Directed payments can require value-based arrangements, but most of the money goes to raising rates. This lesson covers the promise and the honest reality.
Directed payments are a genuine value-based lever, one of their three permitted forms is value-based purchasing. A state can require its plans to route directed dollars through pay-for-performance or bundled arrangements, using the tool to push value across every plan at once. That is the promise.
How the value-based version works
A state can design a directed payment that pays providers more only when they meet quality or outcome targets, applying the pay-for-performance logic of the intro course at scale and uniformly across plans. Because the requirement flows through every MCO contract, it reaches providers a single plan could not move alone. Used this way, directed payments are the most direct route a managed care state has to standardize value-based arrangements statewide.
The honest reality
Most directed payment dollars do not work this way. The dominant use is the third form, raising rates, lifting provider payment toward the average commercial rate, not tying it to outcomes. The value-based purchasing category exists and is used, but it is a small share of a very large and fast-growing total.
Worth remembering: this gap is the theme of the whole module. Medicaid has built a powerful payment tool, and mostly uses it to pay more, not to pay for value. Whether states convert directed payments from a rate-raising mechanism into a genuine value-based one is among the most consequential open questions in Medicaid policy.
Why the distinction matters
For a nonpartisan analyst, the honest framing is the useful one. Directed payments that raise rates can be defensible, low base rates threaten access, but they are not value-based care, and calling them that inflates how much value-based transformation is actually happening. The tool’s real value-based potential remains largely on the table.
Key takeaways
- Directed payments can require value-based arrangements uniformly across all of a state’s plans.
- In practice, most directed-payment spending raises rates rather than rewarding outcomes.
- The unrealized value-based potential of directed payments is a central open question in Medicaid.
Sources
Check your understanding
In practice, what are most state directed payment dollars used for?
Although one permitted form of directed payment is value-based purchasing, the dominant use is rate increases. The value-based potential of the tool is largely unrealized.