Using Medicaid to Support Working Age Adults with Serious Mental Illnesses in the Community: A Handbook. Effective, Economical and Efficient Management of Medicaid Mental Health Services


Managing Medicaid services is a complex undertaking. Managing Medicaid services effectively, economically and efficiently requires states to (a) forge solid, collaborative working relationships between the state mental health authority and Medicaid agency, (b) select appropriate rate setting methods, (c) recruit sufficient numbers of providers to assure access to services, (d) conduct quality management and improvement activities, and (e) marshal information that supports oversight, and aids in understanding the extent to which critical system goals and objectives are attained. Some aspects of federal Medicaid policy affect the management of Medicaid mental health services. But, as in other policy dimensions, states have considerable latitude in crafting effective system management strategies. Medicaid can also contribute resources to underwrite the administrative infrastructure for managing Medicaid services.

Managing the Costs of Mental Health Services

An important concern for policy makers is that mental health services are delivered efficiently and economically. Since Medicaid is an entitlement, it can be difficult to manage expenditures for services. Spending for Medicaid mental health services can fluctuate as a result of changes in the number of eligible individuals and service utilization patterns.

Managing Medicaid mental health spending is complicated. Expenditures for community mental health services affect expenditures for costly in-patient hospital and other emergency services. In general, when the community system has solid capabilities, inpatient hospital expenditures are lower. One reason that some states employ managed care models is that they afford the opportunity to manage both community and inpatient services within a single system of care.

A related problem is that public expenditures outside of Medicaid--especially in the criminal justice system--can be affected if community mental health services are not adequately funded. For example, lack of community funding and services may cause individuals to be incarcerated longer than necessary. Hence, the decisions that a state makes about funding community mental health services can have significant consequences elsewhere in the Medicaid budget, as well as on state and local spending for other services. Especially for individuals with serious mental ill-nesses, the pathway to efficient and economical delivery of services includes the following:

  • Putting in place solid crisis response and ACT capabilities in order to intercept inpatient admissions and effectively support individuals in the community who are at high risk of hospitalization. Absent such capabilities, a state faces the prospect of higher than necessary inpatient hospital spending.
  • Wider dispersion of evidence-based practices that have proven track records in promoting positive outcomes for individuals and are demonstrably cost-effective. These practices and other emerging practices can lead to lower costs over the long term.
  • Emphasizing rehabilitative services that enable individuals to gain skills, promote recovery, and lead to independence and self-sufficiency. Rehabilitation coupled with appropriate treat-ment also point the way toward lower long-term costs.
  • Implementing a solid utilization management and review system to ensure that individuals are receiving the services that best meet their needs, and are in accordance with best practice standards.
  • Complementary funding for housing and job-specific employment training. Such funding promotes stability and self-sufficiency.

Managing Medicaid mental health spending hinges on investing in critical community services in order to avoid costly, frequently repeated and inappropriate use of inpatient hospital and emergency services by individuals with serious mental illnesses.

Rate Setting and Provider Payments28

A state’s rate setting and payment policies are central elements in managing mental health services. In this arena, as others, states have considerable discretion in determining the amounts that they pay for Medicaid-funded community mental health services. Federal policy concerning provider payments lays down a few fundamental parameters that states must observe. These parameters are generally applicable to services furnished through the Medicaid state plan (as opposed to furnishing such services through a waiver or managed care arrangement29), including mental health services.30 In particular,

  • The state plan must describe the policy and methods that are used to set rates for each service.
  • The method that a state employs must be "consistent with efficiency, economy and quality of care" and result in payments that are sufficient to enlist enough providers so that beneficiaries can access services.31 This broad statutory requirement has not been further elaborated upon in federal rules or CMS guidance.32
  • When a state bases its payments on provider costs, it must have procedures to audit those costs.
  • In the case of residential services, the state's payment must exclude the costs of "room and board.
  • The Medicaid agency must provide proper advance notice when it proposes to make a major change in its methodology.
  • Providers must accept the Medicaid payment as "payment in full" for the services they provide. In other words, they may not "balance bill" recipients for an amount over and above the Medicaid payment.

When mental health services are furnished under the Medicaid state plan (rather than through a waiver program), payments are usually structured on a fee-for-service basis. That is, a pre-determined amount is paid for each unit of service provided. States have latitude in defining what constitutes a unit of service and in specifying the different def-initions that may be applied to each service. Units of practitioner services may be defined as a "visit," "session" or in time increments. Residential services may be reimbursed on a per diem rate or on a monthly basis.33

In order to be reimbursed, a provider must submit a "claim" that details the units of services furnished to a specific beneficiary by date. The provider must maintain documentation that supports its claim (e.g., evidence that the covered service was provided to the beneficiary) and, depending on a state's requirements, also show that the service was authorized in the person's treatment plan and/or properly pre-authorized. Provider claims for services must be processed through the states' Medicaid Management Information System (MMIS) in order to verify that they are allowable before payment is issued.34 Claims must also comply with the requirements of the Health Insurance Port-ability and Accountability Act (HIPAA) of 1996.35

Within the foregoing federal payment parameters, states employ a variety of methods to determine provider rates. Different methods may be employed for each service. In general, states use two basic methods, described below.

  • Uniform Fee Schedule. A state may adopt a uniform fee schedule that reimburses each provider the same amount for a service. Such schedules are commonly employed for practitioner services but are also used for other types of services. Fee schedules may be based on an analysis of provider costs, amounts paid by other payers, and/or benchmarked against Medicare payments for similar services. A state's fee schedule may take into account geographic differences in the costs of furnishing services.
  • Provider-Specific Rates. Alternatively, a state may determine a specific payment rate for each provider, based on provider cost reports or budgets submitted by providers. These rates may be "prospective" (i.e., the rate paid to the provider is not adjusted after the fact by comparing payments to actual costs) or "retrospective" (i.e., an "interim rate" is set and payments are settled based on the provider's actual costs). When states determine rates provider-by-provider, usually allowable provider costs are subject to limits (e.g., costs are not allowed that exceed a "reasonableness" threshold), and some costs may be removed from the calculation because they are not allowable under federal policy.36 In addition, states may impose overall ceilings on rates based on "industry" norms.37

Each rate setting method has its pros and cons.38 In general, the trend among states is to adopt uniform fee schedules rather than set rates provider-by-provider because they are less burdensome to administer. In general, CMS defers to states concerning rate-determination methods, as long as the state's proposed method falls within federal parameters (described above). However, CMS may examine a state's proposed method in greater detail when it is uncertain whether the method will promote economy and efficiency.

Reimbursement rates must strike a balance between offering adequate financial incentives for an agency or professional to provide the service and ensuring that states are not 'overpaying' for services.39

Whatever methods are employed, experts recommend that a state's payments for community mental health services contribute to advancing its overarching goals and objectives for these services, including promoting access, quality and effective service delivery. Experience has led state officials to recommend that payments should be sufficient to assure that an adequate number of providers will furnish the service, and that providers have the resources needed to employ skilled professionals and maintain a stable workforce. In addition, especially in the case of rehabilitative services, it frequently is important when setting rates to take into account the costs of activities that are integral to the delivery of effective services but cannot be directly billed to Medicaid. These costs may in-clude time spent traveling or making collateral con-tacts that are not billable as direct services to an individual. Such costs may be taken into account when setting payment rates.

Interagency Agreements

Federal Medicaid law dictates that Medicaid-funded services must be administered by a designated single state Medicaid agency (SSMA). Federal policy prohibits an SSMA from delegating its authority or responsibilities to other entities, including other state agencies40. This requirement is longstanding. Its purpose is to ensure that there is a direct and unequivocal accountability for the administration of Medicaid services between a state and the federal government.

The SSMA requirement potentially clashes with the state mental health authority's (SMHA) fundamental responsibility to manage mental health services and has been a source of tension in some states. For example, SMHAs and SSMAs may have different objectives (e.g., maximizing federal funding to increase the total resources available for mental health services versus containing Medicaid spending). Clearly, absent collaboration and cooperation between the two agencies, the result can be fragmentation in the management of mental health services.

Medicaid policy supports the execution of cooperative arrangements between a state's SMHA and SSMA. While federal policy does not permit a SMHA to exercise direct authority over Medicaid-funded services, it does permit the SMHA and SSMA to enter into an interagency agreement concerning the delivery of mental health services. Under such an agreement, an SMHA may conduct specified administrative activities on behalf of the SSMA, provided that the SSMA retains the ultimate authority and responsibility for such activities. In 2001, 31 states had such agreements.41 When a SMHA conducts administrative activities on behalf of the Medicaid agency, its costs of performing such activities may be eligible for federal financial participation via administrative claiming (see next page). In some states, the SMHA is considered to be part of the SSMA and, hence, can play a more direct role in the administration of Medicaid services.42

For example, Georgia's policy aim is to implement a unified approach to utilization management, and employ common provider and service standards across its community system, regardless of funding source. To do this, it has established an interagency agreement between the Georgia Division of Mental Health/Mental Retardation/Substance Abuse (DMH /MR/SA) and the Georgia Department of Com-munity Health (DCH -- the state Medicaid agency), which provides that DMH/MR/SA will verify that providers meet the qualifications set forth in the state's rehabilitative services coverage, in part by pre-screening provider applications to ensure that new providers are qualified. The agreement also provides that DMH/MR/SA will contract with an external utilization review organization (ERO) to conduct utilization management and prepare reports for both agencies. The agreement also provides for DMH/MR/SA to monitor ERO performance and conduct additional activities on behalf of DCH. The agreement also spells out var-ious DCH responsibilities.

In addition to Medicaid administrative activities, interagency agreements may also provide for the collaboration of both agencies in addressing topics of mutual interest. For example, Florida's interagency agreement between the Agency for Health Care Administration (the state Medicaid agency) and the Department of Children and Family Services (the state mental health authority designated under Florida state law) provides for the "collaboration and joint development of all policy, budgets, procurement documents, contracts, and monitoring plans that have an impact on state and Medicaid community mental health, substance abuse and targeted case management programs."43 A goal of the agreement is that both agencies will work together to promote recovery for adults and family-based care for children. The agreement also provides that the agencies will "establish monitoring and quality assurance standards and protocols … that meet best practices standards."44 The main thrust of this agreement is to establish common principles for the delivery of mental health services across funding sources.

In some Medicaid waiver programs, the SMHA has major responsibilities for the direct operation of a managed care Medicaid waiver program with the SSMA exercising its program oversight responsibilities. This is the case in the Colorado and Michigan 1915(b) waiver programs, as well as Vermont's 1115 waiver program (described in Chapter 6).

The SSMA requirement notwithstanding, federal Medicaid policy clearly does not stand in the way of collaborative relationships between the SMHA and the SSMA and, in most states, the SSMA relies heavily on input from the SMHA in crafting and implementing Medicaid coverages and policies.

Data Systems

Information technology (IT) is vital to the effective management of complex service delivery systems, including mental health services. A solid IT system is the foundation for effective quality management and improvement. IT is also essential in managing costs and gauging the extent to which effective services are being furnished to individuals.

In mental health services, utilization data are critical to effective service management. It is important to keep in mind that underutilization of services can be as problematic as overutilization. When services authorized in a treatment plan are not being utilized or are underutilized, then it is unlikely that the individual's goals and recovery are being advanced. Where such underutilization is taking place, conducting more in-depth analysis and furnishing technical assistance can pay dividends. As discussed in Chapter 5, the application of IT to analyze the utilization of medications can not only aid in cost containment efforts, but can also assist in promoting better practitioner prescribing practices and better medication management. Since mental health services typically are delivered through county or regional service networks, data collection and information technology can also assist in ident-ifying interregional differences in utilization patterns as well as other disparities.45

Conducting such activities is virtually impossible without solid IT capabilities. Such capabilities include the capacity to store and retrieve information about consumers, link it to data concerning services utilization, and generate a wide variety of outputs. In support of such activities, Medicaid paid claims data are a robust source of information. Roughly one-half of the states have Medicaid paid claims data sharing arrangements between the Medicaid agency and the SMHA.46 Such data sharing permits an SMHA to link Medicaid service usage to its consumer data base and other information in order to develop an overall picture of utilization.

Quality Management and Improvement

Contemporary best practice in securing the best value for the health care dollar is for payers to focus on quality and continuously seek improvement in service delivery processes. In recent years, CMS has placed greater emphasis on quality manage-ment and improvement in the delivery of Medicaid services. In addition, Congress incorporated stronger quality provisions into federal law when it enacted the Balanced Budget Act of 1997 (see Chapter 6). For example, states that operate managed care waiver programs -- including behavioral health programs -- must select and implement quality improvement projects as a condition of federal approval of the waiver request. In addition, they must contract with an External Quality Review Organization (EQRO) to evaluate the services furnished under the managed care plan.

There are no parallel requirements that apply to "fee-for-service" delivery arrangements, but states have the latitude to implement quality manage-ment and improvement programs in fee-for-service systems. The costs of such programs may be claimed as an administrative expense to the extent that they are directed toward promoting efficient and effective Medicaid service delivery. Such programs may be conducted directly by the Medicaid agency, the SMHA under an agreement with the SMHA, or a third-party contractor. Again, to the extent that such analysis supports Medicaid-related quality management and improvement activities, it can potentially be financed, at least in part, with Medicaid funds through administrative claiming.

Claims for Administrative Costs

Federal financial participation (FFP) is also available to underwrite a state's costs "for the proper and efficient administration of the [Medicaid] State plan." The rate of federal financial participation in necessary state administrative costs varies depend-ing on the nature of the administrative activity. The base administrative claiming rate is 50 percent but higher rates are available for certain activities.47

In order for an activity to qualify for administrative cost claiming, its performance must be directly related to and necessary for the administration of Medicaid services. Commonly allowable administrative activities for which a state may claim administrative FFP include (among others) eligibility determination, prior authorization of services and utilization management, claims payment, provider audit, rate setting, and quality management/improvement. In general, federal financial participation is not allowable for the costs of conducting general state or local government functions. For example, FFP is not available for the costs of licensing providers (e.g., psychologists) under the provisions of state law. Such activities are considered a state responsibility because they arise from the requirements of state law. However, FFP may be available for the costs of determining whether providers meet Medicaid requirements that are over and above the possession of a license required under state law.

Claims for administrative costs can be complicated, especially when personnel and functions span Medicaid and other non-Medicaid services. When this is the case, a state must apportion costs so that Medicaid administrative FFP is only claimed for that portion of an activity's costs that is reasonably attributable to Medicaid. This is usually done by conducting time studies. When personnel and/or a function are dedicated solely to administering Medicaid services their full costs are eligible for FFP. Federal policy also permits the reimbursement of indirect costs, provided the state has a federally-approved indirect cost plan.

Federal policy does not allow a state to claim administrative activities as services. For example, the costs of eligibility determination may not be included in targeted case management and claimed at the often higher "services" or federal medical assistance percentage matching rate. Such costs must be claimed as administrative expenses.

Claims for administrative costs are not limited to activities performed directly by the Medicaid agency. Such claims also may be made for the costs incurred by other entities that perform activities on behalf of the Medicaid agency to the same extent that they would be allowable if the Medicaid agency were to perform them. For example, utilization management may be contracted to a third-party and the costs claimed as an administrative expense, because such costs would be allowable if the Medicaid agency performed the task itself. Entities that may perform tasks on behalf of the Medicaid agency include other state agencies (e.g., the SMHA), local agencies, and private entities. Whether an activity is performed by the Medicaid agency or another entity, the test of whether the costs are allowable is the same.

When another entity performs an activity on behalf of the Medicaid agency, a written agreement must spell out the nature of the activity, and the agreement must provide that the Medicaid agency oversees the entity's performance and retains ultimate responsibility. Depending on the dollar amount of the agreement, it is subject to the review and approval of the CMS Regional Office. When an administrative activity is contracted out to a private entity, competitive procurement procedures gen-erally must be followed.

In the context of Medicaid mental health services, administrative claiming potentially can assist a state in obtaining federal financial participation in the costs of managing community mental health services. For example, utilization review and management can help to assure that individuals are receiving appropriate, effective services and, thereby, that public dollars are used efficiently. Similarly, conducting periodic reviews of individual treatment plans and assessing whether individuals are receiving necessary services contributes to the long-term effectiveness of services. Both types of activities may qualify for administrative claiming when they are found necessary for the proper and efficient administration of the state plan.

Claims for administrative costs may also be used to cover the costs of outreach activities. Outreach covers the set of activities that a state undertakes to identify and inform potential applicants about the availability of services, and provide information about where and how individuals can get services. Activities can include reaching out to other community networks to which individuals might turn for assistance (e.g., faith-based organizations and homeless shelters). Outreach may also include making information available in relevant languages and/or contracting with individuals and community organizations to conduct outreach in a cul-turally appropriate and sensitive manner.

A state may also contract with community agencies to perform initial intake activities that support final decisions concerning Medicaid eligibility. Alternatively, eligibility workers may be out-stationed to take Medicaid applications and answer potential applicants' questions. Entities that receive Medicaid funds (including public agencies and service providers) must take affirmative steps to accommodate the needs of individuals with limited English proficiency, whether in obtaining Medicaid services or during the provision of such services. FFP may be available for state expenditures related to the provision of oral and written translation administrative activities and services provided to Medicaid beneficiaries.48

Administrative FFP may also be available to underwrite the costs of conducting various training and informational activities (e.g., conducting sessions for providers to provide information about revised billing procedures, changes in utilization review procedures, or to introduce a new service delivery practice). Additionally, administrative FFP may be available for activities designed to help current beneficiaries understand the benefits that are available to them. These activities may be conducted in collaboration with consumer and advocacy organizations. Administrative FFP, how-ever, is not available to train provider agency personnel in the skills that they might require to meet minimum qualifications. The costs of such training must be borne by provider agencies or underwritten with other resources.

While there are limitations on administrative cost claiming, it can assist states to meet the costs of promoting effective delivery and management of Medicaid services.

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