U.S. Department of Health and Human Services

Public Financing of Home and Community Services for Children and Youth with Serious Emotional Disturbances: Selected State Strategies

Henry T. Ireys, Sheila Pires and Meridith Lee

Mathematica Policy Research, Inc.

June 2006

PDF Version

This report was prepared under contract #HHS-100-03-0024 between the U.S. Department of Health and Human Services (HHS), Office of Disability, Aging and Long-Term Care Policy (DALTCP) and Mathematica Policy Research, Inc.. For additional information about the study, you may visit the DALTCP home page at http://aspe.hhs.gov/_/office_specific/daltcp.cfm or contact the ASPE Project Officer, Cille Kennedy, at HHS/ASPE/DALTCP, Room 424E, H.H. Humphrey Building, 200 Independence Avenue, SW, Washington, DC 20201. Her e-mail address is: Cille.Kennedy@hhs.gov.

The opinions and views expressed in this report are those of the authors. They do not necessarily reflect the views of the Department of Health and Human Services, the contractor or any other funding organization.

TABLE OF CONTENTS

ACKNOWLEDGMENTS

EXECUTIVE SUMMARY

I. INTRODUCTION

A. Research Questions and Methods

B. Overview of Report

II. MECHANISMS FOR FINANCING SERVICES FOR YOUTH WITH SED AND THEIR FAMILIES: CRITICAL BACKGROUND ISSUES

A. Number of Youth with SED in Residential Care and Costs Associated with Their Care

B. Sources of Federal Funding for Child Mental Health Services

C. Financing Mechanisms

D. Financial Incentives for State Agencies

E. The Role of Residential Treatment Facilities

III. STATE APPROACHES TO FINANCING HOME AND COMMUNITY-BASED SERVICES FOR YOUTH WITH SED AND THEIR FAMILIES

A. Comprehensive Statewide Reforms

B. Incremental Reforms

C. Contemplating Future Reforms

D. Summary

IV. STRENGTHS AND WEAKNESSES OF SELECTED FINANCING MECHANISMS

A. HCBS Waivers

B. Medicaid Rehabilitation Option

C. Case-Rates Used by Designated Care Management Entities for High-Risk Populations

D. The TEFRA Provision

V. SYNTHESIS AND IMPLICATIONS

REFERENCES

GLOSSARY

NOTES

APPENDICES

APPENDIX A: States with Comprehensive Statewide Reforms

APPENDIX B: States with Home and Community-Based Service Waivers

APPENDIX C: States with a CMS Grant for a Feasibility Study and Development Project for Community-Based Treatment Alternatives for Children with SED

APPENDIX D: Values and Principles Supporting the Systems of Care Approach

APPENDIX E: Cost of Services Provided Through HCBS Waivers

LIST OF TABLES

TABLE ES.1: Advantages and Disadvantages of Four Financing Mechanisms for Supporting Intensive Home and Community Services for Youth with SED

TABLE II.1: Estimates of Expenditures for Home and Community Services and Hospital Level Care for Youth with SED

TABLE II.2: Mechanisms for Financing Intensive Home and Community Services for Youth with SED

TABLE II.3: Use of Selected Mechanisms for Financing Intensive Home and Community Services

TABLE IV.1: Advantages and Disadvantages of Four Financing Mechanisms for Supporting Intensive Home and Community Services for Youth with SED

TABLE IV.2: Intensive Home and Community Services Provided Through HCBS Waivers in Five States

ACKNOWLEDGMENTS

We asked two panels of experts to assist in the development of the project and final report. The first, convened in May 2004, included Robert Friedman, Gary Harbison, Russell Frank, Darcy Gruttadaro, Bruce Kamradt, Carol Lichtenwalter, Lucy Keating, Sybil Goldman, Karen Spoelman, Randy Myers, and Andrea Fiero. These individuals helped develop an appropriate focus for the project in its early stages. The second panel, convened in March 2006, included Gary Blau, Sybil Goldman, Ron Hendler, Chris Koyanagi, Ken Martinez, Martha Moorehouse, Judith Teich, Constance Thomas, and James Wotring. This group read an early draft of the report and provided many helpful comments and suggestions. We are grateful to everyone who participated in these panels, and absolve them all from any inaccuracies or misinterpretations that remain in the report.

Cille Kennedy, our project officer in the Office of the Assistant Secretary for Planning and Evaluation, provided the initial impetus for this project as well as continued encouragement, support, and good ideas. We thank her very much for her considerable help and leadership. Lindsay Harris, a former analyst on our staff, helped enormously in the early stages of the project, participated in many of the discussions with state officials, and drafted several of the summaries found in the appendices. We send her many thanks. Sharon Clark managed the production of early drafts and the final report with her usual efficiency and good humor. Bob Whitaker read an early draft and made numerous suggestions that improved the report considerably.

Many thanks also are owed to the state officials with whom we talked. They answered our many questions with diligence and care, and we are especially grateful for their willingness to review early drafts of the summaries of our discussions. These summaries were finalized between April and November of 2005 (see the front pages of Appendix A, Appendix B, and Appendix C for specific months of completion). We assume full responsibility for the accuracy of the summaries as of their completion date and for the conclusions drawn in the “lessons learned” sections. The summaries are not and should not be viewed as officially sanctioned policy statements or program descriptions.

EXECUTIVE SUMMARY

Numerous reports have underscored the contradictions and deficiencies in the nation’s mental health service system for children with serious emotional disturbances (SED), including a heavy reliance on residential care and out-of-home placements (e.g., Campaign for Mental Health Reform 2005; New Freedom Commission on Mental Health 2003). Recent studies have also reinforced long-standing concerns that some parents have had to relinquish custody of their children solely to obtain treatment for their children’s behavioral or emotional problems (Government Accounting Office 2003). Overall, these reports have motivated federal and state legislators to consider new strategies for improving child mental health services and, in particular, enhancing access to effective home and community services.

Youth with SED include children and adolescents with chronic depression, major conduct disorders, substance abuse problems, and other behaviors that are challenging for families and communities. Many youth with SED are first identified in the schools, child welfare or juvenile justice systems, and they often claim a great deal of public attention because of the wide gap between their need for intensive treatment and the availability of appropriate services, including home-based counseling, respite care, family-to-family support, treatment foster care, and school-based mental health care. More and more studies indicate that these services are effective not only in improving mental health outcomes for youth with SED, but also in reducing or preventing stays in residential care and other out-of-home settings (Hawaii Department of Health 2004; Knitzer and Cooper 2006; Sheidow et al. 2004). Given these signs of progress, policymakers have expressed greater interest in making these services more widely available (Waxman 2006). For example, the 2005 Deficit Reduction Act (Public Law 109-171) authorizes demonstration projects for up to ten states to assess the effectiveness of home and community-based alternatives to psychiatric residential treatment facilities (PRTFs).

States and counties currently are pursuing numerous approaches to support home and community services and, more broadly, to initiate and sustain a fundamental transformation of their child mental health service systems. These approaches include enhancing access to Medicaid coverage of these services, re-directing funds from residential services to community care, integrating funds from the numerous agencies that serve children, designating care management entities to oversee services for high-risk populations, and implementing demonstration projects to develop specific financing models.

The purpose of this report is to present the results of a study of selected public financing mechanisms that states have used to pay for intensive home and community services for children and youth with SED.¹ Although the study covers several key public strategies for funding home and community services for children with SED, it focuses particularly on the Medicaid home and community-based service (HCBS) waiver as a result of recent federal and state interest in this particular financing approach. Policymakers have focused on the HCBS waiver partly because this financing mechanism allows states to provide an expanded set of Medicaid services to a limited number of children. With an HCBS waiver, states have considerable flexibility in addressing the needs of high-risk children by paying for services not included in their standard Medicaid state plans; at the same time, they can maintain some control over costs by sharply limiting the number of children enrolled in the waiver program.

However, the HCBS waiver is only one of several methods for supporting intensive home and community services for youth with SED. States that already have such a waiver also use other financing mechanisms to support comprehensive mental health care for these children and their families. Previous studies have described the financing of model community-based programs (e.g., Bazelon Center 2003; Pires 2002), but there remains a need to examine in greater detail the mechanisms used by states to finance intensive home and community services and the reasons behind states’ decisions for choosing some mechanisms over others. Better information on strategies for selecting the best set of financing mechanisms may help states design and implement new initiatives for broadening home and community-based alternatives to psychiatric residential treatment and other out-of-home care.

To develop this information, the Office of the Assistant Secretary for Planning and Evaluation in the Department of Health and Human Services contracted with Mathematica Policy Research, Inc. to examine how states and communities have financed, or could finance, these services for youth with SED and their families.

Specific policy questions examined in the study include:

• What are the benefits and disadvantages of HCBS waivers and other financing approaches for building home and community services as alternatives to residential care?
• Why do states feel they need waivers and what are the arguments for or against amending the current 1915(c) waiver program to include PRTFs under the rubric of an “institution?”
• How have different financing approaches been combined to support community alternatives to residential care or out-of-home placements?
• What financing strategies are likely to contribute to the sustainability of improvements in mental health services for youth with SED?

Methods

This report is based on discussions with officials in three groups of states, and a review of federal and state reports on financing services for youth with SED and their families. The three groups of states include those that:

• Are implementing broad, statewide reforms in their child mental health service systems (New Jersey and New Mexico);
• Deliver services to youth with SED through HCBS waivers (Indiana, Kansas, New York, Vermont, and Wisconsin);² and
• Received awards in 2003 from CMS to assess the feasibility of developing an HCBS waiver as an alternative to psychiatric residential treatment facilities (Illinois, Maryland, Mississippi, Missouri, and Texas).

As a group, these states are using many different strategies to configure and support mental health services for youth with SED, are at varying stages in the development of statewide systems, and have encountered a diverse set of obstacles and opportunities for improving home and community services. Consequently, discussions with officials in these states covered a wide range of topics, including the legislative and policy background related to services for youth with SED, the reasons for selecting a given financing strategy or strategies, the benefits and challenges associated with HCBS waivers, the extent to which demonstration projects influenced a state’s selection of particular financing mechanisms, tactics for promoting coordination among key agencies, the role of residential treatment centers, and general “lessons learned” from recent state efforts to strengthen the financing of these services.

Findings

Discussions with state officials underscore the challenges of paying for the mix of intensive mental health services that are appropriate to each child and family by combining the resources of different agencies or expanding the type of services covered (or both). Many factors influence the way in which states address these challenges, including:

• The proportion of children living in rural areas;
• The set of services covered under the existing Medicaid plan and the status of the Medicaid budget;
• Prior experience with demonstration projects involving home and community services for children with SED;
• Leadership on this issue from the governor’s office and the extent of support from the state legislature;
• The willingness of residential provider organizations to engage in discussions of new service models;
• The strength of family advocacy and support for change; and
• The history of collaboration among departments of child mental health, child welfare, juvenile justice, and special education.

Because of the many factors involved, state officials have to balance a variety of issues as they decide what financing strategies are most suitable given a state’s resources and constraints. Five findings from this study provide insights into this decision-making process.

First, state officials typically seek to combine a variety of mechanisms and funding sources because no one mechanism provides the flexibility and breadth needed to coordinate and pay for a comprehensive set of intensive home and community services. The mechanisms examined closely in this study include:

• The 1915(c) HCBS waiver.
• The Medicaid rehabilitation option.
• The development of case rates for designated care management entities serving high-risk populations (whereby states pay a monthly fee for each child, allowing the child access to a flexible, individualized array of services and supports).
• A provision in the Tax Equity and Fiscal Responsibility Act (TEFRA) known as the Katie Beckett provision.

Determining what combination of these funding mechanisms is appropriate for a particular state means balancing their advantages and disadvantages in light of the state’s fiscal, legislative, and agency resources (see Table ES.1). In addition to these resources, officials at the state or county level can blend or braid funds from multiple child-serving systems, which allows states to pay for a broader range of services than any one agency could cover. This approach is often used in conjunction with a case rate approach. Many states also have implemented Medicaid managed care (1915(b)) and research and demonstration (1115) waivers that allow for flexibility in types of covered services by implementing managed behavioral health systems. A few states and counties have designated sales, property, or income taxes to generate new revenue to enhance public mental health services, including services for youth with SED.

A second finding involves the importance of legislative and budgetary action at the state level. In several of the states in this study, the passage of state legislation directly focused on services for children has been an important impetus for interagency collaboration around the financing of services for youth with SED. Although state legislation alone is neither necessary nor sufficient for garnering financial support for intensive home and community services for youth with SED, it can move a state in the right direction by establishing expectations and goals, removing barriers to collaboration, and, in some cases, providing new dollars to build the infrastructure necessary to sustain these services. Discussions with state officials suggest that decisions about how to finance intensive community services have to account for a state’s history of legislative and political efforts to improve the child mental health service system.

Third, states and counties that carefully manage access to residential treatment services and psychiatric hospitals tend to have more resources for intensive home and community services. In the process of building financial support for intensive home and community services for children with SED, many states began by re-directing expenditures away from psychiatric hospitals and residential treatment services and toward community alternatives. This process, coupled with careful management of access to beds in both residential treatment facilities and in-patient psychiatric hospitals, is important because it has allowed states to conserve dollars and invest their resources in developing the provider capacity and infrastructure necessary for a community-based service system. Careful management of access to residential care is critical not only because such care is expensive but also because there is little evidence of its long-term effectiveness in solving problems to which it is usually applied.

Fourth, within states, certain administrative and budgetary procedures can support the cost-sharing of services among all or most of the agencies that serve children. Problems with interagency coordination and the associated duplication and gaps in services have long been recognized as a serious barrier to comprehensive child mental health care. In addition to instituting strategies for improving interagency coordination at a policy level, states also have established mechanisms for ensuring that funds from different agencies are integrated at the local level to ensure that the child and family can obtain needed services. In some states, for example, individualized plans of care specify which state agency (mental health, child welfare, juvenile justice, or special education) will pay for which services. In other states, dollars are blended to allow for integrated service delivery across child-serving systems. According to some state officials, case rates are an especially useful financing mechanism because: (1) several agencies can contribute dollars to the case rate for an individual child; and (2) agencies have a predictable amount of dollars to pay for a wide range of home and community services tailored to help children with SED achieve specific outcomes.

Fifth, because of the urgent needs of near-poor children with SED who have little or no insurance coverage for mental health care, and for families of these children who exhaust their coverage, financing mechanisms that allow these children to access intensive services (even if their families are not Medicaid eligible) are critically important. One of the principal advantages of the HCBS waivers is that they allow states to disregard Medicaid’s rules for using parental income in determining a child’s eligibility for Medicaid. Several state officials emphasized the importance of this particular component of the waiver because it provides states with a means for: (1) covering high-risk and uninsured or inadequately insured children who would not otherwise have access to mental health services; and (2) ensuring that families do not have to relinquish custody of a child with SED solely to obtain intensive mental health services.

Implications

The findings from this study have three major implications for policymakers concerned with improving mental health services to youth with SED and their families. First, sustained improvements in financing intensive home and community services for youth with SED depends on the development of effective partnerships between key agencies at the state and local levels. No simple recipe can create this partnership. In some cases, the key partnership was forged between the state mental health department and the Medicaid agency. Medicaid programs in every state now pay for a considerable portion of mental health services for youth with SED, while mental health agencies have the experience necessary to manage clinical care, certify providers, and assess service quality. The resources of both agencies can be used to support initiatives that provide appropriate and cost-effective services. Child welfare, juvenile justice and education agencies also are key because they often control considerable behavioral health dollars, and they serve the majority of children who need mental health services and supports.

In states that are actively pursuing ways to expand the availability of home and community-based services, agencies that serve children have developed new partnerships with one another. Discussions with state officials provided many examples of initiatives--often mandated by state legislation or budgetary processes--that bring different agencies together on behalf of youth with SED (e.g., mental health, Medicaid, child welfare, juvenile justice and education agencies). From a state perspective, the challenge is to ensure that the process of collaboration does not threaten the budget of any single agency, but instead leads to an equitable distribution of financial responsibility across the agencies. From a federal perspective, the challenge is to ensure that legislation directly affecting one system or one funding source (for example, Medicaid) does not unintentionally create barriers to interagency agreements at the state level.

The second implication involves the impact of prior demonstration projects funded under the original federal Child and Adolescent Service System Program, the current federal Comprehensive Community Mental Health Services for Children and Their Families Program, or other foundation-sponsored initiatives. These efforts spawned community level demonstration projects in virtually every state, and many officials with whom we spoke noted that the roots of current initiatives often lay in the experience gained during the implementation and operation of these projects. This finding underscores the strong potential for positive long-term outcomes of the demonstration projects authorized under the Deficit Reduction Act of 2005.

Finally, the study findings indicate that state officials value HCBS waivers because they can provide states with an additional mechanism for financing home and community services and support other efforts to manage access to residential treatment. Moreover, states would be interested in applying for an HCBS waiver for youth with SED if the criteria for documenting budget neutrality could be linked to psychiatric residential treatment facilities rather than to psychiatric hospitalization alone. In most states, very few children now enter psychiatric hospitals, and even fewer stay for long periods of time. Because most states are spending comparatively little on psychiatric hospitalization for children, they will not save many dollars, if any, by substituting intensive home or community services for treatment in these hospitals. However, as inpatient utilization has decreased, use of residential treatment has increased; this trend has placed corresponding demands on Medicaid dollars because Medicaid covers psychiatric residential care for children in most states. By replacing this residential care with more effective home and community services, states should be saving both federal and state Medicaid dollars, which could be available to enhance home and community services for youth with SED.

Notes

1. States and communities can support child mental health services in many different ways. This report addresses several major public mechanisms available to all states, but it is not designed as a comprehensive review of all possible public and private strategies to finance services for youth with SED.

2. Kansas and New York began operating their wavier programs in the mid 1990s and had 2,020 and 1,700 children enrolled in their waivers, respectively, as of 2005; Vermont began its waiver program in 1982 and had 140 children enrolled as of 2004. Indiana and Wisconsin began their waiver programs in 2005 and had 20 and 190 children enrolled, respectively, at the end of that year. Michigan obtained approval for an HCBS waiver for youth with SED in October 2005--too late to be included in this study.

I. INTRODUCTION

Numerous reports have underscored major deficiencies in the response of the nation’s mental health, juvenile justice, and child welfare systems to children with serious emotional disturbances (SED) and their families, including a heavy reliance on residential care and out-of-home placements (Campaign for Mental Health Reform 2005; New Freedom Commission on Mental Health 2003; U.S. Department of Health and Human Services 1999). In addition, recent studies (for example, General Accounting Office 2003) have reinforced long-standing concerns that some parents have had to relinquish custody of their children solely to obtain treatment for their children’s behavioral or emotional problems. Prompted by these findings, many federal and state legislators and program administrators have begun to consider new mechanisms for improving child mental health services.

Youth with SED include children and adolescents with chronic depression, major conduct disorders, substance abuse problems, and other behaviors that are challenging for families and communities. These children and adolescents have claimed a great deal of attention because of the gap between their need for intensive treatment and the availability of appropriate home and community services, which include a range of nontraditional treatments from home-based family counseling, respite care, and family-to-family support to independent skills training, crisis intervention, and treatment foster care. More and more studies indicate that these services are effective not only in improving mental health outcomes for youth with SED, but also in reducing or preventing stays in residential care and other out-of-home settings (Burns 2002; Hawaii Department of Health 2004; Knitzer and Cooper 2006; Sheidow et al. 2004). Given these signs of progress, policymakers have begun to express greater interest in making these services more widely available (Waxman 2006).

The purpose of this report is to present the results of a study of the mechanisms that states use to pay for intensive home and community services for children and youth with SED and their parents. Although the study covers the major public strategies for funding home and community services for children with SED, it focuses on the Medicaid home and community-based service (HCBS) waiver, also known as the 1915(c) waivers, because of the substantial legislative interest in this particular financing approach. It is not intended to be a review of all possible public and private mechanisms for funding mental health services for this group of children.

At the beginning of the study, five states were operating HCBS waivers for youth with SED: Indiana, Kansas, New York, Vermont and Wisconsin.¹ However, the 2005 Deficit Reduction Act (Public Law 109-171) authorizes demonstration projects for up to ten states to assess the effectiveness of home and community-based alternatives to psychiatric residential treatment. As states pursue these demonstration projects and more generally seek to improve their mental health service system for children, they will need information on how different public financing mechanisms can be applied. This report is designed to provide background information to policymakers and program administrators in federal and state departments of mental health, child welfare, juvenile justice, and education who are working to improve care for children and youth with SED.

HCBS waivers allow states to provide an expanded set of Medicaid services to a limited number of children identified as having SED through various clinical criteria. These waivers enable states to provide high-risk children with a set of intensive services not included in the standard Medicaid plan while maintaining some control over costs. However, the HCBS waiver is only one of several methods for supporting intensive home and community services for youth with SED. States and counties are combining many approaches to finance these services and, more broadly, to initiate and sustain a fundamental transformation of their child mental health service systems. These approaches include the various Medicaid coverage options, integrated funds from the numerous agencies that serve children, designated care management entities (CMEs) for high-risk populations, time-limited demonstration projects funded by the Substance Abuse and Mental Health Services Administration (SAMHSA), and other Medicaid waivers (such as the 1115 waivers).

Although case studies have been used in previous studies to describe the financing of model community-based programs (e.g., Bazelon Center 2003; Pires 2002; Stroul 2003), there remains a need to examine in greater detail the mechanisms used by states to finance intensive home and community services, and the reasons behind the states’ decisions for choosing one mechanism over another. To explore these questions, the Office of the Assistant Secretary for Planning and Evaluation in the Department of Health and Human Services contracted with Mathematica Policy Research, Inc. to examine how states and communities have financed, or could finance, these services for youth with SED and their families. In particular, the study examines states’ use of HCBS waivers and other financing approaches in order to provide a context for understanding what can be accomplished with and without waivers.

A. Research Questions and Methods

The study addressed the following research questions:

• What are the benefits and disadvantages of HCBS waivers, as well as other financing methods for building home and community alternatives to residential care?
• Why do states feel they need HCBS waivers, and what are the arguments for or against amending this waiver program to allow for alternatives to psychiatric residential treatment facilities (PRTFs), as well as to hospital level care?
• How and why have different financing approaches been combined to support alternatives to residential care or out-of-home placements?
• What financing strategies are likely to contribute to the sustainability of improvements in mental health services for youth with SED?
• What role do different financing mechanisms play in promoting collaboration among mental health, child welfare, juvenile justice, and special education agencies?
• To what extent have demonstration projects provided the experience that states can use to develop effective financing strategies for home and community services?
• What financial arrangements should be avoided because they work against long-term improvements in the overall system-of-care?

To collect the data required to address these questions, officials in three groups of states were contacted:

• States that are implementing comprehensive statewide reforms in their child mental health service systems, but are not using HCBS waivers as part of this effort: New Jersey and New Mexico.
• States that have HCBS waivers for youth with SED: Indiana, Kansas, New York, Vermont, and Wisconsin.
• States that received grants from the Centers for Medicare and Medicaid Services (CMS) in 2003 to assess the feasibility of developing an application for an HCBS waiver: Illinois, Maryland, Mississippi, Missouri, and Texas.²

Discussions with officials in these states covered a wide range of topics, including the legislative and policy background related to services for youth with SED, the reasons for selecting a given financing strategy or strategies, the benefits and challenges associated with HCBS waivers, the extent to which demonstration projects influenced a state’s selection of particular financing mechanisms, tactics for promoting coordination among key agencies, the role of residential treatment centers (RTCs), and general “lessons learned” from recent state efforts to strengthen the financing of these services. Discussions were held during visits to two states (Kansas and New York) and through telephone conference calls with officials in the other states.

These discussions and a review of relevant state and federal reports were used to develop a summary of each state’s experience in supporting intensive home and community services for youth with SED. Each summary covered the policy context that shaped the services provided to youth with SED; key features of the HCBS waiver, the feasibility study, or the statewide reform plan (depending on which strategy a state had followed); the role of RTCs in each state’s mental health service system for children; and the lessons we might learn from each state’s experience. Officials from each state reviewed the summary for their state, and their comments were incorporated to the extent possible.³ The summaries are included in Appendix A, Appendix B, and Appendix C.

B. Overview of Report

Strengthening the financing of intensive home and community services for youth with SED involves a complex set of policy issues, regulatory constraints, and payment mechanisms. Chapter II presents critical background information on these topics. It describes important system-of-care principles that have shaped the services for youth with SED, the role of the various agencies that serve these children, and the financing mechanisms used by many states.

Chapter III and Chapter IV present the study findings. The former identifies the general financing themes that emerged in our discussions with officials in each of the three groups of states. The latter covers the strengths and weaknesses of four major financing mechanisms: HCBS waivers, the Medicaid rehabilitation option, case-rates for high-risk populations, and provisions in the Tax Equity and Fiscal Responsibility Act (TEFRA), also known as the Katie Beckett provision. The final chapter presents a synthesis of findings with respect to the research questions, and discusses what the findings may imply for current legislative and policy efforts to strengthen the financing of intensive home and community services for youth with SED and their families.

II. MECHANISMS FOR FINANCING SERVICES FOR YOUTH WITH SED AND THEIR FAMILIES: CRITICAL BACKGROUND ISSUES

At least 10 percent of the children in the United States--more than six million young people--have an SED, defined as any diagnosable mental disorder that severely disrupts social, academic, and emotional functioning (U.S. Department of Health and Human Services 1999). An estimated 70-80 percent of these children do not get the treatment they need (Campaign for Mental Health Reform 2005; Koppelman 2004). As a result, many become involved with juvenile justice systems, drop out of high school, and are poorly prepared for adult life (Duchnowski et al. 2002).

Most children and youth with SED are first identified not in mental health clinics but in child welfare agencies, detention centers, juvenile courts, schools, primary care practices, and childcare programs. These agencies and institutions play a critical role in providing services for these children, albeit only for a short time or for certain problems (New Freedom Commission on Mental Health 2003). To complicate the issue, the various agencies that serve youth with SED and their families differ in terms of their legislative mandates, treatment philosophies, funding sources, and reporting requirements. In many states, these differences make for a rigid, poorly coordinated delivery system with financing “silos” that are difficult to integrate. For example, if a child with SED comes to the attention of one agency, he or she may have access to community services; if he or she comes to the attention of another agency, residential treatment may be the only option available.

Problems with interagency coordination and the associated duplication and gaps in services have long been recognized as a serious barrier to comprehensive child mental health care. In 1986, for example, the National Institute of Mental Health developed the Child and Adolescent Service System Program (CASSP) as a means to strengthen mental health services for children by improving interagency coordination and developing a cohesive system-of-care, defined by Stroul and Friedman (1986) as “a comprehensive spectrum of mental health and other necessary services which are organized into a coordinated network to meet the multiple and changing needs of children and adolescents with severe emotional disturbances and their families.” Ideally, such systems of care should also be community-based and culturally competent (see Appendix D for the ideal attributes of a system-of-care for youth with SED, as defined by Stroul and Friedman 1986).

CASSP provided both an important conceptual framework and financial support for states that wanted to strengthen their systems of care for children with SED and their families by promoting more flexible funding and interagency approaches (Potter and Mulkern 2004). CASSP funding ended in the early 1990s, but Congress passed a new program to support efforts in local communities: the Comprehensive Community Mental Health Services for Children and Their Families Program. This program, administered by the Center for Mental Health Services (CMHS), provides six-year grants to selected communities, states, or tribal organizations for the purpose of creating, through a demonstration program, sustainable changes in infrastructure and service delivery systems for children with emotional and behavioral problems who require services from several agencies. Grantees are required to match federal dollars with local, state, or other funds in the early years of their programs and must assume an increasingly larger share of program expenses over time. In October 2005, SAMHSA announced 25 new grantees, totaling $184.5 million over the next six years (Mental Help Net 2005), bringing to over 120 the total number of grantee sites funded to date. As of March 2006, programs were operating in 56 sites.

In addition to federal funds for demonstration projects, several private foundations have sponsored local initiatives to enhance access to community services for youth with SED (see, for example, Saxe and Cross (1998) for an overview of the Mental Health Services Program for Youth (MHSPY), funded by the Robert Wood Johnson Foundation).

Despite more than two decades of experience in the application of system-of-care principles and flexible funding through demonstration programs (see Potter and Mulkern 2004 for a partial review), few states have adopted a comprehensive approach to re-engineering their interagency agreements in support of a statewide financing system for child mental health services (Knitzer and Cooper 2006). Instead, most states have taken an incremental approach to reform, making circumscribed policy changes or implementing demonstration programs under one agency or another. Although these changes have improved access to intensive home and community services for certain populations of at-risk children, the policy and procedural differences still remaining between the various child-serving agencies continue to stifle the emergence in most states of a coordinated, statewide system of financing services for youth with SED (Institute of Medicine 2005).

Nonetheless, many states persist in the search for a better way to pay for services for children with SED and their families (see Armstrong et al. 2006 for a state planning guide). They do so because home and community services offer an opportunity to provide services that are less expensive and more effective than residential care. In fact, a growing number of methodologically sophisticated studies, many based on a randomized design, have demonstrated the positive impact of home and community services such as multisystemic therapy, multidimensional treatment foster care, functional family therapy, various cognitive behavioral therapies, and “wraparound” interventions, among others (see, for example, Burns 2002; Glied and Cuellar 2003; Sheidow et al. 2004). Based on this evidence, states are beginning to recognize the value of these services as essential to any comprehensive child mental health service system (see, for example, Hawaii Department of Health 2004). In contrast to the growing empirical support for these services, there is marked absence of evidence for the long-term effectiveness of traditional residential care (Frensch and Cameron 2002; Joshi and Rosenberg 1997; Weiner et al. 2001).

This chapter provides the foundation for our analysis of strategies that states have used or could use to pay for intensive home or community services as part of a broader system for financing effective treatment for youth with SED. Specifically, we:

• Present estimates of the number of youth with SED in residential care and the costs associated with care in these facilities;
• Describe the incentives that shape the financing decisions made by different agencies;
• Outline mechanisms for financing home and community services; and
• Discuss financial incentives that shape the policy decisions of state agencies.

A limited number of states and counties (for example, Proposition 63 in California, Spokane County in Washington State and Jackson County in Kansas) have designated sales, property, or income taxes to enhance public mental health services, including services for youth with SED. Because so few localities have designated tax revenues specifically for mental health services, the report does not address this issue further. However, tax initiatives are an important potential source of new revenue for child mental health services and are attracting interest from an increasing number of states and localities.

A. Number of Youth with SED in Residential Care and Costs Associated with Their Care

When intensive home or community services are unavailable or ineffective, parents and other authorities typically turn to psychiatric in-patient units, residential settings, or other out-of-home placements to treat children with SED. Residential settings include psychiatric residential treatment facilities (PRTFs), residential treatment centers (RTCs), therapeutic group homes, and therapeutic foster care residences. These facilities are owned by a wide variety of public and private entities and are operated under the jurisdiction of various state agencies, including departments of mental health, child welfare, and juvenile justice (Ireys et al. 2006; Goldstrom et al. 2001; Pottick et al. 2004). According to analyses of data from SAMHSA’s 1997 Client/Patient Sample Survey, social service agencies, including child welfare units, were responsible for referring about 37 percent of all youth in residential care in 1997, and juvenile justice agencies were responsible for referring another 28 percent.

The number of children in residential settings has increased during the past two decades partly in response to the closing of long-term psychiatric hospitals and in-patient institutions (Manderscheid et al. 2004). As states have focused on closing hospital beds and Medicaid managed care has worked to reduce in-patient admissions and lengths of stay, the number of children placed in residential treatment has increased.

Overall, the number of residential beds in a state is shaped by several factors, including:

• Coverage of residential care for youth with mental illness in the state’s Medicaid plan.
• The extent to which juvenile justice, child welfare, special education, and mental health agencies place children in residential care without considering other alternatives.
• Financial incentives that favor placement in residential treatment over provision of home and community care (such as a Medicaid state plan that includes coverage for residential treatment but not in-home counseling).
• The availability of home and community services that could prevent or shorten placement in residential care (a particular problem in the rural areas of many states).
• State agency, juvenile court, provider and family awareness of and willingness to use intensive home and community services as an alternative to residential settings.
• Reluctance on the part of many communities to care for children who are perceived to be very dangerous or uncontrollable.

The total number of beds in RTCs or other out-of-home settings operated or funded by all state agencies combined is an important element in a financing analysis because care in these facilities is expensive. For example, analyses of Medicaid administrative and claims data from New Jersey indicate that annual costs in 1999 for all Medicaid services averaged $25,759 for a child with an emotional or behavioral disorder who spent 30 days or less in an institution for mental diseases (IMD) and $73,884 for children who spent more than 30 days in an IMD (Ireys and Cherlow 2004). In 2002, the Colorado state auditor estimated that the average annual cost in fiscal year 2001 for a child in a PRTF was $56,064 for children committed by the state Department of Youth Corrections (DYC), and $52,990 for children placed by their county child welfare or mental health agency (Colorado Office of the State Auditor 2002). The cost of care in PRTFs with on-grounds schools was higher, averaging $68,313 annually for children placed by DYC, and $65,901 for children placed by a county agency.

In contrast, costs for children who receive home and community services through an HCBS waiver range between $12,813 and $28,058 per child per year (excluding Kansas), depending on the particular state and year of waiver operation (see Table II.1). These figures are substantially lower than the estimates of the institutional level of care costs that would have been incurred had these children not been enrolled in the waiver, ranging from $22,736 to $113,572 per child per year, again depending on the particular state and year of waiver operation (Table II.1). Given that total treatment dollars for youth with SED are limited, the more that states spend on residential and other out-of-home care, the less they have for intensive home and community services. Faced with this dilemma, policymakers in many states see their ability to enhance community services for youth with SED as depending, at least in part, on their ability to reduce the number of residential beds and average lengths of stay in residential settings. The monies saved by diverting children from residential care into community treatment are often referred to as “diversion dollars” or “re-investment funds,” and some states allocate all or a portion of these funds to child-serving agencies with the specific goal of enhancing intensive home and community services.

B. Sources of Federal Funding for Child Mental Health Services

In addition to the demonstration projects funded by SAMHSA under the Comprehensive Community Mental Health Services for Children and Their Families Program, states draw from several federal sources to pay for mental health services for children, including Medicaid, Title IV-E and Title IV-B of the Social Security Act, special education, and community mental health block grants, among others. They also draw considerably on state and local general funds.

Medicaid is today’s largest payer of mental health services in the nation (New Freedom Commission on Mental Health 2003). Consequently, the program plays a significant role in financing mental health services for youth with SED. About 20 percent of all children with mental illness are publicly insured, mostly through Medicaid, which in 1998 covered 24 percent of all children’s mental health expenditures (Koppleman 2005).

States use Medicaid to finance a wide range of mental health services including, in most states, treatment in psychiatric in-patient and residential facilities. Various waivers (such as the HCBS waiver), if approved by CMS, allow states to waive compliance with certain portions of the Medicaid statute, such as the amount, duration, and scope of Medicaid services they provide. As a result, a state may pay for specialized services not otherwise covered under its Medicaid plan in lieu of placing children in hospital in-patient settings but not, currently, in lieu of placing children in PRTFs.

For children involved in the child welfare system, Title IV-E provides states with matching federal funds to pay for the cost of room and board for eligible children in residential settings, including foster homes and other types of out-of-home care under a court order or voluntary placement. Title IV-E does not pay for mental health services provided outside of residential facilities, although it does cover certain types of administrative services, such as case management. (Medicaid typically pays for mental health services for Medicaid eligible children in foster care.)

Under the Individuals with Disabilities Education Improvement Act (IDEA), children who require special education services because of a disability, including SED, are entitled to receive such services, which will enable them to make progress in school and prepare for employment and independent living. IDEA requires public schools to evaluate children who are referred for special education services and, if it is determined that services are required, these schools must develop an individualized education program (IEP) that documents the type and intensity of services that will be provided (General Accounting Office 2003). Public schools are obligated to ensure that services specified in IEPs are provided, including paying for services if necessary, including mental health services and tuition at private schools designed for children with particular types of problems. Many school systems are reluctant to include intensive home or community services in IEPs because of their cost, although many school systems are paying for the cost of services in residential facilities.

The Community Mental Health Services Block Grant program supports the delivery of a broad range of community-based systems of care for individuals with serious mental illnesses, including children with SED, as an alternative to hospitalization. All states and territories are eligible for the grant program, which is administered by CMHS within SAMHSA. The grants are based on a state’s demographic and economic factors. They offer flexible funding that states can use not only to support mental health services not covered by other sources but also to pay for mental health treatment for uninsured individuals. Overall, these funds are quite limited, representing about 3 percent of all mental health costs in most states.

Changes in Medicaid payment strategies to support states’ use of intensive home and community services are essential. However, significant improvement in treating youth with SED depends on aligning the incentives and funding priorities of all key agencies, not just those that rely on Medicaid funding.

C. Financing Mechanisms

Broadly speaking, there are two policy options through which states can reform the way they finance intensive home and community services for youth with SED:

• They can make comprehensive statewide reforms intended to address the entire service delivery and financing system through procedural changes in all participating agencies at the same time over a period of several years; or
• They can make incremental reforms intended to address pieces of the service delivery and financing system through procedural changes in one agency or one department at a time or in a limited number of counties at a time.

As a practical matter, the latter option is typically more feasible than the former, but the large variety of mechanisms that states can actually use to effect change is the same under either approach. This report focuses on the following four mechanisms (see Table II.2):

1. Medicaid 1915(c) HCBS;
2. The Medicaid rehabilitation option;
3. TEFRA provisions; and
4. Case-rates used by designated CMEs for high-risk populations, using blended or braided funding.

Each is briefly described below, together with other mechanisms that can be important components in developing a comprehensive financing system for children’s mental health services.

1. Medicaid 1915(c) Home and Community-Based Services Waivers

Through HCBS waivers, states can expand coverage of mental health services to intensive HCBS for a designated number of children with SED as an alternative to institutional care (defined as hospital level not residential treatment) that would otherwise be covered by Medicaid. States also can use HCBS waivers to expand coverage to populations not otherwise eligible for Medicaid, creating access, for example, to uninsured families and those who exhaust their private insurance because they have a child with SED. These are the families who otherwise may have to relinquish custody of their children to access services.

The waivers are attractive because they allow states to provide selected services to a limited number of children, thereby reducing their risks for a rapid escalation in expenditures. Children are determined to be eligible based on specific clinical criteria and, in some states, on whether the waiver is operational in their county. The expanded package can include a wide range of intensive services that many children with SED and their families need, and that can be combined into individualized plans of care tailored to the needs of the child and family.

2. The Medicaid Rehabilitation Option

The Medicaid rehabilitation option can include a wide range of psychiatric rehabilitation services, which are defined as “medical or remedial services for maximum reduction of mental disabilities and restoration of maximum functioning” (Table II.2). Such services include: (1) restoration and maintenance of daily living skills (grooming, personal hygiene, cooking, nutrition, health and mental health education, medication management, money management, and maintenance of the living environment); (2) training in the social skills appropriate to the use of community services; (3) development of appropriate personal support networks; (4) recreational services that are therapeutic in nature; and (5) telephone counseling services (Bazelon Center for Mental Health Law 2001; Smith et al. 2000, p. 84). States vary widely in the rehabilitation services they offer depending on the various political and administrative factors that influenced the states’ decision to include this option. Some provide psychological assessment; crisis intervention; individual, group, and family therapy; and day treatment. Others offer home-based services, behavioral management skills training, therapeutic foster care, family preservation services, care coordination, or help in medication compliance (Smith et al. 2000, pp. 75-76). Once a state has adopted the rehabilitation option as part of the state plan, it must make the covered services available to all Medicaid beneficiaries.

3. Tax Equity and Fiscal Responsibility Act of 1982

TEFRA added the “Katie Beckett provision” to the Medicaid program as a state option. This provision allows states to waive the requirement for considering parental income in the process of determining Medicaid eligibility for children with disabilities under 18 years old who are living at home but would otherwise be eligible for Medicaid-funded institutional care. As of 2002, 20 states include this provision in their Medicaid plan, but in only ten do children with mental and emotional disorders qualify (Bazelon Center for Mental Health Law 2002). Children who qualify under the provision are eligible only for the services provided under the state’s Medicaid plan. That is, TEFRA did not authorize a specialized package of intensive services for children covered under this provision. (TEFRA included many other provisions not related to children.)

4. Case-Rates for High-Risk Populations

More and more states and counties are contracting with designated CMEs to provide a flexible, individualized array of services and supports for defined populations of youth and pay these CMEs on a case-rate basis in return for meeting specified outcomes. For example, in Oneida County, New York, the Department of Social Services pays a nonprofit CME (Kids Oneida) $2,550 per month for each youth with SED to provide an individualized plan of care (IPC), including such services and supports as care coordination, family support, crisis response, skill building, intensive in-home counseling services, and respite care (see Appendix B for additional details).

In some other states, several state and local agencies that serve children contribute to the case-rate amount. Wraparound Milwaukee, for example, uses pooled dollars from child welfare, juvenile justice, Medicaid, and mental health (see Appendix B for additional details). This program accepts full risk for enrolled children but is able to purchase a broad, flexible array of services and supports. When necessary, the program pays RTCs for care (generally very short-term) on the basis of negotiated fee-for-service arrangements, as it does for all other types of services and supports.

Overall, CMEs such as Kids Oneida or Wraparound Milwaukee can provide a wider range of services tailored to the needs of the individual child and family than would be possible for any single agency. Moreover, because the state contracts with these entities, the state can include provisions specifically designed to enhance quality of care, such as specifying that evidence-based mental health treatments will be used to the extent possible.

5. Other Important Medicaid Financing Mechanisms

a. Early and Periodic Screening, Diagnosis, and Treatment Program 

States use other Medicaid provisions to pay for mental health services for children, including the Early and Periodic Screening, Diagnosis, and Treatment (EPSDT) program, the optional clinic benefit, 1915(b) waivers, and 1115 waivers. Under EPSDT, all Medicaid-eligible children under the age of 21 are entitled to be screened regularly for physical and mental health conditions. States are required to provide screened children with any medically necessary, federally authorized Medicaid service regardless of whether the service is included in the state’s Medicaid plan. Ideally, states would use EPSDT to enhance access to mental health treatment services for children with SED by ensuring that: (1) primary care physicians and clinics use standard screening tools to identify children with or at high risk for SED; (2) identified children are referred for further evaluation and treatment; and (3) identified children have access to a broad range of treatments, including intensive home and community services.

Most states, however, have neither fully put the EPSDT program into practice nor implemented the standard screening tools statewide that can reliably identify children and adolescents at risk for mental health problems (Bazelon Center for Mental Health Law 1999; Koppelman 2004). Consequently, lawsuits have been filed in numerous states alleging shortcomings in the provision of EPSDT services. Some of these lawsuits have focused on a state’s failure to provide intensive community-based mental health services to youth with SED and their families that would enable the youth to reside at home or in the community (GAO 2001; Perkins and Strickland 2004). For example, in June 1999, as a result of a class action lawsuit (Emily Q v. Bontá), Medi-Cal, the California Medicaid Program, was required to: (1) offer therapeutic behavioral services (TBS) so that children with SED could receive treatment in their communities instead of being institutionalized; (2) assess children in institutions to determine if they qualify for TBS; (3) develop and distribute a request and referral form for providers to request TBS services; (4) revise the EPSDT brochure to inform beneficiaries and applicants about TBS and other developmental services; and (5) provide compensatory benefits to class members wrongfully denied TBS services (Perkins and Strickland 2004). The most recent decision in a class action suit (Rosie D. v. Romney) occurred on January 26, 2006 when a judge ruled that Massachusetts violated EPSDT by failing to provide various intensive community-based mental health services, including comprehensive assessments, case management and clinical oversight, and in-home behavioral health services necessary to maintain a child at home or in the community. (Rosie D. v. Romney, No. 01-30199-MAP, January 26, 2006).

b. Clinic Option

Through the Medicaid clinic option, states can provide nonhospital-based community services, but only in community clinics and by or under the direction of a physician. Mental health services supported under this option typically include traditional counseling, psychotherapy, and medication management. The intensive home and community services required by youth with SED and their families are not generally covered under the clinic option.

c. Managed Care Waivers and Demonstrations

Through 1915(b) waivers, states can implement managed care delivery systems or "carve out" delivery systems for specialty care (e.g., behavioral health) that limit an individual’s choice of provider under Medicaid. These waivers must be budget neutral but do not have to be operated statewide. Although the 1915(b) waiver can be used only for individuals who are already Medicaid eligible, the managed care system can utilize funding streams beyond Medicaid, thereby providing a vehicle for using diverse funding sources to implement a coordinated service delivery system for both Medicaid and nonMedicaid eligible children. CMS approves 1915(b) waivers for two years and states have the option to renew for successive two-year periods.

Medicaid 1115 waivers permit states to conduct demonstration projects that are likely to promote the objectives of the Medicaid program. For example, some states use 1115 waivers to expand eligibility to individuals not otherwise eligible under the Medicaid program, to provide services to Medicaid beneficiaries that are not typically covered, or to test innovative service delivery systems. States must show that the demonstrations will be budget neutral. CMS approves 1115 waivers for five years, after which states can submit renewal applications.

Because they offer states substantial flexibility in developing service packages and extending coverage to particular subgroups of beneficiaries, both 1915(b) and 1115 waivers can be important vehicles for funding intensive home and community services for youth with SED.

6. Financing Mechanisms in the Study States

The states in the study are at different points in the process of transforming their mental health services for youth with SED, and have used or are using different combinations of financing mechanisms to do so (Table II.3). The HCBS waiver states tend to use a greater number of mechanisms compared with the states that are exploring the feasibility of an HCBS waiver application. New Jersey and New Mexico have taken yet a different approach in their effort to implement comprehensive statewide reforms.

D. Financial Incentives for State Agencies

Although state departments of mental health, child welfare, juvenile justice, and special education all provide treatment services to youth with SED, the services may vary according to differences in the agencies’ financial and programmatic incentives.

• Child welfare agencies focus on ensuring that children are safe from harm and living under appropriate custody arrangements; the primary sources of federal funding include Title IV-E (for foster care services, including room and board in residential facilities) and Title IV-B (for child welfare services, including family preservation services) of the Social Security Act. Title IV-E dollars are entitlement dollars (i.e., essentially uncapped) that are designated primarily for the maintenance costs associated with out-of-home placements, including foster care and residential services, but Title IV-B dollars, which can be used to pay for intensive community or home mental health services, are capped. As a result, most youth with SED involved in the child welfare system who need intensive treatment are steered toward some type of residential care.⁴
• With funding from state and federal special education appropriations, special education departments focus on providing services that will promote a child’s ability to learn. In most cases, special education officials do not view home or community services as related to education, and hence tend not to include them in a child’s IEP. School-based mental health counseling may be included, but usually for strictly defined time periods. It is difficult for parents to argue successfully that intensive mental health services of any kind should be included in the child’s IEP; when they are included, they typically entail out-of-school day or residential placements.
• Departments of mental health focus on providing preventive, diagnostic, and treatment services for children who have or are at high risk for mental illness or substance abuse, and receive much of their funding for these services through Medicaid, mental health block grants, and general state and local revenues. Treatment dollars typically move through state and county mental health agencies to local community mental health centers (CMHCs) and hence state and county policies (as well as the state Medicaid plan) shape the incentives for CMHCs to provide home and community services. In a number of states, CMHCs function as quasi-independent agencies under contract with the state and accept risk for mental health services provided to children in their area; as a result, they have strong incentives to replace expensive services (i.e., residential care) with less expensive and more effective alternatives (i.e., intensive home or community treatment.) In most states, however, CMHCs do not bear this risk and are limited to providing services for which Medicaid or the state will reimburse them.

E. The Role of Residential Treatment Facilities

In addition to state agencies, PRTFs and RTCs also play pivotal roles in treating youth with SED and, like state agencies, their decisions are shaped by financial incentives. These facilities or centers are owned and operated by various entities, including private nonprofit firms, for profit companies, and to a lesser extent state agencies, and are operated or funded under the auspices of various state agencies, including departments of mental health, child welfare, and social services (Ireys et al. 2006). In 2000, state mental health agencies alone operated 474 RTCs for emotionally disturbed children with SED with a total of 33,421 beds (Manderscheid et al. 2004). This figure does not include beds operated or purchased by other child-serving systems, and hence is a substantial undercount of the total number of beds for children in residential treatment settings (see Ireys et al. 2006).

In some states, the leadership of RTCs is well organized and may actively resist the development and implementation of financing reforms for children with SED because such reforms typically shift dollars away from residential settings. On the other hand, a limited number of residential centers have begun to re-engineer their services by re-training staff to provide intensive home and community services. They also are taking a broader view of their mission, focusing not only on providing residential treatment but also on a continuum of services that vary in intensity and delivery site. For instance, some centers are beginning to explore methods for providing crisis intervention, stabilization, and treatment services in the home, school, detention centers, or other community settings (Kamradt and Connolly 2003).

III. STATE APPROACHES TO FINANCING HOME AND COMMUNITY-BASED SERVICES FOR YOUTH WITH SED AND THEIR FAMILIES

Developing better mechanisms for financing home and community services for youth with SED is a work-in-progress for most states, and an integral part of their ongoing efforts to improve the child mental health service system. By necessity, discussions with state officials focused on their policy and program environments at one point in time (late 2004 to mid 2005), but these environments can change quickly in response to new legislation or lessons learned from ongoing program implementation. For example, during this period, two states had recently initiated HCBS waivers and were still in the early phases of implementation. In addition, several of the states that had received CMS grants to study the feasibility of developing an HCBS waiver were moving forward to implement study recommendations.

Although the summaries are snapshots of the policies and programs in selected states at one point in time, they illustrate the large constellation of mechanisms available to all states interested in financing intensive home and community services for youth with SED and their families. In particular, they show how the states are combining different financing methods to support these services and why the states made the choices they did. This chapter: (1) describes findings from two states (New Jersey and New Mexico) that have implemented broad statewide financing reforms; (2) presents findings on incremental reforms implemented by the states with HCBS waivers; and (3) discusses the key issues that emerged as states conducted their CMS-supported feasibility studies.

A. Comprehensive Statewide Reforms

In light of funding constraints and the many other policy issues competing for legislative attention, few states are likely to have the combination of sustained political leadership, financial resources, and technical capacity required to reform their entire public mental health system for children over a period of several years. Nonetheless, two states in this study--New Jersey and New Mexico--have pursued this goal. (See the New Jersey exhibit and New Mexico exhibit and the states’ summaries in Appendix A for more details.)

In 2004, New Jersey began using a statewide administrative service organization (ASO) to manage the financing and monitoring of child mental health services across several child-serving systems. The ASO uses a standard tool to assess children and refers those at risk for out-of-home placement to local care management organizations (CMOs). The CMOs develop individualized service plans (ISPs), provide care management, and contract with family support organizations (FSOs) for family-to-family services. To help pay for these intensive home and community services, New Jersey implemented the rehabilitation services option under Medicaid and expanded coverage to include such services as mobile response and stabilization, in-home services, and intensive care management.

New Mexico also is using an ASO-like statewide agency to administer mental health and substance abuse programs for both adults and children. Funds from several agencies are being pooled to support intensive home and rehabilitation services, including out-patient services, case management, respite care, in-home treatment services, and wraparound services. The state is in the early stages of implementing its reforms, having officially started on July 1, 2005, after two years of intensive interagency planning and development.

Discussions with officials in these two states also indicated the following:

• The statewide reform efforts were spurred, at least in part, by emerging crises in the mental health system in each state: New Jersey’s system was heavily dependent on in-patient and residential treatment beds, with high costs and poor outcomes. In New Mexico, there was widespread dissatisfaction with, and evidence of deterioration in, the public mental health system with implication of behavioral health Medicaid managed care.
• Reform efforts were initiated and then supported by top levels of government (either the governor’s office or the legislature or both).
• Political support for system re-design, including support from family members, led directly to expanding financial resources for home and community services and the infrastructure necessary for major changes to occur.
• Extensive collaboration among key agencies was necessary for the research, planning, and development efforts required to ensure that funds from key child-serving agencies could be: (1) combined or otherwise coordinated to give care managers flexibility in developing ISPs; and (2) managed in a way that would support a continuum of care in which intensive home and community services could be used to improve outcomes.
• Both states planned and instituted reforms to restructure their entire mental health system for children in order to provide a continuum of care for all children with mental health needs--not just those with the most severe conditions in specific areas of the state.

B. Incremental Reforms

When comprehensive statewide reform was not politically or financially feasible, other states addressed the problem of a less-than-adequate child mental health system incrementally, implementing specific aspects of a larger program over time. Most of the states with HCBS waivers took this approach. Each has several programs that aim to support intensive home or community services for youth with SED, resulting in wide variation in the services available across different counties or different groups of children within a state. The summaries in Appendix B illustrate this pattern. This section describes the incremental approaches taken by three states: New York, Indiana, and Vermont. Appendix B includes additional information on Kansas and Wisconsin.

New York. New York (see New York exhibit and Appendix B) has had a Medicaid HCBS waiver for about ten years that now serves approximately 1,700 children with SED in 40 of the state’s 57 counties and the five boroughs of New York City. Even with the waiver, however, funding strategies in the state vary widely at the county level:

• In some counties, for instance, the waiver is the only vehicle through which some youth with SED can become eligible for Medicaid and gain access to intensive HCBS because counties do not have the resources for providing intensive service through other sources.
• In other counties, children with SED have access to intensive services either through the waiver or through other community-based programs and supports funded by: (1) state re-investment dollars; (2) resources pooled from the Office of Mental Health (OMH), Medicaid, and the local Department of Social Services; and (3) a SAMHSA grant. In these counties, the HCBS waiver supplements, rather than defines, the intensive services available to children with SED.

• Still other counties have sophisticated systems of financing. For example, rather than enrolling children with SED into the HCBS wavier, Oneida County uses a managed care model that is based on case rates and depends also on fiscal collaboration among county departments of social service and mental health. Kids Oneida is a nonprofit CME that has negotiated with the county to receive a case-rate of $2,550 per child per month to provide about 200 children with a flexible, individualized set of services similar to those provided under the HCBS wavier. In addition, the state Medicaid program pays Kids Oneida a monthly case-rate of $1,225 for each Medicaid-eligible enrolled child.
• Some counties have no special financing initiatives for children with SED.

New York’s experience illustrates the challenge of aligning county and state financing in a county-structured state. For instance, when youth with SED cannot enroll in the wavier (i.e., when counties do not participate in the HCBS waiver program or when all waiver slots are filled), counties have a strong financial incentive to admit these children to residential care because the state covers the entire portion of the Medicaid match for residential services whereas the counties have to pay a portion of the Medicaid match for community services.

Indiana. Like New York, Indiana has used a variety of mechanisms to fund intensive home and community services for youth with SED (see Indiana exhibit and Appendix B). In addition to an HCBS waiver, the state uses the Medicaid rehabilitation option and state-funded awards grants of about $50,000 per year for up to two years to 32 single and multicounty sites (covering about half of its 92 counties) specifically to develop system-of-care programs. In state fiscal year 2005, these sites reported serving 993 children. The funds supporting these programs pay for an individualized, wraparound approach to service planning and provide counties with some flexible monies to support specific services. These dollars, however, are not derived from redirecting existing monies currently being spent on residential care, suggesting that the state has provided modest support for new community services but has not implemented a strategy for reducing and re-deploying dollars spent on residential care. In fact, as noted below, the number of the state’s residential beds is increasing.

Indiana’s experience provides insight into two important financing issues: legal pressures to expand the number of residential beds and the challenges of implementing innovative projects statewide. The first issue is related to a class-action lawsuit that was filed in the late 1990s on behalf of parents who had to relinquish custody of their Medicaid-enrolled children in order to obtain residential treatment services because the state’s Medicaid program did not cover services provided to children in PRTFs unless the children were wards of the state. In January 2004, Indiana lost the lawsuit, forcing it to cover, through Medicaid, services provided to children in PRTFs under the auspices of mental health agencies. This change contributed to an increase in the total number of PRTF beds for children in the state. As of early 2005, 11 PRTFs had a total bed capacity of 150, but state staff expect this number to rise as new PRTFs are completed. This increase will add to the existing beds in residential facilities operated under the auspices of juvenile justice and child welfare. Indiana’s counties pay the full amount of the state match of federal Medicaid dollars for PRTF services, and most use their child welfare dollars to do so.

The historical absence of Medicaid coverage for treatment services in PRTFs also meant that Medicaid expenditures for residential care were minimal in the 1990s and early 2000s. As a result, there was no financial incentive within Medicaid to develop community services because these services would not reduce Medicaid expenditures on residential care. In short, there was no “business case” to be made for diverting Medicaid dollars from residential care to community services, as there is now.

The second financing issue--developing a county-based financing program and attempting to apply it statewide--is exemplified by the Dawn Project, a designated CME operating in Marion County (Indianapolis), similar in design to Kids Oneida and Wraparound Milwaukee. The project negotiated case-rates with child welfare, juvenile justice, and special education that cover intensive home and community services for children with SED and their families. Although the project has been a good learning experience for state and county level mental health authorities, several factors have limited the state’s ability to expand this model statewide:

1. Mental health services are planned and organized largely at the county level; as a result, county level factors (such as leadership, population density, and service accessibility) play important roles in shaping mental health services.
2. Most counties have little experience in managed behavioral health care technologies, such as utilization management and risk-based financing, and as a result do not have the experiential foundation necessary to replicate the Dawn Project.
3. In theory, because counties are at risk for the Medicaid match for placements in residential facilities, they should have an incentive to develop Dawn-like projects and participate in the waiver program. However, according to state officials, officials in some counties believe that the number of youth with SED in their county who are at risk for pl