Which type of healthcare payment method does the healthcare plan pay for each service that a provider renders?

States may offer Medicaid benefits on a fee-for-service (FFS) basis, through managed care plans, or both. Under the FFS model, the state pays providers directly for each covered service received by a Medicaid beneficiary. Under managed care, the state pays a fee to a managed care plan for each person enrolled in the plan. In turn, the plan pays providers for all of the Medicaid services a beneficiary may require that are included in the plan’s contract with the state.

The majority of Medicaid enrollees, largely non-disabled children and adults under age 65, are in managed care plans, but just over half of Medicaid benefit spending is in managed care. The enrollment of high-cost populations, such as people with disabilities, in managed care has been more limited than for lower-cost populations. In addition, coverage of certain high-cost services (e.g., nursing home and other long-term services and supports) may be excluded from managed care contracts, although such arrangements are growing in number.

Fee For Service

In general, states set provider payments under fee for service. Section 1902(a)(30)(A) of the Social Security Act requires that such payments be consistent with efficiency, economy, and quality of care, and are sufficient to provide access equivalent to the general population. MACPAC has documented state-specific fee-for-service payment methods for a number of services.

Medicaid FFS payment rates for physician services are often much lower than those paid by other payers, raising concerns that low fees affect physician participation in Medicaid, and thus access to care (Decker 2012, Cunningham and May 2006). While other factors, such as administrative burden, are also known to affect physician participation, research has consistently shown an association between low payment rates (relative to other payers) and lower levels of physician participation. On average, Medicaid FFS physician payment rates are two-thirds of the rates Medicare pays, although this varies greatly by state and service. (For an in-depth discussion of this issue, see Chapter 2 of MACPAC’s June 2013 report.)

It is more difficult to compare Medicaid FFS payments to hospitals and nursing facilities due to the variation in how states pay these providers. MACPAC constructed a state-level payment index to compare states’ Medicaid FFS inpatient hospital payments both to other states and to Medicare. Overall, Medicaid payment is comparable or higher than Medicare once supplemental payments and provider contributions are taken into account. MACPAC has not undertaken a similar analysis for nursing facility payments.

Managed Care

In 2019, 83 percent of  all Medicaid beneficiaries were enrolled in some form of managed care (CMS 2021). States have incorporated managed care into their Medicaid programs for a number of reasons. Managed care provides states with some control and predictability over future costs. Compared with FFS, managed care can allow for greater accountability for outcomes and can better support systematic efforts to measure, report, and monitor performance, access, and quality. In addition managed care programs may provide an opportunity for improved care management and care coordination.

Use of managed care varies widely by states, both in the arrangements used and the populations served. Medicaid programs use three types of managed care delivery systems:

• Comprehensive-risk based managed care. In such arrangements, states contract with managed care plans to cover all or most Medicaid-covered services for their Medicaid enrollees. Plans are paid a capitation rate, a fixed dollar amount per member per month, to cover a defined set of services. The plans are at financial risk if spending on benefits and administration exceed payments; conversely, they are permitted to retain any portion of payments not expended for covered services and other contractually required activities. Many state Medicaid managed care programs have one or more benefits—such as behavioral health services, oral health services, nonemergency transportation, or prescription drugs—that are carved out and provided separately through FFS or by limited-benefit plans (described below).
• Primary care case management (PCCM). In a PCCM program, enrollees have a designated primary care provider who is paid a monthly case management fee to assume responsibility for managing and coordinating their basic medical care. Individual providers are not at financial risk in these arrangements and continue to be paid on a FFS basis. Several states have enhanced their PCCM programs with targeted care monitoring and chronic illness management to specific enrollees with high levels of need, and by incorporating performance and quality measures and financial incentives for providers.
• Limited-benefit plans. Most states contract with limited-benefit plans to manage specific benefits or to provide services for a particular subpopulation such as inpatient mental health or combined mental health and substance abuse inpatient benefits, non-emergency medical transportation, oral health, or disease management.

States use a variety of methods to set rates for risk-based managed care plans but all must pay within an actuarially sound range. Many use an administrative process in which a specific rate is set by the state. Others use a competitive bidding or negotiation process. States may also use hybrid approaches, such as setting a range of rates and then asking plans to bid competitively within that range, or negotiating with plans based on the administered pricing or their competitive bids.

At least 24 states use measures of health status to risk adjust their rates, rather than relying on demographic factors alone. Such techniques are meant to adjust rates to better reflect a plan’s mix of enrollees and their expected care needs and expenditures.

Learn more from the following MACPAC resources:

Key statistics

Total Medicaid Benefit Spending by State and Category
Medicaid Supplemental Payments to Hospital Providers by State
Medicaid Supplemental Payments to Non-Hospital Providers by State
Medicaid Gross Spending for Drugs by Delivery System and Brand or Generic Status
Percentage of Medicaid Enrollees in Managed Care by State
Percentage of Medicaid Enrollees in Managed Care by State and Eligibility Group

Additional background

Timeline of Major Medicaid Payment Policy Developments
Overview of Fee-for-Service Provider Payment Policy
Overview of Managed Care Payment Policy
Federal Requirements and State Options: Provider Payment
Medicaid Fee-For-Service Provider Payment Process
Comparison of Nursing Facility Acuity Adjustment Methods

Fact sheets

Medicaid Inpatient Hospital Services Payment Policy
Medicaid Outpatient Hospital Services Payment Policy
Medicaid Physician Payment Policy
Medicaid Payment for Outpatient Prescription Drugs
Medicaid Nursing Facility Payment Policy
Medicaid Payment Policy for Federally Qualified Health Centers
Medicaid Durable Medical Equipment Payment Policy

Issue briefs

Directed Payments in Medicaid Managed Care
Rural Hospitals and Medicaid Payment Policy
Medicaid Payment Initiatives to Improve Maternal and Birth Outcomes
Medicaid Base and Supplemental Payments to Hospitals
Delivery System Reform Incentive Payment (DSRIP) Programs
Medicaid Hospital Payment: A Comparison across States and to Medicare
Medicaid Payment Policy for Out-of-State Hospital Services

In-depth analysis and policy recommendations

A Framework for Evaluating Medicaid Provider Payment Policy
Improving Operations of the Medicaid Drug Rebate Program
Next Steps in Improving Medicaid Prescription Drug Policy
Examining the Policy Implications of Medicaid Non-Disproportionate Share Hospital Supplemental Payments
Oversight of Upper Payment Limit Supplemental Payments to Hospitals
Using Medicaid Supplemental Payments to Drive Delivery System Reform
Overview of Medicaid Policy on Disproportionate Share Hospital Payments
Analyzing Disproportionate Share Hospital Allotments to States
Improving the Structure of Disproportionate Share Hospital Allotment Reductions
Improving the Targeting of Disproportionate Share Hospital Payments to Providers
Treatment of Third-Party Payments in the Definition of Medicaid Shortfall
Medicaid Primary Care Physician Payment Increase
An Update on the Medicaid Primary Care Payment Increase
Issues in Setting Medicaid Capitation Rates for Integrated Care Plans