Using Medicaid to Support Working Age Adults with Serious Mental Illnesses in the Community: A Handbook. Background: Medicaid and Managed Care


In the early 1990s, states began shifting the delivery of Medicaid services to managed care service delivery models. The rationale and essential features of managed care are outlined in "Managed Care in Brief" on the following page.

During this period, states had to obtain federal waivers in order to expand their use of managed care arrangements. Waivers were necessary for states to mandate that beneficiaries enroll in a managed care plan and selectively contract with managed care organizations to deliver services. Federal waivers also were necessary in order for a state to expand services to uninsured populations that could not be covered using existing statutory authorities.

Managed care has taken hold more slowly in Medicaid than in the private sector but its use has grown rapidly. Some states implemented broad state "health care reform" initiatives designed to extend health services to uninsured individuals who could not otherwise qualify for Medicaid (e.g., low-income childless adults). These initiatives were coupled with extensive use of managed care in order to secure cost savings that could be used to underwrite services for additional individuals. Massachusetts (Mass Health) and Oregon (Oregon Health Plan) were among the states that pioneered such initiatives. Other states saw managed care mainly as a cost containment device to slow the rapid increase in Medicaid spending and/or address other issues in the delivery of services to beneficiaries. These states also shifted significant numbers of beneficiaries to managed care. Between 1991 and 1996, the percentage of all Medicaid beneficiaries who received some or all of their services through a managed care arrangement grew from 9.5 percent to 40.1 percent.1 By 2003, 59.1 percent of beneficiaries were enrolled in managed care plans.2

Managed Care in Brief
Generically, managed care involves a health care purchaser (a state on behalf of Medicaid beneficiaries or a private-sector employer on behalf of its employees) contracting with an organization to provide services to a specified group of individuals. The purchaser pays a fixed fee to the managed care organization (MCO) to furnish all the services spelled out in the contract, rather than paying the MCO for the specific services that they provide, as in a fee-for-service arrangement. This fixed fee is called a "capitation" payment and is paid for each individual enrolled in the managed health plan. Capitation payments are established prospectively and usually paid monthly to the managed care organization.

MCOs may furnish contracted services directly or enter into agreements with other providers to do so. Managed care arrangements usually put the MCO at full or partial financial risk. If the costs of furnishing contractually required services exceed payments, then the MCO may have to absorb the full difference as a loss (full risk contract) or the purchaser and the organization may share the loss (partial risk). Similarly, if the MCO furnishes services for less than the amount it receives from the purchaser, it may keep the difference (full risk) or be required to share the savings with the purchaser (partial risk).

The chief rationale for using managed care arrangements is the assumption that risk-based financial incentives will spur the MCO to hold down costs by negotiating lower prices with health care providers, substituting less costly for more costly services, employing effective care management, or taking other steps to lower service utilization (e.g., by supplying free flu vaccine to avoid the costs of treatment.

Congress enacted major changes in federal Medicaid law related to managed care in the Balanced Budget Act of 1997 (BBA-97).3 In BBA-97, Congress took two important steps. One was to provide states with a method to shift Medicaid services into managed care without having to apply for waivers, provided that certain conditions are met (including, among others, that beneficiaries would have the choice of at least two service delivery arrangements).4 The second major step was to spell out stronger quality requirements and safeguards for Medicaid beneficiaries who are enrolled in managed care arrangements, particularly those with special health care needs.5 This second step ultimately resulted in CMS promulgating extensively revised Medicaid managed care regulations in 2002 and 2003.6 The main thrusts of the BBA-97 provisions were: (a) to acknowledge that managed care had become a common Medicaid service delivery model and (b) to concurrently strengthen statutory requirements governing the use of managed care arrangements. However, as will be discussed below, the BBA-97 changes did not completely eliminate the need for waivers to implement managed care models or address other state policy aims.

Medicaid mental health services were also affected by the expanded use of managed care. Again, starting in the 1990s, a number of states shifted the delivery of Medicaid mental health services to managed care arrangements. Some states contracted with private sector behavioral health companies to take over the provision of Medicaid mental health services. Elsewhere, states coupled managed-care contracting to their community mental health systems, with public and/or non-profit mental health organizations (sometimes in partnership with private sector companies) becoming managed care contractors.

Some states have shifted Medicaid mental health services to managed care through the use of a "specialty" 1915(b) Medicaid waiver program, where mental health services are delivered through specialized behavioral health organizations. Other states have included mental health services in a broader waiver program that covers both physical and mental health services, where mental health services may or may not be integrated with the provision of other health services. States vary considerably in how they have reconfigured their service delivery systems using managed care delivery models.

The rationale for the application of managed care to the delivery of mental health services is much the same as for other health services: namely, contracting for the full range of mental health services through an umbrella organization that bears economic risk will lower costs and potentially result in better coordination of care. Medicaid mental health services delivered through a managed care arrangement often span clinic/outpatient and rehabilitative services, inpatient hospitalization, individual practitioner, and case management services. The contractor is paid a fixed amount per enrollee or "member" to delivery the full scope of medically necessary services specified in its contract. The contractor has an incentive to hold down or reduce the use of inpatient and other costly services by furnishing effective community-based substitutes. Managed mental health arrangements also seek to reduce costs by relying on utilization management and prior authorization to verify the need for services and direct individuals to the most cost-effective treatment alternatives. The managed care contractor has the latitude to negotiate prices with providers and exclude higher cost providers.

Managed mental health care is designed to address issues that often arise in conventional fee-for-service delivery systems, including problems in coordinating services across multiple providers, the lack of financial incentives to deliver care cost-effectively, and the inappropriate or excessive use of costly services, including inpatient hospitalization. Managed mental health care seeks to substitute a comprehensive, integrated approach to managing service delivery in place of a more fragmented system of care.

Applying managed care to the delivery of public mental health services offers potential advantages to a state, which may include those described below:

  • Because contractors receive a single capitated or case rate payment7 rather than payment for each service delivered, funds can be used to purchase the most cost-effective mix of services and supports. Managed care funding mechanisms create incentives to shift hospital dollars to community services. In addition, managed care contracting may allow for the delivery of alternative services (e.g., supported employment);
  • Through contracting, a state may be able to make service delivery system changes that would be more difficult to accomplish in a conventional fee-for-service system. Such changes can include adopting standardized treatment protocols, advancing the use of evidence-based practices, or promoting peer-delivered services.
  • Consumers can access the full range of services through a single point-of-entry organization, potentially improving access;
  • A managed care arrangement offers opportunities to integrate the delivery of mental health and substance abuse services;
  • Managed care features comprehensive care and utilization management, something that a state agency may be unable to implement on its own; and,
  • A state's expenditures for Medicaid mental health services can be more stable and predictable when capitated payments are employed.

At the same time, operating a managed care delivery system can pose significant challenges. Converting to managed care is a major system change and, thus, daunting in its own right. Some of the major challenges that may arise include:

  • The economic framework of managed care may create incentives to under-serve individuals, particularly those with serious mental illnesses;
  • Consumers, providers and advocates may resist the conversion to managed care;
  • Managed care systems sometimes have relatively high administrative costs that may divert dollars from direct consumer services;
  • Generally speaking, cost savings stemming from more tightly managing hospital costs are realized during the initial stages of managed care implementation. In other words, the initiation of managed care tends to yield near-term savings. Over time, costs stabilize and additional savings are more difficult to achieve;
  • Where a managed care contract includes only Medicaid funds, the danger arises of splitting a state's service delivery system, wherein the Medicaid and non-Medicaid systems may operate quite differently, even for individuals with similar needs; and,
  • Finally, in order to realize the potential benefits of managed care while ensuring that individuals receive necessary and high quality services, a state must have the knowledge and expertise to "manage managed care." To form a positive relationship with a managed care contractor, states must strike the right balance between contracting out services and retaining ultimate responsibility for their delivery. Managed care contracting and contractor oversight can be challenging, as many states have discovered.

The experience with managed care service delivery models in public-sector mental health services has been mixed. In some cases, there have been major problems and states have had to either terminate the use of managed care or substantially restructure their approach. In some instances, the private behavioral health companies that states selected as the managed care contractor lacked sufficient expertise to serve public sector consumers, especially individuals with serious mental illnesses.8

However, other states have had positive experiences in using managed care to deliver Medicaid mental health services. In these states, managed care has been in place for several years and appears to have yielded positive results (e.g., improved access and service quality for individuals with mental illnesses.) Over time, states have become more expert in managing managed care. Private sector behavioral health organizations also have become more skillful in serving public sector consumers, and public sector mental health agencies have acquired the expertise needed to assume the managed care organization role.

Shifting to managed care entails a major restructuring of the organization and financing of services. Adopting managed care may yield positive results -- including more efficient delivery of services, better access to services and positive outcomes for consumers -- but such results are achieved only when the transition to managed care is carefully planned and implemented. The distilled experience with managed mental health services points to the importance of a state's having a clear concept of how managed care will advance its overarching system goals and objectives. Employing managed care effectively requires expertise in crafting contracts with managed care organizations and a commitment to monitor their performance.

The expansion of managed care to people on Medicaid who have a significant disability due to serious mental illness has been controversial - both reviled as a system of unreasonable rationing that hurts those most in need, and held up as the solution to a series of long-standing and difficult problems in public mental health systems. According to state officials with several years' experience, neither of these assessments … is accurate. Many states that have already adopted managed care approaches in their public mental health systems report considerable success, but they also warn of limits on the extent to which reform can be accomplished by changing organizational structures and financing.9

Today, approximately fifteen states operate distinct Medicaid managed care delivery systems that serve working age adults with serious mental illnesses along with other Medicaid beneficiaries who require mental health services.10 These individuals are served through specialty "behavioral health" 1915(b) waiver programs or "carved out" managed care arrangements that are part of 1115 Demonstration waiver programs. In some cases, managed care delivery systems operate only in some parts of a state rather than statewide. In recent years, there has been less activity on the part of states to shift the provision of mental health services to managed care.

Rather than operate a managed care delivery system, some states have implemented hybrid arrangements that incorporate some functions (e.g., utilization review and management) that are often identified with managed care models, but keep the state in the position of managing services directly. For example, some states maintain fee-for-service delivery systems but have engaged private sector firms or organizations (called Administrative Services Organizations or ASOs) to conduct these functions or have assumed these functions themselves. As discussed in Chapter 4, for example, Georgia decided to contract with a private sector ASO to conduct utilization review and management activities for its expanded rehabilitative services. Nebraska also employs an ASO, as do several other states. Utilization review is a basic Medicaid administrative function, and contracting with an ASO can aid a state in acquiring the necessary expertise to conduct this function. Employing an ASO arrangement does not require a Medicaid waiver.

Other features and functions usually attributed to managed care models can also be incorporated into fee-for-service systems without a Medicaid waiver. These include: (1) service planning requirements structured to ensure the coordinated provision of the full range of mental health services, (2) targeted case management to coordinate services, (3) prior authorization mechanisms to assure that services match consumer needs, and (4) the establishment of well-defined medical necessity criteria.

There is a misperception that a state must shift to managed care in order to limit providers to only those that are highly qualified. Medicaid law does dictate that, absent a waiver, a state must enter into a provider agreement with all qualified providers. In some cases, this provision has posed difficulties for states that want to avoid contracting with low quality vendors. But, as previously stated, under current Medicaid law, states may establish standards to ensure that only capable providers/ vendors furnish services. Shifting to a managed care service delivery system is not necessary to secure this result. However, it is worth noting that limiting the number of providers has not been a central feature of managed behavioral health programs. Indeed, state contractual requirements typically encourage managed care organizations to expand provider networks to include non-traditional providers and minority provider organizations.11

In sum, managed care is an alternative way to furnish Medicaid mental health services. Federal policy permits a state to shift the service delivery to managed care by securing a waiver. However, some features of managed care also may be implemented in fee-for-service systems.

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