Designing a Medicaid Hospital Global Budget Under CMS’ AHEAD Model

In September 2023, the Centers for Medicare and Medicaid Services (CMS) announced the States Advancing All-Payer Health Equity Approaches and Development (AHEAD) Model, and this week CMS is expected to make a first set of announcements about states set to join the model. In March, Manatt released an initial summary of CMS’ design.

The goals of the AHEAD model are to improve overall population health of a state or sub-state region, reduce health disparities, and curb health care cost growth, using hospital global budgets as a key lever. Notably, current value-based payment models often work well for primary care but can lead to declines in revenue for hospitals. Hospital global budgets help avoid this issue as they do not penalize hospitals that succeed in improving the health of their communities. AHEAD seeks to pair hospital global budgets with continued primary care payment reform and investment within each participating state.

Under AHEAD, participating hospitals in selected states or sub-state regions will receive hospital global budgets (i.e., a fixed amount of revenue) to provide inpatient and outpatient services for the upcoming year, replacing fee-for-service (FFS) payments. CMS is expected to release further technical details this week along with the state announcements.

While details continue to evolve, key design features of the hospital global budgets include:

• Hospital baseline revenue. A participant hospital’s baseline will be based on its historical outpatient and inpatient revenue from the three most recent years preceding the hospital’s first performance year. More recent years will be weighted more heavily. There will be a “gap” year between the multiyear base and the first performance year to allow for claims runout.
• Baseline adjustments. After the baseline is constructed, CMS will apply a series of adjustments to ensure hospital global budgets are sufficient to cover hospital services and quality improvement activities.
• Annual payment adjustments. In addition to adjustments described above, CMS will apply volume- and performance-based adjustments to inform the following year’s budget. The former is intended to account for fluctuations in inpatient and outpatient volume. The latter is based on a hospital’s performance on quality metrics, including health equity-focused measures.

As with all multi-payer payment reform efforts led by CMS, the Medicare FFS methodology specifications will serve as a starting point for other payers’ methodologies, including Medicaid. States participating in the initial AHEAD cohorts will have many design decisions to make over the coming months about how best to align their Medicaid requirements with Medicare FFS in setting up hospital global budgets. More broadly, states will need to consider their strategy for supporting transformation through the model, including how data will flow from participating hospitals to and from the state and how participating primary care practices will improve care coordination working with participating hospitals. Meanwhile, hospitals in AHEAD-participating states with a high proportion of Medicaid patients will need to consider the pros and cons of opting in. Below we examine some of the key considerations for both state Medicaid agencies and hospitals.

AHEAD Requirements for Medicaid Hospital Global Budgets

CMS requires that states’ Medicaid hospital global budgets:

• Consider incentives to recruit and retain hospitals early in the model, including accommodations for critical access hospitals;
• Incentivize decreases in unnecessary and avoidable Medicaid hospital utilization while rewarding improvements in outcomes;
• Include facility services in hospital inpatient, outpatient, and emergency departments at a minimum;
• Allow participation by short-term acute care hospitals and critical access hospitals at a minimum;
• Account for factors that influence the cost of hospital care (e.g., inflation, demographic changes);
• Include medical and social risk adjustments to account for differences in beneficiary populations by hospitals;
• Adjust for changes in service line and unplanned volume shifts.

To implement these aims in Medicaid, some key considerations are as follows:

• Implementation through Medicaid managed care plans. Most states rely on Medicaid managed care delivery systems and those states will need to choose how much the state will prescribe the exact methodology plans must use to implement hospital global budgets or whether plans will need to develop their own methodologies. Experience from CMS’ Pennsylvania Rural Health Model and the Community Health Access and Rural Transformation Model (which was canceled) is that hospital global budgets are extremely complex to operationalize, even for large and sophisticated payer organizations. Even if allowing payment innovation at the plan level, states will need to stand up technical assistance and convening for plans. Plans may prefer that the state tackle the complexities of designing a hospital global budget model and simply direct them on how to implement via a “state directed payment” authorized under Medicaid rules. For participating hospitals that will usually have contracts with multiple Medicaid managed care organizations, a key consideration will be how Medicaid revenue will be divided across the plans while accounting for shifts in plan enrollment (i.e., changes could mean that one plan is paying more than its “fair share” of the hospital’s global budget in a given year).
• Populations served, including health equity implications. Medicaid serves sub-populations, including healthy children, low-income individuals and families, persons with disabilities, and individuals experiencing homelessness with varying degrees of hospitalizations. The balance of Medicaid sub-populations served may also vary widely from hospital to hospital. Therefore, states will need to tread carefully in setting up baseline revenue assumptions in Medicaid, as well cost reduction targets, to ensure that care for generally low-utilizing populations is not artificially constricted. There are related health equity implications too, since Medicaid disproportionately serves people of color who may be under-utilizers of services and thus may not be reflected in baseline calculations. The Medicare FFS design includes some mitigations for this problem that state Medicaid agencies may want to consider adapting. Finally, the recent COVID 19 experience needs to remain top of mind when considering hospital global budgets—medical surges, including seasonal flu and RSV, may disproportionately affect the Medicaid population. Both the state requirements and hospital terms should reflect adequate guardrails to handle these events.
• Specific needs of providers that serve higher proportion of Medicaid patients. Hospitals with a high Medicaid patient mix generally have lower margins since reimbursement rates in Medicaid are typically lower compared to Medicare or commercial insurance. There is less “buffer” for these hospitals in the event the methodology is off. However, one advantage of global budgets is that there is less cash flow instability—hospitals have a predictable payment stream from month to month and year to year.
• Shortfall in payments to cover costs of care. The promise of global budgets is that it provides stable revenue to fund a hospital’s efforts to transform care to focus on improving health and reducing hospital utilization. However, if the baseline payments are well below cost, locking in inadequate payments provides predictability but not stability. Hospitals will still struggle financially in the face of thin or negative margins. States and providers must consider the adequacy of Medicaid reimbursement when contemplating global budgets.
• Supplemental payments. States will likely build supplemental payments, including Medicaid Disproportionate Share Hospital, Upper Payment Limit, and directed payments, into a hospital’s Medicaid global budget. However, states will need to carefully consider which year will be used since there is significant variation year-to-year in supplemental payments.
• Incentivizing providers to address health-related social needs (HRSNs) to improve health. States will need to consider ways to address HRSNs, specifically whether additional funds are needed to finance upstream interventions (e.g., improved connections with the Supplemental Nutrition Assistance Program, federal housing voucher programs) or whether Medicaid global budgets are sufficient.

Authorities to Implement Medicaid Hospital Global Budgets

If a state or sub-state region is accepted into the model by CMS, states must request the necessary authorities to implement hospital global budgets for Medicaid. States have several options for implementing their Medicaid hospital global budget methodologies and should assess their current Medicaid program structures to determine the most streamlined approach for approval. Options include state plan amendments, Medicaid managed care contract amendments, Section 1115 waivers, and state directed payments. Notably, the recent Managed Care Final Rule suggests that CMS intends to allow states to use state directed payments to implement Medicaid hospital global budgets. States will need to develop attribution methodologies since state directed payments are generally tied to attribution. For hospital global budgets, it appears CMS has broadened the concept of attribution to include where individual enrollees are tied to a provider for quality measurement purposes.

Next Steps

For states: States seeking to participate in Cohort 3 must submit their applications by 3:00 PM ET on August 12, 2024. Award notices will be issued in the fall for Cohort 3 applicants.

States pursuing participation in the model should begin planning efforts in the near term since implementation of Medicaid hospital global budgets will need to go-live by no later than the end of Performance Year 1 (December 31, 2026 for Cohort 1 participants and December 31, 2027 for Cohorts 2 and 3 participants). Key planning activities include identifying the appropriate authorities needed to implement Medicaid hospital global budgets, engaging with stakeholders, recruiting hospitals, and developing a state-specific methodology.

For hospitals: Hospitals with high Medicaid patient mix should consider the financial impact of Medicaid hospital global budgets and work closely with their state Medicaid agency to develop a favorable Medicaid hospital global budget methodology.

For more information, refer to the CMS AHEAD Model website and Frequently Asked Questions. Contact Anne Karl at akarl@manatt.com or Edith Stowe at estowe@manatt.com for help with any aspects of this new model.

Manatt has published other resources on CMS’ Transforming Maternal Health, Making Care Primary, and Guiding an Improved Dementia Experience models for reference.