Feasibility of Expanding Self-Directed Services to People with Serious Mental Illness. 4.7. Protecting Public Budgets


According to key informants consulted for this report, most states and the Federal Government will only consider implementing SDC if it will not result in increased budgetary costs for mental health care. One key informant from the managed behavioral health care industry expressed a view that may be applicable to many mental health SDC programs: the costs of mental health care in SDC can normally be maintained at similar or lower levels as traditional managed behavioral health care systems, so long as appropriate administrative checks against excess spending are in place. Even so, the public budget implications of SDC should be a paramount consideration in the design of SDC programs.

Moral Hazard and its Consequences

Mental health SDC program participants are exempted from many of the usual regulatory and managed care controls over spending on mental health care. This raises concern that some SDC participants may over spend their budgets, thereby creating a financial risk to the program. If participants believe that they are not financially liable for over spending their allotted budgets, they may be even more likely to over spend in the first place. Such an incentive for health care consumers to over spend when they are not financially liable for the costs of additional spending is known as "moral hazard."

It is unclear who would be responsible for any financial losses due to over spending in SDC programs, should they occur. SDC programs may not have financial reserves or other financing available to cover such losses. Participants are unlikely themselves to bear financial risks from over spending. Medicaid is unlikely to cover such losses, either. As a result, the state government sponsoring the SDC program may turn out to be the payer of last resort for such losses. This suggests that the possibility of financial losses should be anticipated and planned for in any statewide implementation of SDC. Such contingency planning could result in additional financial oversight, a requirement for a reserve fund to cover losses, a requirement that programs purchase financial loss insurance, or other contingency plans.

Although participants may be unlikely to themselves bear financial risks from over spending, participants' autonomy may suffer as a result of over spending. If participants spend their budgets too rapidly during the plan year, their program will be forced to ensure that sufficient resources are kept in reserve to pay for expenses during the remainder of the year. Programs would have to decide whether to permit continued spending on items being purchased from individual budgets, and could deny some purchases. Not allowing continued spending could be highly disruptive to a participant's recovery and, worse still, program administrators might feel compelled to direct the participant's future spending, thereby undermining the principle of self-direction. On the other hand, letting a participant continue spending beyond the allotted budget may set an undesirable precedent that could result in financial jeopardy to the program.

Evaluations of Program Costs and Spending

Research studies comparing the costs of mental health SDC to the costs of traditional mental health care are scarce. Although there are a few reports of costs and expenditures in SDC, no studies have been conducted with sufficient methodological rigor to ensure reliable conclusions in relation to costs. Some key informants consulted for this report speculated that participation in SDC might result in lower spending on institutional care, whereas others speculated that consumers' health care expenses might increase when they begin self-directing their own care and have the freedom to choose services and providers they prefer. However, research studies to date provide little or no reliable evidence in relation to these issues.

In relation to the narrower concern that some SDC participants will out spend their allowed budgets, none of the first generation of mental health SDC programs is reported to have had problems due to systematic over spending by participants. In SDC programs in Florida and Maryland, participants have not fully spent their individual budgets, on average, at least in some years,58 though it is not clear why they have not. Other programs' experience has been that participants fully spend their budgets. However, given that participants have few individual disincentives to spending, the systemic risks of over spending are likely to increase with the overall scale of SDC participation and with greater participant experience.

Even if rigorous comparative cost evaluations of mental health SDC programs were available, the results of such analyses would not necessarily be generalizable to larger-scale implementations of SDC. How mental health SDC programs get implemented on a larger scale could dramatically affect their costs. Costs could vary especially depending on the specifications of staff training requirements and the administrative reporting requirements stipulated by states and by Medicaid. For example, programs that use peer-specialist providers may have additional supervision costs that programs using professional care managers do not have. One managed care executive also pointed out that implementation of SDC on a larger scale will require upfront investment to cover expenses for program staff, management information systems, and other overhead expenses while caseloads are accruing. Once a target caseload size is achieved, SDC programs would be expected to be self-sufficient. However, bridge funding may be needed during the start-up phase.

Managing Financial Risks

Key informants to this report generally agreed that programs can apply various administrative procedures to manage participants' expenditures, though the effectiveness of these methods has not been demonstrated. One approach to managing participants' expenditures is to complete ongoing, regular (e.g., quarterly) administrative reviews of their spending patterns. If the pace of the participant's spending suggests the budget will run out before the end of the plan year, some purchases could be denied to bring participants' spending back into alignment with their budget. Although the notion of managing participants' utilization through a process of administrative review is conceptually at odds with the principle of self-direction, economic incentives created by SDC may make utilization review or some equivalent process unavoidable if SDC programs are implemented on a larger scale.

In most existing mental health SDC programs, participants' budgets and spending patterns indeed are reviewed by an administrator at regular intervals, and any adjustments in spending are made on an individual basis. However, if SDC programs are implemented on a larger scale, such labor-intensive manual reviews of spending could become prohibitively expensive. Consequently, automation of budgetary review functions, using information systems supports and decision rules, is desirable. Programs could, for example, use an accounting system that maintains frequently updated information on claims, payments, and projected future spending to create regular reports on individual participant's spending and on spending at the program level.

SDC programs could contract with fiscal intermediaries or managed care organization to provide capacities for administrative reviews of spending, as many of these organizations have management information systems, technical expertise, and administrative infrastructure needed to manage costs, and few states have these capacities. In fact, managed behavioral care organizations have already been partners in several mental health SDC programs. However, partnering with managed care organizations may require considerable advance and ongoing planning by SDC programs and their managed care partners, especially in relation to communicating to managedcare staff the purposes and principles of the SDC approach. SDC program administrators also may require training in accessing managed care organizations' information systems, to enter information and obtain reports. It seems likely that the costs of this training would be the responsibility of the state government, although perhaps other funding sources, such as Data Infrastructure Grants (from SAMHSA) could be used to cover these expenses.

Another method that has been used to prevent cost increases following consumers' entry into SDC is indexing new participants' budgets to their level of spending on outpatient mental health care prior to entering SDC. Consumers with higher mental health expenditures prior to starting SDC receive higher budgetary allocations than consumers with lower expenditures prior to starting SDC. Indexing an individual's budget to prior spending may help ensure that the individual's spending in SDC will not exceed their spending in prior years. It is unclear whether this type of "risk adjustment" would generally work well in mental health SDC programs. Indexing implies, for example, that consumers who were inconsistently engaged in outpatient treatment prior to SDC get relatively smaller SDC budgets and consequently have less money available to them compared to consumers who were consistently engaged in outpatient treatment. Such an allocation formula may result in a gap between an individual's budget and the costs of their care for an individual whose needs increase substantially from one plan year to the next. Programs using indexing would consequently need some fiscal flexibility, perhaps a reserve fund, to be able to adjust during a plan year to unexpected changes in individuals' service needs.

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