Medicaid Payment and Reimbursement

Creating Value in the Medicaid Expansion: A Strategic Framework for AMCs

October 4, 2017 12:14 pm

With Medicaid as their biggest insurer, academic medical centers are uniquely positioned to work collaboratively with states to find mutually beneficial Medicaid strategies.

Amid the ebb and flow of efforts by congressional Republicans to repeal and replace the Affordable Care Act (ACA), the nation’s hospitals can reasonably expect that the Medicaid expansion initiated with the passage of the ACA will, for the most part, remain intact. Regardless of the final outcomes of the repeal-and-replace efforts in Congress, however, the nation’s hospitals—and academic medical centers (AMCs), in particular—need to be more strategic in their approach to serving the underserved. This is true whether the Medicaid population is expanded or contracted.

Although the direct financial impact of the expansion on providers has been positive, the indirect effects on various classes of providers have been more complicated to evaluate. AMCs present a particular challenge because Medicaid is now the single biggest insurer in many of the markets they serve. This development is forcing AMCs to take a deliberate and strategic approach to Medicaid.

Similarly, many states, now contending with burgeoning budgets and enrolled populations, are looking for ways to innovate to improve value for both Medicaid enrollees and taxpayers and to improve the condition and performance of care delivery in their states. At this juncture, it is useful to consider the specific impact of the expansion on AMCs and the strategic implications for these organizations and for state Medicaid policymakers contemplating a role for AMCs in their Medicaid systems.

AMCs and state policymakers have an opportunity to work together to create value and innovate in the context of the expansion. Although there are significant challenges to undertaking such an effort, the two sides can work together for mutual benefit.

Medicaid Expansion and the States

Under the ACA, 32 of the 50 states (plus the District of Columbia) accepted new federal funds to expand eligibility for Medicaid, increasing the ranks of the insured by 14 million and reducing the rate of the uninsured among the non-elderly from 16.6 percent in 2013 to 10 percent today. Medicaid consists of four enrollment groups: the elderly (for whom Medicaid covers long-term care), the disabled (including people with multiple chronic comorbidities and often accompanying behavioral health issues), healthy adults who are poor (the main target of the expansion), and children. Most of the expansion has been in the group of healthy adults who are poor. Enrollment and total spending by enrollment group are shown in the exhibit below.

U.S. Medicaid Program Segments (2016)

The expansion is unevenly distributed across the country, and variation in the extent, character, and goals of the expansion across states must be considered in any analysis of the expansion and its implications for AMCs.

These differences across the states, which determine how receptive the environment may be to innovative risk-sharing initiatives from AMCs, are driven principally by four factors:

  • Whether the states elected to accept federal expansion funds under the ACA
  • State Medicaid payment rates and overall spending per adult enrollee
  • The size of the expansion in proportion to the state’s Medicaid program overall
  • The state’s Medicaid Managed Care policies 

For Medicaid expansion states, the numbers associated with the second, third, and fourth factors are all represented on a state-by-state bases in the exhibit below.

Selected Medicaid Expansion States (2016)

As the exhibit shows, state spending per enrollee varies more than threefold across the 18 states between the lowest (California, $1,803) and the highest (Washington, $6,018).

The diversity in program structure, funding, and policy goals across the states reflects, in part, a policy environment for Medicaid that is probably more open to new ideas and approaches than ever before. Those AMCs seeking to work with state policymakers to create innovative, mutually beneficial risk-sharing arrangements may find a warmer reception than at any time since Medicaid was created back in the 1960s. But to be successful, the proposals AMCs take to the states should be responsive to the states’ policy goals for their programs, and those goals differ substantially from state to state.

AMCs and the Medicaid Expansion: Benefits, Challenges, and Opportunities

For hospitals in Medicaid expansion states, and particularly for AMCs in those states, the expansion has been a welcome development, the direct impact of which has been payment for services that previously were uncompensated. The expansion has occurred alongside other, less favorable changes in payment, most notably the rise of high-deductible commercial plans and the tightening in the Medicare market.

Still, the indirect effects of the expansion, particularly in light of these other market trends, present some second-order challenges for many AMCs. These effects stem from some of the characteristics of AMCs that make them different from other provider organizations in the Medicaid context. Many AMCs are located in markets with an already high concentration of Medicaid patients, and most AMCs regard caring for underserved populations to be part of the academic mission. In addition, many AMCs operate at or near capacity, so adding new volume forces them to make trade-offs in determining how best to use existing capacity. And many AMCs have high costs, sometimes with marginal costs in excess of Medicaid payment (depending on the AMC and the state), so that Medicaid may generate direct losses for AMCs even in states where Medicaid contributes to overhead for other providers.

These characteristics, in combination with the expansion, have created a number of challenges that disproportionately affect AMCs.

Capacity management. As the Medicaid population has grown and demand for services has increased, many AMCs have seen their Medicaid volume grow disproportionately, well beyond the conversion of the uninsured. In some AMCs, this new volume has displaced better-paying patients, detracting somewhat from the benefits of reduced uncompensated care.

Network design. The medical and health/social services needs of the new Medicaid population may not align well with many AMC delivery systems, creating bottlenecks and quality and service problems throughout the system. “A very small number of AMCs, like Montefiore for example, began years ago to create delivery systems designed to accept risk and manage populations, including lower income populations,” says François de Brantes, vice president and director of the Health Care Incentives Improvement Institute at the Altarum Institute, a not-for-profit organization that works with state and federal health agencies. “But most of them have not done that yet, and for some AMCs, and in some markets, the Medicaid expansion represents a mismatch with the AMC provider network.”

Insurer strategy and organizational alignment. Many AMCs have not developed an adequate strategy to address the Medicaid population, which may require a level of organizational alignment that is difficult to achieve in the characteristically decentralized, siloed organizational structure of AMCs. They may not have a fully defined Medicaid strategy at all. Administrative leaders may have a strategy, but they may not enjoy the support of the faculty. The Medicaid strategy may conflict with other aspects of the enterprise strategy, or there may be misalignment between strategies at the enterprise level and the department, service line, or program strategy level.

Given the wide variation across the states in Medicaid program structures, funding levels, and policy goals, and the equally wide variation across AMCs in their market environments, scale, scope, market positions, financial positions, and strategies, it would be folly to suggest that all AMCs should seek proactively to negotiate innovative, mutually beneficial risk-sharing arrangements with their respective state Medicaid agencies or their delegated managed care organization (MCO) partners, and thereby achieve greater control over and value from their Medicaid business. But for some AMCs in some markets, such an initiative makes sense, and the timing may be as good as ever.

Three Questions to Answer

Before setting out to define a strategy for Medicaid, AMCs can benefit from answering three big questions, both on their own and in cooperation with their state counterparts:

  • What is the composition of the Medicaid population and its subpopulations, and what services does it need?
  • What is our larger enterprise strategy, and how does our Medicaid strategy fit within it?
  • What is the state’s Medicaid policy?

Answers to these questions will help the AMC focus on value and increase the probability of a deal that is sustainable for both sides.


What is the composition of the Medicaid population and its subpopulations, and what services does it need? To answer this question, an AMC should consider its payment structure with respect to value. Generically, value-based payment can be structured under any of four basic options: a

  • Global risk for a population
  • Integrated primary care
  • Acute and chronic bundles
  • Total care for special needs populations

The strategic choices among these options—as well as the specific scope within each and the terms of any contracting arrangement—require an analysis of claims data on the population in question. “Believe it or not, most organizations do not look at the population in a systematic, quantitatively rigorous way and figure out what services are needed and how that matches up with what they’re good at and not good at or how their networks are designed,” de Brantes says. “Ideally, what you want to do is contract with the state in areas where the population need matches up with the delivery system strategy and capabilities.”

What is our larger enterprise strategy, and how does our Medicaid strategy fit within it? This question requires assessment of four key areas:

  • Insurer strategy
  • Network design and population health strategy
  • Service-line strategy
  • Academic mission and strategy

Within this assessment, AMC leadership should identify its strengths and areas of challenge as well as goals, and then determine whether a value-based deal with the state in Medicaid can help in reaching those goals.


Regarding its insurer strategy, the AMC should take stock of its participation in commercial or Medicare accountable care organizations (ACOs), provider-sponsored health plans, and risk-sharing or bundled payment contracts. The organization also should consider how aggressive its strategies are with respect to value-based payment and whether the internal funds flows and incentives within the system are aligned with accountability.

Regarding its network design and population health strategy, an AMC should consider whether it has a robust primary care network in place and whether behavioral health and nonhealth social services are integrated into the network. Also important are relationships with safety-net providers, including county and/or critical access hospitals and federally qualified health centers. The AMC also should consider how subpopulations are managed under risk contracts and whether the organization has effective care management capabilities and processes in place.

With respect to its service-line strategy, the organization should identify its key service lines and determine how important the Medicaid population is to each of them as well as what role those service lines play in existing value-based contracts. How differentiated are those service lines relative to competitors, and how much do they contribute to the AMC’s differentiation as a clinical enterprise? An organization also should consider whether it has any bundled payment contracts in any of its key service lines, how those contracts are working, and whether expansion of bundles is part of the organizational strategy.

Finally, regarding its academic mission and strategy, the AMC should consider how medical school goals and priorities in teaching and research influence its delivery system strategy and identify the research and teaching priorities in population health, taking into account how those priorities are changing. The AMC should identify the role, if any, of underserved populations in those priorities, and it should ascertain whether the academic leadership supports an expansion of the AMC’s role in managing the Medicaid population?

These considerations should set boundaries around potential Medicaid strategies for the AMC. If an AMC has moved aggressively into risk-based contracting and population health in other insurer classes, has already put in place many of the network components and operational capabilities necessary to manage the health of a population, and already has in place a provider-sponsored health plan, then the Medicaid strategy can be aligned to exploit these existing assets. Conversely, if these capabilities are not in place, then, in general, the AMC should not seek an expansive population health contract in Medicaid. In other words, Medicaid strategy should align with enterprise strategy.

The results of such strategic assessments will vary with each organization.

One midwestern AMC, for example, has moved cautiously in building population health capabilities. As described by the system’s chief strategy officer, “We have developed effective relationships with safety-net providers in our service area, who are well positioned to serve the Medicaid population in primary care. But there are specific services where we’ve focused and invested in Medicaid—areas that are priorities for us.”

One of those is areas is maternity care, where the AMC saw a strategic need to secure the Medicaid women’s and children’s population to maintain volume and share in the NICU and associated specialties. In that instance, the AMC has negotiated specific, narrowly scoped discounted fee-for-service contracts with Medicaid MCOs for those services only. Whether that strategy evolves to more of a risk-sharing population health model will depend in part on state Medicaid policy, which is the focus of the third big question AMCs should be contemplating, discussed below.

Another case example, at the other end of the spectrum, is an AMC in the University of California Health System (UC Health) that has built an extensive and flexible delivery network that can serve multiple payer segments in different geographic and demographic markets, including the expanded Medicaid population. This network includes a long-standing teaching relationship serving the urban Medicaid population, strategic affiliations serving commercial and Medicare segments in adjacent geographies, the addition of a children’s hospital, and, recently, an affiliation with a large faith-based system. To date, the five UC medical centers have been working collectively with the state of California to raise Medi-Cal payment to levels more in line with those in other states. According to Santiago Muñoz, chief strategy officer of the medical center at the University of California-Los Angeles and a leader in the statewide effort, once the rate issues with the state are resolved, attention will turn to putting those care delivery networks in place, and then, where appropriate  formulating more risk-based strategies.

What is the state’s Medicaid policy? As alluded to above, this question addresses an important consideration for AMCs: the need to align its strategy with the needs and goals of the state and its Medicaid policy.

Some states have introduced funding mechanisms and regulatory flexibility to improve care and reduce cost.

In Ohio, for example, the state Medicaid program has implemented an array of initiatives to improve utilization, integrate behavioral health with physical health services, and add new behavioral health capacity and components to the delivery system to accommodate the needs of the population. b

In Oregon, the state’s waiver from the Centers for Medicare & Medicaid Services commits its version of Medicaid ACOs, known as coordinated care organizations (CCOs), to explicit performance targets in exchange for unprecedented flexibility in how the funds are spent. The state has invested aggressively in care redesign within the CCOs to achieve the necessary performance gains. “Oregon’s results so far suggest that you may be able to improve cost effectiveness by redesigning care delivery on a large scale,” says Benjamin Sommers, associate professor of health policy and economics at Harvard University.

AMCs in particular, because of their inherent innovativeness and propensity to experiment, may be able to take advantage of some states’ willingness to trade off policy flexibility in exchange for increased accountability— that is, to have some restrictions relaxed in exchange for a commitment to improve value. There are many opportunities for AMCs to work with the states to develop novel strategies to reduce the cost of care delivery to Medicaid populations. The larger point, emphasized by Christopher Koller, former health insurance commissioner for the state of Rhode Island, is that in designing its Medicaid strategy, an AMC must understand the specific goals and policies of its state and be responsive to those goals and policies in its strategy.


Pulling It All Together

The field of value-based payment innovation between AMCs and state Medicaid programs is still in its infancy. Even after a decade of rapid expansion of provider networks and investment in population health management capabilities, relatively few AMCs are in a position to contemplate global risk contracts covering a large Medicaid population, and fewer still have the delivery system capabilities that match up with population needs sufficient to make such arrangements sustainable. And within that set, it is likely that even fewer yet have the strategic motivation and alignment with the academic enterprise to make such an initiative desirable. On the other hand, those few that do will be true pioneers, and they are likely to play a transformational role in the evolution of U.S. health care.

Similarly, the number of AMCs that today have primary care networks of adequate size and integration to enter an integrated primary care arrangement with their states is very limited, and only a subset of those will pursue such arrangements as a strategic goal. Even as a first step into the Medicaid risk market, this seems like an unlikely strategy for most AMCs.

In the wake of the Medicaid expansion, states are arguably more motivated to experiment with new approaches to risk sharing than ever before. Because of their unique capabilities, AMCs are in a position to innovate with the states in ways that other providers are not. Working together, the two sides have the opportunity to transform the care of the poor and underserved and to do so in a way that lowers costs, improves outcomes, and creates value. But to do so in a way that is sustainable, each side must be sensitive to and disciplined about where the synergies exist and where they do not, and ultimately, ensure that the needs of the population are well understood and matched with the providers that can best meet those needs.

Michael J. Schwartz, MBA, MS, is principal, BDC Advisors, San Francisco.

William T. Eggbeer, MBA, is managing director, BDC Advisors, Washington, D.C., and a member of HFMA’s Virginia-Washington D.C. Chapter. 


a. Houston, R., Heflin, K. J., and McGinnis, T., Navigating the New York State Value-Based Payment Roadmap, The Medicaid Institute at United Hospital Fund, November 2015.

b. Laszewski, R., “Ohio Governor John Kasich’s Medicaid Expansion: Successful Governance Is Very Hard Work,” Forbes, Oct. 14, 2015.


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