On September 15, the Centers for Medicare & Medicaid Services (CMS) released a State Medicaid Director (SMD) letter on value-based care (VBC) opportunities in Medicaid. The letter is designed “to provide information on how states can advance [VBC] across their healthcare systems, with a particular emphasis on Medicaid populations, and share pathways for adoption of such approaches with interested states.”

The SMD letter comes as states face unprecedented budget shortfalls and seek to develop and maintain strategies that support the response to COVID-19. While not a panacea, value-based payment (VBP) models may be an important policy lever to improve health outcomes, lower costs, and offer stable revenue sources for providers. This policy cheat sheet highlights key takeaways, considerations for states, and some questions that arise from the 33-page letter.

  • Does the letter outline changes to VBC/VBP in Medicaid? The SMD letter emphasizes CMS’ ongoing commitment to VBC, consolidating information from CMS on VBP and approval pathways — many of which have been in place since the Affordable Care Act (ACA) was implemented — into one resource with considerations for states. The letter does not introduce new models or approaches, but includes an additional pathway for pursuing VBP via a state plan amendment (SPA) outside of managed care and a new name for a payment model type, as summarized below:
    • SPAs can include downside risk. fact sheet that accompanies the letter states: “CMS will now consider state plan payment methodologies (for payments to providers for covered services) that include downside risk for providers through advanced payment strategies outside of the context of managed care plan payments.” Previously, many states that wanted to pursue VBP models with downside risk had to use 1115 waivers, which required a more time-intensive review and approval process. This new approach could allow for a more expeditious approval of states’ programs through a SPA.
    • CMS encourages the use of “comprehensive models.” The letter introduces “comprehensive models” defined as payment strategies that “generally include comprehensive population-based payments, often in the form of providers receiving a capitated, flat [per member per month payment] and being responsible for some or all aspects of a member’s care via a [total cost of care] arrangement” (p. 29). This definition aligns closely with Category 4B of the Health Care Payment Learning & Action Network’s Alternative Payment Model (APM) Framework, which includes global budgets. The development of comprehensive models is encouraged, with the letter describing them as “among the most innovative and effective ways to align incentives across payers and providers,” and highlighting the flexibility of the approach. However, the SMD letter also cautions that these models require sophisticated provider-payer relationships, and strong state leadership.
  • What are the other key takeaways from the letter? Much of the letter’s content will be familiar to Medicaid stakeholders who follow VBP policy as it largely highlights well-established design considerations and pathways. However, it also adds clarity to CMS’ position on several VBP-related topics:
    • The promise of VBP to ease disruption in uncertain times. CMS mentions that some VBP models may give providers stability and predictability, noting that greater VBP penetration could have lessened the financial impact of the COVID-19 pandemic on providers (p. 1).
    • The end of Delivery System Reform Incentive Programs (DSRIP). While previously noted, the letter clarifies that new DSRIP proposals or renewals of existing DSRIP programs will not be approved by the current administration. The letter cites “mixed results” (p. 4) in a forthcoming federal evaluation as one of the primary reasons for ending the program.
    • Three “critical elements” of a VBP model. The letter emphasizes three “critical elements of VBP design and operations” for states interested in proposing payment models to CMS (p. 5-6). These elements — which states would likely need to emphasize in a model design — include: (1) level and scope of financial risk; (2) benchmarking; and (3) payment operations (which largely focuses on patient attribution).
    • Concerns about voluntary VBP models. Consistent with recent support for mandatory VBP models by the secretary of Health and Human Services, the SMD letter raises concerns about voluntary models, citing their potential to lower participation and encourage adverse selection (p. 6). Although CMS’ administrator, Seema Verma, said in 2019 that mandatory models would be used “very judiciously,” this letter suggests a stronger preference for states to pursue VBP models that are mandatory for providers or MCOs. While mandatory models could address potential participation and adverse selection problems posed by voluntary models, determining whether providers have the resources and expertise to succeed in a mandated model will become increasingly important. Flexibility for advanced providers to enter more sophisticated arrangements could also be limited.
    • Use of existing quality metrics. The letter encourages states and payers to “pick established metrics to reduce provider burden, prioritizing those that are useful across payers, and promote service integration across care settings” (p. 7). CMS has long expressed a preference for multi-payer measure alignment whenever possible and this statement may go further in suggesting that Medicaid payers should conform to existing measure sets.
  • What questions does the letter raise? The information included in the SMD letter may help states in offering clarity on CMS’ prior policy statements and providing greater insight into the agency’s payment reform strategies. However, the letter also raises some important questions:
    • What is the purpose of the Innovative Payment Strategies and Key Features table? The SMD Letter includes a table (p. 9-12) that highlights three categories of payment models: (1) payment models built on fee-for-service architecture; (2) episode of care; and (3) total cost of care accountability. The table is not presented as a framework (it references the APM Framework), but rather as a tool “to facilitate the advancement of APMs and support state efforts…” It is unclear whether the table is simply a reference for states, or a tool that CMS will use to evaluate state VBP model submissions.
    • Will more states pursue comprehensive models? CMS is encouraging states to move toward comprehensive models. However, such models require significant planning and have historically been supported by considerable federal funding. While CMS’ newly affirmed flexibility on using SPAs to implement downside risk models could be helpful to advancing this approach, the decision of states to follow the lead of Vermont and Massachusetts and implement comprehensive VBP models will likely depend on states’ appetite for an endeavor of this scale, as well as available federal support.
    • Could this guidance change under a new administration? While some aspects of the guidance could be modified with a new administration, the vast majority would not be expected to change. CMS’ commitment to VBP has been strong since the ACA was passed in 2010, so while some details or funding may change, it is likely that the broad strokes will endure, particularly since no new models are introduced in the letter.