Across the country, many states are redoubling their efforts to encourage and accelerate improvements in their Medicaid managed care programs. A growing number of states are holding their contracted health plans financially accountable for assuring the provision of high-quality, cost-effective care that improves beneficiary outcomes. There are also a variety of nonfinancial levers states can apply, including reporting and publicizing performance on quality, public recognition of health plans and providers that achieve high performance, and autoassignment of Medicaid members to higher-performing health plans.

The California Department of Health Care Services (DHCS) has historically adopted a number of these nonfinancial strategies with its managed care plans (MCPs).  There is an opportunity to build on these DHCS incentive programs and further accelerate quality improvements in Medi-Cal through the use of financial incentives. This report describes approaches that states across the country are taking to use financial incentives with Medicaid MCPs. They include:

• Bonus payment funded by withhold: Withholding a percentage of MCPs’ monthly capitation payments is the most common approach that states have taken to implement a performance-based incentive.
  
• Shared savings (profit or gain sharing): A state could permit MCPs to retain a greater percentage of the profits that they would otherwise share with health plans.
• Penalty: Under this approach, states impose a financial penalty for poor performance.
• State-funded bonus payments: A performance-based bonus payment provides an opportunity for MCPs to receive revenue in addition to their base payments.
• Capitation rate adjustment: States may adjust the base capitation rate for MCPs based on their quality performance.

The paper describes each of these approaches in further detail and outlines other important policy decisions that will influence the design of a performance-based MCP incentive program.