on a 1915(b) cover costs associated with helping beneficiaries access waiver, and its HCBS services are generally carved out of needed medical and social services (for example, linking managed care (see Appendix D). people with Supplemental Nutrition Assistance Program or other nutritional services). States define the scope Figure 3 demonstrates how medically tailored meals — of the benefits they cover through their state plan and currently being piloted — could potentially be financed can modify the scope through an SPA; as long as the with Medicaid funds (see page 20). Intended Consequences: Modernizing Medi-Cal Rate Setting to Improve Health and Manage Costs 19 Figure 3. Medically Tailored Meals Example Medically tailored meals are not a traditional benefit covered by Medi-Cal. However, Medi-Cal — in partnership with local community organizations — is currently conducting a pilot program that provides medically tailored meals to low-income Medi-Cal beneficiaries with chronic diseases. If the pilot is successful, the state and/or plans can pursue various avenues to finance medically tailored meals and other health-related investments. PotentialFinancing Difficultyof Service Implications Mechanisms Implementation Quality Includedinratesetting; cappedunder Low: Improvement “reasonablenesstest” Requiresstateapproval Includedinratesetting;state approvesasalternativeto Low: In-Lieu-Of coveredserviceandincludes Requiresstateapproval incontract Medically TailoredMeals Includedinratesetting becauseinstateplan,applies Moderate: SPA/ABP toFFSandMC;ABPcanapply RequiresSPAandCMS onlytoMC approval Includedinratesettingas High: 1115Waiver serviceinexperimentalpilot Requiresamendmentto ordemonstrationprojects waiverandCMSapproval Design and Implementation Considerations supports). The state can work with plans to identify areas As referenced earlier, plans expressed a strong inter- or populations where interventions are likely to improve est for the state to develop a menu of investments that health outcomes and generate savings, and revise the list qualify for some level of coverage in the rate-setting as the state and plans gain more experience. process and count toward the health-related investment threshold. To provide some financial support for these investments, the state could identify opportunities to incorporate The state-derived menu could contain three categories priority health-related services in future SPAs and waiv- of investments: (1) investments that meet the health- ers — meaning that these services would become part of related investment threshold requirement, (2) existing the medical load in rate setting. Notably, the state could or new Medi-Cal state plan benefits and approved in- explore the feasibility of creating an Alternative Benefit lieu-of services that count as part of the medical load Plan — for all or certain managed care enrollees — that in rate setting, and (3) investments that count as quality includes certain health-related services.15 improvement and can be included as part of the non- medical load in rate setting.14 California’s current 1115 waiver ends on December 31, 2020, and includes initiatives such as the Whole Person Specific investments will depend on state and plan Care pilots that encourage investments similar to those priorities for different member populations and geogra- described in this report. The recommended rate adjust- phies. Some investments may be a one-time cost (e.g., ment could help sustain promising waiver activities after equipment), while others may be ongoing (e.g., housing the waiver ends. California Health Care Foundation 20 COMPONENT 3 Adding a Social Determinants of Conclusion As states and plans face increasing economic and fed- Health Risk Adjustment to the Rate- eral pressure to slow the growth of Medicaid spending, Setting Methodology they need to work together to bend the cost curve The work group was interested in further exploring add- while ensuring that quality, access, and innovation are ing a risk adjustment reflecting member socioeconomic not jeopardized. California has an opportunity to be status to the current rate-setting process — an approach on the leading edge of developing models of care and currently being tested in Massachusetts (see sidebar). interventions that improve the health of members with complex social, economic, and medical situations while also driving down Medi-Cal’s spending. Implementing the recommended rate adjustment can help achieve Massachusetts Social Determinants of Health these objectives and better align plan incentives with the Risk Adjustment state’s objectives for cost containment, quality, and inno- Massachusetts implemented a risk-adjustment vation. The recommended approach could, in addition, methodology that leverages existing state data serve as a roadmap for supporting and financing success- sets to identify proxies for social determinants of ful 1115 waiver initiatives after the waiver ends in 2020. health (SDOH). Examples include frequent address changes as a proxy for instable housing, and linking As a complementary strategy, California has the opportu- zip codes with census neighborhood stress scores. nity to clarify which types of investments can count within Massachusetts implemented this methodology in the current plan expense base and explore additional fall 2016 and is currently evaluating it.16 avenues for financing health-related services. Doing so would demonstrate the state’s commitment to support- ing nontraditional investments intended to improve care California’s current risk-adjustment model only accounts and outcomes for members with complex medical and for medical conditions; an SDOH risk adjustment could social needs. Lastly, the state also has an opportunity to help identify subpopulations for which targeted interven- refine its risk-adjustment methodology to better reflect tions should be prioritized and could guide health-related the underlying socioeconomic conditions of members to investments under the rate-adjustment approach. ensure that resources are appropriately directed to the Existing member data could be used to identify proxies most vulnerable populations. for social determinants. For example, frequent address changes could be used as a proxy for unstable housing. As a next step, this proposed approach should be shared, Additionally, the adjustment could help allocate premium further assessed, and refined with a wider group of stake- dollars more equitably across plans in multiplan counties. holders, including the administration and legislature. Design and Implementation Considerations Finally, one of the parameters for this project was that the The work group noted concerns about execution, includ- initiative would not result in any new investment by the ing ensuring robustness of data to identify valid proxy state. Additional state investment to improve Medi-Cal indicators for members’ social determinants of health, access and quality, however, could augment the impact and ensuring any new risk-adjustment methodology is of these recommendations and yield health improve- not duplicative of existing risk adjustment — since social ments for members. issues tend to co-occur with certain high-risk medical diagnoses (e.g., behavioral health, substance abuse). Since SDOH risk adjustment is a fairly new concept and there is limited evidence of its success and implementation, the state may consider conducting a review of method- ologies, including Massachusetts’s model, and simulating different measurement strategies to evaluate their effec- tiveness in predicting high-cost and high-need members. Intended Consequences: Modernizing Medi-Cal Rate Setting to Improve Health and Manage Costs 21 Appendix A. Status Quo Model, Year by Year KeyAssumptions Year1 Year2 Year3 Year4 Year5 Year6 Year7 Year8 Year9 Year10 InterventionCost $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 PortiontoIncl.asMedical 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% PortiontoIncl.asNonmedical 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% PlanSharedSavingsRate 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% MSR 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% ProjectedSavings 0.0% 0.5% 0.0% 0.5% 0.0% 0.5% 0.0% 0.5% 0.0% 0.5% CumulativeSavings 0.0% 0.5% 0.0% 0.5% 0.5% 0.5% 0.5% 1.0% 0.5% 1.0% MemberMonths 155,000 155,000 155,000 155,000 155,000 155,000 155,000 155,000 155,000 155,000 ScenarioModeling StatusQuo Ref Description Year1 Year2 Year3 Year4 Year5 Year6 Year7 Year8 Year9 Year10 10-YearTotal BaseData BaseYear (Year-2) (Year-1) (Year0) (Year1) (Year2) (Year3) (Year4) (Year5) (Year6) (Year7) (Yearn-2) (a) BasePMPM $400.00 $420.00 $441.00 $463.05 $483.77 $510.51 $533.36 $560.03 $588.03 $617.43 $501.72 (b) InterventionPMPM $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - Trend AnnualHistoricalTrend (a/3YearPrev.a)^(1/3)-1 5.0% 4.8% 5.0% 4.8% 5.0% 4.8% 5.0% Basew/InterventionCost (c) $400.00 $420.00 $441.00 $463.05 $483.77 $510.51 $533.36 $560.03 $588.03 $617.43 $501.72 (a+b) (d) AnnualProjectionTrend 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% TrendedPMPM (e) (c)*(1+d)^3 $463.05 $486.20 $510.51 $536.04 $560.03 $590.98 $617.43 $648.30 $680.72 $714.75 $580.80 NonMedicalLoad (f) NML% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% (g) InterventionExpense% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% (h) RateAdjustment% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% MLR 93.0% 92.5% 93.0% 92.5% 93.0% 92.5% 93.0% 92.5% 93.0% 92.5% GrossRate (i) $497.90 $522.80 $548.94 $576.39 $602.18 $635.46 $663.90 $697.10 $731.95 $768.55 $624.52 (e/(1-(f+g+h)) Savings InterventionSavingsPMPM $ - $ 2.61 $ - $ 2.88 $ - $ 3.18 $ - $ 3.49 $ - $ 3.84 $ 1.60 InterventionSavingsTotalDollars $ (100,000) $ 305,169 $ (100,000) $ 346,699 $ (100,000) $ 392,485 $ (100,000) $ 440,250 $ (100,000) $ 495,626 $1,480,228 RateAdjustment $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - TotalStateSavings $ - $ 469,033 $ - $ 517,109 $ - $ 570,113 $ - $1,556,256 California Health Care Foundation 22 Appendix B. Rate-Adjustment Scenarios, Year by Year CHCF DraftandConfidential Scenario 1. Baseline KeyAssumptions Year1 Year2 Year3 Year4 Year5 Year6 Year7 Year8 Year9 Year10 InterventionCost $600,000 $ 600,000 $ 600,000 $ 600,000 $ 600,000 $ 600,000 $ 600,000 $ 600,000 $ 600,000 $ 600,000 PortiontoIncl.asMedical 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% PortiontoIncl.asNonmedical 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% PlanSharedSavingsRate 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% MSR 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% ProjectedSavings 2.0% 3.0% 3.0% 1.0% 0.5% 1.0% 1.0% 0.5% 0.0% 0.0% CumulativeSavings 2.0% 3.0% 3.0% 3.0% 3.5% 4.0% 4.0% 4.0% 4.0% 4.0% MemberMonths 155,000 155,000 155,000 155,000 155,000 155,000 155,000 155,000 155,000 155,000 ScenarioModeling Baseline Ref Description Year1 Year2 Year3 Year4 Year5 Year6 Year7 Year8 Year9 Year10 10-YearTotal BaseData BaseYear (Year-2) (Year-1) (Year0) (Year1) (Year2) (Year3) (Year4) (Year5) (Year6) (Year7) (Yearn-2) (a) BasePMPM $ 400.00 $ 420.00 $ 441.00 $ 453.09 $ 470.52 $ 494.04 $ 519.92 $ 542.82 $ 566.77 $ 596.48 $ 490.46 (b) InterventionPMPM $- $- $- $0.97 $0.97 $0.97 $0.97 $0.97 $0.97 $0.97 $0.68 Trend AnnualHistoricalTrend (a/3YearPrev.a)^(1/3)-1 4.2% 3.9% 3.9% 4.7% 4.9% 4.7% 4.7% Basew/InterventionCost (c) $ 400.00 $ 420.00 $ 441.00 $ 454.06 $ 471.49 $ 495.01 $ 520.88 $ 543.79 $ 567.74 $ 597.44 $ 491.14 (a+b) (d) AnnualTrend 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% TrendedPMPM (e) (c)*(1+d)^3 $ 463.05 $ 486.20 $ 510.51 $ 525.63 $ 545.80 $ 573.04 $ 602.99 $ 629.50 $ 657.23 $ 691.61 $ 568.56 NonMedicalLoad (f) NML% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% (g) InterventionExpense% 0.0% 0.0% 0.0% 0.2% 0.2% 0.2% 0.1% 0.1% 0.1% 0.1% (h) RateAdjustment% 0.0% 0.0% 0.0% 0.9% 1.4% 1.4% 0.3% 0.0% 0.3% 0.3% MLR 91.3% 90.3% 90.2% 91.2% 91.1% 90.6% 91.8% 92.6% 92.8% 92.8% GrossRate (i) $ 497.90 $ 522.80 $ 548.94 $ 571.57 $ 597.02 $ 626.82 $ 651.19 $ 677.93 $ 709.89 $ 747.02 $ 615.11 (e/(1-(f+g+h)) Savings InterventionSavingsPMPM $9.96 $ 15.68 $ 16.47 $5.72 $2.99 $6.27 $6.51 $3.39 $- $- $6.70 InterventionSavingsTotalDollars $943,500 $ 1,831,013 $ 1,952,563 $285,935 $ (137,308) $371,575 $409,350 $(74,608) $ (600,000) $ (600,000) $ 4,382,019 RateAdjustment $- $- $- $767,464 $ 1,308,364 $ 1,382,882 $255,935 $- $309,025 $332,453 $ 4,356,123 TotalPlanSavings $943,500 $ 1,831,013 $ 1,952,563 $ 1,053,399 $ 1,171,056 $ 1,754,456 $665,285 $(74,608) $ (290,975) $ (267,547) $ 8,738,142 TotalStateSavings $746,230 $ 1,268,390 $ 1,339,562 $262,725 $ 11,542 $312,214 $334,045 $ 4,274,708 StateShareofHRICosts $- $- $- $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 $ 2,100,000 PlanShareofHRICosts $600,000 $600,000 $600,000 $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 $ 3,900,000 Intended Consequences: Modernizing Medi-Cal Rate Setting to Improve Health and Manage Costs 23 CHCF DraftandConfidential Scenario 2. Increased Shared-Savings Rate KeyAssumptions Year1 Year2 Year3 Year4 Year5 Year6 Year7 Year8 Year9 Year10 InterventionCost $600,000 $600,000 $600,000 $600,000 $600,000 $600,000 $600,000 $600,000 $600,000 $600,000 PortiontoIncl.asMedical 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% PortiontoIncl.asNonmedical 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% PlanSharedSavingsRate 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 75.0% 75.0% 75.0% 75.0% MSR 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% ProjectedSavings 2.0% 3.0% 3.0% 1.0% 0.5% 1.0% 1.0% 0.5% 0.0% 0.0% CumulativeSavings 2.0% 3.0% 3.0% 3.0% 3.5% 4.0% 4.0% 4.0% 4.0% 4.0% MemberMonths 155,000 155,000 155,000 155,000 155,000 155,000 155,000 155,000 155,000 155,000 ScenarioModeling IncreasedSharedSavingsRate Ref Description Year1 Year2 Year3 Year4 Year5 Year6 Year7 Year8 Year9 Year10 10-YearTotal BaseData BaseYear (Year-2) (Year-1) (Year0) (Year1) (Year2) (Year3) (Year4) (Year5) (Year6) (Year7) (Yearn-2) (a) BasePMPM $ 400.00 $ 420.00 $ 441.00 $ 453.09 $ 470.52 $ 494.04 $ 519.92 $ 542.82 $ 566.77 $ 596.47 $ 490.46 (b) InterventionPMPM $- $- $- $0.97 $0.97 $0.97 $0.97 $0.97 $0.97 $0.97 $0.68 Trend AnnualHistoricalTrend (a/3YearPrev.a)^(1/3)-1 4.2% 3.9% 3.9% 4.7% 4.9% 4.7% 4.7% Basew/InterventionCost (c) $ 400.00 $ 420.00 $ 441.00 $ 454.06 $ 471.49 $ 495.01 $ 520.88 $ 543.79 $ 567.74 $ 597.43 $ 491.14 (a+b) (d) AnnualTrend 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% TrendedPMPM (e) (c)*(1+d)^3 $ 463.05 $ 486.20 $ 510.51 $ 525.63 $ 545.80 $ 573.04 $ 602.99 $ 629.50 $ 657.23 $ 691.60 $ 568.56 NonMedicalLoad (f) NML% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% (g) InterventionExpense% 0.0% 0.0% 0.0% 0.2% 0.2% 0.2% 0.1% 0.1% 0.1% 0.1% (h) RateAdjustment% 0.0% 0.0% 0.0% 0.9% 1.4% 1.4% 0.4% 0.0% 0.4% 0.4% MLR 91.3% 90.3% 90.2% 91.2% 91.1% 90.6% 91.7% 92.6% 92.6% 92.6% GrossRate (i) $ 497.90 $ 522.80 $ 548.94 $ 571.57 $ 597.02 $ 626.82 $ 652.09 $ 677.93 $ 710.96 $ 748.18 $ 615.42 (e/(1-(f+g+h)) Savings InterventionSavingsPMPM $9.96 $ 15.68 $ 16.47 $5.72 $2.99 $6.27 $6.52 $3.39 $- $- $6.70 InterventionSavingsTotalDollars $943,500 $ 1,831,013 $ 1,952,563 $285,935 $ (137,308) $371,575 $410,734 $(74,608) $ (600,000) $ (600,000) $ 4,383,403 RateAdjustment $- $- $- $767,464 $ 1,308,364 $ 1,382,882 $384,429 $- $464,242 $500,743 $ 4,808,124 TotalPlanSavings $943,500 $ 1,831,013 $ 1,952,563 $ 1,053,399 $ 1,171,056 $ 1,754,456 $795,163 $(74,608) $ (135,758) $(99,257) $ 9,191,527 TotalStateSavings $746,230 $ 1,268,390 $ 1,339,562 $124,338 $ 11,542 $145,069 $154,557 $ 3,789,687 StateShareofHRICosts $- $- $- $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 $ 2,100,000 CMSComplianceCheck RateAdjustmentas%ofUnadjustedRate 0.0% 0.0% 0.0% 0.9% 1.4% 1.4% 0.4% 0.0% 0.4% 0.4% PlanShareofHRICosts $600,000 $600,000 $600,000 $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 $ 3,900,000 California Health Care Foundation 24 CHCF DraftandConfidential Scenario 3. Increased Credit for Plan Investment in Medical and Nonmedical Load of Base KeyAssumptions Year1 Year2 Year3 Year4 Year5 Year6 Year7 Year8 Year9 Year10 InterventionCost $600,000 $600,000 $600,000 $600,000 $600,000 $600,000 $600,000 $600,000 $600,000 $600,000 PortiontoIncl.asMedical 33.3% 33.3% 33.3% 33.3% 33.3% 33.3% 33.3% 33.3% 33.3% 33.3% PortiontoIncl.asNonmedical 33.3% 33.3% 33.3% 33.3% 33.3% 33.3% 33.3% 33.3% 33.3% 33.3% PlanSharedSavingsRate 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% MSR 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% ProjectedSavings 2.0% 3.0% 3.0% 1.0% 0.5% 1.0% 1.0% 0.5% 0.0% 0.0% CumulativeSavings 2.0% 3.0% 3.0% 3.0% 3.5% 4.0% 4.0% 4.0% 4.0% 4.0% MemberMonths 155,000 155,000 155,000 155,000 155,000 155,000 155,000 155,000 155,000 155,000 ScenarioModeling IncreasedCreditforPlanInvestmentinMedicalandNonmedicalLoad Ref Description Year1 Year2 Year3 Year4 Year5 Year6 Year7 Year8 Year9 Year10 10-YearTotal BaseData BaseYear (Year-2) (Year-1) (Year0) (Year1) (Year2) (Year3) (Year4) (Year5) (Year6) (Year7) (Yearn-2) (a) BasePMPM $400.00 $420.00 $441.00 $453.09 $470.52 $494.04 $520.29 $543.19 $567.14 $597.28 $490.66 (b) InterventionPMPM $- $- $- $ 1.29 $ 1.29 $ 1.29 $ 1.29 $ 1.29 $ 1.29 $ 1.29 $ 0.90 Trend AnnualHistoricalTrend (a/3YearPrev.a)^(1/3)-1 4.2% 3.9% 3.9% 4.7% 4.9% 4.7% 4.7% Basew/InterventionCost (c) $400.00 $420.00 $441.00 $454.38 $471.81 $495.33 $521.58 $544.48 $568.43 $598.57 $491.56 (a+b) (d) AnnualTrend 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% TrendedPMPM (e) (c)*(1+d)^3 $463.05 $486.20 $510.51 $526.00 $546.18 $573.41 $603.79 $630.31 $658.03 $692.92 $569.04 NonMedicalLoad (f) NML% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% (g) InterventionExpense% 0.0% 0.0% 0.0% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% (h) RateAdjustment% 0.0% 0.0% 0.0% 0.8% 1.3% 1.4% 0.0% 0.0% 0.0% 0.0% MLR 91.3% 90.3% 90.3% 91.2% 91.2% 90.7% 92.0% 92.5% 93.0% 93.0% GrossRate (i) $497.90 $522.80 $548.94 $571.90 $597.35 $627.16 $650.63 $679.14 $708.95 $746.47 $615.12 (e/(1-(f+g+h)) Savings InterventionSavingsPMPM $ 9.96 $ 15.68 $ 16.47 $ 5.72 $ 2.99 $ 6.27 $ 6.51 $ 3.40 $- $- $ 6.70 InterventionSavingsTotalDollars $943,500 $ 1,831,013 $ 1,952,563 $286,441 $ (137,050) $372,091 $408,470 $(73,668) $ (600,000) $ (600,000) $ 4,383,360 RateAdjustment $- $- $- $706,149 $ 1,247,664 $ 1,322,193 $- $- $- $- $ 3,276,005 TotalPlanSavings $943,500 $ 1,831,013 $ 1,952,563 $992,591 $ 1,110,613 $ 1,694,284 $408,470 $(73,668) $ (600,000) $ (600,000) $ 7,659,365 TotalStateSavings $695,582 $ 1,216,757 $ 1,287,914 $350,746 $ (176,379) $457,398 $502,702 $ 4,334,721 StateShareofHRICosts $- $- $- $400,000 $400,000 $400,000 $400,000 $400,000 $400,000 $400,000 $ 2,800,000 CMSComplianceCheck RateAdjustmentas%ofUnadjustedRate 0.0% 0.0% 0.0% 0.8% 1.4% 1.4% 0.0% 0.0% 0.0% 0.0% PlanShareofHRICosts $600,000 $600,000 $600,000 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 $ 3,200,000 Intended Consequences: Modernizing Medi-Cal Rate Setting to Improve Health and Manage Costs 25 Scenario 4. Combined Increase in Shared Savings and in Credit for Plan Investment CHCF DraftandConfidential KeyAssumptions Year1 Year2 Year3 Year4 Year5 Year6 Year7 Year8 Year9 Year10 InterventionCost $600,000 $600,000 $600,000 $600,000 $600,000 $600,000 $600,000 $600,000 $600,000 $600,000 PortiontoIncl.asMedical 25.0% 25.0% 25.0% 25.0% 25.0% 33.3% 33.3% 33.3% 33.3% 33.3% PortiontoIncl.asNonmedical 25.0% 25.0% 25.0% 25.0% 25.0% 33.3% 33.3% 33.3% 33.3% 33.3% PlanSharedSavingsRate 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 75.0% 75.0% 75.0% 75.0% MSR 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% ProjectedSavings 2.0% 3.0% 3.0% 1.0% 0.5% 1.0% 1.0% 0.5% 0.0% 0.0% CumulativeSavings 2.0% 3.0% 3.0% 3.0% 3.5% 4.0% 4.0% 4.0% 4.0% 4.0% MemberMonths 155,000 155,000 155,000 155,000 155,000 155,000 155,000 155,000 155,000 155,000 ScenarioModeling CombinedIncreaseinSharedSavingsandinCreditforPlanInvestment Ref Description Year1 Year2 Year3 Year4 Year5 Year6 Year7 Year8 Year9 Year10 10-YearTotal BaseData BaseYear (Year-2) (Year-1) (Year0) (Year1) (Year2) (Year3) (Year4) (Year5) (Year6) (Year7) (Yearn-2) (a) BasePMPM $400.00 $420.00 $441.00 $453.09 $470.52 $494.04 $519.92 $542.82 $566.77 $596.47 $490.46 (b) InterventionPMPM $- $- $- $0.97 $0.97 $0.97 $0.97 $0.97 $1.29 $1.29 $0.74 Trend AnnualHistoricalTrend (a/3YearPrev.a)^(1/3)-1 4.2% 3.9% 3.9% 4.7% 4.9% 4.7% 4.7% Basew/InterventionCost (c) $400.00 $420.00 $441.00 $454.06 $471.49 $495.01 $520.88 $543.79 $568.06 $597.76 $491.20 (a+b) (d) AnnualTrend 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% TrendedPMPM (e) (c)*(1+d)^3 $463.05 $486.20 $510.51 $525.63 $545.80 $573.04 $602.99 $629.50 $657.60 $691.98 $568.63 NonMedicalLoad (f) NML% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% (g) InterventionExpense% 0.0% 0.0% 0.0% 0.2% 0.2% 0.2% 0.1% 0.1% 0.2% 0.2% (h) RateAdjustment% 0.0% 0.0% 0.0% 0.9% 1.4% 1.4% 0.4% 0.0% 0.0% 0.0% MLR 91.3% 90.3% 90.2% 91.2% 91.1% 90.7% 91.7% 92.6% 93.0% 93.0% GrossRate (i) $497.90 $522.80 $548.94 $571.57 $597.02 $626.82 $652.09 $677.93 $708.49 $745.45 $614.90 (e/(1-(f+g+h)) Savings InterventionSavingsPMPM $9.96 $15.68 $16.47 $5.72 $2.99 $6.27 $6.52 $3.39 $- $- $6.70 InterventionSavingsTotalDollars $943,500 $ 1,831,013 $ 1,952,563 $285,935 $ (137,308) $371,575 $410,734 $ (74,608) $ (600,000) $ (600,000) $ 4,383,403 RateAdjustment $- $- $- $767,464 $ 1,308,364 $ 1,382,882 $384,429 $- $- $- $ 3,843,139 TotalPlanSavings $943,500 $ 1,831,013 $ 1,952,563 $ 1,053,399 $ 1,171,056 $ 1,754,456 $795,163 $ (74,608) $ (600,000) $ (600,000) $ 8,226,542 TotalStateSavings $746,230 $ 1,268,390 $ 1,339,562 $124,338 $11,542 $528,803 $577,568 $ 4,596,433 StateShareofHRICosts $- $- $- $300,000 $300,000 $300,000 $300,000 $300,000 $400,000 $400,000 $ 2,300,000 CMSComplianceCheck RateAdjustmentas%ofUnadjustedRate 0.0% 0.0% 0.0% 0.9% 1.4% 1.4% 0.4% 0.0% 0.0% 0.0% PlanShareofHRICosts $600,000 $600,000 $600,000 $300,000 $300,000 $300,000 $300,000 $300,000 $200,000 $200,000 $ 3,700,000 California Health Care Foundation 26 Appendix C. Other Options Considered The work group also considered the following options but chose not to incorporate them in the recommended approach for the following reasons: Shared Savings Shared savings and the rate-adjustment approach are similar in concept in that they allow plans to benefit from savings they generate relative to their projected expense trendline; however, they differ in their mechanics. Shared savings are distributed as a lump-sum payment to plans, while in the rate-adjustment approach the savings are added into the non- medical load of the plans’ future rates. The work group thought that a rate adjustment would be a more viable approach over the longer term. Plan-Provider Value-Based Purchasing (VBP) Arrangements Many states are establishing VBP goals and requirements to promote quality and value of health care service in managed care. Some states have created requirements on the types of risk arrangements (e.g., upside/downside risk and capita- tion) that plans should include in contracts with providers. Additionally, states sometimes tie incentive payments or rate percentage withholds with meeting certain performance measure or VBP requirements. Medi-Cal MCOs already engage in a high degree of delegated risk through subcapitation agreements with providers. Plans have noted mixed success with providers in managing risk and with subcapitation agreements promoting quality objectives. The work group’s preference is for the state to articulate cost and quality objectives and to allow plans flexibil- ity to work with providers on achieving those goals — which may be through VBP arrangements in certain circumstance. Intended Consequences: Modernizing Medi-Cal Rate Setting to Improve Health and Manage Costs 27 Appendix D. California Health-Related Investments and HCBS Crosswalk California currently provides the following health-related services to subsets of the Medi-Cal population through the fol- lowing programs and authorities. However, most of these services are for a targeted group of individuals, such as people with intellectual or developmental disabilities, physical disabilities, and/or mental illnesses. Managed care is typically carved out of these programs and therefore is generally not required to provide these benefits. PROGRAM/AUTHORITY Meals, Medically $$ Community-Based Adult Services (1115): meals, nutritional counseling Tailored Meals, $$ Assisted Living Waiver (1915[c]): Meals Other Nutritional Services $$ HCBS Waiver for Individuals with Developmental Disabilities (1915[c]): nutritional consultation $$ HCBS for Individuals with Developmental Disabilities (DD) (1915[i]): nutritional consultation $$ HIV/AIDS Waiver (1915[c]): home-delivered meals / nutrition supplements, nutritional counseling $$ In-Home Supportive Services (1915[k]): meal preparation, grocery shopping $$ Multipurpose Senior Services Program (1915[c]): nutritional services (congregate meals, home-delivered meals, food) $$ Food Is Medicine Pilot Home $$ California Community Transitions (Deficit Reduction ACT, MFP): home setup, home modifications Modifications $$ HCBS Waiver for Individuals with Developmental Disabilities (DD) (1915[c]): environmental accessibility adaptations $$ HCBS for Individuals with Developmental Disabilities (1915[i]): environmental accessibility adaptations $$ HIV/AIDS Waiver (1915[c]): minor physical adaptations to the home $$ In-Home Operations Waiver (1915[c]): environmental accessibility adaptations $$ Home and Community-Based Alternatives Waiver (1915[c]): environmental adaptations $$ Multipurpose Senior Services Program (1915[c]): minor home repairs and maintenance Personal Care $$ Assisted Living Waiver (1915[c]): personal care services Services $$ Community-Based Adult Services (1115): meals, nutritional counseling $$ Home and Community-Based Alternatives Waiver (1915[c]): waiver personal care services $$ In-Home Operations Waiver (1915[c]): waiver personal care services $$ In-Home Supportive Services (1915[k]): personal care services $$ Multipurpose Senior Services Program (1915[c]): supplemental personal care $$ Pediatric Palliative CareWaiver (1915c): personal care Behavioral Health $$ Community-Based Adult Services (1115): mental health services, social services, behavioral health Services treatment and stabilization (mental health, $$ HCBS Waiver for Individuals with Developmental Disabilities (1915[c]): crisis intervention, behavior substance use intervention services disorder, crisis centers, long-term $$ State plan 1905(a)(13) — rehabilitative services placement) $$ Health Home Program (1945): comprehensive care management, including behavioral health $$ Whole Person Care Program (1115): mental health coordination and other services, sobering centers, post-incarceration services California Health Care Foundation 28 PROGRAM/AUTHORITY Housing Supports $$ Assisted Living Waiver (1915[c]): nursing facility transition care coordination and Services $$ California Community Transitions: transition coordination, home setup $$ HCBS Waiver for Individuals with Developmental Disabilities (1915[c]): transition and setup expenses $$ HCBS for Individuals with Developmental Disabilities (1915[i]): transition and setup expenses $$ Home and Community-Based Alternatives Waiver: community transition services $$ In-Home Operations Waiver: community transition, transitional case management $$ Multipurpose Senior Services Program (1915[c]): nonmedical home equipment, emergency move, emergency utility services, temporary lodging $$ Health Home Program (1945): comprehensive care management, including housing navigator $$ Whole Person Care Program (1115): tenancy-based care management, county housing pools Health Promotion $$ Health Home Program (1945): health promotion, medication administration and management $$ Whole Person Care Program (1115): wellness and education services, sobering centers, post-incarceration services Employment $$ HCBS Waiver for Individuals with Developmental Disabilities (1915[c]): supported employment, Assistance prevocational services $$ HCBS for Individuals with Developmental Disabilities (1915[i]): supported employment, prevocational services Transportation $$ Community-Based Adult Services (1115): transportation to and from CBAS center and residence $$ HCBS Waiver for Individuals with Developmental Disabilities (1915[c]): nonmedical transportation $$ HCBS for Individuals with Developmental Disabilities (1915[i]): nonmedical transportation $$ HIV/AIDS Waiver (1915[c]): nonemergency transportation $$ Multipurpose Senior Services Program (1915[c]): transportation Chores/ $$ HCBS Waiver for Individuals with Developmental Disabilities (1915[c]): homemaker services, chore services Homemaker $$ HCBS for Individuals with Developmental Disabilities (1915[i]): homemaker services, chore services $$ HIV/AIDS Waiver (1915[c]): homemaker $$ Multipurpose Senior Services Program (1915[c]): supplemental chores Intended Consequences: Modernizing Medi-Cal Rate Setting to Improve Health and Manage Costs 29 Endnotes 1.Manatt retained Optumas to provide actuarial support, 13.See 45 CFR 158.150. In general, activities to improve health which included research, analysis, and modeling to evaluate quality must increase the likelihood of better outcomes in ways the potential impact of the revisions to the rate setting that can be “objectively measured” and produce verifiable methodology. results; be directed toward individual enrollees (or, if directed more broadly, result in no additional costs); and be grounded 2.As an advisor to the work group, Medi-Cal Director Mari in evidence-based medicine, widely accepted best clinical Cantwell did not join the recommendations of the work group. practice, or criteria issued by recognized professional medical 3.“In-lieu-of services” are services or settings that a state associations, accreditation bodies, government agencies, or determines are medically appropriate, cost-effective other nationally recognized health care quality organizations. alternatives to state plan services or settings covered in the States also must ensure that the activity is primarily designed MMC contract. For example, an MCO could choose to move to improve health outcomes; improve hospital readmissions an enrollee to a skilled nursing facility for recovery after an through a comprehensive discharge program; improve patient inpatient stay instead of keeping the enrollee in the hospital safety, reduce medical errors, and lower infection and mortality during recovery. rates; implement, promote, and increase wellness and health activities; enhance the use of health care data to improve 4.Medi-Cal Monthly Enrollment Fast Facts, California quality, transparency, and outcomes; and support meaningful Department of Health Care Services (DHCS), July 2017, use of health information technology. www.dhcs.ca.gov (PDF). 14.In addition to being captured in rate setting, in-lieu-of 5.Medi-Cal Managed Care Enrollment Report - June 2017, services and quality-improvement initiatives are included DHCS, June 2017, www.dhcs.ca.gov (PDF). in the numerator for purposes of medical loss ratio (MLR) 6.“Moving Medi-Cal Forward on the Path to Delivery System calculations. On October 13, 2017, California enacted a Transformation,” California Health Care Foundation, July 21, minimum 85% MLR requirement. Health-related investments 2016, www.chcf.org. that are deemed in-lieu-of services or quality-improvement activities are included in the numerator of the MLR. 7.Medi-Cal Managed Care Rate Development Overview, DHCS, June 2015, www.dmhc.ca.gov (PDF). 15.In addition to providing the 10 essential health benefits, the plan would have to be voluntary for certain populations and 8.45 CFR 158.150. meet other federal requirements. For more details, see 9.Deborah Bachrach et al., “Addressing Patients’ Social Needs: www.medicaid.gov. An Emerging Business Case for Provider Investment,” 16.Arlene Ash and Eric Mick, UMass Risk Adjustment Project for The Commonwealth Fund, May 2014, MassHealth Payment and Care Delivery Reform: Describing www.commonwealthfund.org. the 2017 Payment Model, UMass Center for Health Policy and 10.Bridget Booske et al., Different Perspectives for Assigning Research, October 11, 2016, www.mass.gov (PDF). The UMass Weights to Determinants of Health, University of Wisconsin researchers’ model and findings were featured in JAMA Population Health Institute, February 2010, Internal Medicine: Arlene Ash et al., “Social Determinants www.researchgate.net. of Health in Managed Care Payment Formulas,” JAMA Internal Medicine 177, no. 10 (October 2017): 1424-30, 11.Deborah Bachrach, Jocelyn Guyer, and Ariel Levin, “Medicaid jamanetwork.com. Coverage of Social Interventions: A Road Map for States,” Milbank Memorial Fund, July 25, 2016, www.milbank.org. 12.An exception is when federal financial participation is prohibited by law, as in the case of an Institution for Mental Disease (IMD). California Health Care Foundation 30