A new report prepared for the California Health Care Foundation reviews California’s Medicaid rate-setting process and offers recommendations for adjustments to that process to encourage health plan investments in health-related benefits and services that improve care and lower costs.

The Medi-Cal program plays a critical role in California, providing health coverage for a third of all residents. With 81% of Medi-Cal beneficiaries enrolled in managed care, Medi-Cal managed care organizations (MCOs) are central to achieving the state’s objectives of supporting innovative models of care that have the potential to both improve member health outcomes and reduce cost trends over the long term. While plans do make some investments that go above and beyond the required benefits, disincentives in the Medi-Cal MCO rate-setting process may actually discourage sustained investments that could help the state reach its goals of improving care and lowering costs.

An unintended consequence of the current rate-setting methodology is that plans are negatively impacted when they invest in initiatives that result in lower costs. This can occur when an MCO seeks to improve care by investing in services or other initiatives that are not traditional Medicaid benefits, such as improved care coordination or housing supports; such efforts can result in a decline in inpatient hospital use, emergency department use or other high-cost utilization. In such cases, the cost basis for the plan’s future rates declines, and the plan receives a lower rate than it would have received without the intervention, with no recognition of the value of the intervention.

To seek possible solutions to these unintended consequences, the California Health Care Foundation, with support from Manatt and Optumas, convened a work group to explore options for addressing this issue and encouraging joint state and plan investments in innovative health-related initiatives. A new report prepared for the California Health Care Foundation presents the output of that work group process. Specifically, it provides an overview of the current rate-setting process, highlights challenges and unintended consequences, and offers a recommended approach for updating the current rate-setting methodology to advance Medi-Cal’s goals of improving member health outcomes and promoting efficient resource use.

Click here to read the full report.