The Center for Medicare and Medicaid Innovation at the Centers for Medicare & Medicaid Services (CMS) recently released initial specifications for its Medicare Hospital Global Budget methodology under the States Advancing All-Payer Health Equity Approaches and Development (AHEAD) Model. This article provides a short summary of the newly-released methodology and calls out key implications for states and hospitals deciding whether to opt into the AHEAD model.

The AHEAD Model

AHEAD will test whether a combination of hospital global budgets (HGB) and primary care investments—implemented either statewide or in a sub-state region – can improve overall population health, reduce health disparities and curb health care cost growth. AHEAD builds on CMS' previous experience implementing federal-state models in Vermont, Maryland and Pennsylvania designed to limit growth in total cost of care. The AHEAD Model will operate for 11 years, from 2024 to 2034. CMS will select up to eight states through a competitive process, through which states will enter the model in three cohorts. Applications for cohorts 1 and 2 were due to CMS in March 2024, with selection thereafter and pre-implementation starting in summer 2024. Each state will be eligible for up to $12 million in grant funding to support early implementation. Go-live for the payment models themselves (the HGB and primary care payment models) will be in 2026 (cohort 1) and 2027 (cohort 2) respectively. Cohort 3 applications are due later in 2024, with pre-implementation in 2025 and payment model go-live in 2027.

AHEAD’s Medicare HGB Methodology

Once a state is accepted into the model by CMS, hospitals in that state or sub-state region(s) can opt to replace usual payment for an annual HGB – a fixed amount of revenue – for inpatient and outpatient hospital services. Under AHEAD, HGBs will be implemented by both CMS (for Medicare fee-for-service [FFS]) and other participating payers, including the state Medicaid agency and the state’s Medicaid Managed Care Plans (if applicable). Even though Medicare FFS may only account for a small share of a hospital's revenue, particularly in a state with high Medicare Advantage penetration, CMS’ newly released Medicare FFS methodology is important because it will likely function as the default for other payers’ methodologies, including Medicaid, as has been seen in other CMS-led multi-payer models.

The Medicare FFS methodology is made up of three key steps, each of which includes extensive sub-steps:

• Establish a hospital's baseline revenue. CMS will construct a three-year baseline of claims data for inpatient and facility-based outpatient services delivered to Medicare FFS beneficiaries. Recent years will be weighted more heavily and a full “gap” year will be left between the end of the lookback period and current point in time to allow for claims runout.
• Adjust baseline for first performance year. Once the baseline is constructed, CMS will apply a series of adjustments to prospectively establish the Medicare FFS HGB for the hospital's first Performance Year, categorized as:
  • Annual adjustments for Medicare policy and payment updates that hospitals would have experienced annually even if they had not been participating in the model (inflation, Indirect Medical Education, Disproportionate Share Hospital, Uncompensated Care, performance on national Medicare quality programs, and policy changes to Medicare FFS payment policies);
  • Demographic adjustments for changes in population size and clinical risk in a hospital’s service area;
  • Adjustments for planned service line changes the hospital may decide to make, and for which it has obtained a combination of federal and state approval, discussed below;
  • A social risk adjustment of up to 2% upwards to reflect high social needs in the local population, using Area Deprivation Index, dual-income status and Medicare Part D Low-Income Status; and
  • A “transformation incentive adjustment” of 1% upwards in the first two years of the model to provide hospitals with an incentive for early participation.
• Update Medicare FFS global budget for each next performance year. CMS will use each hospital's current Medicare FFS HGB as the basis for calculating the following year's budget, both by repeating the above adjustments and by performing the following additional adjustments:
  • Volume-based adjustments. Hospitals participating in AHEAD will still submit Medicare claims to CMS in the usual way. Based on this data, fluctuations in inpatient and outpatient volume will drive certain adjustments to the following year's HGB. In addition to the annual “Planned Service Line Change” adjustment described above, CMS will apply a “Market Shift Adjustment” and an “Unplanned Volume Change Adjustment.” Together, these three adjustments are intended to balance revenue stability with allowance for changes when services shift. Whether the HGB moves up or down according to the previous year’s volume fluctuations will depend on the reason for the fluctuations, as determined by CMS.
    • The “Market Shift Adjustment” is designed to reflect patient choices in a market between hospitals, making the AHEAD-participating hospital(s) whole for the marginal costs of increased patient choices to use their services; CMS will apply this adjustment only if the claims show that other local hospitals are experiencing respective decreases in volume for equivalent services. The inverse is also true: a participating hospital’s budget will decline if utilization of one service falls at that hospital but increases at nearby hospitals.
    • Generally, service line changes that are not pre-approved within the AHEAD model will not drive adjustments to the budget. However, the “Unplanned Volume Change Adjustment” is designed to account for factors that may cause relatively large (5% or more) under- or over-payments outside the hospital’s control. For example, advances in technology might allow certain surgeries to move to outpatient settings, rendering it inappropriate for CMS to continue to assume these surgeries within a hospital’s HGB.
  • Performance-based adjustments. CMS will also begin to apply several upward and downward adjustments in later years based on a hospital's improvements on avoidable utilization and model-specific quality metrics. Beginning in Performance Year 4, hospitals may receive a Health Equity Improvement Bonus based on selected measures. Notably, CMS may also adjust each hospital’s budget by up to 2% according to total cost of carefor Medicare FFS beneficiaries within the hospital’s geographical service area starting in Performance Year 4—whether or not members of that population were served by the hospital—although details of this portion of the methodology are not yet available.

Considerations and Implications for States and Hospitals

Though CMS has been clear that this is the preliminary version of the Medicare FFS HGB methodology and thus may change, the methodology presents opportunities and potential challenges for states and hospitals considering whether to participate in AHEAD.

Opportunities

• Balancing stability with service line redesign. Predictable revenue is the main benefit of HGBs. Even when hospitals succeed in improving the health of their communities, revenue can remain steady. But there is inherent tension in designing HGBs between the need to provide predictable revenue streams while recognizing the ongoing evolution of hospitals’ services lines to reflect community needs. The recently released Medicare methodology shows that CMS has thought carefully about that balance. For service line reductions or removals that are proactively approved by the hospital's state and CMS, the hospital will be able to maintain a portion of historical revenue associated with that service line for the next two performance years, allowing a glide path for appropriate “right sizing.” And, when a hospital engages in proactive planning to scale an existing service line or add a new one with pre-approval (e.g., increase interventional cardiology to address unmet needs), it can have certainty that the budget will reflect that change.
• Opportunities for Critical Access Hospitals (CAH) and the safety net. CMS’ methodology reflects a concerted effort to include CAHs. Today, CAHs are reimbursed at 101% of costs and are often wary of participating in any risk-based models. CMS intends to modify the HGB methodology for CAHs in several respects to encourage participation. Modifications include additional time in which only upside adjustments will apply; a delay from penalties for avoidable utilization; a longer runway for capacity building; and a specially modified CAH quality program (reflecting CAHs’ lack of experience in CMS’ hospital quality programs for most acute care facilities). CAHs are also guaranteed a payment floor on their global budgets based on their most recent cost report submitted to CMS. These modifications help ensure that CAHs have adequate incentive to participate so that rural areas can also benefit from investments in transformation, in alignment with AHEAD’s emphasis on health equity.
• Orientation to equity and addressing health related social needs (HRSN). As previously laid out in the AHEAD Notice of Funding Opportunity late last year, AHEAD’s programmatic requirements will strongly emphasize health equity and programs to address HRSN, including through a requirement that both states and hospitals create health equity plans (HEP), and an expectation (in common with other recent CMS payment models) that quality and other data be stratified by race and ethnicity. The HGB methodology appears to reinforce this orientation through the health equity bonus and social risk adjustment factors described above, with the social risk adjustment being worth as much as a 2% upside for a hospital.

Potential Challenges

• Methodology covers Medicare FFS only. While CMS will require at least one commercial payer and the State Medicaid Agency to opt into a similar global budget methodology alongside Medicare FFS, would-be participating hospitals may still expect varying reimbursement methodologies from Medicare Advantage plans and other commercial payers that may choose not to participate. This could leave hospitals with a potentially set of mixed incentives that research shows is more difficult to manage than either a purer volume- or a value-based environment.
• Process for service line changes – a “mini Certificate of Need” process? As laid out above, AHEAD-participating hospitals will have a strong incentive to gain pre-approval of service line changes (whether to add or remove volume), to avoid any financial penalties associated with non-approved volume changes. CMS has indicated in the methodology that the approval process will include both state and federal levels at which the hospital will need to demonstrate how the proposed service line changes meet community needs. Would-be participants in AHEAD may have reasonable concerns about how this process will operate, on what timeframes, and what administrative burden may be imposed.
• Downward adjustment risks too far outside hospital’s control? Hospitals will have their budgets adjusted by up to 2% for total cost of care performance for Medicare FFS beneficiaries in the area local to the hospital (whether or not they were served by the hospital). Additionally, CMS mentions that budgets may be affected by how well the entire state performs relative to total cost of care targets, although no valuation of such an adjustment has yet been given. Would-be participating hospitals may reasonably be concerned about current total cost of care in the state and local region and their ability to influence it: in some states and regions, Medicare FFS spend may already be low; in others, it may be high, but because of market factors outside the hospital’s control, it may be difficult to influence. Further, in some states heavily overlapping geographic service areas may complicate efforts at attribution. These factors will need to be weighed up against stability and the ability to redesign with support, especially when more detail emerges from CMS about how the downside adjustments will operate.
• Do the adjustments provide enough predictability? While the balance between predictability and sensitivity to needed adjustments has clearly been considered carefully by CMS, any would-be hospital participant will need to consider the level of its own need for revenue predictability and whether that need will be adequately met. In addition to the unpredictability that comes with any model with new financial incentives, the operation of the adjustment factors specific to the Medicare FFS HGB will be nuanced, as will the potential interplay between the incentives. For example, one set of adjustments are designed to reward hospitals who pull in more patients relative to competitors through “appropriate” patient choice; whereas “unplanned” upward volume adjustments may bring a penalty, if interpreted as neither “appropriate patient choice” or approved service line changes by CMS. CMS has indicated its understanding of the uncertainty felt by hospitals and has forecasted that tools (potentially extending to hospital-by-hospital modeling) will be available between the selection of the first cohort of states and that first cohort’s go-live in 2025.

Next Steps

For states: States wishing to participate in Cohorts 1 or 2 must have applied by March 18, 2024. States seeking to participate in Cohort 3 must submit their applications by 3:00 PM ET on August 12, 2024. Award notices will be issued on May 24, 2024, for Cohorts 1 and 2 applicants and October 21, 2024, for Cohort 3 applicants.

For hospitals: Interested hospitals can include a non-binding letter of support for their state to include in its application. Hospitals in applicant states may want to track CMS material on AHEAD, which will include updates to the Medicare FFS methodology discussed here, and assistance understanding hospitals’ projected budget amounts for Performance Year 1.

Manatt has published other resources on CMS’ Transforming Maternal Health, Making Care Primary, and Guiding an Improved Dementia Experience models for reference.