Creating value expectations in state directed payments

State directed payments (SDPs) are an integral strategy for Medicaid programs to ensure accessible and high quality services for populations enrolled in managed care. The Centers for Medicare & Medicaid Services (CMS) recognizes its critical role in Medicaid financing. However, the proliferation of SDPs since the 2016 final rule adoption and the relative magnitude of SDPs in terms of funding have fueled federal concerns, mostly centered around the lack of transparency and accountability for these funds.

The SDP section of the 2024 Medicaid and Children’s Health Insurance Program Managed Care Access, Finance, and Quality Final Rule  reflects CMS’ desire to institute stronger fiscal and program integrity guardrails, enhance quality and improve understanding of the impact and value proposition of SDPs. Personally, I applaud this effort. Transparency and accountability are characteristics that we should all collectively demand of healthcare payers, providers and systems. And while we’re at it, let’s all keep our collective focus on paying for value. 

While SDPs can involve different provider types, most SDP dollars flow into inpatient and outpatient hospital payments. States direct its contracted health plans to pay specific payment increases on top of the negotiated reimbursement rates to hospitals. In many state Medicaid programs, particularly those that benchmark against the average commercial rate (ACR), the directed payment portion of the overall payment can be very significant, sometimes more than doubling the overall payment for the encounter.¹

It is true that in general, many state Medicaid programs have historically underfunded Medicaid hospital reimbursement, and significantly higher commercial reimbursements to hospitals tend to offset the low Medicaid payments. SDPs are designed to help close the gap between Medicaid payment and cost. Now that many Medicaid agencies are contemplating or have implemented hospital SDPs that are benchmarked to the ACR, the disparities in hospital reimbursement among the major payers (i.e. Medicaid, Medicare and commercial) should be ameliorated. That’s a good thing.

However, a potential new issue could be looming. Will the linkage created by SDP between the Medicaid and commercial worlds create an upward inflationary spiral? Or will the relative parity in reimbursement between Medicaid and commercial keep prices in check? In either scenario, hospital payments in Medicaid have significantly increased because of SDPs.

The way those payments are designed and made should promote and reward efficiency. Value-based care is here to stay and should permeate all healthcare payments, including SDPs. These principles need to merge into one in a meaningful way.

Many new tools have been developed within the healthcare industry to help states transform the way hospital payments are made. Hospital reimbursement tools, hospital-specific quality tools, as well as system-level quality tools can be used to design a hospital SDP payment approach that is transparent, risk adjusted, value-driven and consistent with CMS’ intent. These tools can be used to evaluate the value proposition of SDPs over time.

Matthew Ferrara is the state program manager for the regulatory and government affairs team at Solventum.

¹The nonfederal share of the overall Medicaid hospital SDP payment is often financed by the hospital themselves. This should be factored in when calculating payment increases.