How Medi-Cal Uses Financial Incentives to Improve Access, Quality, and Equity

California’s Medicaid program, known as Medi-Cal, serves nearly 14.8 million Californians. Approximately 95% of them receive care through managed care plans (MCPs) and behavioral health plans (BHPs). This represents a $161 billion investment in state fiscal year 2024–25. The California Department of Health Care Services (DHCS) has strategically expanded its use of financial incentives over the past five years to strengthen MCP and BHP efforts in delivering accessible, high-quality, and equitable care.

CHCF partnered with Aurrera Health Group to better understand the role that financial incentives to MCPs and BHPs play in promoting improvements in timely access to high-quality care and advancing health equity.

Key Findings

DHCS operates eight distinct Medi-Cal managed care incentive programs that fall along a continuum ranging from up-front investments to capitation withholds to sanctions. They include the following:

• Bonuses. Incentive Payment Program, Housing and Homeless Incentive Program, Student Behavioral Health Incentive Program, and Behavioral Health Community-Based Organized Networks of Equitable Care and Treatment (BH-CONNECT) Access, Reform, and Outcomes Incentive Program
• Performance-based rewards. Auto Assignment Incentive Program
• Withholds. Quality Withhold and Incentive Program
• Penalties. Managed Care Accountability Set Sanctions and Behavioral Health Accountability Set Sanctions

While these programs demonstrate DHCS’s innovative approach, many are relatively new and lack published evaluations demonstrating their direct impact. The Quality Withhold and Incentive Program places up to 0.38% of capitation at risk, compared to higher stakes in other successful programs — Covered California’s Quality Transformation Initiative uses 2.8% of capitation, while three state Medicaid programs range from 0.75% to 4.25%.

Success stories from other incentive programs demonstrate meaningful potential: Covered California’s initiative generated $15 million in Quality Transformation Initiative payments while still producing gains in high blood pressure, diabetes, and cancer screening; Maryland’s program paid out $18.8 million after improvements in asthma, diabetes, and perinatal care; and Oregon’s program disbursed $327 million, as nearly all health plans met benchmarks for language access and postpartum care.

Lessons Learned

In an examination of the incentive programs, the following lessons emerged:

• Size and mechanism of the incentive matter. Representatives from state Medicaid agencies, health plans, and consumer advocate groups acknowledged that there is an optimal balance between the size of the incentive and the mechanism used to achieve it. Incentives must be large enough, but not excessive, and paired with the right mechanism (reward, penalty, withhold) to spur investment. Representatives from Medi-Cal health plans and one state Medicaid agency said quality withholds of 1.0%–2.0% hit the motivational sweet spot.
• Importance of incentive program alignment. Successful programs strategically align with other state and federal initiatives, reducing administrative burden and fostering collaboration while maximizing impact on member outcomes.
• Simplicity, feasibility, and actionability are key. Simple, achievable, and consistent measure sets and targets drive sustained engagement. Complex programs with excessive measures burden health plans and distract from quality improvement goals.
• Stakeholder engagement and collaboration is critical. Early, consistent engagement with clear program expectations and timelines drives success. Late program details create uncertainty that hinders planning and resource allocation.

Recommendations

Based on the lessons learned, Aurrera Health Group recommends that DHCS consider the following as it develops and refines incentive programs for MCPs and BHPs:

• Preserve innovation. California’s multi-hundred-million-dollar incentive programs advance population health through cross-sector partnerships and represent groundbreaking approaches addressing social, economic, and environmental drivers of health.
• Maintain strategic alignment. Programs collectively representing billions in financial incentives are strategically coordinated under CalAIM (California Advancing and Innovating Medi-Cal), reducing duplication, easing administrative burden, and enabling focused quality improvement efforts.
• Establish consistent measures and targets. Consistent measurement cycles (e.g., three-year cycles) allow Medi-Cal health plans to properly plan and invest in sustainable quality improvement rather than short-term adjustments.
• Focus on high-impact measures. Limiting incentive measures to actionable, high-impact areas enables concentrated resource allocation on priority improvements.
• Build implementation capacity. Incorporating pay-for-reporting components with clear two-year timelines for transitioning to pay-for-performance measures allows infrastructure development before accountability.
• Strengthen engagement. Early, consistent engagement with Medi-Cal health plans and at least one year of lead time before measurement periods enable effective resource allocation and meaningful improvement strategies.

Looking Forward

California’s managed care incentive framework represents a robust approach to driving health system improvement. By refining financial signals, reducing measure instability, and embedding health equity considerations into every program, DHCS can accelerate progress toward a Medi-Cal system that reliably delivers timely, high-quality, and equitable care for nearly one in three Californians — supporting DHCS’s aspirations for health and well-being while addressing systemic barriers to care.