Note: Quality Incentive Program Design Decisions: An Overview of Programs in California and Selected Other States was updated February 17, 2021, to correct information about the program in Texas.

Medi-Cal, California’s Medicaid program, is the state’s health insurance program for Californians with low incomes, including over 40% of all children, half of those with disabilities, over a million seniors, and around one in six workers. More than 80% of Medi-Cal enrollees get their care through a Medi-Cal managed care plan (MCP). Every person enrolled in Medi-Cal managed care should have access to high-quality care.

However, the quality of care provided to Medi-Cal managed care enrollees is, on average, below that received by Medicaid enrollees in many other states. External evaluations have found that the Department of Health Care Services (DHCS) has not generated significant quality improvement gains in Medi-Cal over the past 10 years.

This report recommends a new way to pay Medi-Cal managed care plans, with financial incentives designed to spur better quality of care for Medi-Cal enrollees. DHCS would move from its current penalty structure to an approach that combines a capitation withhold (that is, DHCS would withhold part of its per-member per-month payments to MCPs) with an incentive payment for MCPs whose performance on quality measures meets or exceeds expectations. In other words, MCPs could earn back some or all of the amount withheld by DHCS depending on their performance.

Other key elements of this approach should include:

• DHCS should continue to require that specific performance expectations be met (a “gate”) to earn an incentive payment.
• DHCS should couple the gate with a “ladder,” in which the amount of the financial incentive increases as performance improves.
• DHCS should reward both achievement, using the gate-and-ladder approach described above, and improvement, defined as a statistically significant gain over prior performance.
• The reward for improvement should be balanced with a negative adjustment for performance that has deteriorated by a statistically significant amount.
• DHCS should include one or more health-disparity reduction measures in the incentive measure set.

The approach is described in further detail in the paper along with other considerations, such as taking into account geographic variation and social risk factors.

About the Authors

These papers were written by Justine Zayhowski; Jennifer N. Sayles, MD, MPH; and Michael Bailit. Bailit Health Purchasing (Bailit Health) is a health policy consulting firm dedicated to ensuring insurer and provider performance accountability on behalf of public agencies. The firm primarily works with states to take actions that positively influence the performance of the health care system and support achievement of measurable improvements in health care quality and cost management.