This article first appeared in the June/July 2008 issue of the newsletter "States in Action."

Arizona's Medicaid program, Arizona Health Care Cost Containment System or AHCCCS, used the ROI calculator to help design a statewide Medicaid pay-for-performance (P4P) system for its contracted managed care organizations (MCOs). Though each MCO currently has its own P4P program, AHCCCS officials reasoned that multiple P4Ps place burdens on physicians by requiring them to provide different types of data and focus on different performance measures for different health plans. "One coordinated statewide P4P would be less burdensome and would allow physicians to focus more intently on a uniform set of evidence-based performance measures," says Marc Leib, M.D., J.D., AHCCCS's chief medical officer.

Through an iterative process of modeling scenarios and estimating ROI, AHCCCS designed a P4P program that would offer financial rewards to physicians for providing optimal care to diabetic patients and complete immunizations for two-year-olds. Early in this process, the tool led AHCCCS to dismiss a plan to expand an asthma intervention, since the low ROI results indicated that prior asthma care improvements had already been achieved and further investments were not likely to result in adequate additional returns.

Planners chose to link financial rewards to processes over which physicians have control, rather than outcomes that depend on patient compliance and other factors. Under the plan, physicians serving Medicaid beneficiaries would receive a $25 bonus payment per diabetic patient if: they have at least 50 diabetic patients and at least 50 percent of these patients receive three recommended tests during a year (HgbA1c, lipid profile, and renal panel). Also, physicians would receive a $25 bonus payment per two-year-old patient if: they have at least 50 patients turning two in a year and at least 80 percent of them receive all recommended immunizations. With estimated development, implementation, and incentive payment costs of $4.6 million over three years, and estimated savings of $10.1 million over three years (using conservative assumptions of reduced utilization), the ROI Calculator estimated a 2.2 to 1 return on investment over three years. That is, for each dollar spent on the program, $2.20 would be saved in reduced utilization. More optimistic assumptions resulted in ROI estimates of up to 5 to 1.

The budget and ROI findings, both derived from the ROI Calculator, were presented in the agency's budget requests to the legislature. However, current budget shortfalls have put virtually all new investments on hold. "Unfortunately, even with positive ROI within three years, the legislature needs to consider this year's budget needs," says Leib. But AHCCCS will present updated ROI findings again next year and will be ready to implement the intervention when funds become available. Also, Medicaid officials are considering ways to encourage better coordination of P4P programs and measures across the contracted MCOs to achieve greater focus on shared improvement goals.

AHCCCS will continue using the ROI Calculator in other ways, such as assessing programmatic changes and other value-based initiatives. Also, they will encourage the MCOs to use the tool for their own P4P programs. "The ROI tool forces you to conduct analysis based on solid data," says Leib. "Frankly, we were sometimes surprised because what we thought we knew proved not to be the case."