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Payment Innovation Basics: A Brief Discussion of Alternative Payment Models




Matt: Welcome to Healthcare in Policy and in Practice, the health policy update from America’s Essential Hospitals. I’m Matt Buechner. America’s Essential Hospitals has recently released a new policy brief, called The Landscape of Medicaid Alternative Payment Models. The brief focuses on innovative payment models around the country. I’m joined, today, by Xiaoyi Huang. Xiaoyi is the director of policy, here, at America’s Essential Hospitals. She leads our legislative and regulatory policy portfolio. Welcome to the podcast!

Xiaoyi: Thank you, Matt.

Matt: I’m excited to have you here to discuss what’s going on with Medicaid and Medicare payments across the country. Before we launch into our discussion on alternative models can you talk a little about the existing payment models?

Xiaoyi: Sure, the two most common payment models for Medicaid are fee-for-service and managed care. In the fee-for-service model, the payer, in this case, the state Medicaid agency, pays a pre-determined price to a hospital or provider for the services that they have provided to the patient.

Matt: So, it’s like when you get groceries. If you need apples, bananas, and bread, you pay for apples, bananas, and bread. With fee-for-service, the provider keeps track of all of the different services that they provide and then the state Medicaid agency pays for those services.

Xiaoyi: Exactly. Services for about a quarter of Medicaid enrollees are paid under this model. The rest are paid under some sort of managed care model. The most widely used managed care model is a comprehensive risk-based plan, where the state has a contract with a managed care organization. The state then pays a certain amount per person to the managed care organization and the patient receives services within networks set up by the managed care organization.

Matt: So, the state pays your ticket every month and you get the services you need, no matter if these services end up being of higher or lower value than the price of your ticket.

Xiaoyi: Right. The hope is that it will all even out and also prevent unnecessary procedures. And that can be accomplished because the plan can limit which providers you can go to, how many times you can go to these providers, and how much they’ll pay. There are a couple of other types of managed care models, too, like limited benefit plans and primary care case management. The policy brief we just released discusses these other models in more detail.

Matt: Since the brief focuses on new payment models, many of which are intended to replace or augment the existing fee-for-service and managed care models, what are the downsides to these currently used models that newer alternative payment models seek to address.

Xiaoyi: Newer models focus largely on providing more efficient, coordinated, and quality care for Medicaid patients, as well as allowing the state to shift risk for some of the cost of services. The alternative payment models generally focus on reducing cost while improving the quality of the patient experience and care. Medical homes, for example, are actually built off the primary care case management approach. They focus on providing holistic care for patients. Patients are meant to have a point person – generally a physician or nurse – that helps to coordinate all of the health care that person receives. This includes routine physical care, as well as mental health care, in some circumstances. Medical homes in some states are paid on a per-member per-month basis, on top of the normal fee-for-service reimbursement. And depending on the state, these per-member per-month payments can vary or be at risk, depending on whether the medical homes can meet cost or quality thresholds. Now, of course, the success of any model would depend on whether, in addition to cost saving, it is also able to improve patient care.

Matt: Interesting. This integrated approach must be particularly helpful for people with complex health needs, right?

Xiaoyi: Yes, especially when these medical homes are part of an essential health system. For Medicaid patients with complex chronic illnesses, the Affordable Care Act actually defined something called a Medicaid health home, which is similar in concept to a medical home. These health homes are specifically for Medicaid patients who have multiple chronic illnesses. The federal government agrees to pay 90 percent of the costs for managing eligible patients for the first eight quarters that these health homes are in operation.

Matt: So, how can a patient tell if they are in one of these programs? Are there any alternative models that wouldn’t actually change the patient experience?

Xiaoyi: Well, if a patient is part of a medical home, for instance, or another program focused on care coordination, they will notice more communication between their providers. There are also programs that are done completely behind the scenes. One approach that a patient wouldn’t necessarily know about is episodic or bundled payments. For this model, providers or hospitals are generally reimbursed a pre-determined amount for all of the care that goes into treating a specific diagnosis.

Matt: If I need a knee replacement, Medicaid or Medicare, depending on the patient, will pay a one-time, pre-set amount for all of the associated costs. So, that single payment will cover the operation itself, check-ups, and any other costs that are related to the knee replacement, right?

Xiaoyi: Exactly. Directly or indirectly, these models all try to incentivize lower cost and higher quality of care.

Matt: Does the Centers for Medicare & Medicaid Services work with states in any other innovative ways?

Xiaoyi: CMS works very closely with individual states and providers on a number of these alternative models. One area of focus is care for dual-eligibles, or people who are eligible for both Medicaid and Medicare. These patients are often excluded from the other models, because of the intricacies involved with coordinating payment and care between both Medicaid and Medicare. This policy brief actually has maps for many of the things we’ve talked about today, including state-level activity for each of these models, and two of them highlight models for dual-eligible patients.

Matt: I see that one map shows the 15 states that are integrating care for dual-eligibles and another shows the 12 states that are working with CMS to focus on payment integration.

Xiaoyi: So, for that first map you referenced, 15 states are developing and testing new delivery system models for dual eligibles under the State Demonstrations to Integrate Care for Dual Eligible Individuals initiative. For the second map, 12 states are piloting financial integration models under the Financial Alignment Initiative. These efforts are intended to help improve access, quality, and efficiency of care for dual-eligible patients. What’s really important for dual eligibles or any other vulnerable patient population is whether the model takes into account social determinants of health factors.

Matt: These alternative models all sound like they have potential to challenge the status quo, while providing patients with better, more coordinated care. Where can someone go if they want to know more about what models their state is implementing?

Xiaoyi: Well, Matt, a great place to look is the policy brief. It provides a quick overview of all of the models that we’ve talked about and where the models are being implemented. After you look there, you can check out publications from the Medicaid and CHIP Payment and Access Commission, or MACPAC. MACPAC often releases information, including overviews of different models that states and CMS are in the process of implementing or have implemented.

Matt: States, CMS, health care institutions, and providers are constantly looking for new ways to improve patient quality, while balancing the complex give and take between cost of care and reimbursement levels. The new policy brief, The Landscape of Alternative Payment Models, is a great resource for learning about the ways in which stakeholders are pushing to innovate care.

For more health policy news and information on topics we discussed today, please visit the Action tab or search bar on the America’s Essential Hospitals homepage at Thank you for listening to today’s edition of Health Care in Policy & in Practice and thank you to Xiaoyi Huang for joining us today. My name is Matt Buechner, join us next time for another health policy update.


About the Author

Matt Buechner is the policy and advocacy associate for America's Essential Hospitals.

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