PACE payment basics

Program of All-Inclusive Care for the Elderly (PACE) is a capitated, value-based model designed for older adults who need nursing-home–level care but want to continue living in the community. Because most participants are low-income, many are eligible for both Medicare and Medicaid. Understanding how these programs interact and how each portion of reimbursement is calculated is important for financial planning and operational sustainability.

Medicaid payments

How Medicaid rates are set

Each state Medicaid agency establishes the Medicaid capitation rate(s) for PACE. The methodology for setting those rates varies by state and is described in each State Plan Amendment (SPA).

• Medicaid capitation rates must be cost-effective relative to what the state would otherwise pay for a comparable population receiving care through the state plan (the Amount That Would Have Otherwise Been Paid, or AWOP). States must demonstrate that the resulting capitation rate is lower than the AWOP. Federal requirements give states significant discretion in how the AWOP is calculated.

State rate-setting approaches

• A common approach is the experience-based rate methodology. Under this method, the state uses historical PACE experience in rate setting and may rely on PACE program data, experience from similar programs, and statewide and national trends to project future performance. Non-benefit costs are typically set to reflect the administrative and profit requirements of the PACE organization (PO).
• Another common approach is for the state to set the capitation rate as a percentage of the AWOP. That percentage is often negotiated with the PO and is always below 100% so the rate remains less than the amount the state would otherwise pay.

Rate variation

• PACE capitation rates may vary by characteristics such as Medicare eligibility, age, and/or geographic service area.
• PACE Medicaid payment for an individual PACE participant is not adjusted for the health status of that participant, although the health status of the PO’s entire population may be considered in the rate-setting process.

Medicare Part A and Part B payments

Monthly Medicare capitation payments

• The Centers for Medicare and Medicaid Services (CMS) establishes a monthly capitation amount for each Medicare-enrolled participant to cover Medicare Part A and Part B services while the participant is enrolled in PACE.
• Medicare capitation rates vary by geographic area and End-Stage Renal Disease (ESRD) status.
• Medicare capitation rates are based on Medicare fee-for-service data and are not specific to PACE.

Risk and frailty adjustments

• Each participant’s payment rate is adjusted for the participant’s expected healthcare needs, using factors such as diagnoses, age, disability status, and other Medicare risk characteristics. Higher expected costs generally produce a higher capitation payment.
• PACE payments also include a frailty adjustment that recognizes that PACE enrollees generally require more intensive services than the broader Medicare population.

Medicare Part D payments

Monthly Part D payments

• Medicare pays POs a prospective monthly amount for each enrolled participant’s covered Part D prescription drug benefits.
• The monthly payment is based on the organization’s estimate of its cost to provide the Part D benefit, including drug costs, administrative expenses, and required profit margin. The estimate varies by Medicaid status (dual eligible versus Medicare only) and is submitted to CMS through the annual Part D bid process.

Part D payment components and risk adjustment

• The total Part D payment equals an amount intended to cover Medicare’s defined standard Part D benefit plus subsidies that cover expenses such as the cost-sharing a participant would have if they were not in PACE, catastrophic costs, and drug manufacturer discount responsibilities.
• A portion of each participant’s payment rate is adjusted for the participant’s expected prescription drug needs, using factors such as diagnoses, age, disability status, and other risk characteristics. Higher expected costs generally produce a higher prospective payment.

Part D reconciliation and risk sharing

• Unlike Medicare Parts A and B, Part D prospective payments received by the PO are compared to the PO’s actual Part D drug costs at the end of each year. The difference between the drug costs included in the prospective payments and the actual drug costs can create a payable to or receivable from Medicare.
• About 60% of the prospective payment for dual-eligible participants is reconciled using a risk-sharing formula rather than a dollar-for-dollar comparison of revenue and costs.

Private pay premium payments

• POs must collect a monthly premium from participants who are not eligible for Medicaid.
• The monthly private pay premium covers the Medicare and/or Medicaid payment(s) for which the participant is not eligible, including several of the Part D subsidies.

How an actuarial consultant supports PACE organizations

PACE reimbursement is complex because Medicaid, Medicare Parts A and B, Medicare Part D, and private-pay premiums each follow different rules, data requirements, and timing. A consultant can help an organization navigate these payment streams and evaluate their implications for operations, financial performance, and long-term sustainability.

For Medicaid, that means reviewing rate development, evaluating the adequacy of proposed capitation rates, supporting discussions with state Medicaid agencies, and helping organizations both understand the changing regulatory and programmatic landscape and identifying opportunities to improve financial results.

For Medicare Parts A and B, quarterly audits of CMS payment data can identify participants for whom payments were not accurate and may warrant corrective action. Organizations may also benefit from incurred-but-not-reported analyses and other actuarial insights tailored to their unique enrollment, services, and claims payment patterns.

For Medicare Part D, an actuarial consultant will develop and certify annual bids, including bids for new POs, and estimate reconciliation results before CMS issues final settlements. Drug-cost benchmarks, pharmacy and PBM consulting, and contract support also can help organizations evaluate trends, manage vendor relationships, and improve financial performance. Quarterly fraud, waste, and abuse monitoring and compliance review can identify potential compliance issues and opportunities to lower drug spend and strengthen oversight.

For more information, please contact your Milliman PACE Consultant.