Editor’s note: As states’ Medicaid programs continue to evolve from fee-for-service to value-based healthcare delivery, there is growing recognition that system-wide multipayer approaches provide the market power needed to address the triple aim of improved patient care, improved health of populations and reduced costs. Federal initiatives, such as the State Innovation Model grant program, make significant funds available for states seeking to transform their healthcare systems. In crafting their reform strategies, states can learn from early innovators. Manatt Health has produced a new issue brief, summarized below, for The Commonwealth Fund focusing on one such state: Arkansas. To download the full paper, click here.

Increasingly, states are moving beyond their traditional Medicaid programs to embrace new roles as leaders of statewide payment and delivery system transformation. The search for statewide solutions is fueled by cost pressures, health system inefficiencies and poor outcomes, and enabled by expansions in coverage and the availability of substantial federal funding.1 In 2011, Arkansas began a process to address the challenges and opportunities presented by the state’s existing healthcare delivery and payment environment. What emerged was a statewide payment reform initiative, the Arkansas Health Care Payment Improvement Initiative (AHCPII), which spanned outpatient and inpatient care.2

AHCPII Reforms Seek to Address Fiscal, Population and Provider Challenges

In 2010, Arkansas officials faced a triple threat: a confluence of fiscal, population, and provider system challenges. A potential Medicaid Trust Fund shortfall loomed, Arkansas’s population suffered from pervasive chronic disease, and Arkansas’s provider community was fragmented. An uninsured rate that exceeded the national average3 and a Medicaid program with the lowest eligibility levels in the nation added to Arkansas’s challenges.

In 2011, Arkansas Medicaid was almost entirely a fee-for-service system with low payment rates and substantial reliance on provider taxes and supplemental payments. The architects of Arkansas’s statewide health system transformation determined that the traditional options for averting a Medicaid shortfall (e.g., rate cuts, reductions of benefits, introduction of Medicaid managed care) were unpalatable and that an alternative path was needed. Arkansas benefited from government leaders who understood the Arkansas healthcare market, had the experience and expertise to diagnose the drivers of the existing challenges, and proved adept at designing a program that was responsive to stakeholders.4 Medicaid’s fiscal crisis and similar pressures in the private sector presented an opportunity to integrate individual payer efforts into a collective framework for reform.

The state convened stakeholders to develop a common vision and framework for health system transformation. At the outset, providers and payers agreed on three foundational propositions:

  1. the trajectory of healthcare costs was unsustainable;
  2. there were inefficiencies in the system that, once corrected, could result in shared savings; and
  3. the traditional fee-for-service model perpetuated misaligned incentives and had to be replaced with a value-based system.

Emerging from the deliberative process were the three components of the AHCPII: (1) patient-centered medical homes (PCMHs), (2) Health Homes for chronically ill and other individuals with complex healthcare needs, and (3) payment and delivery models based on episodes of care. AHCPII incentivizes providers through greater accountability for costs and quality and concomitant opportunities to participate in generated savings that align interests across healthcare providers, purchasers, and both public and private payers.

AHCPII Moving Forward

Within the next three years, Arkansas expects episode-based payments to account for 50 percent to 70 percent of the state’s total healthcare spending for acute care and complex chronic conditions.5 By 2017, Arkansas expects PCMHs to serve the majority of Arkansans.6 AHCPII expansion will also be significantly boosted by Arkansas’s decision to expand Medicaid through Qualified Health Plans (QHPs) in the Marketplace, referred to as the “Private Option.” The Arkansas Insurance Department requires QHP issuers to participate in the Private Option, and beginning in 2015, in AHCPII’s PCMH program.7These requirements will vastly increase the reach of the PCMH program; as of July 2014, over 170,000 individuals enrolled in QHPs through the Private Option, and another 40,000 enrolled through the Marketplace.8  

AHCPII Has Lessons for Other States

While Arkansas’s success is grounded in reforms that address its particular healthcare landscape, there are insights that can inform other states’ health system delivery and payment reforms. These include:

  • Leadership. There is no substitute for high-level leadership from the state’s governor and his/her key advisors who can command the respect and attention of key stakeholders.
  • Inclusive and Ongoing Stakeholder Participation. Comprehensive transformation of a state’s healthcare system requires that providers, payers and other key stakeholders are meaningfully engaged from inception through implementation.
  • Common Principles. Stakeholder consensus on key principles is critical, providing a common lens for assessing progress and resolving problems.
  • Ambitious but Realistic Reforms. While important for health reform to be bold to garner and maintain attention, it must take into consideration the healthcare systems’ capabilities and be paced pragmatically.
  • Use of State Levers to Drive Multipayer Involvement. States must strategically deploy their purchasing and regulatory authorities across agencies (e.g., Medicaid, insurance, public health, and state employees), reinforced when needed by the state leadership’s bully pulpit.9
  • Payment Reform Coupled with Expanded Coverage Meaningful system reform will be far more difficult, if not impossible, to achieve for states in which a significant number of residents remain uninsured.
  • Funding. Funding generates interest in and enables reform. Going forward, other states can fund payment and delivery system reforms as a result of the availability of $730 million for the next round of State Innovation Model grants and Delivery System Reform Incentive Payment program waivers, with the technical support of the Medicaid Innovation Accelerator Program (IAP).10


Whether driven by the triple aim of improved patient care, improved health of populations, and reduced costs; budget pressures; Medicaid expansion; or a combination of all three, states are advancing their health systems’ evolution toward value-based care. States can draw valuable lessons from the AHCPII experience. With fully committed and experienced state leaders and the increased availability of federal funding for multistakeholder strategies, states can work out the details of reform though a process of engaged, collaborative planning and implementation.