CHCS - Center for Health Care Strategies

Improving the quality and cost-effectiveness of publicly financed health care

Medicaid Payment Reform: What Policymakers Need to Know About Federal Law

Deborah Bachrach, CHCS Senior Program Consultant
November 2010
The Robert Wood Johnson Foundation

As Medicaid transitions from a welfare program to the nation's largest health insurer, it is critical that payment policies support high-quality, cost-effective care. This policy brief examines the requirements of federal law that govern Medicaid payment practices and reflects on the implications of federal health reform. 

This review of the laws, regulations, and court cases demonstrates the complexity that states face in implementing sound payment strategies.  The three requirements for Medicaid payment rates found in the Social Security Act are compelling, requiring states to adopt payment methods and procedures that: (a) safeguard against unnecessary utilization; (b) are consistent with efficiency, economy, and quality of care; and (c) are sufficient to ensure that Medicaid beneficiaries have access to care that is comparable to others in the geographic area.  To date, however, the Centers for Medicare & Medicaid Services has provided limited additional guidance, leaving states, and in some instances the courts, with the task of developing the standards or methodologies that give meaning to the statutory requirements.

With Medicaid slated to become the nation's single largest insurer covering 25 percent of all Americans, getting Medicaid payment right is critical.  Additional federal regulations or standards would provide states with a much-needed framework for establishing sound payment fundamentals and a sound base upon which to build the payment reforms called for in the Patient Protection and Affordable Care Act. 

This policy brief is part of CHCS' series on reforming Medicaid payment policies; see also:


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