California is eager to identify and support innovative models of care that have the potential to both improve member health outcomes and reduce cost trends over the long term. With 81% of Medi-Cal beneficiaries enrolled in managed care, Medi-Cal managed care organizations (MCOs) are central to achieving these objectives.

An unintended consequence of the current rate-setting methodology is that plans can be negatively impacted when they invest in initiatives that result in lower costs. For example, MCOs that invest in improved care coordination or housing supports often lower costs due to declining inpatient hospital or emergency department use. However, 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.

The California Health Care Foundation, with support from Manatt and Optumas, convened a workgroup to explore options for addressing this issue and encouraging joint state and plan investments in innovative health-related initiatives. The workgroup comprises leaders of several Medi-Cal MCOs, and the Medi-Cal director served as an advisor to the group.

While the workgroup considered a variety of options and complementary strategies, the primary component of the recommended approach is to devise a rate adjustment that would encourage plans to consistently invest significant dollars in care improvements and health-related services that can generate program savings.

As envisioned for California, a plan-specific rate adjustment would be triggered if a plan meets three criteria:

1. Generates savings above a certain threshold
2. Meets specified quality targets
3. Makes an investment in approved health-related initiatives at a level set by the state

This paper describes the recommended rate adjustment in further detail while also providing an overview of the current rate-setting process and describing the workgroup process and principles.