Some Medicaid enrollees are served through a fee-for-service delivery system where health care providers are paid for each service (like an office visit, test, or procedure).

States describe payment methodologies for mandatory and optional Medicaid services in their Medicaid State plan. The Centers for Medicare and Medicaid Services (CMS) reviews all state plan amendments to make sure reimbursement methodologies are consistent with federal statutes and regulations.

How Fee-for-Service Provider Rates are Set

States may develop their payment rates based on:

  • The costs of providing the service
  • A review of what commercial payers pay in the private market
  • A percentage of what Medicare pays for equivalent services

Payment rates are often updated based on specific trending factors, such as the Medicare Economic Index or a Medicaid-specific trend factor that uses a state-determined inflation adjustment rate. The methodologies for service rates are described in the Medicaid state plan.