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State Playbook: Pay for Success Financing – How to Use Innovative Financing to Fund Innovation in Medicaid Value-Based Purchasing Programs


By Andrew Olson, Michael McKnight, Kevin Chan and Ruth Ann Norton

The U.S. Department of Health and Human Services (HHS) projected that the Centers for Medicare and Medicaid Services (CMS) budget will exceed USD 1 trillion dollars in 2017.[1]  They use the majority of funds to cover necessary medical expenses of populations qualifying for the respective programs. However, in some cases these medical expenditures can be prevented with non-medical expenditures, which can also generate substantial benefits for society beyond medical coverage. This Playbook is designed to assist states to take advantage of these opportunities.

The barriers to seizing these opportunities are restrictions on the use of funds in the publicly-financed healthcare system, especially for Medicaid beneficiaries. For example, regulations prevent reimbursement for non-medical expenditures, even when the alternate use of funds has direct medical impacts and has been undertaken for medically relevant purposes. Investments in preventive or supportive services that abate the need for medical services have been shown, in many cases, to result not only in better health, but also more cost-effective solutions. Further, dollars spent on preventive care frequently have secondary effects that benefit communities beyond medical utilization measures.

There are potential resolutions for this impasse. One of the most promising is a recent change in managed care regulations that allows for states to require or enable their partnering managed care entities to develop value-based purchasing arrangements. This dynamic allows states and managed care entities the ability to create payment mechanisms that pay for outcomes, not costs. These outcomes may be generated from alternate services that do address the root causes of many of the costliest medical conditions. States can use this relationship with their managed care entities to secure federally matched funds to address the social determinants of health by investing in their communities.

Consider the case for asthma prevention: CMS spent more on medical utilization for asthma patients in every single state in the country in 2014 than they did for cancer patients according to data tables they made available.[2] This comparison is insightful when considering the role that the social determinants of health play in medical needs. As much as 40 percent of asthma medical utilization is directly attributable to the home environment;[3] however, regulations prohibit reimbursing managed care entities for addressing the home-based causes and triggers of asthma directly because those housing services are not narrowly defined medical benefits. Those same regulations allow reimbursement for a value-based purchasing arrangement where a managed care entity purchases directly reductions an asthma patients’ total cost of care.

States can and are developing Pay for Success strategies to address public health needs, including Arizona and Texas, and many others are working to overcome limitations preventing adoption. The key issues are those of risk, reward, and capacity for managed care entities and health-related social service providers. States and managed care entities using publicly-financed healthcare dollars are rightfully risk averse in adopting new service delivery models that put taxpayer dollars at risk. Health-related social service providers are often incapable of supporting large-scale service delivery, waiting for the outcomes of the actions to secure payment due to financial limitations.

There is a mechanism that allows funding the provision of health-related social-service interventions that leverages the potential future value of the programs. Pay for Success financing agreements allow outside parties, usually foundations, to ‘invest’ in the programs – providing funds to deliver services. When evaluated, the managed care entity would make a value-based payment to the foundation or other investors based on the measured value created by the program. The Pay for Success financing arrangement funds the provision of services, while mitigating the risk of program success for the taxpayer and managed care entities responsible for publicly-financed healthcare expenditures.

Additionally, there will be an aggregate effect reducing cost and improving quality in running many smaller ground-up projects in concert with ongoing top-down efforts from the states and federal authorities. Ground-level innovation can be disseminated and institutionalized by states and federal partners. Managed care entities can pick from the most effective models to continue their drive to provide higher quality care that improves health, even beyond the traditional continuum of care, and still brings down aggregate costs.

State Playbook Pay for Success Financing – How to Use Innovative Financing to Fund Innovation in Medicaid VBP Programs

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