Medicaid and Permanent Supportive Housing for Chronically Homeless Individuals: Emerging Practices From the Field. 6.5. Medicaid Financing Issues for Managed Care Organizations and Providers


"Full-risk" managed care plans receive funding on the basis of capitation, meaning that the plans are paid a set amount per-member per-month and expected to cover all care needed by their members. Capitation payments may be adjusted based on a variety of factors, including geography (reflecting regional cost variations within a state), characteristics of plan members, and plan performance relative to specified quality metrics or other performance criteria.

Depending on the specific provisions of a state Medicaid plan or waiver and of the contracts between the state and health plans, MCOs may have the flexibility to do some things that could potentially be of great help to members with complex and co-occurring health and behavioral health needs such as those experiencing chronic homelessness or living in PSH. First, they can use capitated funding to pay for care management and also potentially for services that are not easily reimbursable under a fee-for-service system, if these services can produce better health outcomes or control utilization of other more costly services. Some states permit the MCOs to use a share of savings for "re-investment" strategies that can cover some of the costs of innovative care models, if they can achieve savings in other costs.

MCOs can use a portion of their profits to pay for services or activities that are not specifically defined as Medicaid benefits, but generally they must get state approval if they want to use their capitated funding in these ways. Otherwise, without state approval, they may not be permitted to pay for services not covered in a state's Medicaid plan. If states want their MCOs to have the flexibility to pay for services that help achieve savings in costs for avoidable hospitalizations, the states in turn must get CMS approval as part of the terms of a waiver under Section 1115 or 1915(b)(3) before using the Medicaid program to pay for what may be considered "costs not otherwise matchable" (CNOM), including costs of services that are not specifically included in the Medicaid state plan. This creates some uncertainty regarding the degree to which MCOs have flexibility to pay for services in PSH, to the extent some of these services may not be currently defined as covered benefits for some of the people who have experienced chronic homelessness, particularly people without serious mental illness who have been prioritized for PSH because of their vulnerability or frequent and avoidable emergency room visits and hospitalizations.

6.5.1. Risk-Adjustment

Health policy experts have described the importance of "risk-adjustment" in setting capitation rates, meaning that plans (and groups of providers) may receive capitation rates that are adjusted based on characteristics of plan members that predict higher or lower risk for the total costs of delivering appropriate care.77 For example, a health plan or provider network that specializes in serving people who are receiving high-cost care for cancer, AIDS, or liver disease would receive a higher rate per-member per-month, compared with a plan or network that enrolled mostly relatively healthy members for whom expected costs and risks would be lower.

Rates could be adjusted to pay more for health plans or providers who serve people with serious mental illness, including co-occurring substance use disorders, compared with those without behavioral health care needs, based on data that demonstrates higher costs associated with managing chronic illness for people with these added conditions. Some providers who focus on serving people with chronic patterns of homelessness and complex health needs (including those who incur high costs for hospitalizations, emergency room visits, and stays in nursing homes) would like to be able to use risk-adjusted capitation rates to serve vulnerable people with the greatest needs and create incentives for improving the quality and efficiency of care for them.

The state Medicaid agency staff interviewed as part of this study explained that current approaches to risk-adjustment are far from ideal. Often, they take into consideration only a few variables that are easy to track in Medicaid data such as age, gender, home address (to reflect regional cost variations), and whether a person is receiving Supplemental Security Income (SSI) benefits, nursing home care, or home and community-based services (HCBS) that may be available through a Medicaid waiver. State Medicaid staff say that these factors predict only a small fraction of the variation in costs among Medicaid beneficiaries. Important factors omitted from current risk-adjustment practices include service utilization or claims history, social determinants of health such as deep poverty and homelessness, or the complexity of and interactions among a beneficiary's health conditions.

Data provided by the Illinois Medicaid program show that about 3 percent of people enrolled in that state's program receive health care services associated with about 50 percent of total Medicaid expenses, and 20 percent of all expenses are associated with care for only 0.5 percent of beneficiaries. For this small group, costs averaged more than $100,000 per person in 2011. Meanwhile 74 percent of Medicaid beneficiaries received services with average costs of less than $500 in the same year.

With better risk-adjustment, a program that targets services to people in the top cost deciles would receive funding at a rate significantly higher than the amount paid to a program serving primarily people with lower anticipated costs.

Managed care plan administrators are concerned about "adverse selection"--meaning that if they develop specialized programs and provider networks with the capacity to deliver high-quality care tailored to meet the needs of people experiencing homelessness with the most complex health conditions and highest costs, those health plans will likely attract more members who need this level of service. Without risk-adjustment, the plans that enroll too many of these members will lose money, even if they deliver care that improves health outcomes and reduces avoidable costs. But if the capitation payments to the health plans were appropriately risk-adjusted, so that plans with more high-cost members received higher capitation rates, the health plans with specialized programs could serve these members and achieve savings.

State officials would like the option to offer stronger incentives to health plans (especially those with proven capacity overall) to enroll and deliver high-quality, cost-effective care to the relatively small number of individuals who have the most complex needs and who incur avoidable costs, including people with chronic patterns of homelessness. They recognize that this is the group of people for whom effective care management and more appropriate and integrated services, delivered in the right setting and tailored to the needs of individuals, have the potential for making a big impact on costs and outcomes.

However, state Medicaid program staff have had little opportunity to develop or test the robust risk-adjustment methodologies that would be needed to pursue this concept. As state Medicaid programs and health plans have been strained to implement the rapid transition to managed care for many thousands of Medicaid beneficiaries and to prepare for enrolling people who became newly eligible for Medicaid in 2014, some say that it is nearly impossible for Medicaid agency leaders to devote the attention needed to address this complex design challenge for a small number of people--even though they recognize that the cost implications and potential savings opportunities are significant.

6.5.2. Innovative Approaches from Case Study Sites

Even without robust risk-adjustment tools or clear financial incentives, a few Medicaid managed care plans are moving ahead to support innovative programs and to establish partnerships that can help the plans control costs and improve outcomes for their current members.

Minnesota: Managed Care Support Services Linked to Permanent Supportive Housing

In Minnesota, state contracts with the Special Needs Basic Care plans allow the MCOs to provide "in lieu of" services--meaning some services that are not defined in the state Medicaid plan but "make sense" because of the needs of members and the potential to achieve cost offsets. Representatives of Medica (one of the MCOs participating in managed care in Minnesota) are initially focusing on identifying members who are experiencing homelessness and making frequent use of hospital care or other health services. They say they recognize that, "If people aren't housed they cannot focus on health care." They believe that people identified by the plan as having long or frequent episodes of homelessness and who may be eligible for federal or state housing subsidies are likely to be high users with avoidable costs in the future, even if they are not high-cost, frequent users now.

Performance incentives include Medicaid payment withholds (in rates paid to managed care plans) based on performance targets for reducing emergency department use and hospital re-admissions. Such incentives have real financial implications for health plans and have given Medica added motivation to invest in partnerships with some of the organizations that provide PSH and services for people experiencing homelessness.

Beginning in December 2012, Medica and Hearth Connection established a partnership to serve 85 Medica plan members living in PSH. The health plan provides funding for services that help people retain their housing and become or remain healthy, with HUD's Shelter + Care program paying the rent.

At the time of our final site visit, implementation was just beginning with the identification of Medica's Special Needs Basic Care plan members who appear to be homeless, eligible for housing subsidies and targeted case management services, and in need of both housing and more-intensive supports than the standard approach to care coordination.

During the project's first four months, the Medica Supportive Housing Project enrolled 51 single adult participants. Medica provides Hearth Connection with a list of names of plan members who have been identified based on utilization data or referrals from Medica's social workers and care managers. The program is not limited to serving people with the highest costs, but Medica is hoping to see some return on investment in terms of savings or improved health outcomes.

The project is being implemented in collaboration with a subset of Hearth Connection's partner organizations that already have the capacity to deliver Medicaid-reimbursed TCM services. Hearth Connection and its partner service providers are using the information provided by Medica to find people and engage them in housing and services. Some of the people referred by Medica have previously had limited interaction with the community's homeless outreach programs or community-based social services.

Medica makes payments based on a negotiated amount per-member per-month for two months as service providers try to find and engage each person. Payment is available for an additional month, if needed, to get the person engaged and enrolled in services and connected to a housing unit whose rent can be subsidized using Shelter + Care. Ongoing services are available through the existing TCM reimbursement mechanism, which the plan pays on a monthly basis, or through other existing benefits provided through the Special Needs Basic Care plan.

Hearth Connection would like to negotiate similar agreements with other MCOs and with Hennepin Health (described in Chapter 7 of this report). Another PSH provider currently accepts referrals from Hennepin Health housing navigators and will also get referrals to serve Medica members. So far, the scale of both efforts is small. Competition for supportive housing units has not yet been an issue, but there is some concern about whether there will be enough housing subsidies or opportunities in site-based PSH to meet demand as both Hennepin Health and Medica expand their efforts to link homeless members to housing.

The partnering organizations see this project as an opportunity for collaborative learning and cross-training. Hearth Connection is providing training about housing-first and PSH for Medica care managers, and the Medica care managers will provide training for new Hearth Connection service teams to support them in doing care management for health care. Medica will invest in data analysis and evaluation. Hearth Connection and its partners expect to learn a lot about health care delivery systems and to build their competence in the area of health care. They see the project as an opportunity to build or strengthen connections to health homes, community clinics, and hospitals. Hearth Connection hopes for more opportunities to expand, as plans and health care providers begin to recognize the importance of social determinants of health and of PSH as a cost-effective intervention.

For some Medicaid managed care plans and providers of services to people who are currently homeless and PSH tenants, funding relationships may begin with one-time grant funding through the MCO's program of charitable giving or a foundation connected to the health plan.

  • For example, some relationships with homeless service providers in Minnesota begin with grants through the Medica Foundation. This allows time to build relationships as plan representatives and providers learn to talk the same language, establish trust, and begin to see results. Over time, more of these services and partnerships are expected to move under the health plan with ongoing contracts.

Through its foundation, Medica is providing grant funding to St. Stephen's Human Services, a provider of PSH and other services for people experiencing homelessness. The grant will pay for a housing navigator who will work with 15 people experiencing homelessness who use emergency room services frequently and are not connected to primary care or other more appropriate health services. The navigator will help link people to other services that are available through the Special Needs Basic Care plan, including primary care and transportation assistance, and work to connect people to housing options that meet their needs.

California: Challenges with Rate-Setting for Managed Care

In California, the opportunities for using capitation as a sustainable strategy for financing more flexible and effective approaches to serving high-need and high-cost beneficiaries are not so clear as they are in Minnesota.

LA Care is the largest public managed care plan in the country, serving more than 1 million Los Angeles residents through free and low-cost health insurance programs. It is one of two Medicaid managed care plans in Los Angeles County.78 Part of LA Care's mission as the managed care health plan for Los Angeles County is to preserve and strengthen the "safety net" providers of health care for very poor people in the county, including the county hospitals and clinics operated by the Los Angeles County Department of Health Services (DHS). As described in more detail in other chapters in this report, DHS and safety net providers that are part of the LA Care provider network are actively involved in serving people who are chronically homeless, creating PSH, and delivering services in PSH. DHS and some of the providers are hoping that LA Care will be able to use a portion of the Medicaid funding it receives to pay for services that help to achieve reductions in other costs for services covered by Medicaid, including avoidable emergency room visits, hospitalizations, and nursing home stays.

LA Care pays a capitation rate to some medical groups or provider networks to cover primary care, specialty care, and hospital services, and it pays some hospitals directly for inpatient and emergency room care. LA Care also pays directly for the first 100 days of nursing home stays. These nursing home stays often follow discharge from an inpatient hospital stay, particularly for patients who entered the hospital from a homeless situation and cannot be discharged safely to shelters or the streets. LA Care also pays for pharmacy and some other expenses. Efforts to control avoidable hospitalizations and provide better support during care transitions are still evolving. Communication and linkages among hospitals, primary care providers, health plan staff, and the mental health service providers and PSH providers who serve the most vulnerable chronically homeless people in the community still need to be improved.

Leaders at LA Care, DHS, and other public and nonprofit agencies recognize that there are significant opportunities to collaborate and develop better procedures for enrollment, assignment of primary care providers, and ongoing care management for people experiencing homelessness and residents of PSH. LA Care is interested in finding better ways to identify those individuals who have the greatest vulnerability and most complex needs and to serve them effectively, recognizing that the health plan has an interest in improving the quality of care and achieving savings.

Medicaid managed care capitation rates are based on the services included in California's Medicaid state plan. It is therefore unlikely that Medicaid managed care capitation rates will cover all the service elements in a PSH program, as the state plan does not include some important services. Based on preliminary discussions with senior leaders at the California Department of Health Care Services, which runs the state's Medicaid program, it is not clear if or how current Medicaid managed care financing mechanisms will pay for some of the service interventions that are likely to produce better outcomes for people experiencing homelessness and to reduce costs for avoidable hospitalizations. Among these are medical respite and nursing and other flexible services in PSH, including services that are delivered in PSH to address problems related to substance use disorders. Based on the terms of California's current Medicaid program, including approved waivers, there is some uncertainty about whether the state could allow health plans to use their capitation rates to pay for services that are not currently defined as covered benefits in the Medicaid state plan, even if there is evidence that these services reduce avoidable costs for other covered services.

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