Medicaid Managed Care: Four States' Experiences With Mental Health
Carveout Programs (Letter Report, 09/17/1999, GAO/HEHS-99-118).

Pursuant to a congressional request, GAO provided information on how
states design and monitor Medicaid mental health programs, and how, at
the federal level, the Health Care Financing Administration (HCFA)
exercises its oversight of the Medicaid program, focusing on: (1) the
extent of beneficiary choice in capitated mental health carveouts, the
range of covered mental health services, and access to these services;
(2) the states' approaches to monitoring the quality of care in their
Medicaid mental health carveouts; and (3) HCFA's oversight of states'
mental health carveouts.

GAO noted that: (1) in Colorado, Iowa, Massachusetts, and Washington,
the mental health carveouts limited Medicaid beneficiaries to a single
prepaid mental health plan; (2) because there was no choice of carveout
plan, these states generally tried through contractual provisions to
ensure that prepaid health plans (PHP) did not limit beneficiaries'
access to services inappropriately in order to contain costs; (3) the
states also set standards in their contracts for determining appropriate
levels of services, using broad definitions of medical necessity, and
the states and plans generally reduced or eliminated requirements for
prior authorization for access to outpatient care; (4) the states
generally expanded the range of covered community-based mental health
services, compared with their prior fee-for-service (FFS) programs, and
reduced the use of inpatient services; (5) to discourage the
underprovision of services, these states also capped PHPs' profits,
losses, or administrative expenditures; (6) Colorado and Iowa required
PHPs to invest a portion of their profits in new community-based mental
health services; (7) the states' approaches to monitoring the quality of
their Medicaid mental health carveouts were based on federal laws and
HCFA's regulations governing quality assurance systems, grievance and
appeals systems, medical audits, independent assessments of waiver
programs, and data requirements; (8) these federal requirements for
managed care programs are more extensive than those for FFS programs
because of the need to compensate for capitated plans' incentives to
underserve beneficiaries; (9) each of the four states supplemented these
federal requirements with additional strategies for monitoring quality;
(10) the states' supplemental strategies included the use of site visits
to PHPs to analyze access to services and choice of provider, among
other issues; (11) some of the states GAO studied established ombudsman
programs and advisory committees, composed of mental health providers
and consumers; (12) however, the states did not widely use some
potentially powerful tools; (13) the four states also generally did not
use HCFA's optional quality guidance because they considered it too
general for their mental health carveouts; (14) HCFA's oversight of the
four mental health carveouts consisted primarily of reviewing and
approving states' applications for Medicaid waivers and requests for
waiver renewal; and (15) HCFA has recently taken several steps to
strengthen its oversight of Medicaid mental health programs.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-99-118
     TITLE:  Medicaid Managed Care: Four States' Experiences With
	     Mental Health Carveout Programs
      DATE:  09/17/1999
   SUBJECT:  Health care cost control
	     Health resources utilization
	     Health services administration
	     Managed health care
	     State-administered programs
	     Beneficiaries
	     Mental health care services
IDENTIFIER:  Colorado
	     Iowa
	     Massachusetts
	     Washington
	     Medicaid Program

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Cover
================================================================ COVER

Report to Congressional Requesters

September 1999

MEDICAID MANAGED CARE - FOUR
STATES' EXPERIENCES WITH MENTAL
HEALTH CARVEOUT PROGRAMS

GAO/HEHS-99-118

Medicaid Managed Care

(101570)

Abbreviations
=============================================================== ABBREV

  ACT - assertive community treatment
  ASO - administrative services only
  BBA - Balanced Budget Act of 1997
  CMHC - community mental health center
  FFS - fee-for-service
  HCFA - Health Care Financing Administration
  HHS - Department of Health and Human Services
  HMO - health maintenance organization
  MCO - managed care organization
  OMB - Office of Management and Budget
  PCCM - primary care case management
  PHP - prepaid health plan
  PRO - peer review organization
  QARI - Quality Assurance Reform Initiative
  QISMC - Quality Improvement System for Managed Care
  SAMHSA - Substance Abuse and Mental Health Services Administration
  SSI - Supplemental Security Income

Letter
=============================================================== LETTER

B-279000

September 17, 1999

The Honorable Edward M.  Kennedy
The Honorable Paul Wellstone
United States Senate

Mental health services, such as crisis stabilization and partial
hospitalization,\1 are an important component of the health services
covered under Medicaid, a joint federal-state program that pays for
the health care of nearly 31 million low-income Americans.  In 1996,
federal and state governments spent an estimated $12.6 billion on
Medicaid mental health services, representing about 8 percent of
total Medicaid expenditures for that year.\2 On average, Medicaid
mental health expenditures grew almost 9 percent a year between 1986
and 1996.  In an effort to control costs and improve services, many
states, beginning in the early 1990s, received waivers of certain
Medicaid rules to establish new managed care programs for mental
health services.  For example, many states "carved out" or separated
mental health services from physical health services, placing them
under separate financing and administrative arrangements.  They also
contracted with public and private prepaid health plans (PHP) and
required beneficiaries to obtain their mental health care through the
PHPs.\3 Many managed care programs, including mental health
carveouts, seek to reduce reliance on hospitalization by substituting
community-based mental health services that many experts consider
more appropriate as well as less costly. 

PHPs are paid a fixed amount per person--known as a capitated
payment.  Capitation creates financial incentives to contain program
costs by providing services in the least costly setting as well as by
limiting the volume of services through methods such as prior
authorization.  As with other capitated plans, there is a risk that
PHPs may undertreat illnesses in order to contain costs or increase
profits.\4 Underservice can be particularly problematic for Medicaid
beneficiaries needing mental health services.\5

For states, the challenge is to design and monitor mental health
programs that provide Medicaid beneficiaries with the care that they
need while reducing or containing the growth in costs.\6

Because of your concerns about beneficiaries' access to appropriate
mental health services under managed care, we reviewed how states
design and monitor these Medicaid programs and how, at the federal
level, the Health Care Financing Administration (HCFA) exercises its
oversight of the Medicaid program.  We focused on mental health
carveouts because their use and importance are increasing in state
Medicaid programs.  Although many carveout programs provide both
mental health and substance abuse services, we focused only on mental
health services in this study.  As discussed with your offices, we
analyzed, for selected states, (1) the extent of beneficiary choice
in capitated mental health carveouts, the range of covered mental
health services, and access to these services; (2) the states'
approaches to monitoring the quality of care in their Medicaid mental
health carveouts; and (3) HCFA's oversight of states' mental health
carveouts. 

For this study, we selected 4 states for intensive
analysis--Colorado, Iowa, Massachusetts, and Washington--out of the
30 states that used Medicaid waivers for managed mental health
services when we began our review.\7 When we designed our study,
these four states had all completed at least one contracting cycle
and therefore had more experience than most other states in
contracting for their Medicaid mental health services on a capitated
risk basis.  These states also included rural and urban areas;
statewide and regionally based contracts; and for-profit,
not-for-profit, and county-based PHPs.  Experts we consulted in
designing our study recommended these states, which had undergone
considerable development as state and plan managers gained
experience.  As a result of this selection process, the Medicaid
mental health programs in these states are not representative of
Medicaid mental health carveouts elsewhere.  We conducted our work
between July 1997 and July 1999 in accordance with generally accepted
government auditing standards.  (Appendix I provides details on our
scope and methodology.)

--------------------
\1 Crisis stabilization and partial hospitalization, which are
provided as alternatives to hospitalization, offer intensive,
short-term psychiatric treatment in a structured environment.  Crisis
stabilization provides continuous 24-hour observation; partial
hospitalization offers daily psychiatric treatment. 

\2 Although more recent Medicaid data are available through the
Health Care Financing Administration (HCFA), HCFA data do not
systematically separate mental health care costs from general
physical health care costs.  The most recent year for which Medicaid
mental health cost estimates are available is 1996.  See David
McKusick et al., "Spending for Mental Health and Substance Abuse
Treatment, 1996," Health Affairs, Sept.-Oct.  1998, p.  150. 

\3 A PHP, for the purposes of this report, is an organization that
provides a specified or limited set of health services, such as
mental health services.  Like a health maintenance organization
(HMO), a PHP receives fixed monthly payments for each person enrolled
(capitation) and bears the financial risk for the services it
provides to its enrollees. 

\4 Joseph P.  Newhouse et al., "Risk Adjustment and Medicare:  Taking
a Closer Look," Health Affairs, Vol.  16, No.  5 (1997), pp.  26-43;
Medicaid Managed Care:  Challenge of Holding Plans Accountable
Requires Greater State Effort (GAO/HEHS-97-86, May 16, 1997), p.  7. 

\5 Specialists report that persons with severe mental illness
frequently function poorly as consumers and often do not follow
prescribed treatments, such as taking their medications.  Because of
their illnesses, they are often unable to obtain or maintain
employment, resulting in low income; many are also homeless. 

\6 States often began managed care programs because of increased
Medicaid and mental health costs.  In Massachusetts, for example,
Medicaid costs before the implementation of its waiver program rose
from $1.5 billion in fiscal year 1988 to nearly $2.7 billion in
fiscal year 1990, according to the state's waiver application.  In
Colorado, total expenditures for Medicaid mental health services rose
from $54 million in 1990 to about $98 million in 1995--an 83-percent
increase--under fee-for-service (FFS) Medicaid. 

\7 As of July 1998, 36 states had Medicaid waivers for managed mental
health services.  Sixteen of these states had waivers for carveout
programs for Medicaid mental health services for adults, often
combined with substance abuse services, according to the Managed Care
Tracking System Report published by the Substance Abuse and Mental
Health Services Administration (SAMHSA) on July 31, 1998. 

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

In the four states we studied, the mental health carveouts limited
Medicaid beneficiaries to a single prepaid mental health plan. 
Because there was no choice of carveout plan, these states generally
tried through contractual provisions to ensure that PHPs did not
limit beneficiaries' access to services inappropriately in order to
contain costs.  For example, as HCFA required, these states allowed
beneficiaries to choose their providers from within a PHP's network
and sometimes from outside the network.  The states also set
standards in their contracts for determining appropriate levels of
services, using broad definitions of medical necessity, and the
states and plans generally reduced or eliminated requirements for
prior authorization for access to outpatient care.  The states
generally expanded the range of covered community-based mental health
services, compared with their prior fee-for-service (FFS) programs,
and reduced the use of inpatient services.  To discourage the
underprovision of services, these states also capped PHPs' profits,
losses, or administrative expenditures.  Colorado and Iowa required
PHPs to invest a portion of their profits (or savings, in the case of
not-for-profits) in new community-based mental health services. 

The states' approaches to monitoring the quality of their Medicaid
mental health carveouts were based on federal laws and HCFA's
regulations governing quality assurance systems, grievance and
appeals systems, medical audits, independent assessments of waiver
programs, and data requirements.  These federal requirements for
managed care programs are more extensive than those for FFS programs
because of the need to compensate for capitated plans' incentives to
underserve beneficiaries.  Each of the four states supplemented these
federal requirements with additional strategies for monitoring
quality, in part because these requirements were developed for
managed care programs generally and do not specify the unique mental
health requirements that states say they need.  The states'
supplemental strategies included the use of site visits to PHPs to
analyze access to services and choice of provider, among other
issues.  Some of the states we studied established ombudsman programs
and advisory committees, composed of mental health providers and
consumers, to help ensure that the programs address beneficiaries'
needs.  They also used quantitative mental health performance goals,
to which two states attached monetary rewards and penalties. 
However, the states did not widely use some potentially powerful
tools, such as the analysis of data linking consumers' diagnoses and
services, although state officials told us that they plan to use such
analyses more in the future.  The four states also generally did not
use HCFA's optional quality guidance because they considered it too
general for their mental health carveouts. 

HCFA's oversight of the four mental health carveouts consisted
primarily of reviewing and approving states' applications for
Medicaid waivers and requests for waiver renewal--reviews intended to
ensure that states met Medicaid requirements for managed care
programs.  Between these review periods, HCFA's oversight generally
targeted specific issues, such as the adequacy of the provider
network during program implementation.  HCFA's regional offices
conducted much of the oversight for the mental health carveout
programs, and it varied in both content and intensity.  HCFA provided
minimal written guidance to its staff for the oversight of Medicaid
mental health programs, and HCFA's staff had limited expertise in
mental health managed care issues, according to HCFA and state
officials we interviewed.  HCFA has recently taken several steps,
such as establishing an ongoing collaboration with the Substance
Abuse and Mental Health Services Administration (SAMHSA) and
test-piloting an early monitoring program, to strengthen its
oversight of Medicaid mental health programs. 

   BACKGROUND
------------------------------------------------------------ Letter :2

For low-income persons, Medicaid is a critical source of financing
for health care services.  In fiscal year 1998, Medicaid expenditures
for physical and mental health care totaled $177 billion.  Medicaid
is a significant funder of mental health care; its expenditures
represented an estimated 19 percent of nationwide mental health
expenditures in 1996, the most recent year for which estimates are
available.  Families with low incomes can qualify for Medicaid under
specified federal and state criteria.  Low-income disabled persons,
including those with mental disabilities, become eligible for
Medicaid in most states if they receive Supplemental Security Income
(SSI) payments under the Social Security Act.  In December 1997,
about one-third of SSI adults with disabilities for whom diagnoses
were available had a mental disability.\8

Compared with the privately insured, the Medicaid population includes
a higher proportion of people who experience severe mental disorders
and who use mental health services. 

Medicaid is administered and partially funded by the states, in
accordance with federal statutes and regulations that allow states
flexibility in operating their programs.  At the federal level, HCFA,
within the Department of Health and Human Services (HHS), provides
states with federal matching funds and broad oversight of the
Medicaid program.  Medicaid covers both required health services
(such as inpatient and outpatient services) and optional services
(such as rehabilitation) selected by the states.  Mental health
services are included within these broad health categories. 
Generally, these health benefits must be provided in the same amount,
duration, and scope to all Medicaid beneficiaries.  Reflecting
Medicaid's medical focus, Medicaid mental health services have
traditionally been provided by physicians, including psychiatrists,
working at hospitals, clinics, and other organizations.  These
services have also been provided, to a lesser extent, by other
practitioners, such as psychologists and psychiatric social workers. 
Under traditional FFS Medicaid programs, beneficiaries were allowed
to choose any qualified provider who was willing to accept Medicaid
patients. 

In addition to HCFA's funding of Medicaid mental health services,
other governmental agencies and organizations, notably SAMHSA, are
involved in mental health programs and funding.  SAMHSA oversees
federal block grants to states for mental health services and
provides technical assistance on managed mental health services to
HCFA and the states.  States and counties, using their own revenues
as well as federal grant funds, also provide important mental health
services to low-income consumers.\9

Since their establishment in 1963 by the Community Mental Health
Centers Act, community mental health centers (CMHC) have provided
mental health services for both Medicaid and non-Medicaid consumers,
with increasing emphasis on serving persons with persistent mental
illnesses. 

--------------------
\8 Diagnostic information was available for about 2.9 million of the
3.5 million disabled adult SSI recipients in December 1997.  About
one-third of these recipients--or 977,000 people--were diagnosed with
mental disorders other than mental retardation.  The December 1997
data are the latest available that report diagnoses for SSI
recipients. 

\9 The term "consumer" rather than beneficiary or patient is commonly
used in the mental health programs that we studied.  It reflects a
treatment philosophy in which the person receiving services is an
active participant in care. 

      MEDICAID MANAGED CARE
---------------------------------------------------------- Letter :2.1

States are increasingly using managed care approaches involving
capitated payments for their Medicaid programs.  In capitated
programs, states contract with HMOs and PHPs, which are paid a fixed
amount each month, in advance, for each person enrolled, in return
for a contracted array of health services.  Capitation payments do
not vary with an individual's use of services.  In June 1998, more
than 40 percent of the Medicaid population--about 12.6 million
people--were enrolled in some form of fully or partially capitated
managed care.\10

States can implement Medicaid managed care programs under one of
three options, subject to certain federal requirements:  the state
Medicaid plan, section 1915(b) program waivers, and section 1115
demonstration waivers.\11 Before the enactment of the Balanced Budget
Act of 1997 (BBA) (P.L.  105-33), the state plan option allowed
states to contract with managed care plans only if enrollment was
voluntary and if beneficiaries were ordinarily permitted to disenroll
at any time and return to the Medicaid FFS program.\12 If states
wanted to mandate enrollment in managed care plans, require
beneficiaries to remain in a plan for more than a month, or contract
with plans that enrolled predominantly or only Medicaid
beneficiaries, they needed to obtain HCFA's approval for waivers from
the relevant Medicaid requirements.  However, under a new section
1932 in the BBA,\13 state Medicaid agencies have greater authority to
establish managed care programs under their state plan, including the
authority to mandate enrollment in managed care for most
beneficiaries.\14 Under section 1932, states generally must allow
Medicaid beneficiaries to choose from at least two managed care
organizations (MCO) or primary care case managers, but states can
still apply for waivers that limit Medicaid beneficiaries to one such
entity.  The BBA also strengthened quality assurance requirements for
managed care programs under state plans. 

The BBA did not make significant changes to the section 1915(b) or
section 1115 waiver programs.  Section 1915(b) program waivers allow
states to mandate enrollment and contract selectively with providers
and plans.  In most cases, beneficiaries have the freedom to
disenroll every 30 days.\15 Program waivers are valid for 2 years and
can be renewed for successive 2-year periods.  Section 1115
demonstration waivers, used increasingly in recent years, allow
broader authority to waive nearly any provision of the Medicaid
statute to study mechanisms that may help promote the program's
objectives.  This type of waiver has been used to mandate enrollment
and lock in beneficiaries to a plan for longer periods.  Typically
approved for up to a 5-year period, section 1115 demonstration
waivers have also been used to develop innovative Medicaid programs,
including the expansion of eligibility to people formerly
ineligible.\16

--------------------
\10 Under partial capitation, the state and plan share the financial
risk in some way, such as each paying half of any losses or keeping
half of any profits above or below a specified amount.  Partial
capitation can also refer to an arrangement whereby a plan is paid
for providing services to enrollees through a combination of
capitation and FFS reimbursements. 

\11 Except as otherwise noted, any reference in this report to a
section is a reference to the Social Security Act. 

\12 An exception existed for federally qualified HMOs and certain
other federally designated organizations.  After a 1-month trial
period had passed, the states were allowed to restrict an enrollee's
ability to disenroll for 5 months. 

\13 On September 29, 1998, HCFA issued proposed rules for the
implementation of the BBA for Medicaid managed care programs.  HCFA
has received comments but does not expect to publish final rules
until late in 1999. 

\14 Exceptions include "dual eligibles," who are enrolled in both
Medicare and Medicaid. 

\15 States can lock in enrollment for up to 6 months for prepaid
plans that meet certain federal requirements. 

\16 The BBA provided for section 1115 demonstration waivers to be
extended for an additional 3 years. 

      OVERSIGHT AND GUIDANCE OF
      MEDICAID MANAGED CARE
      PROGRAMS
---------------------------------------------------------- Letter :2.2

HCFA oversees managed care programs under both state plans and
Medicaid waivers.  HCFA approves initial state plans and can approve
or disapprove plan amendments.  HCFA can also withhold federal
payments if it determines that a state plan is not complying with
federal requirements, although in practice the process to deny
payments is slow, allowing the states the opportunity to come into
compliance, and HCFA has never withheld any funds.  In the case of
waivers, HCFA can grant or deny waiver requests from the states.  The
nature of HCFA's requirements and oversight of waiver programs
depends on the type of waiver that is authorized.  For a section 1115
demonstration waiver, HCFA develops terms and conditions of approval
that vary by state, depending on the provisions being waived.  For
both section 1115 demonstration waivers and section 1915(b) program
waivers, HCFA is responsible for ensuring that access to services be
at least equal to access under traditional FFS programs and that
federal costs do not increase because of the waiver. 

With the advent of capitated care, oversight of quality became
increasingly important, especially for vulnerable populations such as
people with mental illnesses.  In contrast to FFS payments, which
financially reward providers' overutilization of services, capitation
creates incentives for plans to limit access and underserve their
enrollees.  Although other factors such as clinical standards and
professional norms may offset this incentive to limit care, concerns
about access and potential underservice remain.  Because of such
concerns, HCFA developed and published guidelines for the states on
quality assurance under managed care.  These guidelines are intended
to supplement Medicaid statute and regulation, but the states are not
required to use them. 

HCFA issued the first of these guidelines in 1993 under its Quality
Assurance Reform Initiative (QARI).  The QARI guidelines contained a
framework for a health care quality improvement system for Medicaid
managed care and recommendations for (1) standards for managed care
programs' internal quality assurance programs; (2) priority clinical
areas of concern, use of clinical indicators, and practice
guidelines; and (3) types of activities for external quality reviews. 
The second guideline, the Quality Improvement System for Managed Care
(QISMC), was published in September 1998 and was designed to update
the QARI guidelines.  The QISMC standards direct managed care
programs to (1) operate an internal program of quality assessment and
performance improvement that achieves demonstrable improvements in
enrollee health, functional status, and satisfaction; (2) collect and
report data reflecting its performance on standardized measures of
health care quality and meet any performance standards specified in
its contract with the state; and (3) demonstrate compliance with
basic requirements for administrative structures and operations that
promote quality of care and beneficiary protection. 

      THE FOUR STATES WE STUDIED
---------------------------------------------------------- Letter :2.3

The four states we studied all implemented their capitated mental
health carveout programs before January 1996, which allowed them to
have experienced more than one round of the contracting cycle before
we began our review.  In 1992, Massachusetts was the first state to
establish a statewide capitated mental health carveout.  Washington
followed in 1993, Iowa and Colorado in 1995.  In Colorado and
Washington, the carveouts were administered through the state mental
health divisions.  Colorado had regionally based, mostly
not-for-profit plans, and Washington had public, county-based plans. 
In contrast, in Massachusetts the Medicaid agency took the lead in
managing the mental health program, while in Iowa a team with members
of both the Medicaid and the substance abuse divisions jointly
managed the program.  Iowa and Massachusetts each contracted with a
for-profit mental health plan to serve the entire state.  (See table
1.)

                                         Table 1
                         
                         Characteristics of Four States' Medicaid
                             Mental Health Carveout Programs

Characteristic     Colorado          Iowa\a            Massachusetts\b   Washington\c
-----------------  ----------------  ----------------  ----------------  ----------------
Date implemented   Aug. 1995         Mar. 1995         Nov. 1992         July 1993

Waiver type        1915(b)           1915(b)           1115; before      1915(b)
                                                       July 1997,
                                                       1915(b)

State carveout     Mental health     Joint Medicaid-   Medicaid          Mental health
manager            division\d        substance abuse   division          division\e
                                     divisions

Waiver program     State             State             State             State
area

Plan contract      Region            State             State             Region
area

Number of plans    8                 1                 1                 14

Types of plans     Mostly not-for-   For-profit        For-profit        Public; one or
                   profit                                                more county
                                                                         governmental
                                                                         entities

Approach to        Plan bears full   Plan bears full   Financial risk    Plan bears full
financial risk     risk              risk              shared between    risk
under capitation                                       plan and state

Total number of    238,570\g         264,191\h         401,052\i         718,109\j
Medicaid carveout
enrollees, state
fiscal year
1998\f
-----------------------------------------------------------------------------------------
\a Iowa's carveout program since January 1999 has included both
mental health and substance abuse services.  The program is
administered jointly by the Division of Medical Services and the
Division of Substance Abuse and Health Promotion, each in a different
department.  The Division of Mental Health and Developmental
Disabilities and the Division of Medical Services are both within the
Department of Human Services. 

\b The column refers only to the Massachusetts carveout program. 
Consumers can also choose an HMO health care program that provides
both physical and mental health services. 

\c Washington covered only outpatient mental health services under
its first section 1915(b) program waiver.  The program is now making
a transition under a new program waiver to an integrated carveout
offering both inpatient and outpatient services.  Nine of the 14
plans had signed integrated service contracts as of June 30, 1999,
according to state officials. 

\d Although Colorado's waiver program administration was the
responsibility of the state Medicaid agency, the program was managed
by Mental Health Services within the Department of Human Services,
through an interdepartmental memorandum of understanding with the
Department of Health Care Policy and Financing. 

\e In Washington, the Mental Health Division within the Department of
Social and Health Services was also the contract administrator. 

\f Enrollment figures include both children and adults. 

\g Colorado's figure represents number of member months paid divided
by 12 months and is not an unduplicated count.  Enrollment figures
include two plans that were new to the capitation program in May and
June 1998, although these plans had not yet provided services to
their enrollees. 

\h Iowa's figure is an unduplicated count for the state fiscal year
ending June 1998. 

\i Massachusetts' enrollment data are a May 1998 end-of-month
"snapshot."

\j Washington's enrollment data are a June 1998 end-of month
"snapshot." According to state officials, Washington "casts a wide
net" for Medicaid eligibility.  Officials believe that this may
account for the carveout's relatively high enrollment figure compared
with figures for the other states. 

   THE STATES LIMITED
   BENEFICIARIES' CHOICE IN
   MANDATED PROGRAMS WHILE MAKING
   EFFORTS TO ENSURE THEIR ACCESS
   TO SERVICES
------------------------------------------------------------ Letter :3

Three of the four states we studied required that nearly all Medicaid
beneficiaries enroll in the mental health plan that served the area
in which they lived and did not offer beneficiaries a choice of plan. 
The fourth state, Massachusetts, mandated enrollment in managed care
and offered beneficiaries a limited choice between two kinds of
capitated arrangements.  Freedom of plan choice can help promote
quality and offset incentives to restrict access.\17 However,
enrollment in a single carveout plan offered advantages as well as
disadvantages to beneficiaries and the states in terms of beneficiary
protections and program oversight.  The four states generally tried
in their contract provisions to promote access to services in their
mental health carveouts, generally expanding the range of
community-based services and reducing the use of inpatient services. 

--------------------
\17 Under the BBA, states are required to permit Medicaid
beneficiaries to choose from at least two plans.  States can still
apply for waivers that further limit choice to a single plan. 

      MANDATED ENROLLMENT IN A
      SINGLE PLAN HAS ADVANTAGES
      AND DISADVANTAGES FOR
      MEDICAID BENEFICIARIES AND
      FOR THE STATES
---------------------------------------------------------- Letter :3.1

Colorado, Iowa, and Washington mandated enrollment in their capitated
mental health carveouts for most Medicaid beneficiaries, including
SSI disabled beneficiaries and people with chronic mental
illnesses.\18 Enrollment in the mental health carveout was automatic
in these states, according to state officials.  In Massachusetts,
Medicaid beneficiaries were also required to enroll in a capitated
program for their mental health services,\19 and most people eligible
for Medicaid in Massachusetts, especially SSI beneficiaries, were
enrolled in the mental health carveout program.  Colorado and
Washington included Medicaid beneficiaries in nursing homes in their
carveouts, but Iowa, Massachusetts, and Washington excluded
beneficiaries in state psychiatric hospitals from the carveouts.\20
Typically, only a small portion of enrollees used mental health
services in these carveouts, ranging from a statewide average of
about 7 percent of enrollees in Washington for fiscal year 1998, for
outpatient services only, to 25 percent in Massachusetts.\21

In addition to mandating enrollment, the four states we studied did
not offer beneficiaries a choice of competing mental health carveout
plans:  Iowa and Massachusetts each had a single statewide carveout
plan, and Colorado and Washington had one plan for each geographic
region.  The single-plan approach in these carveout programs, in
conjunction with mandated enrollment, has mixed implications for
enrollees.  Among the benefits are that (1) the carveout plans cannot
favorably select the healthiest enrollees for their own financial
advantage, leaving the sickest for other plans;\22 (2) enrollees are
not exposed to marketing abuses that have occurred elsewhere when
several plans compete for enrollees;\23 and (3) carveout plans cannot
encourage beneficiaries to disenroll because of an adverse change in
their health.\24 One drawback is that mandating enrollment in a
single plan prevents consumers who are dissatisfied with their mental
health care from acting on their dissatisfaction by choosing another
plan or returning to FFS.  Because there is no competition among
plans, enrollees must accept the coverage and quality of services
that the plan provides. 

For states, the single-plan approach--together with mandated
enrollment--also has mixed implications for program development and
oversight.  It may, for example, make it possible for rural states,
such as Iowa, to establish reasonably sized financial-risk pools for
plans by ensuring a sufficient enrollee base.\25 Monitoring a single
plan may also be more manageable and less complex than monitoring
several plans.  However, if there are major problems with a plan's
performance, state officials may be less prepared to force it to
improve performance or to cancel the contract when an entire state or
area would be affected by the decision, because this action could
disrupt mental health care for many people.\26 Such issues may be
compounded with statewide contracts, as in Iowa and Massachusetts. 
Similarly, if the single plan representing an area or an entire state
decides to terminate its contract, then the state can be faced with
the need to quickly replace the plan midstream--a tricky
proposition--or return to FFS until the state is able to rebid the
contract.\27

--------------------
\18 In contrast, in physical health Medicaid managed care programs,
states often made enrollment voluntary for beneficiaries with
disabilities, such as SSI disabled beneficiaries--or they enrolled
them only after the program had been established for other
eligibility groups, because of concerns about potential shortcomings
in the availability or quality of services for populations with
special needs.  See Medicaid Managed Care:  Serving the Disabled
Challenges State Programs (GAO/HEHS-96-136, July 1996), p.  22. 

\19 In Massachusetts, Medicaid beneficiaries could choose either an
HMO plan providing both physical and mental health services or a
joint program entailing a primary care case management (PCCM) plan
for physical health services and the capitated carveout PHP for
mental health services.  Although families and children can be
assigned to the HMO or the PCCM/mental health carveout plan, the
PCCM/mental health carveout was the default for SSI beneficiaries. 
For a discussion of some of the issues in coordinating physical and
mental health services in these four states, see app.  II. 

\20 Adults between 21 and 65 in institutions for mental diseases
cannot receive Medicaid benefits for the services these institutions
provide. 

\21 For more information on the number and percentage of service
recipients, as well as on capitation rates in the four carveout
programs, see app.  III. 

\22 Some argue that eliminating plans' ability to select enrollees
may outweigh the loss of choice for beneficiaries.  See Haiden
Huskamp, State Requirements for Managed Behavioral Health Care
Carve-Outs and What They Mean for People With Severe Mental Illness
(n.p.:  National Alliance for the Mentally Ill, Nov.  1996), p.  7. 

\23 Medicaid:  States' Efforts to Educate and Enroll Beneficiaries in
Managed Care (GAO/HEHS-96-184, Sept.  1996), pp.  4-6. 

\24 Disenrollment was largely limited in the four states to changed
circumstances, such as when beneficiaries moved out of the service
area or became ineligible for Medicaid. 

\25 Iowa's program staff said that they preferred a statewide program
to a county-based program because in most counties the state has a
small Medicaid population over which to spread risk.  Washington set
a minimum number of citizens for each contractor for similar reasons. 

\26 See Medicaid Managed Care:  More Competition and Oversight Would
Improve California's Expansion Plan (GAO/HEHS-95-87, Apr.  1995), p. 
18, for a discussion of this point. 

\27 This situation occurred in Montana when the single statewide
Medicaid mental health plan terminated its contract with the state. 
State officials told us in June 1999 that the state is reverting to
FFS until Montana can develop and contract for a new mental health
plan. 

      THE STATES MADE EFFORTS TO
      PROMOTE ACCESS TO MENTAL
      HEALTH SERVICES
---------------------------------------------------------- Letter :3.2

The states we studied tried to promote Medicaid beneficiaries' access
to mental health services through their contractual provisions
regarding providers, provider choice, medical necessity standards,
and prior authorization requirements.  The states generally required
their carveout plans to broaden the range of community-based mental
health services offered.  In addition, states decreased the use of
inpatient services and included payment incentives in their contracts
to discourage potential underservice. 

         PROVIDER NETWORKS
-------------------------------------------------------- Letter :3.2.1

To help ensure an appropriate and adequate network of providers, as
well as continuity of care under the carveouts, states and plans
generally built upon existing mental health service systems.  They
all included in their networks traditional Medicaid not-for-profit
provider agencies, such as CMHCs, as well as individual providers. 
In Washington, the plans--which are county governmental
entities--generally provided services through the same CMHCs that
existed under FFS.  In Colorado, most plans were themselves
CMHCs--singly, in consortium, or in partnership with for-profit
organizations.\28 In Iowa, CMHCs were included among the providers
and were important, according to plan officials, for treating people
with severe mental illnesses and for providing traditional outpatient
services and some community support programs.  Massachusetts allowed
individual contracts with providers, including CMHCs, that met
credentialing standards. 

By itself, contracting with traditional providers is no guarantee of
the quality of services.  However, using traditional providers gives
some assurance of experience with Medicaid populations, which have a
much higher proportion of severe mental illnesses than members of
employee-based plans.  Including traditional mental health providers
allows some continuity of providers from before capitation but may
also result in the retention of inefficient providers.  Plans
generally profiled providers' performance to identify inefficient
providers and take corrective action.  For example, the Massachusetts
contract required the plan to have a system for profiling providers
and to report their improvement goals annually to the state. 

--------------------
\28 In a January 1997 report, Colorado officials noted that many
consumers viewed the loss of choice of provider under the capitated
program as a significant negative of the program.  Under FFS, most
consumers received services from their local CMHCs, but some went to
private practitioners.  Most CMHCs continue to provide mental health
services under the capitated program. 

         PROVIDER CHOICE
-------------------------------------------------------- Letter :3.2.2

Although the mental health carveouts we reviewed typically did not
allow a choice of plan, they allowed enrollees to choose their
providers from among those in the plans' network, as required by
HCFA, and allowed some flexibility to change providers periodically. 
In some cases, enrollees in Colorado and Massachusetts were allowed
to use out-of-network providers.  While plans' policies and practices
may be more critical than choice of providers in determining the care
that consumers receive, the ability to select one's own provider
constitutes a meaningful choice to consumers, as it is under FFS.\29
This is especially so if choice allows consumers to have continuity
of care or convenient access to a provider or if it allows them to
obtain the services of a provider with a particular cultural or
linguistic background. 

--------------------
\29 See GAO/HEHS-95-87, p.  18. 

         MEDICAL NECESSITY
         STANDARDS FOR AUTHORIZING
         SERVICES
-------------------------------------------------------- Letter :3.2.3

Medical necessity standards are the criteria used to determine
clinically appropriate services and the necessary level and intensity
of care under the terms of a contract.  In effect, they establish the
conditions under which services must be provided.  In commercial
plans especially, medical necessity standards tend to be based on
medical and institutional models of care.\30 However, such medical
models do not encompass certain community and social services that
mental health professionals, state officials, and advocacy
organizations believe are important to help improve the functioning
of consumers with mental illnesses.\31 Concerns have therefore been
raised about plans' potential use of these standards to restrict
Medicaid consumers' access to services.\32

To ensure that the need for nonmedical services in mental health was
recognized, the states we studied generally defined medical necessity
broadly in contracts to include preventive and social models of care. 
In Washington, medical necessity criteria included services designed
to "prevent, diagnose, or alleviate the worsening of conditions."
Massachusetts used similar language in its definition of medical
necessity.  Colorado required its plans to provide "all necessary
mental health services," including practice in daily living skills
and social interactions designed to maximize clients' ability to live
and function independently in the community.  Colorado's contract
added that plans have the "flexibility to deliver whatever services
are necessary and appropriate to effectively treat each client's
illness." Iowa required that service authorizations be based on
"psychosocial necessity" instead of medical necessity.  Psychosocial
necessity refers to "clinical, rehabilitative, or supportive" mental
health services, including services that may avert the need for more
intensive treatment to maintain functioning. 

Of the four states we studied, Massachusetts established the most
extensive medical necessity standards while also incorporating
psychosocial concepts.  For each type of mental health service, the
contract included a definition of the service as well as the criteria
for admission, exclusion, continuing care, and discharge.  However,
Massachusetts also incorporated social concepts and social services
in its definitions of mental health services.  For example, community
support services were described as services that used mobile,
multidisciplinary teams to assist people with persistent mental
illnesses in addressing basic needs, such as obtaining food, housing,
and community services. 

In some cases, these broader definitions appeared to be more in the
nature of statements of treatment philosophy rather than enforceable
standards.  This was the situation, for example, when plans were
"expected" to provide new services, as in Colorado, or when service
definitions did "not limit or preclude" a plan from providing
psychosocial rehabilitation services or other innovative services and
supports, as in Washington.  Massachusetts' medical necessity
definitions were probably the most easily enforceable because of
their specificity.  However, as one way of helping to ensure that
needed mental health services were not denied by plans, all the
carveouts we studied showed a distinct shift away from narrow,
medically based criteria for authorizing services. 

--------------------
\30 For example, medical necessity criteria often call for
"substantial improvement," or even cure, as a condition for
recommending therapies--requirements that pose problems for people
with disabilities, for whom maintenance and avoidance of
deterioration may be acceptable goals. 

\31 With medically focused standards, providers of services that are
regarded as social or residential, such as clubhouses or halfway
houses, may not be reimbursed by plans--even though providers and
consumers may regard these services as important aspects of mental
health care. 

\32 According to a SAMHSA official, advocates and consumers
frequently expressed concerns to agency officials about the effect of
medical necessity standards on mental health care.  Medical necessity
issues were also discussed in Sara Rosenbaum et al., "Special Report: 
Mental Illness and Addiction Disorder Treatment and Prevention,"
Negotiating the New Health System:  A Nationwide Study of Medicaid
Managed Care Contracts, 2nd ed.  (Washington, D.C.:  George
Washington University Center for Health Policy Research, Mar.  1998),
pp.  vii and viii, 30-35, and 71-72. 

         PRIOR AUTHORIZATION
         POLICIES FOR OUTPATIENT
         SERVICES
-------------------------------------------------------- Letter :3.2.4

Although prior authorization of services is a key aspect of managed
care, the carveouts we studied generally did not require plans' prior
approval for outpatient services until service use reached certain
limits, if at all.  Massachusetts replaced its earlier prior
authorization requirement with a system whereby providers notified
the plan about the number of outpatient services they expected to
provide.  No further authorizations were needed and there were no
limits on the number of sessions allowed; instead, the plan shifted
to a system of profiling providers and managing outliers.  Most
Colorado plans allowed consumers to have from about eight to ten
outpatient visits without prior authorization, according to officials
we interviewed.  Under Iowa's 1999 contract, prior approval was not
required for individual, family, and group therapy; medication
management; initial evaluation; and targeted case management
services.  In Washington, prior authorization practice varied among
the plans and was monitored by the state, according to state
officials. 

Reducing preauthorization requirements for outpatient services
primarily serves consumers with less severe illnesses, whose needs
may be satisfied with a limited number of visits, rather than
consumers with severe and persistent mental illnesses, who generally
need more intensive and extensive services.  However, reducing the
need for prior authorization also simplifies consumers' initial
access to outpatient services, compared with more typical managed
care practices regarding specialty care.  It can also allow time for
developing treatment plans for additional services. 

         COMMUNITY-BASED MENTAL
         HEALTH SERVICES
-------------------------------------------------------- Letter :3.2.5

To varying degrees, the four states required mental health plans to
offer an expanded array of community-based mental health services,
including services that were not previously covered by traditional
FFS Medicaid.  For example, in addition to traditional Medicaid
mental health services, such as individual and group therapy,
Colorado expected its plans to provide nontraditional options, such
as peer counseling and support services, family preservation
services, consumer drop-in centers, and early intervention services. 
Similarly, Iowa's 1999 contract required the plan to provide services
such as mobile crisis counseling, peer support groups, and supported
community living,\33 as well as assertive community treatment\34 and
intensive psychiatric rehabilitation for consumers with severe mental
illnesses.  Other examples of nontraditional services offered under
the carveouts included telemedicine consultation, vocational
rehabilitation programs, halfway houses, crisis triage centers, and
residential support for older adults released from state hospitals. 

The carveout plans in Colorado, Iowa, and Washington used the
flexibility possible under capitation to tailor mental health
services to the special needs of individual consumers, according to
plan and other officials.  Sometimes this was done by providing
nonmedical assistance to help stabilize individuals in their
communities.  For example, plans in these states purchased items and
made payments to help support individual consumers' fundamental
needs--such as being able to eat, hold a job, contact their mental
health providers in a crisis, and remain in their homes. 
Interventions described to us included purchasing, for different
individuals, a microwave oven and a bicycle, and paying apartment
security deposits.  Although unusual, such interventions illustrate
how plans can be flexible in designing individual treatment plans
while remaining at financial risk for their choices. 

The carveout plans we studied typically expanded the range and use of
community mental health services in part by decreasing the use of
inpatient services.  For example, according to a program report to
Colorado's state assembly, Colorado's expenditures for inpatient
psychiatric hospital services decreased from $30 million in fiscal
year 1995--before the capitated program began--to less than $10
million in fiscal year 1996, the first year of the capitation
program.  The report noted that during this time expenditures for
alternative community-based services increased--from about $30
million in fiscal year 1995 to about $47 million in fiscal year
1996.\35 In Iowa, the carveout reduced the percentage of expenditures
for inpatient psychiatric care from 51 percent under the previous FFS
Medicaid program to 29 percent for inpatient services in the second
year of the capitated program, according to state documents. 
Moreover, under capitation, 20 percent of expenditures--nearly $9
million--were for community-based services that were not previously
covered under Iowa's Medicaid FFS program.  An independent study of
Massachusetts' program reported significant decreases in its
PCCM/mental health carveout in the number of inpatient days and the
average length of stay in the hospital:  For example, inpatient days
for SSI beneficiaries fell nearly 40 percent over a 3-year period.\36
According to Massachusetts officials, the carveout program
concurrently experienced increased utilization at other levels of
care and new utilization of services that had not existed before the
carveout began.  In Washington, state officials also reported
declines in inpatient usage and expenditures.\37

Plans in Colorado and Iowa reinvested savings\38 from the carveout
programs in the development of alternative community-based mental
health services, focusing on the needs of geographical areas that
historically were considered underserved, such as rural service
areas, or the needs of special populations, such as adults with
severe and persistent mental illnesses.  The two for-profit plans we
visited in these states generated savings beyond contractually
allowed profits.  In Iowa, for example, in the first 3 years of the
carveout program, the statewide plan reinvested $1 million each year
in pilot mental health service projects, such as mobile counseling
and therapeutic socialization programs for adults with severe mental
illnesses.\39 In Colorado, one plan we visited saved about $1.3
million in the first year of the program, from a budget of about $15
million, and $1.9 million in the second year, according to plan
officials.  The plan reinvested these savings in alternative services
such as telemedicine, of particular importance in rural areas;
24-hour psychiatric treatment programs for patients with serious
mental disorders; and increased respite care.  Colorado's PHPs were
required to submit business plans for state approval proposing how
reinvestment funds would be spent. 

Colorado also required its PHPs to reinvest savings--after ensuring
that "all enrolled Medicaid clients .  .  .  received all necessary
services"--to provide mental health services for indigent consumers
who did not qualify for Medicaid.\40 This reinvestment requirement
reflected the state's intention not to differentiate among those in
need of services on the basis of their Medicaid eligibility. 
However, according to a June 1998 HCFA policy statement, states
cannot require in their contracts that PHPs use savings from their
capitation payments for services for non-Medicaid consumers under
future Medicaid waivers or state plans.  HCFA considered it
inappropriate for states to essentially leverage Medicaid funds to
provide services for non-Medicaid consumers.  States will no longer
be permitted to continue this practice when their existing waiver
programs are renewed. 

Not surprisingly, the states varied in the degree to which they
achieved their goals of expanding the array of service options.  In
Iowa, providers and advocates suggested that some new, nontraditional
services were not uniformly available and that other services that
appeared to be new under the carveout had been previously available
to consumers.  For example, before the mental health carveout, Iowa
counties paid for half of the state's Medicaid share for targeted
case management services, partial hospitalization, and day treatment,
which were usually viewed as county services; under the carveout,
these services were fully funded by the state and federal
governments.  The counties formerly paid for community support
services, but now the Medicaid carveout shares in the funding of
these services.  Washington officials noted that some alternative
services, such as clubhouses\41 and consumer support groups, were new
not to the mental health community but only to the Medicaid program. 

--------------------
\33 "Supported community living" services include 24-hour crisis
services and counseling as well as services that teach needed
practical social and personal skills, such as hygiene, cooking,
shopping, and housekeeping, and help with the development of personal
support networks in the community.  Supported community living
services may also include crisis residential services, which are
small community residential facilities that function as alternatives
to inpatient care. 

\34 Assertive community treatment (ACT) programs are targeted to
consumers with serious and persistent mental illnesses.  ACT programs
involve community support services and intensive treatment by a
multidisciplinary team.  The goal of this treatment is to increase
the consumers' independent functioning through symptom management and
direct assistance with daily needs, such as housing and vocational
support.  In June 1999, HCFA issued a letter to state Medicaid
directors suggesting that states consider positive findings about the
effectiveness of ACT programs in their plans for comprehensive
approaches to community-based mental health services. 

\35 According to an October 1998 report by Colorado's state auditor,
Colorado is spending more per person served for mental health
services under the carveout than under the FFS program.  (State of
Colorado, Report of the State Auditor:  Department of Human Services,
Medicaid Capitation for Mental Health Services, Financial Review
(Denver, Colo.:  Oct.  1998).) Colorado program officials disputed
this finding.  An earlier study on the cost of serving adults with
severe and persistent mental illnesses before and after the carveout
produced mixed results.  Where the state contracted with CMHCs, costs
remained about the same.  Where the state contracted with joint
ventures of one or more CMHCs and a private managed care firm, costs
decreased under capitation.  (Joan R.  Bloom and others, "Mental
Health Costs Under Alternative Capitation Systems in Colorado: 
Preliminary Findings for the First Six to Nine Months Following
Implementation," Berkeley, California, July 1, 1997.)

\36 The Lewin Group, Report on Impact of Massachusetts' Medicaid
Managed Care Initiatives.  Presented to Division of Medical
Assistance, Oct.  9, 1997. 

\37 Washington plans were responsible for authorizing admissions and
length of stay for psychiatric inpatient care, although inpatient
care was not included in their service contracts until recently. 

\38 In Colorado, "savings" refers to additional plan revenues over
expenses, after allowable profits, which are capped.  In Iowa,
savings refers to the amount by which actual claims are less than
expected claims, if any, for the plan's claim period.  The amount of
savings, which were shared between the state and the plan, was
determined 12 months after the claims period ended.  According to
state officials, Iowa's reinvestment plan called for setting aside $1
million for reinvestment projects first and then sharing any
remaining savings between the state and plan.  The reinvestment plan
was designed to reduce the amount of the shared savings and to keep
funding in mental health services. 

\39 In the third year, the $1 million was also used to fund provider
rate increases.  Iowa's 1999 contract did not require that savings be
reinvested.  Instead, it required the plan to set aside 2.5 percent
of its capitation payment as a community "reinvestment" account,
which could include financing one pilot project each year on the
prevention of mental health problems. 

\40 According to the Colorado Department of Human Services, by
serving non-Medicaid populations with excess funds not spent for
services to Medicaid beneficiaries, the state received more than $6
million in additional federal funds during fiscal years 1996 and
1997.  Colorado's state auditor agreed that additional federal funds
were brought into the state.  (Colorado, Report of the State Auditor,
p.  18.)

\41 Clubhouse programs emphasize vocational opportunities and client
empowerment.  Individuals participating in clubhouses are considered
members rather than clients. 

         PAYMENT INCENTIVES
-------------------------------------------------------- Letter :3.2.6

The states we studied also attempted to reduce the financial
incentives for capitated plans to underserve mental health consumers. 
In addition to Washington's and Colorado's use of mostly
not-for-profit plans, states limited profits, losses, and
administrative expenditures. 

Colorado, Iowa, and Massachusetts limited plan profits in different
ways.  Colorado capped profits at 5 percent of pre-tax payments under
its first carveout contract and retained a similar profit cap in its
second contract.  Iowa set a cap on profits in its first contract: 
Beyond the first $1 million in savings, which had to be reinvested in
services, the plan could retain as profit 20 percent of any savings
in services from its $43 million contract.  According to state
officials, the plan could also retain any savings from administrative
costs.  Massachusetts shared both profits and losses with the
statewide for-profit plan through a contract arrangement called a
"risk corridor." Under this arrangement, if the plan achieves
savings, the state shares in these savings, according to a set
percentage.\42 If the plan has losses, it is responsible for 45
percent of the first $11 million of service expenditures that exceed
the capitation rate payments; the state is responsible for the rest,
as well as for all losses greater than $11 million.  According to
Massachusetts officials, in designing this risk corridor they wanted
to allow an opportunity for a for-profit plan to earn profits while
limiting the incentives to deny care--that is, they did not want the
contractor to limit services either to avoid losing money or to
increase profits.  However, it is harder for states to predict
savings or losses with a shared-risk arrangement than with a
full-risk arrangement.  This limitation may make shared-risk
arrangements less attractive to some states, despite their potential
advantages to plans and consumers. 

Administrative expenditures under capitation are important because
they typically include service authorization, quality assurance,
claims payments, and data systems.  Nevertheless, Iowa, Washington,
and Massachusetts tried to shape plans' behavior and maximize funding
for direct services by limiting administrative payments to
contractors or limiting the use of such funds as a source of profits. 
Iowa capped contract administration payments at 19 percent of the
capitation payment in the first program cycle, according to state
officials, and at 15 percent in the second.  Under Iowa's 1999
combined mental health and substance abuse carveout, profits on a $77
million contract\43 can be made only from savings in the plan's
capped administrative expenditures and from financial incentives of
up to $1 million linked to performance measures.  Washington capped
mental health plans' administrative costs at 25 percent and required
that 75 percent of funds be used to provide direct services. 

Massachusetts' more complex arrangement for administrative expenses
resulted, according to state officials, from its experience with its
first contractor.  Under that contract, the plan reduced staffing for
service authorization requests and claims payments to reduce costs
and increase profits, resulting in delays in authorizing services and
paying claims.  The contract ended with a $20 million settlement in
outstanding claims, according to state officials.  In amending the
state's second contract--with a different plan--Massachusetts
officials sought to avoid a recurrence of this problem by paying for
administrative expenses separately from the capitation payment and
capping the profit that the plan could earn on administrative
expenses. 

--------------------
\42 The Massachusetts plan can also receive additional revenues by
meeting performance indicators attached to financial incentives. 

\43 Of the $77 million, $15 million represents a block grant for
substance abuse services, according to program officials. 

   THE STATES SUPPLEMENTED FEDERAL
   QUALITY ASSURANCE REQUIREMENTS
   WITH ADDITIONAL MONITORING
   APPROACHES
------------------------------------------------------------ Letter :4

In overseeing their mental health carveouts, the states we studied
must adhere to federal quality assurance requirements.  These
requirements are generally the same as those for MCOs (such as
grievance and appeals procedures) and those for programs operating
under Medicaid waivers (such as the independent assessments for
section 1915(b) program waivers).  However, mental health carveouts
are currently exempt from HCFA's requirement for annual external
quality reviews of managed care plans.  HCFA also has quality
assurance guidance, developed for comprehensive managed care
programs.  This guidance is optional and generally was not used by
the states we studied.  Instead, the states supplemented HCFA's
requirements with their own methods to ensure quality.  While the
states' methods were similar in many respects, we found that two
states relied heavily on conducting site visits of plans and
involving stakeholders, while the two other states made extensive use
of quantitative performance goals and measurements, to which monetary
rewards and penalties were attached.  Acting on their experience and
various means of oversight, states and plans made numerous and often
substantial changes in their mental health carveouts over time. 

      THE STATES USED FEDERALLY
      REQUIRED APPROACHES IN
      OVERSEEING THEIR MENTAL
      HEALTH CARVEOUTS
---------------------------------------------------------- Letter :4.1

In monitoring their carveout programs, the states we studied used
methods of quality assurance that were federally required.  The
requirements for MCOs are quite general.  All plans must have an
internal quality assurance system and procedures for appeals and
grievances that meet certain standards; they must also undergo an
annual medical audit.  In addition to these broad requirements, HCFA
requires that all MCOs except PHPs be reviewed each year by a
HCFA-certified independent review organization.  For section 1915(b)
program waivers, HCFA requires independent assessments of the
program's cost, quality, and access; section 1115 demonstration
waiver programs must collect encounter data and follow the specific
provisions included in the waiver.  (See table 2.) HCFA provides
little guidance that states considered useful about how these systems
and procedures should be adapted for mental health carveouts. 

                                         Table 2
                         
                              Major Federal Requirements for
                             Monitoring Medicaid Managed Care
                                         Programs

                                    Requirement       Detail
                  Program           ----------------  -----------------------------------
Federal           All Medicaid      Internal quality  Plans must have a quality assurance
requirements      managed care      assurance system  system that is consistent with
                                                      Medicaid utilization control
                                                      requirements and provides
                                                      --for review by appropriate health
                                                      professionals of the process
                                                      followed in providing health
                                                      services,
                                                      --for systematic data collection of
                                                      performance and patient results,
                                                      and
                                                      --for interpretation of these data
                                                      to practitioners and for making
                                                      needed changes. (42 C.F.R. 434.34)

                                    Grievances and    States must provide for granting an
                                    appeals           opportunity for a fair hearing to
                                                      any individual whose Medicaid claim
                                                      is denied or not acted upon with
                                                      reasonable promptness. (42 U.S.C.
                                                      1396a(a)(3))

                                                      Managed care contractors must
                                                      provide for an internal grievance
                                                      procedure that
                                                      --is approved in writing by the
                                                      state Medicaid agency,
                                                      --provides for prompt resolution of
                                                      grievances, and
                                                      --ensures the participation of
                                                      individuals with authority to
                                                      require corrective action. (42
                                                      C.F.R. 434.32)

                                    Medical audits    States must
                                                      --conduct audits at least once a
                                                      year for each contractor,
                                                      --identify and collect management
                                                      data for use by medical audit
                                                      personnel, and
                                                      --ensure that data include reasons
                                                      for enrollment and termination and
                                                      use of services. (42 C.F.R. 434.53)

                  All Medicaid      Annual external   States must use, with limited
                  managed care      quality review    exception, a utilization and
                  except PHPs                         quality control peer review
                                                      organization to conduct an
                                                      independent, external review of the
                                                      quality of services furnished, and
                                                      the results must be made available
                                                      to the state and certain federal
                                                      officials. (42 U.S.C.
                                                      1396a(a)(30)(C))

HCFA              Section 1915(b)   Independent       States must conduct an assessment
requirements      program waivers   assessments       of cost, quality, and access for
                                                      the whole program that is
                                                      --performed on a 2-year cycle and
                                                      --required for first two waiver
                                                      renewals only.

                  Section 1115      Encounter data    HCFA requires all states with these
                  demonstration                       waivers to collect all encounter
                  waivers                             data.

                                    Terms and         The initial terms and conditions of
                                    conditions        approval contain HCFA's specific
                                                      monitoring requirements for section
                                                      1115 waiver states.
-----------------------------------------------------------------------------------------
The four states' requirements for plans' quality assurance systems
varied.  For example, Iowa required the mental health plan's quality
assurance program to assess the clinical impact of services and
consumers' functioning as well as to conduct semi-annual surveys of
client satisfaction and quality of life, annual surveys of referral
agencies, and annual surveys of provider satisfaction.  Colorado
emphasized outcomes in its requirements for plans:  In addition to
identifying key indicators of clinical outcomes, quality assurance
programs in Colorado must include methods to collect outcome data,
criteria to determine if outcomes are satisfactory, evaluation of
outcomes, methods to improve outcomes, and strategies to report
quality improvement efforts. 

For beneficiaries who cannot choose their health plan--such as those
in the four states' mental health carveout programs--the grievance
and appeals process is especially important.  None of the plans in
the states we visited received a large number of grievances and
appeals, which could mean that the programs were working well. 
However, it could also mean that consumers with mental illnesses had
difficulties filing grievances.  For example, some consumers may not
know where or how to file a grievance, since different kinds of
grievances are addressed by different organizational units in the
plan or by the state.  In addition, consumer advocates reported that
some consumers had concerns that providers might retaliate for
complaints, particularly if consumers complained directly to a plan. 
Although a relatively low number of complaints is often found as well
in public sector managed care programs for physical health care,
consumers in these programs can choose to change plans (although they
may have to wait for an open season) rather than file a complaint. 
This option is not available to consumers in the mental health
carveout programs we visited. 

To provide an alternative route for consumers to register concerns
about mental health plans, Washington established independent
ombudsman programs for each plan to help consumers navigate the
carveout system.  Colorado established an independent statewide
ombudsman program to help consumers with the public mental health
system, including the grievance process.  Grievance and appeals
systems may be helpful for dealing with specific plan problems as
well as individual consumers' complaints.  However, it is
questionable whether the number of grievances and appeals can be used
alone as a measure of quality, because it is difficult to determine
whether a small number of reported grievances indicates barriers to
registering grievances or consumers' satisfaction with the plan and
its care.  Grievance and appeals data, used in conjunction with other
indicators, such as satisfaction surveys, may provide important
insights, however. 

Medical audits, which are conducted annually, are designed to ensure
that each plan furnishes quality and accessible health care to
enrolled beneficiaries.  These audits can be conducted by the state
Medicaid agency, another state agency, or an external body. 
According to officials, Iowa contracted with an external organization
for a medical audit of its statewide plan, but Washington and
Colorado conducted their own audits.  Washington officials told us
that their clinical review team, which included clinicians in private
practice as well as state officials, conducted chart reviews of 1
percent of the cases at provider agencies.  In addition, the team,
following a structured protocol, conducted in-depth performance-based
reviews of three cases per provider agency--chosen by the plan--for a
total of about 180 case reviews each year statewide.  State officials
viewed these review sessions as opportunities to reinforce positive
practices and generate new ideas.  They were therefore not concerned
that the number of cases per agency was small or that the selection
of cases might not fully represent the plan's caseload.  While some
providers viewed these audits as a learning experience, others
questioned the state audit teams' qualifications to conduct the
reviews and said that three cases per agency were insufficient to
draw conclusions about their programs. 

During the period of our study, mental health carveout plans, as
PHPs, were exempted from annual external quality reviews, an
important monitoring requirement for Medicaid MCOs.\44 HCFA officials
signaled a change in their approach to this issue in the agency's
September 29, 1998, proposed rule.  This rule, which will implement
the Medicaid portion of the BBA for MCOs, would also require PHPs to
have annual external quality reviews.  If this requirement is
retained in the final rule, future mental health carveouts will be
subject to an external quality review unless the Secretary of HHS
specifically waives that requirement.  However, according to HCFA
officials, HCFA does not, as a matter of policy, waive quality
provisions.  In commenting on a draft of this report, HCFA stated
that it is finalizing the rule and that it will require PHPs,
including those providing mental health services, to have annual
external quality reviews. 

To receive approval for the renewal of section 1915(b) program
waivers, states must provide HCFA with independent assessments of
waiver programs at the end of the second and fourth years of the
waiver period.  Independent assessments are unlike other quality
assurance tools, such as external quality reviews, in several ways. 
Independent assessments are reviews of an overall state program,
whereas external quality reviews focus on the quality of services in
each plan within a state.  This is a critical difference for states
like Washington and Colorado that have several regionally based
mental health plans.  Independent assessments are conducted only
every 2 years for the first 4 years of a waiver, while external
quality reviews would be required annually. 

Although independent assessments are intended primarily to provide
HCFA with information about the extent to which states have met their
commitments under the waiver agreements, these assessments are often
of uncertain quality, according to a HCFA official.  During our site
visits, we found little evidence that HCFA offered the states
guidance on the design of the assessments.  According to one state
official, when he asked HCFA officials for a model independent
assessment, HCFA was unable to provide one.  Although HCFA officials
acknowledged that the quality of assessments was uneven, they said
that they have not typically suggested to states how to improve
inadequate assessments.  To address some of these concerns, in
December 1998, HCFA issued guidance to states on independent
assessments.  This guidance describes criteria for entities
conducting independent assessments; the content of the independent
assessment, which includes beneficiaries' access to services, the
quality of services, and the cost-effectiveness of the waiver
program; and related quality improvement strategies and activities. 
However, this guidance is generic, applying to all section 1915(b)
program waivers, and does not specifically address mental health
assessments. 

Encounter data--similar to claims data under FFS and sometimes called
"shadow claims"--are potentially important because they can be used
to examine services by type of client, program, provider, diagnosis,
or region and to detect evidence of possible under- or over-service. 
The four states we studied collected individual-level encounter
data--although only Massachusetts was required to do so for its
section 1115 demonstration waiver.  State officials reported that
they were not using the data systematically so far, although
Massachusetts officials told us that they planned to use encounter
data to adjust capitation rates in accordance with case mix and to
issue quality management reports. 

State officials reported that they sometimes found it difficult to
obtain encounter data from the mental health plans, whose information
systems did not always meet the states' specifications.  Data from
some plans were untimely, incomplete, and inaccurate.  Such
difficulties are not unique to mental health carveouts.  There is
often little incentive to collect encounter data in managed care
plans, in which reimbursement does not depend on billing for specific
services.  Encounter data require adequate information systems, and
when data from several systems are combined, both technical and
definitional issues must be resolved.  In addition, some
nontraditional mental health services are difficult to track.  For
example, clubhouses and self-help groups are not considered
environments in which it is realistic or desirable to track the
participants by name.  If states and plans address some of these data
problems, encounter data could be used to monitor plan performance,
even if the data were limited to services provided by professional
staff in more traditional environments.  Colorado recently began
fining plans that did not submit required data on time as a way of
encouraging them to meet the state's requirement.  Similarly, Iowa
included penalties for late submission of encounter data in its 1999
contract. 

The initial terms and conditions for section 1115 demonstration
waivers serve as HCFA's minimum assessment standards in its
monitoring of states' demonstration waiver programs.  These terms and
conditions are detailed and specific in the content and timing of
reporting requirements.  For example, HCFA has required specific
patient-provider ratios for plans and maximum travel times and
distances to providers in such waivers, in contrast to section
1915(b) waiver programs, for which HCFA has suggested more generally
that providers be located near beneficiaries. 

--------------------
\44 External quality reviews are conducted by peer review
organizations (PRO), a PRO-like entity, or an accreditation agency
under contract to states, and they are funded jointly by HCFA and the
states.  These organizations most often carry out focused studies in
which they review medical records to determine specific types of
services delivered to a group of people--for example, immunizations
given to children.  Two important aspects of these external quality
reviews are that they are done by qualified professionals who are
independent of the plan and that they tend to be focused evaluations
of each plan's quality of care. 

      MENTAL HEALTH CARVEOUTS
      GENERALLY DID NOT USE HCFA'S
      MANAGED CARE QUALITY
      GUIDELINES
---------------------------------------------------------- Letter :4.2

The states we studied made little use of HCFA's guidelines for
helping them monitor managed care plans to ensure program quality. 
From 1993 until the fall of 1998, the QARI guidelines were available
for states' use.  These guidelines were intended to "chart a course
of action" for states and plans that serve the Medicaid population
using capitated payments.  While the QARI guidelines were advisory,
26 states have used some aspects of QARI for physical health
programs, according to a survey conducted by the National Academy for
State Health Policy. 

However, the states we studied did not use the QARI guidelines for
their mental health carveouts, including Washington, which piloted
QARI for its physical health managed care programs.  There are
several explanations for this.  In Massachusetts, the carveout plan
followed National Committee for Quality Assurance guidance because it
was working toward accreditation from the committee.  In Iowa,
according to one state official, the state decided against using the
QARI guidelines as a monitoring tool because QARI did not set
specific measurable goals.  In addition, the QARI guidelines were
developed when Medicaid programs largely focused on enrolling mothers
and children in managed care and other populations were not generally
included.  Although QARI guidelines could in principle be applied to
mental health carveouts, HCFA did not encourage the states we studied
to use the guidelines in their programs. 

In September 1998, HCFA updated the QARI guidelines with QISMC, which
sets out health care quality improvement standards and guidelines for
Medicare and Medicaid programs contracting with MCOs.  While QISMC
refers to mental health and physical health generally, it lacks the
specificity in mental health issues that at least one state official
sought from guidance.\45 For example, the clinical focus areas are
generic rather than tailored specifically to mental health. 

--------------------
\45 In April 1998, HCFA issued draft guidance on using managed care
systems for persons with special health care needs, including those
with mental illnesses.  This guidance was intended to help states
identify and resolve access problems for special needs populations,
ensure adequate provider networks, and address social and support
needs.  Although SAMHSA, among other federal agencies, participated
in the guidelines' development, the guidelines were meant to apply
broadly to all populations with special health care needs. 

      THE STATES USED ADDITIONAL
      STRATEGIES TO ENSURE QUALITY
---------------------------------------------------------- Letter :4.3

The four states we studied supplemented federal requirements with a
wide range of approaches to quality assurance and monitoring of
plans.  The states drew upon a fairly standard set of monitoring
techniques, including site visits to plans, performance measurement,
clinical reviews, and consumer advocate advisory committees. 
However, the states had distinctly different emphases in monitoring. 
Colorado and Washington relied heavily on site visits to plans and
provider agencies and on the views of stakeholders in overseeing
their mental health carveouts, although they also collected
quantitative data about plan performance.  Iowa and Massachusetts,
while they also involved stakeholders to various degrees in their
programs, relied heavily on the use of quantitative performance
goals, to which they attached monetary rewards and penalties. 
Performance measures functioned both as oversight tools and as
incentives to encourage plans to focus on issues the states
considered important.  Most carveout plans used a range of approaches
to quality assurance--including conducting patient satisfaction
surveys, establishing and monitoring standards, and having consumer
committees. 

In Colorado and Washington, the approach to monitoring was generally
"hands on." Colorado program officials reported that they made
regular site visits to each plan.  In their site reviews of plans,
Colorado officials followed a structured protocol in talking to a
plan's staff, conducting focus groups with mental health consumers,
and meeting with community agencies.  Final reports on each plan
discussed the population served, the services provided, access to
services, consumers' choice of providers, consumer satisfaction, and
complaints and appeals.  The reports also noted strengths, areas for
improvement, and follow-up expected from the plans.  Colorado
officials also conducted annual programmatic site reviews of every
CMHC participating in the capitated carveout.  These reviews, which
lasted for several days, included chart reviews, quality assurance
reviews, and reviews of critical incidents, such as suicides.  State
officials reported that they also provided the carveout plans with
technical assistance and guidance.  Colorado worked extensively with
consumer advocates and other stakeholders through their participation
in the state's advisory committees and plans' consumer advisory
boards. 

In Washington, administrative and clinical teams similarly conducted
annual reviews of Washington's county-based plans.  State officials
also required the plans to have an independent team of consumers and
family members visit each service location at least once a year to
conduct focus groups with consumers, family members, social services,
and community representatives.  The state surveyed at least 2 percent
of consumers each year about four areas:  access, helpfulness of
services, areas for improvement, and respect. 

In contrast, Massachusetts and Iowa officials relied
heavily--although not exclusively--for their monitoring on the use of
performance measures to which they attached financial incentives and,
in some cases, penalties.\46 According to state officials,
Massachusetts uses performance measurement and financial incentives
and penalties to shape systemic changes in its program.  In its
contract with the carveout plan, Massachusetts established twenty
performance measures.  These measures included medication monitoring
after discharge, notification of hospitalization to the outpatient
primary care physician, after-care planning, and intensive case
management for persons with both a psychiatric and a substance abuse
diagnosis.  In a contract totaling almost $199 million for fiscal
year 1998, a maximum of $6.7 million could be paid in incentives, and
individual incentives were as much as $700,000.  Penalties could
reach $3.7 million overall and up to $500,000 for a single
measure.\47 Iowa similarly tied monetary rewards and penalties to
performance measures that were developed in consultation with
stakeholders. 

Performance measures must, however, be used with care.  Both
Massachusetts and Iowa learned that, to be effective, measures must
be well developed, clearly written, and not subject to "gaming." For
example, in Massachusetts' first year of using performance measures,
one measure was the percentage of clients readmitted to the hospital
for the same diagnosis within 7 days.  To keep their percentages
down, providers could simply change the diagnosis.  Furthermore,
performance measures carry the risk that plans will focus on areas
that carry financial awards or penalties, to the exclusion of other
equally important areas. 

--------------------
\46 For example, Massachusetts established stakeholder advisory
councils for both the state and the plan, and state officials met
regularly with the plan's staff to monitor the plan's performance. 
In addition, medical directors from the state and plan met weekly to
review the quality of clinical care being provided, according to
state officials. 

\47 In addition, the Massachusetts PHP developed a formula for
sharing up to $1 million in achieved incentive payments with
providers who met the plan's goals for four performance measures. 
The PHP would similarly impose a penalty on providers if both the
plan and providers failed to meet two of these measures.  This effort
was limited to specific goals that the PHP has had a difficult time
meeting. 

      MONITORING CARVEOUT PROGRAMS
      RESULTED IN PROGRAMMATIC
      CHANGES
---------------------------------------------------------- Letter :4.4

Multiple monitoring methods and sources of information helped the
states and plans modify their mental health carveout programs over
time.  For example, in addition to HCFA's required monitoring efforts
and the states' use of site reviews and performance measures, the
states and plans examined rates at which enrollees used services,
conducted outcome studies, assessed consumer functioning, and
conducted consumer and provider surveys.  From their analyses of
these multiple sources of information, the states and plans made
changes over time from when the programs were first implemented. 
Important changes already discussed included reducing or eliminating
requirements for prior authorization of services and establishing
ombudsman programs.  Others included adding financial incentives and
penalties to performance measures in contracts and making changes in
the handling of administrative payments.  Among its other changes,
Massachusetts instituted a performance measure to increase consumer
involvement in treatment planning.  Plans in Washington established
four triage centers, and state officials told us that they revamped
their screening processes and length-of-stay requirements.  Iowa
changed its criteria for when inpatient services are appropriate and
solicited stakeholder comments on performance measures, and Colorado
made changes to improve response times in the carveout's emergency
services system. 

   HCFA PROVIDED LIMITED OVERSIGHT
   OF MENTAL HEALTH CARVEOUTS
------------------------------------------------------------ Letter :5

HCFA's oversight of Medicaid mental health carveouts in the four
states varied in both content and intensity.  Oversight of the
carveouts was most intensive at waiver development and approval and
at continuation or renewal.  Otherwise, HCFA's oversight tended to be
more reactive than proactive and was usually restricted to problem
issues.  HCFA staff in different regional offices took different
approaches to monitoring.  According to state and HCFA officials,
these variations may stem from limited written guidance for
monitoring the mental health carveouts and HCFA staff's lack of
experience with managed mental health care. 

      HCFA MONITORED CARVEOUTS
      LARGELY THROUGH THE MEDICAID
      WAIVER PROCESS
---------------------------------------------------------- Letter :5.1

HCFA oversees Medicaid waiver programs largely at two points in time: 
when states apply for approval of a Medicaid waiver and when they
apply for extension or renewal.  First, initial waiver applications
enumerate the specific requirements requested to be waived and give
an overview of the program.  HCFA's central office scrutinizes
section 1115 demonstration waiver applications.  HCFA officials
reported that regional offices play a significant role in the
approval of section 1915(b) program waivers, although HCFA's central
office takes the lead.  The Office of Management and Budget (OMB) and
other HHS agencies such as SAMHSA also participate in the reviews of
both section 1115 demonstration waivers and section 1915(b) program
waiver applications.\48 In the states we studied, HCFA regional staff
worked with state officials in preparing the waiver applications,
providing advice and guidance insofar as they were able. 

Second, HCFA examines waiver programs when states request
extensions--every year for the continuation of section 1115
demonstration waivers and every 2 years for the renewal of section
1915(b) program waivers.  For renewals and extensions, states are
required to summarize their programs' accomplishments:  Section 1115
demonstration waiver programs are required to provide quarterly and
annual reports and encounter data for continuation, while section
1915(b) waiver programs are required to provide independent
assessments. 

Other than reviewing at these fixed milestones, HCFA generally
monitored the mental health carveouts when problems were brought to
its attention by providers, advocacy groups, or HCFA's own reviews
and previous site visits.  For example, one HCFA regional office
raised concerns during the carveout's implementation about the
adequacy of the plan's provider networks, especially in rural areas,
and later about the plan's backlog in handling complaints and
grievances.  Regional office staff responsible for other states we
visited noted that they did not carry out as many site visits as they
would have liked and that such visits were most often made in
response to perceived problems. 

--------------------
\48 OMB reviews cost-effectiveness analyses and examines the
potential effect of a waiver on Medicaid costs. 

      HCFA MADE LITTLE ATTEMPT TO
      STANDARDIZE REVIEW CRITERIA
      AND POLICY ACROSS REGIONAL
      OFFICES
---------------------------------------------------------- Letter :5.2

Although HCFA has issued monitoring guides for Medicaid managed care
programs, its officials reported that HCFA had few written protocols
or guidance outlining the type of program monitoring and oversight
that its staff should perform on mental health carveouts.\49 HCFA's
regional office staff conducted much of the monitoring of Medicaid
mental health carveouts, and HCFA's central office officials told us
that some regional offices were better than others in monitoring the
states.  Regional staff expressed particular concern about the lack
of guidance, until recently, for states in developing their
independent assessments of the carveouts, because these assessments
provide information on quality, access, and cost that are used for
waiver renewals. 

--------------------
\49 A 1997 draft monitoring guide for HCFA regional offices listed
mental health disorders as a factor in its section on special
populations.  The section on mental health and substance abuse
disorders was drafted later, and HCFA officials reported that the
entire document remained a working draft when we completed our work. 

      HCFA'S OVERSIGHT OF MENTAL
      HEALTH CARVEOUTS WAS BASED
      ON MINIMAL CRITERIA AND
      EXPERTISE
---------------------------------------------------------- Letter :5.3

HCFA and state officials reported that HCFA had minimal criteria for
evaluating and overseeing Medicaid mental health carveouts.  HCFA
officials in the central office told us that there were sometimes no
criteria for evaluating certain aspects of new waivers, such as the
composition of a proposed provider network.  HCFA regional office
staff for both Colorado and Massachusetts also told us that HCFA had
little written guidance for states' mental health managed care
programs and had limited mental health monitoring protocols for the
regional offices.  The December 1998 guidance that HCFA provided to
states did not provide criteria for regional staff to evaluate
independent assessments. 

According to HCFA and state officials, HCFA regional office staff
responsible for the states we studied had limited expertise or
experience in mental health and managed care issues.  For example,
according to HCFA staff, the regional office for Iowa did not have a
managed care specialist on staff when Iowa's first request for
proposal was issued.  Officials from the HCFA regional office
covering Colorado said that when they reviewed Colorado's waiver
application, they had difficulty reviewing the section on performance
standards and outcome measures because they had no written guidance
on mental health standards and measures. 

To help address the need for mental health expertise, HCFA now
routinely asks SAMHSA to review all Medicaid waiver applications
involving mental health and to provide comments to HCFA.\50 HCFA
officials also reported that they have relied on SAMHSA's expertise
regarding performance measures and outcomes for mental health
programs.  Furthermore, to help monitor new Medicaid mental health
waiver programs, HCFA has developed, with SAMHSA, an "early warning"
system to monitor behavioral health managed care programs.  The
system's purpose is to help HCFA quickly detect access and quality
problems in ongoing programs and during the implementation of a new
managed care program.  In this system, a limited set of clinical and
administrative indicators are collected weekly, monthly, or
quarterly.  The indicators include, for example, data on service
authorizations, homelessness, inpatient recidivism, and involuntary
admissions for use in monitoring access, outcomes, and quality. 
Although not originally designed for mental health services, this
early monitoring program is now being used to monitor Pennsylvania's
behavioral health waiver program.  According to HCFA, early test
results have been promising and may lead to an expansion of the
monitoring system.  In the spring of 1999, HCFA also issued a new
standardized waiver application form--for states' use in requesting
section 1915(b) waivers--that notes issues pertinent to special
populations, including people with mental illnesses. 

--------------------
\50 SAMHSA has also published a contracting guide for public
purchasers of managed care programs and has developed a managed care
tracking system to monitor mental health and substance abuse care in
the public sector, including Medicaid waiver programs.  SAMHSA was
also working with states to develop a common framework or report card
for measuring program quality. 

   OBSERVATIONS
------------------------------------------------------------ Letter :6

Under these four states' experiences, capitated mental health
carveouts generally provided a broader array of community-based
services than was possible under Medicaid FFS.  The lack of
competition in the mental health carveout plans had some benefits,
giving the plans a larger risk pool than they would otherwise have
had, significantly limiting the need for marketing, and largely
eliminating adverse selection.  Through their contracts with plans,
the four states tried to counter possible adverse consequences of
consumers' lack of choice among plans and to minimize capitation's
potential for underservice.  Key contract provisions included
expanding the range of services available, broadening definitions of
medical necessity, and capping profits, losses, or administrative
expenditures. 

Because consumers were generally restricted to what one plan chose to
provide and could not exit the plan at will, quality assurance
functions were particularly important.  In the four states we
studied, there was considerable variation in the ways that the states
monitored quality and held plans accountable, although all states
were required to follow quality assurance provisions in federal law
and HCFA regulations.  They supplemented federal requirements with
their own monitoring practices, and the carveout programs changed as
they matured, handled problems, and received feedback from
stakeholders and others. 

HCFA's recent actions suggest that it recognizes its need to oversee
mental health carveouts more systematically.  First, HCFA's final
rule, which is in development, would require PHPs, such as mental
health carveouts, to have annual external quality reviews.  Second,
HCFA is drawing more on SAMHSA's expertise than previously.  Third,
HCFA is piloting an "early warning" program for monitoring mental
health services and, if the system proves successful, will expand its
use. 

   AGENCY AND STATE COMMENTS
------------------------------------------------------------ Letter :7

We provided a draft of this report to the Administrator of HCFA and
the Administrator of SAMHSA.  HCFA generally agreed with our
findings, stating that enhancing its oversight of mental health
carveouts was one of its highest priorities.  HCFA pointed to recent
efforts to make its oversight more systematic, including the
development of a final rule requiring PHPs to have annual external
quality reviews, as well as a draft report to the Congress, on
safeguards for individuals with special health care needs who are
enrolled in managed care.  HCFA also noted that it collaborated with
SAMHSA on several major projects, such as entering into an
interagency agreement to evaluate state Medicaid experience in
supporting interdisciplinary treatment programs for persons with
serious and persistent mental illness.  HCFA cited, as a recent
example of guidance that it provides to states, its technical
assistance to Montana in the state's transition from a managed care
delivery system to FFS.  SAMHSA discussed the ongoing collaboration
between HCFA and SAMHSA on Medicaid mental health waiver programs. 
In response to these comments, we revised the draft report as
appropriate.  (For HCFA's and SAMHSA's comments, see apps.  IV and
V.)

We also provided a draft of this report to Medicaid and mental health
staff in the four states we studied.  The four states generally
agreed with the draft report and emphasized the importance of
expanding access to community mental health services under their
carveout programs.  HCFA, SAMHSA, and the four states also provided
technical comments that we incorporated as appropriate. 

---------------------------------------------------------- Letter :7.1

We are sending copies of this report to the Honorable Nancy-Ann Min
DeParle, Administrator of HCFA; the Honorable Nelba Chavez,
Administrator of SAMHSA; and representatives of the four states we
studied.  We will also make copies available to others on request. 

Please contact me on (202) 512-7114 if you or your staffs have any
questions.  Major contributors to this report are listed in appendix
VI. 

William J.  Scanlon
Director, Health Financing
 and Public Health Issues

SCOPE AND METHODOLOGY
=========================================================== Appendix I

For this study, we conducted case studies that included site visits
to four states with Medicaid mental health carveouts--Colorado, Iowa,
Massachusetts, and Washington.  We focused our review on states that
enroll Supplemental Security Income (SSI) beneficiaries in their
Medicaid mental health managed care carveout programs.  We focused on
care for adults only and did not include Medicaid substance abuse
services or services for beneficiaries with mental retardation and
other developmental disabilities.  We also focused our work on
capitated mental health programs--emphasizing managed care that is
based on financial risk--because prepayment for services can
potentially result in underservice to enrolled beneficiaries.  We
decided to study mental health carveouts because an increasing number
of states are favoring carveout arrangements and because mental
health care practices and policies can be discerned and analyzed more
clearly in carveout programs than in integrated programs, which merge
mental health and general physical health services into one system. 
Carveouts also presented potentially greater coordination issues with
physical health care than integrated programs, as noted in app.  II. 

In the course of this study, we analyzed numerous documents, such as
federal law, regulations, policy statements, and quality guidance. 
In addition, we reviewed journal articles and other publications on
mental health services and managed care.  For the four states, we
reviewed waiver applications and renewals, requests for proposals to
contract for prepaid mental health services, contracts with
participating prepaid health plans (PHP), program evaluations, and
auditors' reports as well as data from various state and PHP reports. 

In addition, we interviewed officials from the Health Care Financing
Administration's (HCFA) headquarters and regional offices responsible
for the states we studied and from other federal agencies, such as
the Substance Abuse and Mental Health Services Administration
(SAMHSA).  We also discussed Medicaid mental health and capitation
issues with mental health service researchers and representatives of
national mental health advocacy groups.  During our site visits to
the four states, we interviewed officials from state Medicaid and
mental health agencies and from public and private PHPs as well as
inpatient and outpatient providers of mental health services and
representatives of consumer advocacy organizations.\51 We conducted
these site visits between November 1997 and April 1998.  Since then,
we have conducted follow-up interviews with state officials and
obtained more recent documents and data as needed.  For this report,
we did not independently verify state or PHP data or analyze their
assumptions. 

In selecting the states for site visits, we first identified 30
states that when we designed our study had had experience in using
capitated carveouts to deliver mental health services to adult
Medicaid beneficiaries.\52 From these states, we selected those that
(1) had "carved out" Medicaid mental health services from general
physical health services; (2) had capitated, risk-based programs; (3)
had implemented their capitated mental health programs no later than
January 1, 1996, which allowed them to have experienced more than one
round of the contracting cycle before our review; (4) included SSI
disabled beneficiaries in their program; and (5) served adults.  The
four states we selected--Colorado, Iowa, Massachusetts, and
Washington--represented a mix of rural and urban areas and statewide
and regional carveouts.  They also had carveouts that were
administered in different ways--for example, through the Medicaid or
mental health departments, using private for-profit plans, public
not-for-profit plans, and county-based plans.  Importantly, experts
we consulted recommended these four states for study more often than
carveout programs in most other states.  We also included Washington
because it was one of the three states that pilot-tested the use of
the Quality Assurance Reform Initiative (QARI) guidelines for HCFA. 

Except for Massachusetts, the states we selected had capitated
carveouts only for mental health services until recently. 
Massachusetts had a carveout program that provided both mental health
and substance abuse services, although we concentrated on the mental
health aspect of the program.  Colorado and Washington had Medicaid
capitated carveouts solely for mental health services.  Iowa had a
separate mental health carveout until January 1999, when it combined
what had been separate mental health and substance abuse carveout
programs into one joint mental health and substance abuse program. 

Colorado, Iowa, and Massachusetts included both outpatient and
inpatient services in their mental health carveouts; until recently,
Washington included only outpatient mental health services in its
carveout program.  Washington's plans, all of which are county-based
governmental entities, have the right of first refusal in deciding
whether to cover inpatient as well as outpatient services under the
current round of contracts.  As of June 30, 1999, 9 of the 14
Washington plans had contracted to provide both inpatient and
outpatient mental health services. 

The states we selected also reflected differences in types of managed
behavioral care organizations under contract to the states.  These
ranged from public, governmental plans to private for-profit PHPs. 
Iowa and Massachusetts, for example, both contracted with private
for-profit PHPs.  Washington, in contrast, contracted solely with
public, county-based administrative organizations known as regional
support networks.  Two of these county plans had administrative
services only (ASO), no-risk contracts with a private for-profit
plan.  The ASO organization handled authorizations and claims
payments.  Colorado's eight regionally based contracts were with a
range of organizations.  They included public organizations that were
either individual community mental health centers (CMHC) or groups of
CMHCs, partnerships of CMHCs with a private for-profit PHP, and most
recently a private, not-for-profit, health maintenance organization
(HMO). 

Another characteristic of the states we selected was that they
reflected both statewide and regional approaches to program
administration.  Iowa and Massachusetts each had a statewide
contract, while Colorado and Washington had regional contracts based
on geographic catchment areas.  Iowa's statewide contractor had a
subcapitation contract for a six-county area with a nonprofit
organization formed by a hospital and a CMHC. 

We conducted our work between July 1997 and July 1999 in accordance
with generally accepted government auditing standards. 

--------------------
\51 Consumer advocates included representatives of state and plan
advisory boards and legal groups, families of people with mental
illnesses, and consumers of mental health services. 

\52 Our analysis was based on the 1997 SAMHSA Managed Care Tracking
System reports, which discussed the status of state and Medicaid
mental health programs as of spring 1997. 

COORDINATION OF MENTAL AND
PHYSICAL HEALTH CARE
========================================================== Appendix II

Because Medicaid consumers with a psychiatric diagnosis can also have
physical health problems,\53 it is important to integrate or
coordinate mental health care with physical health care.  In the
states we studied, state and plan officials generally agreed that
while they did not view the coordination of mental health with
physical health care as a major problem, coordination remains
challenging and could be improved.  Coordinating medical and mental
health care can be complex, whether programs are integrated or carved
out.  However, coordination is generally considered potentially more
problematic when there is a carveout, because benefit packages,
provider networks, payment systems, and program administration are
separate for the mental health carveout and the general medical
program.  Medication management can become a major issue, for
example, because drugs are often prescribed by both physicians and
psychiatrists operating under different payment and benefit systems. 
Issues can arise when a psychiatrist under the capitated carveout
prescribes a medication that is paid for by a Medicaid HMO.  In the
states we studied, the mental health carveout programs were not
responsible for the cost of pharmaceuticals, which were paid under
the Medicaid FFS or HMO programs when they were prescribed by the
carveout mental health practitioner.  To improve the coordination of
pharmaceuticals in Washington, the mental health carveout provider
asks consumers for a medical history during intake assessments. 
Coordination of care can also be difficult when not all mental health
consumers have a primary care physician, as providers in Washington
and elsewhere noted. 

One way the states we studied tried to improve coordination was to
work out memorandums of understanding and other agreements between
key entities.  For example, in Colorado mental health plans had
written cooperative agreements with Medicaid HMOs to improve the
coordination of physical health care and mental health services.  In
Washington, mental health contractors were required to have
"cross-system partnerships" with allied community providers,
including local Medicaid managed care plans and state psychiatric
hospitals and other county programs.  In Iowa, the mental health plan
was required to establish linkages with HMOs and with the substance
abuse carveout plan to ensure the coordination of services.  And in
Massachusetts, the mental health carveout and primary care case
management (PCCM) plans had a communication protocol for providers as
well as a performance measure requiring hospitals to notify the PCCM
if a disabled beneficiary is receiving psychiatric inpatient
treatment.  In most of these cases, it was unclear how such
cooperative agreements and linkages could be enforced.  A further
issue was that in Colorado and Washington, most or all SSI
consumers--which would include people with severe mental
illnesses--were in FFS programs for their physical health care,
according to program officials.  Officials we interviewed considered
it more difficult to develop policies and coordinate care with many
individual physicians than with a distinct organization like an HMO. 

In some cases, confidentiality requirements can become barriers to
coordination between mental health and physical health care
providers.  For example, Washington had confidentiality protections
that allowed mental health providers access to medical records but
that prohibited medical providers from viewing mental health records. 
Under an integrated health plan, in which the primary care physician
refers the patient for psychiatric care, the coordination between
physical and mental health care would appear to be somewhat less
problematic. 

--------------------
\53 For example, a study of Indiana's Medicaid agency found that
nearly 30 percent of beneficiaries with a psychiatric diagnosis also
had serious physical health problems, as noted by Collette Croze in
Medicaid Managed Mental Healthcare (Portland, Me.:  National Academy
for State Health Policy, 1995). 

MENTAL HEALTH CAPITATION RATES AND
PERSONS SERVED
========================================================= Appendix III

Capitation rates in the four states we studied varied by Medicaid
eligibility category and sometimes also by other factors, such as age
group, region, and gender.  In most cases, the capitation rate for
SSI enrollees was considerably higher than for other eligibility
categories.  Colorado and Washington, with their regionally based
contracts, showed considerable variation across PHPs in their
capitation rates as well for each category of eligibility.  (See
table III.1.) In all, Colorado had a total of 75 rates across
enrollment groups, plans, and CMHCs. 

                        Table III.1
          
               Comparison of Medicaid Monthly
          Capitation Rates for Adult Enrollees in
           Four Carveout States, Fiscal Year 1999

                               Capitation rate
                    --------------------------------------
State                       SSI adults      Non-SSI adults
------------------  ------------------  ------------------
Colorado                      $25-$172               $4-27
Iowa\a                         $72-$84             $20-$31
Massachusetts\b                   $112             $23-$78
Washington\c                      $121                 $13
----------------------------------------------------------
\a Iowa 1999 rates are for a behavioral health capitated program that
includes substance abuse services as well as mental health services. 
Rates differ by gender, age, and eligibility category.  This table
does not include rates for beneficiaries who are dually eligible for
Medicaid and Medicare because the rates cover children as well as
adults and are therefore not comparable to the rest of the data
presented here.  Capitation rates for "dual eligibles" range from $40
to $45, depending on gender. 

\b Massachusetts' 1999 rates are for a behavioral health capitated
program that include substance abuse services as well as mental
health services.  The rates do not distinguish between children and
adults. 

\c Washington's capitation rates, which include both inpatient and
outpatient services, apply to 9 of the 14 PHPs that have contracted
for integrated services.  The other PHPs do not yet cover inpatient
services.  The rates represent statewide averages and exclude the
medically needy. 

Source:  State capitation data. 

Typically, only a small portion of enrollees in the carveouts
actually used mental health services during the year.  (See table
III.2.)

                        Table III.2
          
             Number and Percentage of Enrollees
           Served in Four Mental Health Carveout
                  States, Fiscal Year 1998

                     Number of service       Percentage of
State                       recipients    enrollees served
------------------  ------------------  ------------------
Colorado\a                      20,722               11.9%
Iowa                            33,982               12.8%
Massachusetts\b                100,491               25.1%
Washington\c                    50,560                7.0%
----------------------------------------------------------
\a In Colorado, the percentage of enrollees served was based on a
total average enrollment figure of 174,765.  The higher enrollment
figure cited in table 1 of this report was inappropriate for
analyzing percentage of enrollees served because it included two new
plans that had enrolled, but not yet provided services to, Medicaid
beneficiaries. 

\b Adult SSI beneficiaries represented 41 percent of enrollees and 61
percent of service users, according to Massachusetts' utilization
data. 

\c The percentage of enrollees served in Washington represented
outpatient services only. 

Source:  State program summary data. 

(See figure in printed edition.)Appendix IV
COMMENTS FROM HCFA
========================================================= Appendix III

(See figure in printed edition.)

(See figure in printed edition.)Appendix V
COMMENTS FROM SAMHSA
========================================================= Appendix III

(See figure in printed edition.)

MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix VI

Phyllis Thorburn, Assistant Director (202) 512-7012
Deborah A.  Signer, Project Manager
Carolyn L.  Feis, Senior Evaluator
Shaunessye Curry, Senior Evaluator
Craig H.  Winslow, Assistant General Counsel

*** End of document. ***