Introduction: Why Medicaid capitation revenue matters for PACE organizations
Medicaid capitation revenue is one of the central components of financial stability for Program of All-Inclusive Care for the Elderly (PACE) organizations. Unlike Medicare rates, which follow a standardized federal formula, Medicaid rates are developed state by state and must be approved by the Centers for Medicare and Medicaid Services (CMS). That state-specific process can make it challenging for PACE organizations to understand what is driving their revenue or how to participate effectively in a rate renewal discussion.
CMS issued updated PACE Medicaid rate-setting guidance in December 2024, including provisions that affect the length of rate periods, incentive arrangements, and mid-year changes. As your organization approaches a renewal, the key question is whether the rate reflects the needs and complexity of the population you serve while remaining cost effective for the state.
At a glance: Medicaid capitation rates must meet three criteria for PACE organizations
The amount that would have otherwise been paid (AWOP) estimates what the state Medicaid program would spend on PACE-eligible individuals if they were served through the state's alternative delivery programs.
| 1 | The capitation rate must be less than the AWOP. |
| 2 | The capitation rate must take into account the comparative frailty of PACE members. |
| 3 | For each member, the amount must be fixed regardless of changes in that member’s health status. |
Four implications for your organization
1. The AWOP is the benchmark behind your Medicaid rate.
The AWOP estimates what the state Medicaid program would spend on PACE-eligible individuals if they were served through the state's alternative delivery programs. It is the foundation for demonstrating that PACE is cost-effective.
2. Population mix matters as much as the underlying data source.
States may develop the AWOP from fee-for-service experience, managed care encounter data, financial data, or a combination of sources. Whatever the source, the result should be adjusted to reflect the individuals who are eligible for and likely to enroll in PACE. Important considerations include the higher frailty of the PACE-eligible population, the expected community and institutional mix, projected utilization and unit-cost trends, and the value of state-directed or incentive payments in the programs used as the comparison. A rate discussion that focuses only on a broad Medicaid average could miss some of the characteristics that make PACE unique.
3. The AWOP is only the starting point.
The AWOP serves only as an upper limit on the amount the state is allowed to pay PACE organizations. States have significant flexibility around how capitation rates are determined, so long as they remain compliant with the AWOP requirements. Your organization may be able to request the state's rate package or related documentation. Reviewing the information available can help you understand the population, programs, and assumptions underlying the rate, even when the state does not provide every detail.
4. Your Medicaid capitation is prospective and fully at risk.
PACE Medicaid capitation rates are set prospectively: The amount is determined in advance and paid as a fixed monthly amount per member. CMS does not permit risk corridors or other arrangements that retroactively reconcile rates to actual experience. That makes the initial rate and each renewal especially important. It also means that enrollment mix assumptions, service needs, and cost trends should be understood before the contract period begins, because the PACE organization absorbs any costs that exceed the rate.
What to do before your next renewal: PACE and Medicaid rate setting
Consider your rate package as a decision document. Identify the data period, comparison populations, trend assumptions, and adjustments that are available in the state's materials. Consider whether the resulting rate is consistent with the clinical complexity and community or institutional profile of your participants. Track external developments that could affect the AWOP or your costs, including changes in provider payment policy and managed long-term services and supports (LTSS). Finally, prepare questions early so your organization can engage with the state before the rate is finalized.
The key takeaway is that Medicaid rate setting is state-specific, but the framework is consistent. The state estimates what it would otherwise spend, adjusts that estimate to reflect the PACE-eligible population, and sets a prospective capitation amount below the AWOP. Understanding that framework gives your organization a stronger basis for monitoring sustainability and participating productively in renewal discussions.
How an actuarial consultant can help a PACE program set its Medicaid rates
When your next rate arrives, will you know whether it truly reflects the frailty, complexity, and community mix of your participants? Will you be ready to raise the right questions before it is finalized? An actuarial consultant helps PACE organizations answer these questions, interpret Medicaid rate documentation, assess how the rate framework relates to their population and operating environment, and prepare for discussions with state Medicaid agencies. The support may include rate methodology review; scenario analysis; monitoring of policy and cost developments; traditional actuarial support such as financial impact analysis of policy and program changes, trend analysis, and benchmarking; and broader PACE revenue planning across Medicaid and Medicare. For more information, please contact your Milliman PACE consultant.
References
Centers for Medicare and Medicaid Services. (December 2024). PACE Medicaid Capitation Rate Setting Guidance. Retrieved October 26, 2026, from https://www.medicaid.gov/medicaid/long-term-services-supports/downloads/pace-med-cap-rat-set-guid.pdf.
Centers for Medicare and Medicaid Services. (2026, March 16). Program of All-Inclusive Care for the Elderly (PACE): Medicare and Medicaid guidance and regulations. Retrieved October 26, 2026, from https://www.cms.gov/medicare/medicaid-coordination/about/pace.
42 C.F.R., pt. 460. (2026). Programs of All-Inclusive Care for the Elderly (PACE). Available at ecfr.gov. Retrieved October 26, 2026, from www.ecfr.gov/current/title-42/chapter-IV/subchapter-E/part-460.