Financial Sustainability

How to lay the foundations for success under CMS’s new MDC program

September 28, 2020 6:01 pm

The CMS Medicare Direct Contracting (MDC) program offers a unique opportunity take the next step in value-based payment and population health management. Success requires the right targeted investments in expertise and infrastructure.

CMS launched MDC in 2019, giving providers and payers an opportunity to take risk and manage population health for Medicare fee-for-service (FFS) beneficiaries. Although the program builds on existing features of accountable care organization (ACO) models, payment under MDC will be based on partial or full capitation. Outside of Medicare Advantage (MA), the new MDC models are the government’s most ambitious move to date in the direction of flexible benefit design combined with first-dollar shared risk.

MDC provides a unique opportunity for first-to-market movers to establish a competitive advantage within targeted markets. To take advantage of its significant strategic and financial benefits, organizations must be willing to build the competencies and infrastructure needed to establish a solid position in this dynamic and ever-changing competitive environment.

Program details

To participate in the MDC program, organizations must establish a legal entity called a Direct Contracting Entity (DCE). On signing the agreement to participate in the program, the DCE must meet criteria outlined by the Center for Medicare and Medicaid Innovation (CMMI) in the request for applications (a primary criterion being the ability to contract downstream with the DCE provider network).Organizations can establish DCEs independently or in partnership with other organizations. Eligibility extends to a broad swath of provider types. The aim is to attract a diverse pool of entities, including existing Next Generation ACOs, Shared Savings Program ACOs and managed care organizations with fully integrated and dual plans. 

The MDC program currently comprises two voluntary risk-sharing payment models, designated as professional and global. A third geographic model is in development. Although details are not final, this option targets more mature risk-bearing organizations and would offer DCEs the ability to assume risk for the total cost of care for Medicare FFS beneficiaries in a CMS-approved geographic area using a geographic assignment methodology.b

Each model spans five years plus an optional initial implementation period to align sufficient Medicare beneficiaries. The initial implementation period for the first two models began January 2020 and the first performance year is 2021, with a start in April due to Covid-19 related delays. The next application cycle will begin in the first quarter of 2021 for a Jan. 1, 2022, performance year.c

Professional. This population-based payment option offers a 50% savings/losses risk-sharing arrangement with risk corridors protecting against significant swings in cost, on the total cost of care. DCEs choosing this option receive primary care capitation, with a risk-adjusted per-beneficiary-per-month (PBPM) priced at 7% of the total cost of care. CMS’s assumption is that this pricing will likely be higher than a DCE’s baseline primary care cost, thereby providing a temporary advance payment to cover enhanced primary care services. After the performance year and before shared savings or losses for the year are calculated, CMS will recoup any of the 7% PBPM capitation over and above baseline so it will not skew the total cost of care savings or loss calculation. This reconciliation against baseline is independent of actual expenditures. For example, if baseline is 5%, CMS will recoup 2% (7% – 5%), even if DCE actual expenditures are greater or less than the 5% baseline.

Global. This payment option offers 100% risk-sharing of savings or losses, again with risk corridors, against the total cost of care. It also offers a choice of primary care capitation, with the same recouping rules as per primary care capitation in the Professional option above, or total care capitation – for which there is not a recoupment of capitation outside of the shared savings/loss reconciliation. A risk-adjusted PBPM payment covers all services provided by the DCE and the preferred providers with which the DCE has an agreement.



Primary care capitation

Total care capitation


  • 50% of savings/losses
  • Risk corridors with higher cut-offs
  • Stop-loss for random, high-cost expenditures

The only available capitation payment mechanism for the professional model

Not an option


  • 100% of savings/losses
  • Risk corridors with lower cut-offs
  • Stop-loss for random, high-cost expenditures

Optional – must select one of the two capitation payment mechanisms

Optional – must select one of the two capitation payment mechanisms

In addition to selecting one of the available payment models, applicants must choose from among three DCE types:

  • Standard – for providers with experience delivering care to at least attributed 5,000 Medicare FFS beneficiaries
  • New entrant – for providers with less experience in Medicare FFS and the ability to gain a minimum of 3,000 attributed FFS beneficiaries in their first performance year (PY) and 5,000 by PY4d
  • High-needs population – for providers with target populations that meet the criteria for “high needs” for Medicare, can meet the threshold of 250 in PY1 and can grow to 1,400 by the end of PY2

Eligibility for these types is driven by current experience with risk, required beneficiary alignment volume and desired target population to be managed within the program.

Participants in MDC can choose either professional or global risk for any of the standard, new entrant or high-risk options.


Medicare Direct Contracting

NextGen ACO*

Shared Savings ACO

Minimum beneficiary size
  • Standard model: 5,000 beneficiaries
  • New Entrant Model: 1,000 with glide path to 5,000 by performance year 4 (PY4)
  • High-risk Model: 250 with glide path to 1,400 by PY5

10,000 (7,500 in rural area)



Capitation is required, either professional or global. It is mandatory for participant providers, but optional for preferred providers in the Direct Contracting Entity,

All-inclusive population-based payments (AIPBP) option

No capitation option

Shared Savings or Loss

First-dollar savings or loss with risk corridors and optional stop-loss insurance. Includes discount withhold and quality withhold:

  • Professional: 50%
  • Global: 100%
  • (Geographic TBD)

First-dollar savings or loss for spending below or above benchmark (includes a discount withhold)

  • Arrangement A: 80% risk years 1-3; 85% risk years 4 & 5 with 15% savings/losses cap
  • Arrangement B: 100% risk with 15% savings/losses cap

First-dollar savings once minimum savings rate (MSR) is met or exceeded. First-dollar loss after minimum loss rate (MLR) rate is met or exceeded.

  • Basic track: Savings glide path of 40% to 50% savings based on quality performance, not to exceed 10% of updated benchmark; losses for risk/reward models at 30% with caps
  • Enhanced Track:75% based on quality performance, not to exceed 20% of updated benchmark; loss rate of 40% to 75%, not to exceed 15% of updated benchmark**

Quality Measures

14 quality measures proposed, 10 of which are CAHPS measures – P4R during PY1 and P4P thereafter Mirrors Shared Savings ACO quality measures, excluding ACO-11: Percentage of primary care physicians who successfully meet meaningful use requirements 23 quality measures with Pay-for-reporting to pay-for-performance progression***
Beneficiary Alignment Prospective claims-based and voluntary alignment with new prospective-plus alignment option Prospective claims-based and voluntary alignment with new prospective-plus alignment option Choice of prospective assignment or preliminary prospective assignment with retrospective reconciliation****

*Centers for Medicare & Medicaid Services Center for Medicare and Medicaid Innovation Next Generation ACO Model, Request for Applications.
**CMS, Shared Savings Program Participation Options for Performance Year 2021.
***CMS, Medicare Shared Savings Program Quality Measure Benchmarks for the 2020/2021 Performance Years.
****, Final Rule Creates Pathways to Success for the Medicare Shared Savings Program Fact Sheet, Dec. 21, 2018.

(See the sidebars below for discussions of the benefits of MDC participation and how to determine whether participation in MDC represents the best strategic option for an organization.)

MDC success factors

The factors that determine success under MDC are no different than those of population health management and value-based payment. To successfully tap into the revenue opportunities MDC presents, participating organizations must invest in infrastructure, network and cultural change. Risk-bearing organizations must be able to reduce the total cost of care and improve performance against quality metrics highly focused on beneficiary satisfaction and total cost of care. To effectively do so, they may have to make significant changes to current business practices and develop new key competencies.

Following is an at-a-glance overview of the strategies and potential investments that organizations will need to consider if they are to achieve success under MDC. It provides a checklist for completing the steps required to lay the groundwork for high-level performance under this model.

1. Make MDC part of the overall value-based payment (VBP) strategy and operations:

  • Develop an overarching VBP roadmap with defined milestones for growth and goals for medical management capabilities.
  • Align the existing employee health plan with the overall VBP, network, managed services organization (MSO) and contracting strategy.
  • Assess and renegotiate existing payer agreements, as necessary, to maximize alignment of incentives and delegation models so they can be coordinated with the MDC network, MSO and contracting strategy.

2. Cultivate a deep understanding of the attributed MDC population, network and service area:

  • Assess performance and make tough decisions about the organization’s target service area(s) and which primary care physicians, specialists, hospitals, skilled nursing facilities, home care and other key providers will be included in its network and served through its referral system.
  • Analyze and understand actual or likely prospective claims-based attribution of beneficiaries to the providers within the DCE and opportunities for voluntary Medicare FFS beneficiary alignment.
  • Clarify how a region defined by beneficiary alignment will impact the organization’s benchmarking.

3. Ensure the required licensing and compliance apparatus are in place before the start of either the 2020 implementation period or 2021 performance year:

  • Ensure the organization has proper licensure as required in its state to take and manage downside risk.
  • Ensure required Medicare compliance structure and processes are in place.
  • Create or leverage the appropriate legal entity and governance structure for the DCE.
  • Assess current state gap to goal and build or buy, as necessary, the MSO competencies required to manage capitation and other aspects of MDC and the other VBP arrangements that are either in place or on the VBP roadmap.
  • Assess and ensure that the organization’s network can meet Certified Emergency Health Record Technology (CEHRT) requirements.e

4. Assess the organization and network’s ability to take on and manage risk:

  • Assess the organization’s historical success and future ability to improve medical loss ratio (MLR) for an attributed population under risk arrangements with an open network, as is required not only under MDC but also under MSSP ACOs, NextGen ACOs, commercial preferred provider organizations and clinically integrated networks.
  • Assess the need to fill gaps in existing infrastructure for MSO-related services, such as care management, network management, provider detailing, beneficiary engagement and related population health management services, including the ability to manage capitation payments.
  • Quantify the investment required to optimize, build or buy to close MSO gaps, considering how the MDC capitation dollars could mitigate the up-front cash requirement.
  • Assess and close gaps or implement, as needed, a risk-mitigation strategy that builds on the risk corridors and stop-loss protections of MDC, including overall reinsurance and risk-based capital needs for all VBP arrangements across all lines of business.
  • Create a gap closure plan for addressing any required care coordination and contractual relationships with a high-performing network, including hospitals, specialists, skilled nursing/post-acute providers and other community organizations that will be instrumental in managing medical costs for the attributed population.
  • Build out a financial pro forma and funds-flow model to demonstrate for targeted DCE network providers how their participation in the organization’s DCE will affect their future financial performance, taking into consideration potential FFE rate reductions.
  • Leverage claims data made available by CMS upon approval of application to the program.

5. Develop a network optimization and management strategy:

  • Analyze and identify the highest-performing providers in the target geographies from a total-cost-of-care perspective to determine who will be in and out of network from a referral and contracting perspective, including any preferred providers that might be engaged in a discounted rate program.
  • Develop a clear, data-driven specialty strategy, including considerations related to potential shared savings access and/or withholds, and objective performance metrics covering quality, beneficiary satisfaction and total cost of care.
  • Assess and create as needed clear incentives, referral guidelines and protocols for primary care physicians related to alignment with the organization’s care model, total-cost-of-care management, patient satisfaction and specialty referrals.
  • Leverage, enhance or implement, as needed, an electronic referral system, e-consult and telehealth capabilities, including alignment of employed and contracted provider incentives.
  • Establish guidelines for proper documentation to ensure appropriate billing and coding.

6. Plan for beneficiary engagement, membership growth and retention:

  • Assess and determine ability to meet membership requirements for the chosen MDC option, including existing MSSP or NextGen ACO, or attributed Comprehensive Primary Care Plus beneficiaries, who can be transitioned to the organization’s DCE.
  • Integrate a marketing plan, including supplemental benefit design, and beneficiary engagement strategy, process and infrastructure with other VBP programs, including the employee health plan, if one exists.
  • Identify any investments, process redesign, network optimization or related activities required to improve CAHPS scores and other quality metrics across the organization’s network.

7. Ensure the organization has a compliant governance model and funds flow:

  • Decide whether to be an independent DCE or to partner with one or multiple other organizations.
  • For a collaborative DCE approach, undertake a process to value organization’s relative contributions to overall beneficiary alignment, operational requirements and baseline performance.
  • Create a clear division of financial and operational responsibility for all parties, including MSO vendors and network participants, aligning it with the organization’s employee health plan and any other VBP arrangements.
  • Define risk pools, distribution of MLR savings and a contracting strategy that supports the organization’s overall strategy, including a collaborative DCE approach if applicable.
  • Create a pro forma and ROI analysis, leveraging existing data, to understand all benchmark and financial requirements (e.g., looking at the organization’s experience under MSSP ACO).

A unique opportunity

To ensure their organizations’ success under CMS’s new wave of APMs, including MDC, health system leaders must educate themselves fully on program requirements, the benefits of each option, required public disclosures and the associated financial risks, as well as the overall organizational and cultural readiness of their organizations.

Organizations with existing MSO service capabilities (e.g., advanced analytics, care management platforms, provider scorecards and profiling and value-based incentive and compensation structures) will likely perform better than organizations without such an infrastructure in place. Optimizing these capabilities will be critical to achieving success in MDC.

MDC is not for everyone, but with the right amount of cultural and infrastructure investment, this program can help the industry move one step closer to realizing the Quadruple Aim (to enhance patient experience, improve population health, reduce total cost of care and improve provider satisfaction).


a. CMMI, Direct Contracting Model: Global an professional options, Request for Applications, Nov. 25, 2019.

b. CMMI, “Request for information on direct contracting—geographic population-based payment model option,” Accessed Sept. 17, 2020.

c. The latest information from CMS can be found on their Medicare Direct Contracting website.

d. No more than half of a new entrant’s DCE participant providers can have had experience with a Medicare FFS shared savings program such as MSSP or NextGen ACO or others.

e. 42 C.F.R.414.1305

6 benefits of MDC participation

Although the various combinations of options for Medicare Direct Contracting (MDC) differ significantly from each other, each potential combination offers distinct benefits for organizations that choose to leverage MDC as a key component of their value-based payment, strategic market growth and population health management development strategies. Here are six key benefits healthcare organizations can gain from participating in MDC.

1. Exclusive ability to grow Medicare fee-for-service market share. Unlike the current MSSP ACOs, MDC gives participants the ability to reach out to and align Medicare FFS beneficiaries to their provider network. Alignment in this model is analogous to attribution. It creates the opportunity, much like MA but without the requirement of a health plan, to concurrently grow market share and gain access to more of the total Medicare premium.

2. Reduced administrative burden and consolidation of quality metrics. MDC includes a smaller set of core quality measures than the NextGen and MSSP ACO models. MDC’s measures are focused primarily on beneficiary satisfaction and total cost of care. Organizations can leverage MDC to streamline quality efforts and administrative overhead, maximizing the ROI for efforts targeted both on quality incentive and total cost of care focused activities.

3. Enhanced cash flow. MDC’s capitation options create a unique cash flow opportunity from a FFS Medicare population, enabling investments in population health management capabilities and provider and beneficiary targeted incentives.

4. Coordinated benefits for dual-eligible beneficiaries. Through the high-needs option, participants with experience managing complex, high-risk patients can improve care coordination for dual-eligible beneficiaries by leveraging existing resources and workflows. This option presents a unique opportunity for providers with a trusted health plan partner and a large dual eligible Medicaid managed care population still in FFS for Medicare.

5. Ability to curate a high-performing network. MDC includes broad provisions for preferred provider networks, enabling participants to select and partner with organizations that provide the highest quality of care at the lowest cost.

6. Opportunity to add supplemental benefits outside the MLR. Building upon the NextGen ACO model and Medicare Advantage, MDC allows participants to provide beneficiary incentives to encourage good behaviors through prevention/wellness, chronic care management and other services not currently covered in Medicare FFS.


Does MDC fit your organization?

Although the potential benefits of direct contracting are clear, leadership teams should assess and balance the opportunities with the real downside risks to determine whether Medicare Direct Contracting (MDC) represents the best strategic option for their organization.

Here are some high-level considerations.

MDC may be attractive for organizations that are just starting out in value-based contracting, particularly those that have achieved some measure of success with existing MSSP ACO programs. The versatility and comparative simplicity of this program offers a compelling opportunity for many healthcare organizations, including medical groups, independent provider associations, federally qualified health centers, health systems and health plans. MDC provides a unique upside and market share growth opportunity for two types of healthcare organizations:

  1. Those that lack existing value-based payment arrangements beyond MSSP ACO
  2. Those having confidence based on preliminary analysis that their performance in MDC would be positive or at least break-even as they ramp up population health management infrastructure and network management capabilities

MDC can be a great entry point into capitation for organizations that have experience with value-based payment but not yet capitation. The MDC program is designed to complement other value-based models in use today, such as bundled payments, Medicare Advantage (MA) and ACOs. Provider organizations that have experience with these models may find that MDC offers a practical way to proceed from limited value-based arrangements to full capitation.

MDC can help organizations that already have experience in capitation expand on that strategy. MDC offers providers and payers already engaged in capitation for MA, Medicaid and/or commercial a unique opportunity to access capitation for the Medicare FFS beneficiaries in target markets.

MDC is a unique opportunity for organizations in markets with low-MA penetration. The MDC model options are financially attractive to a much wider range of providers, even in communities with lower MA penetration, enabling physician groups, health systems and health plans to take more accountability and access greater premium dollar through risk arrangements for Medicare beneficiaries who have not chosen MA.



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