Health Center State Policy

State Directed Payment Arrangements to Support Behavioral Health Services during COVID-19

Written in collaboration with Subject-Matter Experts Roger Schwartz, Esq. and Mary Cieslicki, MHS

Federally Qualified Health Centers (FQHCs) are the largest primary care network in the country, providing medical, dental, behavioral, and enabling services to over 29 million patients, including 1 in 5 Medicaid beneficiaries. Medicaid is the largest payer for mental health services in the country, having played key roles in addressing public health emergencies, such as the opioid epidemic. Despite the expansive reach of both programs, COVID-19 has resulted in new barriers to care and exacerbated the conditions that place already vulnerable patients are at higher risk of avoiding needed care.

One Medicaid payment policy that NACHC has identified as a way to address decreased provider capacity and increased barriers to care for Medicaid beneficiaries is a managed care regulation appearing at 42 CFR § 438.6(c). This regulation allows states to implement payment arrangements that direct expenditures under Medicaid managed care contracts. These state-directed payment arrangements act as supplemental payments made in addition to capitation, and states have the flexibility to determine their amount and frequency. One type[1] of state-directed payment, i.e., enabling specific types of parameters for provider payments of a particular type of service, may prove most useful to FQHCs, allowing higher payment without additional administrative burdens.[2]

The use of state-directed payments to temporarily enhance provider payment under managed care contracts was also enumerated in a May 14, 2020, CMS informational bulletin, “Medicaid Managed Care Options in Responding to COVID-19.” The bulletin further clarifies that the regulations permit states to direct expenditures for a class of providers providing services under the contract, specifically naming FQHCs as an example of a targeted class of providers. The guidance goes on to address issues such as risk mitigation and payment levels.

Per CMS’s original guidance on state-directed payments in 2017 and its recent May 14 bulletin, state-directed payments can be used to provide for enhanced or supplemental payment of specific types of FQHC services, including behavioral health services to Medicaid beneficiaries during the COVID-19 emergency. Additionally, state-directed payments can be used to address behavioral health needs that are outside of the COVID emergency as discussed in earlier 2017 CMS guidance.

Addressing FQHC financial challenges by leveraging existing Medicaid payment policy will be critical to bridging the behavioral health care access gap. To learn more about how these and other Medicaid policies can be leveraged during the COVID-19 emergency, please reach out to state@nachc.org and see our new resources designed for PCAs and HCCNs working on this topic.

Tips for Seeking a State-Directed Payment

This project was supported by the Health Resources and Services Administration (HRSA) of the U.S. Department of Health and Human Services (HHS) under cooperative agreement number U30CS16089, Technical Assistance to Community and Migrant Health Centers and Homeless for $6,375,000.00 with 0% of the total NCA project financed with non-federal sources. This information or content and conclusions are those of the author and should not be construed as the official position or policy of, nor should any endorsements be inferred by HRSA, HHS, or the U.S. Government.


[1] There are three basic types of state-directed payment: (1) value-based purchasing, (2) multi-payer or Medicaid-specific delivery system reform or performance improvement initiatives; and (3) adoption of specific types of parameters for provider payments for providers of a particular type of service under the contract, including minimum fee schedules, a uniform dollar or percentage increase, or maximum fee schedules.

[2] CMS rules and guidance appear to require that in this state-directed payment option the payment would apply to all providers in the class (i.e., all FQHCs in the state).