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Medicaid reimbursement overview

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xviMedicaid reimbursement structures designate that each state controls its own Medicaid program. Consequently, every Medicaid program differs based on state regulations. However, most Medicaid reimbursement models use fee-for-service, managed care, or a combination of both to pay providers. Fee-for-service payment dominates Medicare reimbursement structures across states. Over one-half of Medicaid spending in 2015 stemmed from a fee-for-service payment model, the Medicaid and CHIP Payment and Access Commission (MACPAC) reported. 

Fee-for-service Medicaid reimbursement models pay providers by the volume of services they provide to beneficiaries. States establish their Medicaid reimbursement rates under fee-for-service models, but policymakers must base the rates according to the following federal methodologies: 

  • Healthcare costs associated with providing services 
  • Review of commercial payer rates 
  • Percentage of what Medicare reimburses for equivalent services 

Most Medicaid fee-for-service methodologies set rates by the charge for services or maximum allowable price, whichever is lesser.  Thirty-eight out of the 51 U.S. Medicaid programs use this method, a recent MACPAC report showed. In contrast to a fee schedule, states pay providers based on either a percentage of Medicare payment, a state-determined market assessment, or a relative value scale. 

Medicaid fee-for-service rates tend to be significantly lower than Medicare reimbursement for similar services. The Kaiser Family Foundation found that Medicaid rates in 2014 were just two-thirds the amount of equivalent Medicare payments. Fee-for-service currently drives Medicaid spending, but most beneficiaries are enrolled in a managed care plan. CMS reported that 72% of Medicaid beneficiaries belonged to some type of managed care plan in 2013. 

Under these plans, states contract managed care organizations to handle enrollee benefits and claims management. The plans can contain fee-for-service structures for provider reimbursement, resulting in Medicaid fee-for-service spending increases. However, they can also include varying levels of financial risk or value-based reimbursement. 

Medicaid managed care models generally fall into categories. First, some states use a comprehensive risk-based managed care model in which plans receive a capitated rate for Medicaid-covered services. The fixed amount per-member, per-month aims to cover a specific set of services for the beneficiary. However, the plans assume the financial risk if care exceeds the capitated amount. Providers under the comprehensive risk-based managed care model can be paid via fee-for-service or share in the model’s financial risk arrangements. 

In 2013, about 54% of Medicaid beneficiaries received care under a plan that included comprehensive risk-based managed care, MACPAC reported. Limited benefits plans are also common, covering 49.5% of beneficiaries. States with this managed care option partner with limited benefits plans to provide services for specific patient populations or to manage certain benefits. The limited benefits plan may hone in on specific services, such as inpatient mental health, non-emergency medical transportation, oral health, or chronic disease management. 

A small portion—12.7%—of Medicaid beneficiaries fall under primary care case management models. Primary care providers serving these beneficiaries receive a monthly case management fee. States intend for the primary care provider to use the care management fee to manage and coordinate basic medical care for each beneficiary. Providers are still reimbursed via fee-for-service and the plan absorbs the financial risk.  States can also reimburse any additional costs such as technical support, transmission charges, and equipment. These add-on costs can be incorporated into the fee-for-service rates or separately reimbursed as an administrative cost by the state. If they are separately billed and reimbursed, the costs must be linked to a covered Medicaid service.