Using Medicaid to Support Working Age Adults with Serious Mental Illnesses in the Community: A Handbook. Section 1915(c) Waiver Authority


Section 1915(b) of the Social Security Act permits the Secretary of HHS to grant waivers of certain specific provisions of the Medicaid Act. Waivers granted under this section are sometimes called "freedom of choice" waivers because they permit a state to limit the providers of Medicaid services and require that beneficiaries obtain services through a managed care arrangement. Section 1915(b) contains four distinct authorities:

  • §1915(b)(1) permits a state to mandate that beneficiaries enroll in a managed care plan.
  • §1915(b)(2) authorizes a state to establish a "central broker" to assist beneficiaries to select among health plans.16
  • §1915(b)(3) provides that a state may employ savings derived from managed care to furnish additional services to beneficiaries over and above those in its state plan.17 These services must be furnished for medical or health-related reasons. It is important to note that the additional services furnished under this provision do not permit a state to secure additional federal Medicaid funding because such services must be financed out of savings.18
  • §1915(b)(4) permits a state to limit the number of service providers, including engaging in "selective contracting" with preferred providers.

In the mental health arena, states usually combine the §1915(b)(1) and §1915(b)(4) authorities to implement a managed care arrangement. Several states have also used the §1915(b)(3) authority to broaden the array of services available to enrollees.19

A 1915(b) waiver program must also meet a "cost-effectiveness" test. A state must be able to show that the average per beneficiary costs of services furnished under the waiver program are no greater than under a fee-for-service arrangement. A 1915(b) waiver program may be approved for an initial period of two years and renewed for two-year periods thereafter, provided that CMS deems the state's performance in operating its program has been satisfactory.

Under §1915(b), the specific provisions of Medicaid law for which a state may request waivers in order to operate a managed care arrangement include:

  • §1902(a)(1) -- Statewideness. A waiver of this provision permits a state to operate its 1915(b) waiver program in some but not all parts of a state. For example, Utah's 1915(b) mental health waiver program operates under such a waiver. Beneficiaries who reside in very rural areas of Utah receive mental health services through alternative service delivery arrangements.
  • §1902(a)(4) -- A waiver of this provision permits a state to mandate that beneficiaries enroll with a single managed care organization;
  • §1902(a)(10)(B) -- Comparability. When some but not all Medicaid beneficiaries are served through the managed care arrangement, a waiver of this provision is necessary. This waiver is also necessary when the services people receive through a managed care arrangement differ from the services available to non-enrollees (e.g., when a state provides additional services by invoking the §1915(b)(3) savings provision); and,
  • §1902(a)(23) -- Free Choice of Provider. A waiver of this provision permits a state to mandate that individuals obtain services through the managed care organization's provider network.

When requesting a 1915(b) waiver, a state also may request waivers of other provisions of the Social Security Act; however, such waivers are infrequently granted.

In order to secure a 1915(b) waiver, a state must submit a detailed waiver application to CMS. The requirements that a state must satisfy in order to operate a 1915(b) waiver program are far more extensive than states must meet in order to add a coverage to their Medicaid state plan. There are also greater ongoing administrative requirements once a program is implemented. States must address a wide range of topics, including:

  • The state plan services that would be furnished through the managed care arrangement and, as appropriate, the additional services that would be furnished under the provisions of §1915(b)(3). For illustration, Michigan's 1915(b)(3) waiver services are described on the following page.
  • How the state would assure enrollee access to services and sufficient service providers.
  • The state's definition of medical necessity. This definition is important as it contains the conditions under which services will be furnished to enrollees, thereby determining when the managed care contractor is obligated to furnish or arrange for services. Colorado's 1915(b) waiver illustrates a medical necessity definition.
  • The groups of Medicaid beneficiaries who would be required to obtain services through the managed care arrangement and, as appropriate, beneficiaries who would be excluded (e.g., nursing facility residents or Medicaid-Medicare dual eligibles) and, thereby, continue to receive state plan services on a fee-for-service basis.
  • The type of delivery system that a state would operate (e.g., the number and types of organizations with which it would contract and the extent to which they will bear financial risk).20
Colorado's Medical Necessity Definition21
"A covered service shall be deemed medically or clinically necessary if, in a manner in accordance with professionally accepted clinical guidelines and standards of practice in behavioral health care, the service:
  1. is reasonably necessary for the diagnosis or treatment of a covered mental health disorder or to improve, stabilize or prevent deterioration of functioning resulting from such a disorder; and
  2. is furnished in the most appropriate and least restrictive setting where services can be safely provided; and,
  3. cannot be omitted without adversely affecting the consumer's mental and/or physical health or the quality of care rendered.

The contractor, in consultation with the service provider, consumer, family members, and/or person with legal custody shall determine the medical and/or clinical necessity of the covered service.

The authorization process shall take into consideration other factors, such as the need for services and supports to assist a consumer to gain new skills or regain lost skills that support or maintain functioning and promote recovery.

The contractor shall not deny services based on medical or clinical necessity solely because the consumer has a poor prognosis or has not shown improvement, if the covered services are necessary to prevent regression or maintain the present condition."


Michigan's 1915(b)(3) Services22
Michigan's waiver program provides for the following "alternative services and supports" that its contractors may authorize for adults with mental illnesses from their capitated payments. These alternative services extend the range of services and supports available to individuals beyond those spelled out in Michigan's state Medicaid plan.
  • Community Living and Training Supports that "focus on personal self-sufficiency, facilitating an individual's independence and promoting his/her integration into the community. These supports may be furnished in the person's living arrangement or elsewhere in the community. They include assistance, support (including reminding and observing, and/or guiding) and/or training in such activities as: household tasks, activities of daily living, money management, socialization and relationship building, transportation, and participation in regular community activities.
  • Extended Observation Beds, a hospital-based service of less than 24-hour duration that includes rapid diagnosis, treatment, and stabilization of an individual with a psychiatric emergency with subsequent transfer to community.
  • Housing Assistance with short-term or one-time-only expenses associated with a person's transition to home ownership or leasing or renting a dwelling, such as utility, insurance, moving, and other expenses. This assistance does not include payment for room and board costs.
  • Peer-Delivered or Operated Support Services, which are "service activities intended to provide [individuals] with opportunities to learn and share coping skills and strategies, move into more active assistance and away from passive patient roles and identities, and to build and/or enhance self-esteem and self-confidence. Such services may include consumer run drop-in centers and other peer operated services (e.g., peer run hospital diversion services)."
  • Skill-Building Assistance consists of activities that assist an individual to "achieve economic self-sufficiency and/or engage in meaningful activities such as school, work and/or volunteering.
  • Supported/Integrated Employment Services "provide initial and ongoing support to assist persons to obtain and maintain paid employment. On-going support services without which employment would be impossible are provided as required. Examples of these services are job development, job placement, job coaching, and long-term follow-along services required to maintain employment."
  • How the state would implement the safeguards and other protections spelled out in the CMS managed care regulations, including (a) appeal, grievance and fair hearing procedures, and (b) furnishing information to enrollees, including information about their rights;
  • The state's quality assurance and program improvement (QAPI) plan. This plan must address how the state intends to measure performance under the managed care arrangement and where it intends to devote attention to improve performance. In addition, effective August 2003, all waiver programs must provide for an external quality review system;23
  • The demonstration of the program's cost effectiveness by comparing the projected costs of furnishing services without the waiver to the costs of furnishing services through the managed care arrangement. These projections must be actuarially sound and based on actual utilization and expenditure information during prior periods, as well as administrative costs. In the case of 1915(b) waiver programs, cost-effectiveness is calculated on a per beneficiary basis. States are not financially at risk for expenditure increases that stem from growth in the number of beneficiaries. They are at risk if per beneficiary costs exceed approved levels.
  • When capitated payments are made to managed care organizations, a state must also spell out how it will capture "encounter data" in order to compile information about the services actually furnished to beneficiaries.24

With respect to the 1915(b) waiver authority (as well as the 1115 authority), it is important to point out that states generally must bid and periodically re-bid contracts for managed care providers. This competitive bidding requirement arises from 45 C.F.R. Part 74 rather than the Medicaid Act itself. States meet this requirement by issuing a Request for Proposal (RFP) that requires bidders to provide detailed information concerning the organization's capabilities and willingness to abide by the state's performance and other requirements.25 It is standard practice to incorporate the successful bidder's response into its contract with the organization. In almost all cases, CMS must review and approve contracts with managed care organizations. Managed behavioral health care contracts usually cover multi-year periods (3-5 years).26

Characteristics of 1915(b) Managed Behavioral Health Waiver Programs

Several states have used the 1915(b) waiver authority to restructure the delivery of mental health services. The table in Appendix C summarizes the features of eleven states' "specialty" mental health/ behavioral health 1915(b) waiver programs that include working-age adults with serious mental illnesses in the population served by the program.27 As can be seen from the table:

  • Most of these programs operate on a statewide or nearly statewide basis;
  • California's 1915(b) waiver program is a §1915(b)(4) "selective contracting" waiver program. It is designed to align contracting for services with the organizational structure of the state's mental health system. In particular, the state contracts with a mental health plan in each county that directly furnishes Medicaid services, or subcontracts for their provision from other providers. Medicaid beneficiaries must obtain mental health services through the county plan. The program does not provide for capitated payments nor are the county plans classified as managed care organizations.
  • All these programs furnish services to both children and adults; some exclude certain groups of Medicaid beneficiaries (e.g., nursing facility residents, medically needy beneficiaries, Medicare-Medicaid dual eligibles).
  • Five programs include substance abuse services;
  • Prescription drugs are not covered by these programs; they are furnished to beneficiaries under standard Medicaid fee-for-service arrangements or by a "physical health" MCO if the beneficiary is served by such an organization and the organization is responsible contractually to provide prescribed drugs.28
  • Only one program (New Mexico) contracts with health services managed care organizations that, in turn, subcontract for the provisions of mental health services. However, the state has announced that it plans to end this arrangement and contract separately for mental health services, carving them out from other Medicaid services delivered by MCOs.29 The other programs are distinct, specialized arrangements specifically designed to furnish mental health services and are not tied directly to the delivery of other health services.
  • Most states contract with public mental health agencies, some of whom partner with private behavioral health organizations to serve as managed care organizations. Only one statewide program (Iowa) contracts exclusively with a private behavioral health organization.
  • Most states use the §1915(b)(3) authority to cover additional services through savings.

Despite some commonalities, there is considerable variation across the states' programs. Colorado's30 and Iowa's31 1915(b) waiver programs are profiled on the following pages.

In addition to these specialty mental health services programs, a few states operate 1915(b) managed care waiver programs where funding for behavioral health services (usually basic inpatient and outpatient benefits) is combined with funding for other health services. In such arrangements, managed care contractors may furnish such services directly or contract with behavioral health organizations to provide services. It is not typical for states to include rehabilitative services for persons with serious mental illnesses in general purpose managed care contracts and persons with serious mental illnesses in these states continue to receive these services on a fee-for-service basis.32

Section 1115 Waiver Authority

Section 1115(a) of the Social Security Act permits the Secretary of Health and Human Services to authorize experimental, pilot, or demonstration projects that, in the judgment of the Secretary, are likely to assist in promoting the objectives of the Act, including those of the Medicaid statute.33 The authority's principal purpose is to foster the testing and researching of innovative new approaches to the provision of services and benefits under the Social Security Act. In particular, this provision allows the Secretary to waive any of the requirements of §1902 of the Medicaid Act as are necessary to permit the state to carry out its proposed project. §1902 contains the fundamental federal statutory provisions that govern the Medicaid program.

Under the 1115 Demonstration waiver authority, the Secretary may permit a state to offer services under Medicaid that are not otherwise eligible for FFP and to expand eligibility to persons who would not otherwise be eligible for the Medicaid program. HHS also has employed the 1115 Demonstration authority to test new approaches to the delivery of Medicaid services in partnership with interested states.34 When a state furnishes services under this authority, it must propose a research program and agree to conduct an evaluation of the project. Projects authorized under this authority generally are approved for a five-year period and may be extended under certain circumstances. Demonstration projects must be budget neutral over their life. This means that the expected total cost of the demonstration to the federal government cannot exceed the total cost without the waiver.35 This financial test can be challenging to meet. Also, when mental health services are furnished through a managed care arrangement under an 1115 waiver, the state also must meet the requirements of BBA-97.

Colorado Medicaid Mental Health Capitation and Managed Care Program
This program was launched in 1995 and extended statewide in 1998. Through this program, the state contracts with eight single point-of-entry "mental health assessment and services agencies" (MHASAs) serving designated regions. Services furnished include inpatient hospital, case management, outpatient clinic services, and rehabilitative services. Prior to this program, Medicaid mental health services were delivered through a fee-for service system which had "no central gatekeeper determining the need for services and no single clinician or case manager coordinating all aspects of an individual's mental health care." In 2000, the state modified its program to place a stronger emphasis on recovery as the program's central aim.

MHASAs are community mental health centers, consortia or partnerships of centers, which may also partner with a pri-vate sector behavioral health company that functions as an Administrative Services Organization. MHASAs are responsible for assessing service need and coordinating service delivery (by providing services directly or referring individuals to subcontracted providers) and monitoring service delivery. Under this program, capitated payments are made to each MHASA. Colorado limits MHASA administrative costs and profit. The program is administered by the Colorado Division of Mental Health in the Department of Human Services under an interagency agreement with the Department of Health Care Policy and Finance, the state's Medicaid agency. The program's goals are:

  1. "to promote and assist in the recovery of individuals with mental illnesses through innovative services that empower consumers and families to determine and achieve their goals;
  2. to assure access to necessary mental health services for consumers and families;
  3. to provide the appropriate mix of mental health services that meet the needs of each individual consumer and family;
  4. to assure that quality services are provided to consumers and families;
  5. to provide all necessary services through a cost-effective system;
  6. to achieve a coordinated system of mental health service delivery to Medicaid and non-Medicaid Colorado citizens; and,
  7. to continue to manage the cost of the mental health system and to control the rate of future cost increases."

State officials report that the program has: (a) contributed to shifting services away from inpatient hospital settings to the community; (b) increased the involvement and empowerment of consumers and families; (c) aided in the development of new services (including crisis beds, respite care, and self-help groups); (d) expanded community services; (e) improved coordination of mental health services; (f) fostered the development and implementation of a recovery model of care through the development of consumer-driven and consumer-run services, and by creating increased opportunities for consumer employment within the mental health system; and, (g) resulted in cost savings.

Colorado has used the §1915(b)(3) "savings" provision to cover additional services not offered under the state plan, including (for adults) intensive case management, residential services, and vocational services to assist persons to gain skills necessary to secure employment. In addition, the state expects MHASAs to develop and offer "optional services" over and above the core services included in the waiver program. Some optional services furnished by MHASAs include ACT, peer counseling and support, clubhouses, consumer-operated "warm lines," family support and education, supported living, supported employment, recovery/self-help groups, and peer-run employment services.

In conjunction with this program, the state has established the Mental Health Ombuds program. This program is operated by an independent organization that provides advocacy, assistance, and education for consumers and families enrolled in the program.


The Iowa Plan
The Iowa Plan integrates the delivery of mental health and substance abuse treatment services. Approved in 1998, the Iowa Plan replaced two separate 1915(b) mental health and substance abuse waiver programs. The plan uses a single statewide private-sector contractor (Magellan Behavioral Health). Nearly all adult and child Medicaid beneficiaries are required to obtain mental health and substance abuse services through the Iowa Plan.

Services offered through this program include basic inpatient and outpatient mental health and substance abuse services. In addition, Iowa employs the §1915(b)(3) "savings" provision to add coverage of:

  • Intensive Psychiatric Rehabilitation, described as "recovery-oriented, consumer-driven, readiness, skill and support development interventions in the area of social, vocational, educational and residential functioning for persons with serious behavioral illness that require long-term services and supports;"
  • Assertive Community Treatment; and, Community Support Services for persons with severe and persistent mental illness, designed to support an individual in the community with outreach and support to manage symptoms of mental illness, assure follow-up, and develop crisis plans.

Among the additional services that the contractor is expected to provide from cost savings are mobile crisis services, peer support and supported community living services, defined as "services and supports determined necessary to enable consumers with a chronic mental illness to live and work in a community settings [and] are consumer individualized [and] need and abilities-focused." These services can include assistance with housing and living arrangements, mental health treatment, crisis intervention and assistance, social and vocational assistance, service coordination, protection and advocacy, and support, assistance, and education for the consumer's family. The contractor may also develop alternate ways to address mental health needs. Optional services that the contractor may provide under this provision include consumer-operated telephone "warm lines," respite services and support, and clubhouse. Iowa also requires the contractor to include all willing and qualified providers in its provider network.

There is no pre-formatted application for states to use when seeking waivers under the 1115 authority. The process for obtaining a demonstration waiver usually starts with a state's submitting a general outline of its proposal to CMS and proceeds to the development of a formal proposal. CMS and the state then negotiate the "terms and conditions" (i.e., the specific parameters) under which the demonstration will operate. Once CMS is confident that the state is prepared to implement the demonstration, the state may proceed.

In Medicaid, a major use of the 1115 waiver authority (but not the exclusive use) has been to permit states to launch what are termed "health care reform demonstrations." Through these demonstrations, several states have substantially restructured the delivery of Medicaid services, principally by employing managed care as a means to secure cost savings that can be applied to extend health care to additional populations. Several of these demonstrations include mental health and/or substance abuse services.

Delivery of Mental Health Services Under 1115 Demonstration Projects

There are no stand-alone 1115 demonstrations that solely concern the provision of mental health services. Instead, mental health services have been included as part of broader health care reform demonstrations. About twelve states operate broad scale 1115 health care reform demonstrations.36 How mental health services are organized and financed in these demonstrations varies considerably, but they employ two basic approaches to deliver mental health services: (1) carve out mental health services but maintain fee-for-service delivery, or (2) carve out and implement a managed care service delivery model for mental health services. Both approaches are described below.

Carve out mental health services but maintain fee-for-service delivery. While 1115 demonstration waiver programs usually make extensive use of managed care arrangements, states may elect to exclude some Medicaid services and/or eligibility groups from the scope of such arrangements. When services are excluded from capitated managed care organizations, they are said to have been "carved out" and continue to be provided on a fee-for-service basis. Fee-for-service delivery is also employed when groups of beneficiaries (e.g., SSI recipients) are excluded from mandatory enrollment in a managed care arrangement. Sometimes, states include a basic inpatient/outpatient mental health benefit in the managed care arrangement but pay for more intensive services on a fee-for-service basis and/or continue to serve some populations (e.g., individuals with serious mental illnesses) through a traditional fee-for-service model. Where mental health services have been carved out and are furnished outside the managed care delivery system, a state may still restructure its provision of mental health services, taking advantage of the flexibility afforded in a demonstration waiver. Several states that operate 1115 demonstrations have carved out intensive mental health services for working-age adults with serious mental illnesses. Maryland and Vermont (profiled below) are two states that operate health care reform demonstrations but continue to provide mental health services on a fee-for service or other basis.39

Section 1115 Carved Out Fee-For-Service Arrangements
Maryland's HealthChoice 1115 Demonstration waiver was implemented in 1997. Medicaid beneficiaries must enroll to receive health care services through a comprehensive health care benefits MCO. These MCOs are responsible for furnishing "primary" outpatient mental health and substance abuse services. Carved out from MCO delivery are more intensive "specialty mental health services." These services are furnished through the Public Mental Health System (PMHS) administered by Maryland's Mental Hygiene Administration in the Department of Health and Mental Hygiene. Maryland's network of Core Service Agencies (CSAs) are responsible for planning, managing, and monitoring the delivery of publicly-funded mental health services at the local level. CSAs, in turn, contract with mental health providers to furnish services on a fee-for-service basis. Maryland has engaged an ASO (Maryland Health Partners) to provide support to the state and the CSAs. The ASO determines whether a person qualifies for PMHS services, refers the person to providers, pre-authorizes non-emergency services, conducts utilization review, compiles data, and processes claims and remits payments to providers. The PMHS serves both Medicaid eligible and non-eligible individuals who meet the state's eligibility criteria for mental health services.

In 1996, Vermont implemented the Vermont Health Access Plan (VHAP), its 1115 health care reform demonstration. Through VHAP, the state has expanded Medicaid eligibility for both children and adults. VHAP uses a primary care case management service delivery model rather than an MCO service delivery model.38 Under VHAP, basic mental health benefits are furnished on a fee-for-service basis. The state also operates its long-term behavioral health program (Community Rehabilitation and Treatment (CRT) Program) under the demonstration. The CRT Program serves approximately 3,300 adults with severe and persistent mental illnesses, of whom about 88 percent are Medicaid beneficiaries. Due to the nature of their mental illnesses, CRT consumers have varying needs for services over the long-term. Core CRT services include:

  • Service planning and coordination;
  • Clinical interventions;
  • Crisis services;
  • Partial hospitalization;
  • Day services;
  • Housing and home supports in a variety of living arrangements;
  • Employment services, including assessment, employer and job development, job training and ongoing support to maintain employment; and
  • Community supports, defined as "individualized and goal oriented services that assist individuals (and families) in developing skills and social supports necessary to promote positive growth. These supports may include assistance in daily living, supportive counseling, support to participate in community activities, collateral contacts, and building and sustaining healthy personal, family and community relationships."

CRT services are furnished primarily by Vermont's network of comprehensive community mental health agencies (known as "designated agencies") that serve designated catchment areas. A case rate payment system is employed instead of traditional fee-for-service payment methods. Designated agencies receive monthly case rate payments for each individual they serve, based on a three-tiered system. Providers are expected to use these case rate payments to furnish both traditional Medicaid state plan services and "off-plan" services (e.g., supported employment) to CRT consumers. Under this system, providers are not classified as Medicaid MCOs but instead function in a lead-agency role, furnishing services or arranging for services through other providers. In addition, Vermont uses its own general fund dollars to pay for individuals who do not qualify for Medicaid.

State officials have found several advantages in delivering services under an 1115 demonstration waiver. A relatively high percentage of adults with serious mental illnesses qualify for Medicaid funding. The adoption of the case rate payment method has simplified administrative procedures for providers because they do not need to submit fee-for-service claims or keep track of encounter data. The waiver has also given providers more flexibility to furnish the most appropriate services rather than being confined to the traditional Medicaid services menu. In Vermont, the use of day treatment has declined substantially as a result of this flexibility. About 28 percent of CRT consumers are employed in the community, a rate significantly above the national average. This flexibility has also aided in the adoption of evidence-based practices, most of which are used in varying degrees by designated agencies. The state is expanding the use of evidence-based practices throughout its service system.

Carve out and implement a managed care service delivery model for mental health services. Five 1115 health care reform demonstration waiver states have elected to carve out mental health services and deliver them through a behavioral health managed care arrangement. These carve out arrangements are similar to those that other states have established through 1915(b) waiver programs. That is, the state contracts with one or more entities to furnish mental health (and sometimes substance abuse services) to beneficiaries using a capitated payment arrangement. These arrangements are subject to the same federal managed care regulations as similar arrangements implemented under a 1915(b) waiver. Five states that operate behavioral health managed care arrangements under an 1115 demonstration waiver are described below.

Arizona. The Arizona Health Care Cost Containment System (AHCCCS) 1115 Demonstration has operated since 1982.40 The demonstration has three main components: (a) acute care services provided through MCOs; (b) long-term care services; and, (c) behavioral health services. Arizona phased in the coverage of behavioral health services between 1990 and 1995. The managed behavioral health carve out provides comprehensive mental health and substance abuse services to all adult and child Medicaid eligibility groups.41 The carve-out is managed by the Division of Behavioral Health Services at the Arizona Department of Health Services under an agreement with the state Medicaid agency. The division contracts with Regional Behavioral Health Authorities on a capitated basis to furnish services. Three tribal authorities furnish services to Native Americans.

Hawaii operates a small behavioral health carve-out (Behavioral Health Managed Care Plan, or BHMCP) for adults as part of its Hawaii QUEST 1115 demonstration. Individuals with a serious mental illness have the option to participate in the carve-out, but may instead elect to receive services from the standard Medicaid plan, although the waiver offers a greater array of services. BHMCP also provides services to individuals with co-occurring substance abuse disorders. Beneficiaries have access to services including crisis, residential treatment, prescription drugs, inpatient/outpatient mental health and substance abuse treatment, and mental health support services.

Massachusetts implemented a 1915(b) waiver Medicaid behavioral health managed care program in 1992. In 1997, it implemented Mass Health, a statewide 1115 health care reform demonstration waiver. When Mass Health was implemented, 1915(b) waiver behavioral health services were folded into it. For health services, beneficiaries select between a primary care case management (PCCM) arrangement or enroll with a comprehensive benefits managed care organization. Adult beneficiaries with serious mental illnesses usually are enrolled in a PCCM arrangement and receive mental health (and substance abuse) services through the Massachusetts Behavioral Health Partnership managed care carve out program.42 The Partnership program is operated by a private-sector behavioral health managed care organization and is responsible for furnishing the full range of inpatient and outpatient mental health and substance abuse services to enrolled members.

Oregon. The Oregon Health Plan 1115 health care reform demonstration waiver was implemented in 1994. The mental health/substance abuse carve-out managed care arrangement employs multiple types of providers (private behavioral health MCOs, CMHCs, county-operated entities, and regional authorities). The carve out program includes crisis, inpatient/outpatient mental health services, rehabilitative services, mental health support, and outpatient substance abuse services.

Tennessee. The Tenncare 1115 health care reform demonstration waiver was implemented in 1994. Since the program's inception, mental health and substance abuse services have been carved out and are now delivered by a single behavioral health managed care organization (BHO). The services furnished by the BHO include crisis, inpatient/outpatient mental health and substance abuse, rehabilitative services, mental health and substance abuse residential services, mental health support, and detoxification.

The table in Appendix C contains additional information about these managed behavioral health carve outs.

When a state operates its Medicaid program under the 1115 demonstration authority, it gains the flexibility to expand eligibility and employ alternative service delivery models. Some states that operate 1115 demonstrations have elected to continue to provide services to working-age adults with serious mental illnesses using a traditional fee-for-service delivery system. Others have used the flexibility afforded by the demonstration authority to restructure their provision of mental health services, but not all have done so by employing a managed care service delivery arrangement.

Section 1915(c) Waiver Authority

Section 1915(c) of the Social Security Act was enacted in 1981.43 It permits the Secretary of Health and Human Services to grant waivers to states so they can furnish home and community-based services (HCBS) as an alternative to institutional services for those individuals who qualify for Medicaid-reimbursable institutional services. Through the HCBS waiver program, states have substantially expanded home and community services and supports for people with disabilities of all ages. In 2002, over 800,000 individuals nationwide received services through HCBS waiver programs at a state-federal cost of $16.3 billion. Nationwide, states operate approximately 275 HCBS waiver programs. However, only a few waiver programs target services specifically to individuals with mental illnesses.

HCBS Waiver Program in Brief

The major provisions of Section 1915(c) of the Social Security Act are described below.

  • States may offer home and community services to individuals who qualify for services furnished in a nursing facility, intermediate care facility for the mentally retarded,or a hospital. When a state operates an HCBS waiver program, individuals who meet the level-of-care requirements for these Medicaid institutional settings may instead be offered home and community services. Individuals must affirmatively elect to receive home and community services in lieu of institutional services.
  • §1915(c) identifies several services that a state may offer through an HCBS waiver program, such as case management, personal care, habilitation, adult day health care, homemaker, home health aide and respite. States may cover additional services and supports as long as they assist individuals to avoid institutionalization. The services that a state may offer in a 1915(c) waiver program include: 1) optional services it can cover under its state plan but has chosen not to; 2) additional services that can not be offered under the state plan; and 3) services that the state offers under its state plan with limitations on amount, duration and scope, but wishes to offer on an "extended basis" to waiver participants, i.e., with less stringent limitations.
    A state is barred from claiming the costs of "room and board" (e.g., housing and other routine living expenses) furnished to waiver participants. Such expenses must be met from the participants' own resources (e.g., SSI payments) or other funds.
  • §1915(c) permits the Secretary of Health and Human services to waive three provisions of the Social Security Act to permit a state to operate an HCBS waiver program: (a) §1902(a)(1) for the purpose of operating a program on a less than statewide basis; (b) §1902(a)(10)(B) in order to furnish waiver services to specified groups of beneficiaries (e.g., older persons, working-age adults with disabilities, persons who have experienced a traumatic brain injury); and, (c) §1902(a)(10)(C)(i)(III) to permit a state to offer waiver services to individuals who would qualify financially for Medicaid only if institutionalized. As noted in Chapter 3, state Medicaid financial eligibility standards for institutional services are often more generous than community standards.
    All other provisions of the Medicaid Act apply to HCBS waiver programs. For example, §1915(c) does not authorize a waiver of beneficiary's free choice of service provider as required by §1902 (a)(23) of the Act. In order to link the provision of waiver services to a managed care strategy, a state must request a combination 1915(b)/1915(c) waiver program and meet the requirements for each.45
  • §1915(c) dictates that the services provided through a waiver program be spelled out in a "plan of care." The plan of care also identifies other services and supports (paid and unpaid) that are needed to support the waiver participant in the community.
  • Individuals who participate in an HCBS waiver program are eligible to receive all other services that a state offers under its Medicaid state plan. HCBS waiver services complement the services that a state offers in its state plan. Waiver services cannot be furnished to individuals who are institutionalized. However, some waiver services may be furnished to facilitate the transition of institutionalized persons to the community.46
  • In order to obtain CMS approval for an HCBS waiver program, a state must demonstrate that its proposed program will be "cost-neutral." A state must show that the average per person cost of furnishing waiver and other Medicaid state plan services to individuals would not exceed the average cost of furnishing institutional and other Medicaid services to these individuals in the absence of a waiver program. The program must meet this cost-neutrality test for the duration of its operation. A state may elect to limit its program to individuals for whom the cost of community services will not exceed the cost of institutional services. Alternatively, a state may operate its program on an "aggregate" basis, balancing individuals who have higher costs with those whose costs are lower.
  • In proposing to operate a waiver program, a state specifies the number of individuals it plans to serve. A state is not obligated to furnish services to additional persons once it reaches its self-imposed enrollment cap. The ability of states to limit the number of people receiving waiver services is a feature unique to this waiver authority. States may elect to serve as few or as many individuals as they chose.47
  • A state must assure that it has necessary safeguards to assure the health and welfare of individuals served through the waiver program.
  • There is no federal limitation on the number of waiver programs a state may operate. Some states operate as many as ten programs.
  • Waivers may be granted for an initial period of three years. If a state's performance in operating a program is acceptable, then the program may be renewed thereafter for successive five-year periods.

States have employed the HCBS waiver program extensively to promote the cost-effective delivery of long-term care services to many Medicaid beneficiary target population groups. The cost of furnishing community services has been demonstrated to be considerably lower than institutional services. In addition, the program is very flexible. States have wide-ranging latitude both in selecting the populations to whom they will furnish services and in selecting the services that they will offer.

States must apply to CMS to operate an HCBS waiver program. CMS has issued a standard waiver application template that a state may employ in seeking approval to operate an HCBS waiver program.48

HCBS Waiver Program and Working Age Adults with Serious Mental Illnesses

Working-age adults with serious mental illnesses may receive services through an HCBS waiver program. Like other individuals with disabilities, such persons must meet a waiver program's applicable eligibility criteria, including the determination that the person requires the level-of-care furnished in a Medicaid-reimbursable institutional setting and that waiver services are necessary to assist the person to remain in the community. In various states, individuals with serious mental illnesses qualify for broader HCBS waiver programs for persons with disabilities, even though a state's program may not have explicitly specified that they are members of the target population.

But, there are challenges in operating an HCBS waiver program designed to serve only individuals with serious mental illnesses. The main difficulty in designing an HCBS waiver program to exclusively serve individuals with serious mental illnesses is the linkage between the operation of a waiver program and Medicaid institutional services. HCBS waiver programs operate as alternatives to Medicaid institutional services. In the case of individuals with developmental disabilities, for example, persons are eligible for waiver services if they meet ICF/MR level-of-care criteria and, thus, waiver services are furnished as an alternative to ICF/MR services.

In the case of working-age adults with serious mental illnesses, due to the IMD exclusion discussed in Chapter 4, there is no distinct Medicaid-reimbursable mental health institutional setting for which a waiver program may serve as an alternative. In contrast, because inpatient psychiatric hospital services for individuals under 21 are a reimbursable Medicaid institutional setting, crafting HCBS waiver programs for children with serious mental and emotional disorders is technically more feasible.

Although the IMD exclusion poses an obstacle to developing an HCBS waiver program for adults with serious mental illnesses, it remains possible for a state to operate an HCBS waiver program that targets such individuals. In particular, a state may (as Colorado does) operate an HCBS waiver program for individuals with serious mental illnesses who also meet the state's level of care criteria for nursing facility services.

At present, Colorado operates the only HCBS waiver program for adults with serious mental illnesses. Colorado's program is profiled on the following page. Five HCBS waiver programs specifically target services for children with serious mental and emotional disorders (in Indiana, Kansas, New York, Vermont and Wisconsin).49

Colorado's HCBS Waiver Program for Persons with Mental Illness50
Since 1995, Colorado has operated an HCBS waiver program for adults (persons age 18 and older) who have a major mental disorder (e.g., schizophrenia, major affective disorder) and also meet nursing facility level of care criteria. This program is operated by the Department of Health Care Policy and Financing, the state's Medicaid agency. In 2000-01, this program served 1,706 individuals at an average per person cost of $5,505.

Colorado's nursing facility level of care criteria are based on a functional needs assessment that evaluates a person functioning in several ADLs areas. One of the areas evaluated is the person's need for supervision that results from challenging behaviors or memory/cognition deficits. Individuals, of course, must also meet Colorado's financial eligibility standards. In the case of this (and other Colorado waiver programs), Colorado extends eligibility to individuals who have incomes up to 300 percent of the SSI federal benefit rate.

Colorado offers the following services through this HCBS waiver program:

  • Adult Day Services - center-based daytime health and social services, including intensive supportive services for individuals who require extensive rehabilitative therapies.
  • Alternative Care Facility - a community living arrangement that furnishes personal care and protective oversight to residents.
  • Electronic Monitoring Services - the installation, purchase or rental of electronic monitoring devices that enable individuals to summon help in the event of an emergency (e.g., personal emergency response systems) or remind a person of medical appointments, treatments or medication schedules.
  • Home Modification - making adaptations, modifications or improvements to the person's home setting that address a person's health and safety needs or enable the individual to function with greater independence in the home
  • Homemaker Services - performing general household activities (e.g., light housecleaning, meal preparation, and shopping) on behalf of an individual and/or teaching the individual to perform such chores.
  • Non-Medical Transportation - furnishing transportation so that the person can shop or attend counseling sessions.
  • Personal Care - services furnished to individuals who live in their own or family home and which meet a person's physical, maintenance and supportive needs. These services can include traditional personal care services in a person's home as well as accompanying the person to medical appointments and on personal errands, including shopping. This service can also encompass protective oversight as well as providing respite care for the primary caregiver.
  • Respite Care - substitute care furnished in an alternative care facility or nursing facility when a person's primary caregiver is absent or requires relief.

Colorado's waiver program uses the same service definitions and provider standards as the state's HCBS Elderly, Blind, and Disabled (EBD) waiver program for older persons and working-age adults with disabilities, which permits it to share the EBD waiver's provider network. Mental health providers may also qualify as service providers.

Case management services are furnished by Colorado mental health centers and organizations that hold contracts under the state's 1915(b) waiver. These services are reimbursed as a Medicaid administrative expense. Case management responsibilities include intake, case planning, coordinating waiver services with mental health services, and monitoring service provision and the person's well-being.

State nursing facility level-of-care criteria vary considerably, but generally are based on various combinations of medical and nursing needs, as well as functional limitations. In some states, however, persons may be eligible for nursing facility services on the basis of functional limitations only. In these states, individuals with serious mental illnesses may meet a state's nursing facility level of care criteria. State mental health authorities, by virtue of the role that they play in conducting assessments of individuals for nursing facility pre-admission screening and resident review (discussed in Chapter 7), may be able to gauge the extent to which persons with serious mental illnesses might qualify for an HCBS waiver program. Those who qualify may be offered services through a waiver program limited to serving individuals with serious mental illnesses. Operating an HCBS waiver program for persons with serious mental illnesses offers some potential advantages for a state, which are listed below.

  • States have the option of using Medicaid institutional financial eligibility criteria for HCBS waiver programs. Because these criteria typically are more generous than "community" financial eligibility criteria, a larger proportion of individuals may be able to qualify for Medicaid services. This will be especially true in states that employ the "special income standard" of 300 percent of the SSI federal benefit rate for institutional and HCBS waiver services (described in Chapter 3).
  • There is no federal requirement that a waiver program be limited solely to current nursing facility residents transitioning to the community (although such individuals clearly may be offered services). Individuals in the community who meet nursing facility level of care criteria also may be offered waiver services, irrespective of whether they are seeking admission to a nursing facility.
  • The operation of an HCBS waiver program would permit states to furnish services that cannot readily be covered under the rehabilitative services or other state plan options. Such services can include personal care/assistance and respite. The coverage of personal care/assistance may aid in promoting supported housing and employment, especially in states that do not offer personal assistance in their Medicaid programs or that impose significant restrictions on the use of such services. Operating an HCBS waiver program for adults with serious mental illnesses may provide opportunities for a state to complement the mental health services that it offers under its Medicaid state plan.
  • Since HCBS waiver participants are also eligible to receive all the other services that a state offers under its state plan, a state generally would not include mental health services in its HCBS waiver program except to include services that are not offered under the state plan or when a state wishes to offer some of its state plan services on a modified basis in the HCBS waiver program.51 For example, a state may modify state plan limitations on the number of prescription drugs by providing for "extended state plan" coverage of prescription drugs in its HCBS waiver program. In states that offer personal care/assistance services under their Medicaid state plans but limitations on such services make it difficult for individuals with serious mental illnesses to utilize them, such services in modified form can be offered in an HCBS waiver program in order to overcome those limitations.
  • Because HCBS waiver programs operate under state-determined participant caps, they can be less challenging to manage fiscally than state plan services. HCBS waiver programs can be sized to match the dollars available, making expenditures more predictable.
  • Case management services play a central role in the operation of HCBS waiver programs. Such services include working with the participant to identify providers of services and supports, coordinating waiver services with other Medicaid and non-Medicaid services, and conducting on-going monitoring of the person's health and welfare. In states that already furnish targeted case management services to individuals with mental illnesses, HCBS waiver case management functions (such as preparing the individual's plan of care) may be conducted under the targeted case management coverage through existing providers.

The operation of an HCBS waiver program for working-age adults with serious mental illnesses may pose challenges for states. In particular:

  • Because waiver services may be furnished only to individuals who meet institutional (nursing facility) level-of-care requirements, the proportion of working-age adults with serious mental illnesses who might qualify for an HCBS waiver program may be difficult to determine. Individuals whose functional limitations qualify them for Medicaid mental health services may not meet waiver eligibility criteria. Creating two categories of eligibility for Medicaid services (waiver criteria and mental health system criteria) could fragment the state's mental health system.
  • A state might have difficulty securing matching funds to operate an HCBS waiver program, especially if the program would offer services and supports not currently furnished.
  • Meeting HCBS waiver cost-effectiveness requirements might be another challenge. In the case of an HCBS waiver program that would target individuals with serious mental illnesses, the costs of waiver services plus other state plan services (e.g., prescription drugs and rehabilitative services) could not exceed the costs of nursing facility plus state plan services. Depending on a state's nursing facility payment levels, the target population for the waiver program, and the services offered in the waiver program, meeting the HCBS waiver cost-effectiveness requirement might be difficult.
  • To some extent, the advantages of operating an HCBS waiver program for individuals with serious mental illnesses might also be realized through the operation of a managed care waiver program, especially one that provides for the coverage of additional services under the §1915 (b)(3) savings provision or one that operates under the §1115 waiver authority. However, as previously noted, a state cannot expand eligibility when it operates a 1915(b) waiver. Such expansion would potentially be permitted if a 1915(c) waiver is operated in states where institutional financial eligibility criteria are more generous than community criteria. A 1915(c) waiver may operate side-by-side with a 1915(b) waiver program. In such a case, individuals who gain Medicaid eligibility by virtue of their participation in the 1915(c) waiver program would receive their specialized mental health services through the 1915(b) waiver program.

View full report


"handbook.pdf" (pdf, 3.55Mb)

Note: Documents in PDF format require the Adobe Acrobat Reader®. If you experience problems with PDF documents, please download the latest version of the Reader®