Manatt on Health: Medicaid Edition

Manatt on Medicaid: CMS Approves Alabama's Delivery System Reform Waiver

Authors: Anthony Fiori, Managing Director | Dori Glanz Reyneri, Manager


On February 9, 2016, the Centers for Medicare and Medicaid Services (CMS) approved Alabama's request for a waiver under Section 1115 of the Social Security Act. The waiver enables the transition of the State's Medicaid delivery system from fee-for-service to Regional Care Organizations (RCOs), risk-bearing, provider-led organizations established in five regions of the State.

While the waiver approval is recent, Alabama has been planning implementation of the RCO program since 2013 when the State first authorized reform. The State has already issued RCO regulations and guidance, and the provisions of the waiver largely align with these policies. To date, Alabama has granted probationary status to 11 RCOs that meet initial readiness requirements. RCOs will launch on October 1, 2016.

Importantly, the waiver also provides time-limited funding to support providers and RCOs as they transition to this new delivery model. The funding ends in 2021 and the waiver provides that it may not be renewed. This funding reflects a continued commitment from the federal government to support states in delivery system transformation and value-based payment reforms, while also ensuring a reduced reliance on 1115 waiver funding coupled with long-term sustainability.

Key Features of Alabama's RCO 1115 Waiver

  • RCOs will cover most Alabama Medicaid populations and services. The majority of Alabama Medicaid enrollees (65%, according to State estimates1) will be enrolled in RCOs under this waiver. These populations include parents, pregnant women, children, and most aged, blind and disabled enrollees not receiving long-term care services. Some higher-need or limited-benefit populations—primarily those receiving long-term services and supports, Medicare and Medicaid dually eligible enrollees, and family planning enrollees—will remain in fee-for-service and are not affected by RCOs. Likewise, most Medicaid services will be covered by RCOs under the capitated payment, with the major exceptions of prescription drugs and long-term services and supports.
  • Most Medicaid beneficiaries must join an RCO to receive services. When there are two or more RCOs operating in a region, RCO enrollment is mandatory for most populations. The State will begin mandatory enrollment on October 1, 2016. When only one RCO is operating in a region, residents of urban areas may opt out of the RCO into the fee-for-service system, but those in rural counties must enroll in the RCO. Rural enrollees will have the option to choose from at least two physicians or case managers.
  • Waiver provides funding to support RCOs and providers. The waiver provides up to $328 million over the next three years to support RCOs and providers as they transition away from the fee-for-service system. This funding is front-loaded in the first year of the waiver ($187.5 million). The State's ability to receive federal funds is also tied to specific process measures in each year of the waiver.

    There are two major components to the transition funding: funding for RCO start-up costs and "Integrated Provider System" funding for RCO providers. In addition to this transition funding, the State expects to draw down an additional $420 million in federal funds2 to support RCO capitation payments and State administrative costs.
    • Process Measures for Funding. The State must meet specified metrics to ensure federal dollars continue to support the transition funding. Performance requirements include launching at least one RCO in each region in year one; shifting hospital payment to an APR-DRG methodology; increasing well-child, adolescent primary care, and prenatal visits; and reducing hospital admissions.
    • RCO Start-Up Transition Pool. Up to $50 million will be provided to RCOs in 2016 to support start-up costs, including administrative expenses, enrollee and provider support, Health Information Exchange (HIE) and Health Information Technology (HIT) systems, medical management, policy and procedure development, quality reporting and data analytics, and training. This funding is critical to provide up-front administrative support for RCOs as they launch.
    • Integrated Provider System (IPS) Payments. Alabama's waiver includes a Delivery System Reform Incentive Payment (DSRIP) "like" program called Integrated Provider System, which will fund population health and delivery system improvement projects by providers participating in RCOs. IPS payments will total up to $278 million in the first three years of the waiver. There are four goals for the IPS program, and applicant providers must develop detailed work plans showing how they will achieve progress against these goals:
      • Improved prevention and management of chronic disease
      • Improved access to and care coordination of health services
      • Improved birth outcomes
      • Healthcare delivery system financial efficiency
      The State has also indicated that work plans will be evaluated for funding based on their expected impact on the process measures tied to funding. Unlike DSRIP waivers in many other states that direct funding to individual providers and hospitals (such as California, Texas, and New Jersey), Alabama's waiver requires providers to contract with and apply through RCOs for these funds. RCOs will distribute funds to providers, and may retain up to 10% of the awards for administrative purposes. This is a similar approach to that under New York's waiver, which distributed funding to providers through "Performing Provider Systems," collaboratives of multiple providers, led primarily by hospitals. Implementation of this program is expected to move quickly. The State must develop more detailed protocols and processes and submit these to CMS for approval within 120 days of the waiver approval. Most of the funding will be distributed by March 2017.

Moving Forward

The Alabama waiver provides both needed authority and critical transition funding as the State nears implementation of the long-planned RCO program. However this funding is time-limited—at the end of the waiver period, the State must transition to a 1915(b) waiver or State Plan authority for RCOs, rather than continuing to use 1115 waiver authority. This provision may signal a new trend from CMS to ensure 1115 waiver authority is used only when a different authority will not suffice. The waiver confirms Alabama's delivery system reform plans and allows the RCO program to be launched in October.

1Alabama Medicaid Agency Annual Report for Fiscal Year 2014; Alabama Medicaid Regional Care Organizations Fact Sheet:

2Governor Bentley Press Release: Alabama Medicaid Transformation RCO Program Approved for 1115 Waiver. Feb. 9, 2016



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