FQHC: Harnessing the Incentives of Cost Reimbursement

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Community health centers (CHCs) are federally supported primary care providers to the low-income and uninsured. The federally qualified health center (FQHC) legislation requires states to pay CHCs for Medicald services on the basis of reasonable cost, The statute generated controversy, particularly in a time when, for most providers, cost-related reimbursement has given way to fixed payments and managed care. This article examines the impact of FQHC on revenue and utilization of CHCs, using data for 328 centers that were in continuous operation between 1989 (the year the legislation was enacted) and 1992, the first year of full implementation. During this period, the CHCs Medicaid revenue grew rapidly. FQHC is estimated to account for under one third of the total increase, while inflation and growth in utilization due to expanded Medicald eligibility are estimated to account for the other two thirds. At the same time, the change to cost-related reimbursement had a significant increase in total service users and Medicaid recipients receiving care from CHCs. Although some expected that cost-reimbursement would lead to inflationary increase in utilization, this did not occur. There was no statistically significant relationship between the change in payment methodology and changes in encounters per user. The experience of FQHC indicates that, for safety net providers of primary care, cost-related reimbursement is not “inherently Inflationary.” Results of this study raise the question of whether payment within constraints, but bearing relationship to cost, is not an appropriate approach to developing primary care capitation rates for these providers—and assuring maintenance of the safety net for the uninsured.

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