Building new ways of delivering care to the millions of older adults and people with disabilities who are eligible for both Medicare and Medicaid (dual eligibles) is a daunting task. There is much work to be done – from building appropriate provider networks, to assessing the needs of enrollees, to creating a robust set of appeals and grievances procedures. To facilitate the development of new delivery systems the Centers for Medicare and Medicaid Services (CMS) designed its “Financial Alignment Demonstrations,” which offer states two options for financing demonstration projects aimed at better integrating care for dual eligibles. Most of the 20-plus states participating in the demonstration chose the “fully capitated” option that would turn over responsibility for care to managed care plans. Under capitation, a health plan receives a flat fee for each person in exchange for providing all the medical and support services the person needs. However, the learning curve may be steep for plans with little to no experience in creating integrated systems of care around members with very high needs. Having a good payment system will be critical to ensuring high quality care for beneficiaries.

To date, four states—Illinois, Massachusetts, Ohio and California—have signed agreements with CMS to use this financing option. While the financing proposals differ in each state, there’s one big problem: the financing structures are weak across the board. We recently explored how the weak structures in Massachusetts, Ohio and Illinois could spell trouble for plan members, especially those with the most complex needs. The method for setting Medicaid rates does not account for members’ varied needs for non-medical supportive services like personal care attendants and home health care. Overall capitated financing unwisely puts health plans at too much financial risk, which increases the danger of beneficiaries not getting the care and support they need. Other provisions that reduce the capitation rates only increase this risk.

The newest agreement with California perpetuates the problematic financing. California’s intricate financing structure appears to offer an improvement over those in the other three states. However, a closer read of the complicated fine print shows similar weaknesses in the overall approach. The financing proposal does not adequately take into account the needs of the most complex beneficiaries, and savings expectations are unreasonably high. Risk sharing between the plans and Medicare and Medicaid is insufficient, effectively not protecting enrollees from the potential affect losses would have on plans and their obligation to provide essential medical and support services.

Advocates in California point out that these expectations do not bode well for members, coming on the heels of recent cuts to Medicaid provider rates and consumer-directed services. The agreement between California and CMS fails to shelter plans from serious losses, raising the risk of underservice. On the other hand, there are almost no limits on the profits plans could make.

We have a simple solution for the federal and the state government: require that every financial alignment demonstration that uses the capitated model incorporate “the three R’s”—risk adjustment, reinsurance and risk sharing, described in more detail below.

Risk Adjustment: It’s important the needs of the most complex and high cost beneficiaries are taken into account in setting plan reimbursement rates. Until plans and the federal and state government have more data on beneficiaries’ functional status, states should use individual prior cost information to risk adjust payments for dual eligibles enrolled in the demonstrations, especially those with a high need for long-term services and supports.

Reinsurance: Plans should be shielded from large losses for individuals whose annual costs exceed an appropriate threshold, e.g. $100,000.

Risk corridors: Limiting the windfall profits or catastrophic losses of plans will reduce the incentives to avoid or undertreat high-need beneficiaries. During the life of the demonstration, we recommend total risk to each health plan should be limited, so that none will lose or profit by more than 3 percent.

These simple, straightforward approaches—which every plan sold in an Exchange must have—will provide a solid foundation on which to build truly innovative approaches for improving the lives of the millions of dual eligibles enrolled in the demonstrations. And, with the first demonstration slated to launch in less than three months, the time to get the financing fine print right is rapidly running out.