States that can successfully factor social needs into their health care payment policies may see health and well-being improvements among citizens while helping reduce health care utilization and spending.
Greater use of the emergency room has been linked to homelessness,1 diabetes-related hospital admissions have been attributed to food insecurity,2 and social isolation has been identified as a risk factor for stroke and heart attack.3 These are just a few of the ways in which the social determinants of health (SDoH) contribute to health outcomes, health care utilization, and spending. These determinants, which include social, economic, and environmental factors such as income, housing, transportation, and education, account for roughly 20 percent of premature deaths in the United States.4
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Increased awareness of how SDoH can affect health outcomes has prompted many practitioners and policymakers to rethink health care delivery—especially for Medicaid beneficiaries, whose low incomes typically make them disproportionately likely to have health-related social needs.5 In fact, there are a number of broad-scale efforts now under way to identify and direct resources toward individuals with social needs. For example, some states are beginning to require managed care organizations (MCOs) to screen enrollees for social needs. Meanwhile, some providers and plans around the country are working with community-based organizations (CBOs) to link individuals to resources such as food pantries, housing supports, and transportation assistance.6 (For more information about social determinants of health, see figure 1.)
But another powerful, largely untapped way states can address social needs is through payment arrangements with MCOs, which cover nearly two-thirds of Medicaid beneficiaries nationwide.7 States that can successfully factor social needs into their health care payment policies with MCOs may begin to see significant improvements in the health and well-being of individuals who face socioeconomic and environmental challenges and help reduce avoidable health care utilization and spending.
In this article, we discuss two complementary strategies states can use to address SDoH among Medicaid beneficiaries: risk adjustment and pay-for-performance (P4P). Both strategies are directed at MCOs. By factoring social needs into risk adjustment formulas, states can ensure that MCOs that have more members with social needs receive more money to take care of those members. This strategy also provides MCOs with the incentive to assess their members for social needs and capture data that can be shared with, and useful to, the state. Incorporating social needs measures into managed care P4P arrangements can help states develop, implement, track, and measure the impact of interventions that address health-related social needs.
Because these strategies will require careful data collection and evaluation, it is unlikely states will be able to implement them immediately. But they can start on the path now. In this article, we outline the steps states can take to achieve these longer-term policy goals.
Under a managed care arrangement, a state pays a capitated rate—a fixed fee to an MCO for each person enrolled in the plan—and the MCO assumes the total cost of care for its population of Medicaid beneficiaries.8 States have traditionally considered age, gender, eligibility category, and region/locality when setting capitation rates. However, because financial risk varies based on the health of individuals covered by different MCOs, several state Medicaid programs apply risk adjustments to these capitation rates to offset the difference in cost between MCOs of providing health insurance for individuals who represent a relatively high risk to insurers. Under risk adjustment, an insurer who enrolls a greater than average number of high-risk individuals receives compensation to make up for extra costs associated with those enrollees. These risk adjustment models often account for enrollees’ medical histories and factor in chronic conditions, which tend to be strong predictors of care needs and expenditures.9 States typically gather health status information from medical claims, encounter data, and pharmacy data.10
Though research demonstrates that socioeconomic status and social needs can influence health care utilization and expenditures, risk adjustment models typically do not account for these factors. Massachusetts is a notable exception (see sidebar, “Massachusetts incorporates two social indicators into their risk adjustment formula”). By incorporating social determinants into risk adjustment formulas, states can improve the accuracy of the relative rates they pay their MCOs while also providing MCOs with the incentive to assess their members for social needs and capture data that can be shared with the state and used to inform social interventions.
In 2016, Massachusetts implemented a new Medicaid payment model that incorporates housing indicators and neighborhood stress scores into its MCO risk adjustment formulas. In this state’s model, individuals who have had three or more addresses in a single calendar year, or individuals who are coded as “homeless” in a medical encounter record, increase an MCO’s risk score, resulting in higher payments to the plan. Neighborhood stress scores include a composite measure of “financial stress” from census data, based on addresses that are geocoded to the census block group or tract.11 Enrollees who live in neighborhoods with higher-than-average stress may also trigger higher payments for MCOs. Early evaluations of the Massachusetts model have found that adding social determinants and related variables to risk scores strengthens the predictive power of risk adjustment and yields more accurate payments to MCOs.12
A risk adjustment model could include factors such as housing instability, financial stress, food insecurity, social isolation, and low educational attainment. To date, no state has incorporated a robust set of SDoH-related indicators into its risk adjustment models. There are several possible reasons for this.
First, since not all MCOs screen for social needs, states may lack data on such needs. Second, even when MCOs collect SDoH data, the screening tools organizations use can vary widely. They may be collecting different indicators, or two MCOs may define the same indicator in different ways. For example, one organization may define housing instability as chronic homelessness, while another defines it as frequent changes of address. Because risk adjustment models attempt to capture the relative risk of the population across organizations, MCOs must use the same indicators, defined in the same way, to make their comparisons. Without standardized definitions and data collection, states could struggle to develop and apply sound risk adjustment formulas.
Despite these barriers, states can take several immediate steps to lay the groundwork for a risk adjustment model that considers a robust set of SDoH indicators (see figure 2).
While accounting for SDoH through risk adjustment may improve the accuracy of payments from states to MCOs and incentivize MCOs to collect data on their members’ social needs, it does not incentivize MCOs to address those needs. To ensure that the needs of beneficiaries are not only identified but met, states can require or incentivize MCOs to implement SDoH interventions. States are beginning to move in this direction: Among the 39 states with comprehensive risk-based MCOs, 19—or roughly one-half—currently require their MCOs to screen for social needs and refer beneficiaries to social services.18 While screening and referrals are an important step, it’s even more important to ensure that Medicaid beneficiaries are actually completing the screening assessments, and that the interventions implemented successfully address social needs. States could use a combination of contractual requirements and incentive payments to achieve this goal.
In existing arrangements with MCOs, states often offer bonus payments or other incentives to MCOs that succeed in measurably improving access to care, disease management, and clinical outcomes. Such P4P arrangements may also reward measurable reductions in preventable health care utilization and total cost of care. To date, however, these quality incentive programs have primarily focused on clinical measures alone.19 By also including SDoH in their P4P initiatives, states could encourage insurers and providers to address the social needs that research has linked to health outcomes.
Optimally, states could set up a P4P arrangement that rewards MCOs for demonstrating that their SDoH interventions produce better health outcomes and reduce utilization and spending. It is important for states to recognize that if MCOs are to respond to payment incentives to address SDoH, bonus payments would need to exceed the investment costs. States would also have to rigorously monitor and evaluate these initiatives in order to provide accurate payments; before states can put such measures in place, they would need to standardize a set of quality metrics related to social determinants and assess which interventions work. By taking an incremental approach, states could gradually work their way toward implementing P4P arrangements for interventions that meet social needs (see figure 3).
As this article outlines, incorporating SDoH into risk adjustment models can allow states to more appropriately compensate health plans that disproportionately cover populations with a high burden of social needs and incentivize MCOs to collect social needs data on their members. Giving MCOs incentives to address Medicaid members’ social needs through an incremental approach that culminates in P4P or contractually requiring them to do so can enable states and MCOs to better understand the links between social needs and health, and develop programs that effectively address those needs.
More broadly, if states incorporate SDoH into their health care payment policies, they can better address the socioeconomic barriers their citizens face, improve citizens’ health, and reduce avoidable health care utilization and spending. The step-by-step strategies outlined in this article can help states begin their journey toward achieving these goals.
Deloitte LLP's public sector state health care consultancy helps states address their most difficult health and Medicaid challenges, including managing costs, enhancing the individual care experience, and improving population health. Our teams offer expert Medicaid consulting and industry-leading insights, solutions, and business practices. Whether it's modernizing technology systems, aligning federal policies and standards, or helping states develop Medicaid waivers and transform their programs, Deloitte brings the innovative tools, subject matter expertise, and time-tested experience to help states achieve their missions and effectively manage their programs.
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