Directed Payments - A Lifeline for Rural Healthcare
Rural hospitals face a perfect storm of challenges: aging populations, higher rates of chronic disease, lower reimbursement rates, and thinner operating margins. The Medicaid Directed Payment Program has emerged as a critical tool to ensure these essential healthcare facilities remain viable while improving care quality. Nebraska's recent implementation offers valuable insights into how these programs can transform rural healthcare delivery.
Directed payments, established by the Centers for Medicare & Medicaid Services (CMS) in 2016, allow states to require Medicaid managed care organizations (MCOs) to pay providers according to specific rates or methods. According to MACPAC (Medicaid and CHIP Payment and Access Commission), these payment arrangements can be used to establish minimum fee schedules, require participation in value-based payment arrangements, or implement uniform payment rate increases. Unlike traditional supplemental payments, which aren't allowed in managed care, directed payments must be tied to utilization and delivery of services under the managed care contract, distributed equally to specified providers, and advance at least one goal in the state's managed care quality strategy.
For rural communities, directed payment programs address several existential challenges. Financial sustainability is perhaps the most immediate concern, as rural hospitals typically operate with razor-thin margins. The Nebraska Hospital Directed Payment Program, enacted through LB 1087 in April 2024, ensures "hospital financial sustainability while continuing to deliver high-quality care to Medicaid recipients." This financial stability is particularly crucial as rural facilities often serve as economic anchors in their communities.
Access preservation represents another critical function of these programs. When rural hospitals close, communities lose not just emergency services but often primary care, maternal care, and behavioral health services. MACPAC's research found that "higher Medicaid payment rates were associated with higher rates of physician acceptance of new Medicaid patients." Directed payments help maintain crucial access points in underserved areas where alternative care options may be hours away.
Nebraska's implementation of the Hospital Directed Payment Program offers valuable lessons for other predominantly rural states. Since fall 2023, the Nebraska Hospital Association (NHA) has worked closely with DHHS-Medicaid to design a program that balances financial viability with quality improvement. This collaborative partnership model ensures stakeholder buy-in and practical implementation.
LB 1087 specifically prioritized investments in behavioral health care, maternal care, senior care, and workforce development—all critical needs in rural communities. The program explicitly addresses the "evolving needs of Nebraska communities" rather than simply serving as a financial stopgap. This targeted approach helps ensure that directed payments address the most pressing healthcare gaps in rural areas.
Nebraska's program includes robust quality components, requiring hospitals to track and report key performance metrics, including social determinants of health screening, maternal postpartum depression screening, and infection rates. The initial quality metrics for July 2024 through December 2025 focus on areas particularly relevant to rural health, including behavioral health services and age-friendly health systems. This emphasis on measurable outcomes helps ensure the program delivers actual value to rural residents rather than merely providing additional funding.
Beyond direct financial benefits, directed payment programs can spur broader rural health system transformation. Financial sustainability helps rural facilities retain healthcare professionals, addressing the persistent workforce shortages that plague rural areas. Nebraska's focus on workforce development recognizes this crucial connection between payment adequacy and staffing stability.
The program also enables innovation by allowing "hospitals to invest in innovative care models that align with the evolving needs of Nebraska communities." This flexibility enables rural providers to adapt care delivery to meet unique local needs, which often differ significantly from those in urban settings. Rural healthcare facilities can experiment with telehealth, care coordination, and community outreach programs that might otherwise be financially unfeasible.
As directed payments reduce Medicaid losses, hospitals can redirect resources toward community benefit programs and services that address population health needs. Nebraska's approach includes tracking investments in behavioral health, maternal health, senior care, and workforce through both a comprehensive reporting platform and community benefit tracking. This approach recognizes that rural hospitals serve as more than medical facilities—they're often integral community institutions.
Despite their benefits, directed payment programs present implementation challenges. The quarterly reporting and reconciliation processes require significant administrative capacity, which smaller rural facilities may struggle to maintain. CMS's 2024 managed care rule strengthens evaluation requirements, mandating at least two metrics (including one performance metric) and regular reporting. Rural facilities must invest in data infrastructure to meet these requirements.
States implementing directed payment programs must also consider long-term funding sustainability, especially as CMS phases out separate payment terms by 2027. This regulatory change will require states to incorporate directed payments into base capitation rates rather than administering them as separate payment streams, potentially complicating administration.
As directed payments continue to evolve, rural healthcare leaders should build data capacity to effectively measure and report quality metrics and focus on long-term transformation rather than viewing payments as merely supplemental funding. Aligning quality initiatives with other value-based care efforts can maximize impact and efficiency. Perhaps most importantly, healthcare leaders must effectively tell the story of how directed payments enable preservation of essential services and community benefits.
For rural communities facing healthcare access challenges, directed payment programs represent not just a financial mechanism but a lifeline ensuring that local hospitals can continue providing essential services while advancing toward higher-quality, more efficient care delivery. By bridging the financial gap while driving quality improvement, directed payment programs like Nebraska's offer a sustainable path forward for rural healthcare—one that balances financial viability with the ultimate goal of healthier rural communities.
