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CHAPTER VII

Financial Issues

This chapter provides an overview of the key financial issues and options that a purchaser of managed substance abuse and mental health services should address when developing requests for proposals (RFPs) and contracts:

The shifting of financial risk from the purchaser to the MCO;

• Applying incentives and sanctions to MCOs;
• Dealing with third-party payments;
• Making decisions about copayments and deductibles;
• Managing cash flow;
• Specifying reinvestment requirements for MCOs; and
• Requiring financial reports by MCOs.

A. The Shifting of Financial Risk From the Purchaser to the MCO

Traditionally, "risk" in insurance means the cost of the health services. The entity paying for the service is said to assume the risk for that service. The shifting of financial risks from the purchaser of managed care to an MCO or a provider is one of the defining characteristics of managed care and represents a major departure from the traditional fee-for-service system that has dominated health care in recent decades. Under the traditional fee-for-service payment system, the purchaser reimburses providers for services after their provision; furthermore, the purchaser assumes the bulk of four major types of financial risk: namely, risks due to variation in (1) rate of membership and enrollment, (2) the cost of producing units of health services, (3) the volume and type of units used, and (4) service users per 1,000 enrollees (see Exhibit VII-1). In managed care contracts, the purchaser prospectively pays--that is, pays in advance--a negotiated fee to an MCO to provide all medically necessary covered services to an individual or defined population for a treatment episode or an established period of time. Depending on the type of prospective payment arrangement the purchaser selects--a global budget, capitation payment, or case-rate payment--the purchaser thus transfers or shifts some of the four types of financial risk to the MCO.

The structure of the contractual financial risk-transfer arrangement between a purchaser and an MCO must be carefully negotiated and clearly understood by the parties so that unexpected service costs or savings risks are predictably born by the appropriate party. Failing to clearly identify the risks in a risk-transfer arrangement may cause unexpected cost shifting between providers and MCOs or between different components of the same organization. Although the purchaser can tailor a managed care contract with risk transfer to create the desired constellation of incentives for the MCO, any contract that exposes the purchaser to risk should be carefully reviewed by legal counsel to ensure that all risks are properly balanced as intended by the parties.

To establish the necessary foundation for devising the optimal risk-transfer strategy in a managed care financing package, a purchaser must thoroughly analyze the strengths, weaknesses, and the unique attributes of the particular environment (such as the financial resources available, the capacities of the existing provider pool, the demographic and utilization characteristics of the eligible population). The capacity to bear financial risk varies widely among MCOs and providers, and it is imperative that public purchasers of managed care not assign risk to any MCO or providers that lack sufficient capacity to absorb and manage that risk.

The following section will present methods of managing risk, issue related to risk-transfer financing, and risk-transfer financing models.

1. Managing Financial Risk

There are several approaches that can be used by purchasers to assist in managing the financial risk: (1) limits on profits and losses; (2) specifications for reinvestment of excess savings; and (3) requirements for risk reserves/reinsurance.

a. Limits on Profits and Losses

The purchaser may contractually limit the profits and/or losses an MCO may experience. In the case of profit limits, the purchaser must determine early the amount of profit it is willing to allow the MCO to make and how this profit may be achieved. The contract documents between the parties should address the degree to which each party keeps any MCO profit in excess of the agreed-upon amount. A purchaser can also limit the level of MCO profits or losses, based on a percentage of the budget. Thus, for example, a purchaser might place a cap on total profits or losses of 10 percent of the total payment; then, no matter how far above or below the target the MCO's actual costs were, the MCO would not incur a loss or profit of more than 10 percent of the total payment.

Alternatively, a purchaser may choose to limit the losses an MCO will incur. This approach can serve three important purposes:

• It reduces financial incentives for an MCO to provide insufficient services (because the purchaser will share some of the costs of care above a target claims level);

• It protects an MCO from extreme financial risk, so there is less concern about the financial viability of the MCO; and

• It reduces the incentive for an MCO to include a "risk premium" (i.e., higher payment for assuming risk) in a competitive bid by shielding the MCO from some potential financial risk.

One approach to lessen an MCO's incentives to undertreat is the use of stop-loss arrangements (also referred to as "catastrophic stop-loss"), under which losses are capped at a specified level. Two types of stop-losses exist: (1) an aggregate-level stop-loss, and (2) an individual-level or per-case stop-loss:

• An aggregate stop-loss is identical to a cap on the MCO's losses mentioned above and creates similar incentives.
• Under a per-level case stop-loss, a limit on expenditures per consumer per time period (often a year) is set. After the consumer's costs reach that level, the purchaser pays 100 percent of that enrollee's claims costs for the rest of the year. For example, if an individual stop-loss of $30,000 per year is set, the purchaser is responsible for any costs for an enrollee that exceed the stop-loss amount. An individual stop-loss reduces the incentive for an MCO to restrict services provided to individuals with the most severe illnesses, since the purchaser shares responsibility for the costs of the most expensive cases. Rather than pay 100 percent beyond the designated expenditure limit, the purchaser may opt for a risk-sharing arrangement with the MCO. In this case, the purchaser would pay, for instance, 90 percent of the costs and the MCO would pay 10 percent of the costs beyond the expenditure limit. The purpose of such an arrangement is to impose some incentive on the MCO to manage care even after the expenditure limit has been reached.

b. Specified Reinvestment of Excess Savings

Purchasers may require that MCOs reserve a specified portion of savings for reinvestment in the public system. Doing this tempers the incentive to limit access, withhold care, or compromise quality to contain expenses, because the MCO has less to gain financially from such practices. It is important that the contract specifically address the mechanisms and procedures to be used by the MCO to account for savings and reinvestment activities.

If the parties require a reinvestment of funds into the delivery system, careful attention should be paid to Federal funds. The Federal Government may assert that it is entitled to the portion of profits or savings of the managed care plan attributable to the Federal funds. The contract should carefully reflect the intent of the parties and, in the case of Medicaid funds, provide written assurances from the Health Care Financing Administration (HCFA) concerning any such surplus or reinvestment. (Reinvestment requirements are discussed in more detail later in this chapter.)

c. Requirements for Risk Reserves/Reinsurance

The purchaser must determine whether it will require the MCO to maintain a sufficient sum of money to cover any reasonable costs that may be incurred (risk reserves), or to obtain reinsurance to protect the financial integrity of the managed care program. Some States' insurance regulations may require the MCO to maintain a predetermined amount of risk reserve or to purchase reinsurance. If so, the purchaser must explore the applicability of these insurance rules and regulations to the managed care program.

In some cases, purchasers may require the MCO to purchase reinsurance or may determine through the RFP process whether the MCO plans to purchase such insurance. Under a typical reinsurance arrangement, the reinsurance policy pays all claims costs above a certain threshold. This arrangement does shield the MCO and the purchaser from a portion of the financial risk for claims, but it also increases direct costs for the purchaser who ultimately pays for the cost of reinsurance.

Also, how risk reserves are identified and evaluated in the RFP is of critical importance. For instance, are the risk reserves part of administrative expenses? Do the risk reserves revert to the purchaser upon termination? A good example of problems relative to risk reserve issues is found in the recent Ohio procurement challenge (see Value Behavioral Health, Inc. v. Ohio Department of Mental Health, 966 F. Supp. 557 (S.D. Ohio 1997)).

2. Issues in Risk-Based Payment

There are several issues related to risk transfer financing that should be considered, including: (1) cost shifting; (2) MCO risk sharing with providers/subcontractors; (3) separating service costs from administrative costs; (4) duration of risk-based contracts; and (5) setting appropriate payment rates.

a. Cost Shifting

Giving different health care organizations responsibility for different subpopulations with different payment rates can encourage substantial cost shifting. Thus, for instance, recent analyses in Missouri have found that the relatively low-cost population of enrollees in the Aid to Families With Dependent Children program is overrepresented in health maintenance organizations (HMOs), while the high-cost severely and persistently mentally ill population is overrepresented in community mental health centers (CMHCs) (Broskowski, 1997). For these reasons, many observers believe that only a single organization is appropriately positioned to be responsible for achieving the optimal balance of resources for a diverse population.

b. MCO Risk Sharing With Providers/Subcontractors

A fundamental financial decision of the purchaser is whether, or to what degree, to allow the transfer of financial risk from the MCO to the providers through subcontracts. Whatever risk is transferred must be carefully monitored by the purchaser, as there is the potential for the MCO to transfer an unreasonably large component of the risk to other parties.

The purchaser must make clear its policies about transferring financial or other risks from the MCO to providers in the contractual agreement. The purchaser should contractually ensure that the obligations and responsibilities in the prime contract between the purchaser and the MCO devolve to all provider subcontracts. In addition, the purchaser should retain the ability to oversee the amount of risk that is transferred to providers and subcontractors. Doing this is particularly important in Medicaid managed care contracts because of the Federal prohibitions against illegal physician incentive plan arrangements. These prohibitions outlaw the use of physician incentive plans that create excessive risk, which HCFA has defined as risk levels that surpass 25 percent of the physician's anticipated revenues.

Purchasers should be aware that a wide-open policy regarding the transfer of financial risk in subcontracts with providers can result in the MCO's transferring virtually all of the risk associated with the provision of care to providers, thus assuring the MCO of a predictable profit. This situation can be dangerous, because most providers are not likely to have large capital reserves and thus are not likely to be able to absorb large cash flow fluctuations or periods of unusually high utilizations; when such providers bear the bulk of the financial risk, their incentives to withhold or minimize services during a financially difficult time could be great.

It also should be noted that the purchaser exerts control over a managed care program mainly through the MCO, which is subject to financial and possibly insurance regulation; the purchaser's ability to monitor a subcontracted provider's financial position and service management practices is far more limited (Rosenbaum et al., 1997). To reduce the risks of substandard care, purchasers should consider including monitoring and performance standards for subcontractors in the prime contract. Specific contractual terms can allow the purchaser to review, modify, and terminate subcontractual terms, conditions, and relationships. Regardless of any subcontracts entered into by the MCO, the prime contract should require the MCO to remain financially liable for the delivery of the goods and services negotiated in the contract throughout its term.

Largely because many providers' management information systems (MIS) are detailed financially but not clinically, providers with at-risk subcontracts are sometimes unable to develop detailed and accurate reports on the delivery of care and financing to the contracting MCO. The MCO, in turn, may be unable to obtain much detail on capitated providers' levels of service or utilization and/or quality management activities, leaving both the purchaser and MCO with few or no data upon which to base evaluations, establish accountability, and/or improve quality. Consequently, purchasers should be very attentive to the capacity of providers to assume risk and build and/or manage sophisticated MIS when considering strategies regarding subcontracts. Purchasers may also want to require on-line use of the provider of the MCO's MIS, if it is sufficiently comprehensive (see Chapter V).

If the contract lacks specificity about risk transfer to providers, MCOs may create financial incentive structures that encourage inappropriate limits on services. Purchasers may wish to limit or prohibit risk-transfer or incentive-based arrangements and require MCOs to offer (or require the purchase of) stop-loss insurance for network providers (Rosenbaum et al., 1997). Many States place limits on the level of risk that can be assumed by providers without insurance licenses. Both of these mechanisms maintain at least some degree of financial risk with the MCO, where it can be more adequately monitored.

It should be noted that despite the many challenges associated with providers absorbing too much of the financial risk, many purchasers, MCOs, and/or providers are interested in establishing, or are required by legislation to establish, risk-transfer contracting arrangements between MCOs and providers. Providers may be interested in establishing a risk-transfer arrangement in return for flexibility in making decisions about treatment and about service mix, accessing capitation payments up front to permit investment, and developing rollover authority to build up reserves.

Letting providers have a stake in the quality and quantity of care (i.e., sharing risk with the MCO) has many associated risks but also may have benefits. Increasing numbers of providers are interested in and capable of assuming risk. Providers can act more creatively and rapidly to intervene on a patient's behalf when they do not have to deal with the time- and resource-consuming aspects of an external authorization process. Creative and prompt responses are generally more likely to produce better outcomes at lower costs (e.g., a relatively minor intervention at a moment of crisis can be far more effective than a more expensive and intensive intervention days afterward).

c. Separating Service Costs From Administrative Costs

For each type of financial risk-sharing arrangement mentioned above, a purchaser can choose to separate payments for administrative costs and for service costs (e.g., under a pure capitation contract, a purchaser can pay a per capita rate for administrative costs and a separate per capita rate for service costs). The purchaser can also choose to use different types of risk-sharing arrangements for each type of cost. For example, a purchaser could use a pure capitation arrangement or global budget for administrative costs and use a partial capitation arrangement for service costs. This combined arrangement would provide strong incentives to control administrative costs, but would temper somewhat the financial incentives to reduce service provisions that are inherent in a global budget or full capitation arrangement for service costs. Separating payments in this manner allows purchasers to keep a more careful watch over the different types of costs and to more precisely target incentives for each.

Administrative services only (ASO) contracting arrangements are common in employer-sponsored health plans, but the use of this model is relatively new in the public sector. Several public purchasers now use ASO contracts, including Maryland's public mental health system, San Diego County's mental health system, and portions of Florida's Medicaid behavioral health program. Under an ASO contract, the purchaser pays the MCO (or an entity providing one or more standard managed care services), a set of performance-based fees to perform specified administrative or management functions, passing no financial risk for health service costs to the MCO.

For example, a purchaser may pay an MCO a designated fee per enrollee per month to provide such services as recruiting and maintaining a provider network, processing claims, completing financial reports, conducting utilization management activities, and/or providing various quality management functions. Under this arrangement, the MCO bears no financial risk for the cost of health services.

At first glance, an ASO model appears to provide no risk to the purchaser and the MCO. Frequently, however, the purchaser will also put the ASO administrative fees at risk or include financial incentives and/or sanctions tied to key measures (e.g., timely processing of claims, percentage of claims that are fully filled out, error-free, and able to be processed upon submission). Consequently the volume, complexity, and quality of the submitted claims can have a significant influence on the MCO's risk. Clearly written provisions can be especially important as they relate to claims and the definition of a "clean" claim.

An ASO contract provides minimal financial incentives⁽¹⁾ to an MCO to control health service costs because the MCO is not responsible for these costs and there is no limit or target set on spending for covered services. Thus, an ASO contract arrangement may make it difficult for the purchaser to control costs or to accurately predict annual expenditures for budgetary purposes. Purchasers also should be aware that an ASO arrangement can discourage needed investments in quality-improving technology for the purchaser's management information system (MIS) unless the system is set up in such a way as to provide incentives for building or refining the purchaser's MIS. Purchasers should ensure that the ASO contract does not create several opportunities for bundling additional costs (e.g., quality improvement efforts in MIS performance) into the administrative fee and thus artificially inflating administrative expenses.

ASO arrangements can provide purchasers an opportunity to gain valuable experience with managed care practices and technologies, to buy and/or learn how to best use available technologies, and/or to obtain crucial data that facilitates accurate estimates of future utilization. An ASO arrangement can eventually evolve into a purchaser-based management services organization, in which the purchaser assumes responsibility for many or all of the ASO functions.

d. Duration of Risk-Sharing Contracts

Purchasers should not underestimate the importance of the time period used in the contract. In general, quality improvement initiatives take a fair amount of time to have their influence felt in the system and will usually not be pursued if there is not a long-term mutual commitment between the involved parties. For instance, 1-year contracts provide strong incentives for MCOs and others involved in risk-transfer arrangements to seek quick, short-term gains, while longer-term contracts with built-in renewability options are more likely to encourage the development of quality-driven, systemic improvements that will produce savings. While 1-year contracts make sense when purchasers seek technology or supplies ("keep shopping for a better vendor"), they can be quite destructive for a commodity like health, that by its very nature requires a long-term perspective.

e. Setting Appropriate Payment Rates

The actuarial science of setting appropriate public sector capitation rates for behavioral health is still in its earliest stages, available data used to develop rates is often very weak, and actuaries must depend on the validity of numerous assumptions throughout the development process. Rate setting, as a result, seems to be proceeding largely by trial and error, leaving some systems seriously underfunded. Providing relevant information to the actuaries can influence their assumptions and is a key task for those involved in this process. An inappropriately low rate will inevitably lead to significant problems for consumers, providers, MCOs, and ultimately, the purchaser.

3. Risk-Transfer Payment Models

Many States, counties, and regional authorities have now begun to develop and refine risk-transfer payment systems with MCOs. These include Massachusetts, Oregon, Iowa, Colorado, Washington, Utah, Nebraska, Ohio, and San Diego County.

A continuum of financial risk-sharing arrangements for managed care contracts--including a global budget, capitation payment, case-rate payment, and fee-for-service payment--is shown in Table VII-1 below. These arrangements allocate the four major components of financial risk--that is, risk due to variation in the rate of enrollment, in the cost of producing services, in the volume and types of units used, and in service users per 1,000 enrollees--between the purchaser of managed behavioral health care services and an MCO in very different ways.

a. A Global (or Fixed) Budget

A payment arrangement that transfers full financial risk for the components of financial risk mentioned earlier from the purchaser of managed care to an MCO (or from an MCO to a network provider) is a global (or fixed) budget. Under this model, the purchaser of managed care pays a fixed dollar amount to the MCO both to administer the managed care program and to provide all services for which the MCO is responsible. No matter how high the costs of providing care to enrollees are, or how many additional enrollees join or leave the plan in a given year, the MCO is paid the agreed-upon global budget payment.

Note, however, that if a public purchaser is held financially responsible for any shortfall in the global budget (as is currently the case in some jurisdictions), the planned global budget process becomes largely irrelevant.

A global budget arrangement allows the purchaser of managed behavioral health care to predict with certainty the level of expenditures on mental health and/or substance abuse services in a given year. Global budgets are often used when the number of eligibles is unknown and are usually based on the prior year's costs, less a predetermined percentage for savings. They are more especially likely to be used when the purchaser is a State or county substance abuse and mental health authority.

A global budget creates very strong incentives for an MCO to control costs and improve the efficiency of its service delivery and administrative practices, especially if the MCO is to retain all savings as profit or as new operating capital. However, the very strong incentives to the MCO to achieve savings can encourage the entity to provide less than the therapeutically appropriate level of care or to reduce overall access to care, particularly when enrollment is greater than expected.

A fixed budget places the MCO at the highest level of financial risk. If managed care enrollment is higher than expected and/or claims costs greatly exceed the amount in the global budget, the financial viability of the managed care initiative may be put in jeopardy. For an MCO with low financial reserves, the result could be very serious financial difficulties or insolvency. The risk of insolvency is particularly great for small regional MCOs or providers whose budget is dependent on the managed care contract. The loss of such a contract could lead to serious financial troubles. Several States have seen their CMHCs suffer such a misfortune when they have acted as underfunded MCOs.

Because an MCO may assume a relatively high degree of financial risk under a global budget arrangement, the MCO is likely to seek higher payment rates from the purchaser for assuming this risk.⁽²⁾ Thus, a global budget arrangement may actually result in higher overall costs for the purchaser, especially if the purchaser has insufficient data to accurately estimate need, utilization, and costs. Because of the potentially higher costs of a fixed-budget arrangement, some purchasers have chosen to use a global budget arrangement for selected services or populations only and to use other payment strategies to pay for other types of services or groups of recipients.

The greatest legal concern in a global budget arrangement is ensuring that the MCO can safely assume the risks associated with it. In determining the rates that are to be paid to the MCO, the purchaser should consider including provisions in the contract to allow for renegotiation of the rates in the event the amount reimbursed proves to be unrealistically low or high. Allowing some renegotiation options may allow a managed care program to remain a viable option for the purchaser if the MCO is on the verge of bankruptcy, pushing risk too far down to the provider pool, or is taking too much profit from the system.

b. Capitation Payment

Under a fully capitated, full-risk arrangement, the purchaser pays the MCO a monthly per capita rate to cover all costs associated with providing behavioral health care services to a population of enrollees. The per capita rate for each enrollee is fixed, regardless of whether an enrollee uses any services. It may be set by the purchaser in advance or determined in the context of a competitive bidding process. The MCO assumes all financial risk for variation in the cost of producing services but assumes no risk for variation in enrollment. The latter risk is assumed by the purchaser, who pays an additional per capita payment for each additional enrollee, or who pays less in aggregate if enrollment reverses.

Fully capitated payment arrangements are like a fixed-budget arrangement in that they provide a strong incentive to control costs and improve efficiency. Although full capitation can create strong, short-term financial incentives to unduly restrict enrollee access and use of services, it also can provide equally strong incentives for the MCO to provide high-quality services and to secure effective linkages with other types of service providers to support positive outcomes. The strength of the contract access monitoring and quality monitoring mechanisms, and effective use of incentives and sanctions will in large part determine the way in which a full capitation payment system impacts the success of the managed care initiative.

Purchasers should understand that accurately estimating capitation rates is an actuarial art, not a science. Errors in judgment or erroneous assumptions are common and can cause an otherwise well designed program to fail due to insufficient capitation rate(s). In attempting to establish the most valid rates, different purchasers have used different approaches. One option to use when there is insufficient data to make highly accurate estimates for capitation rates is to develop a "floating" capitation rate that is adjustable based on the actual utilization data in the new system. See Exhibit VII-2 for three different approaches to arriving at capitation payment rates.

The contractual agreements between the parties should identify the following: (1) MCO per capita fees and claims target; (2) the risk-sharing ratio; and (3) the risk-free corridor.

MCO per capita fees and claims target. Often, a per capita fee paid to the MCO is specified in the contract as a portion of the total capitation rate. This fee covers the administrative costs of the contract and should include overhead and any applicable profit. The contract then specifies a per capita claims target for substance abuse and mental health services covered under the plan. The claims target is based on the benefit plan and average per-person claims expenditure for the population, as well as the utilization management rules used. To establish a claims target, purchasers can start with previous average per capita spending levels and adjust these levels using numerous assumptions about the appropriate or desired impact of the managed care program on expenditures for mental health and/or substance abuse services. If the purchaser wants to create a stronger incentive for the MCO to limit costs, it can choose a lower target; to create a weaker incentive to limit costs but a stronger incentive to improve access and quality, the purchaser may select a higher target.

Risk-sharing ratio. Once a claims target has been set, the purchaser defines a risk-sharing ratio that specifies how the costs of claims above the target--or savings, if expenditures are below the target--will be shared by the MCO and the purchaser. As an example, a 50:50 sharing ratio for savings requires the two parties to share equally in any savings or losses if expenditures are below or above the targeted capitation amount. To create a stronger incentive for cost containment or reduction, a purchaser can choose a sharing ratio that allows the MCO a greater share of savings and assigns the MCO greater responsibility for losses (e.g., 90:10, under which the MCO keeps 90 percent of savings and assumes 90 percent of losses). To temper the incentive to restrict service provision, a purchaser could choose a sharing ratio that places less responsibility for losses on the MCO and allows the MCO a greater share of savings (e.g., the MCO keeps 50 percent of the savings, but assumes only 25 percent of the losses). This is known as asymmetrical risk. Above or below the set rate, other financial arrangements prevail (refer to the section on stop-loss arrangements below).

Risk-free corridor. Many purchasers also use a risk-free corridor above or below the claims target to specify a portion of the claims risk for which the MCO is not responsible. For example, if the target is $10 per enrollee per month and the risk-free corridor is ± 5 percent, the MCO is not responsible for claims costs between $10 and $10.50 and cannot keep any savings between $9.50 and $10.00. (The purchaser gains or loses the $.50.) The use of risk-free corridors acknowledges that the development of capitation rates is not a perfect science, and that, as long as the MCO's claims costs fall within a particular range around the target, the negotiated fee will still be paid without penalty or bonus. This arrangement, which has been used in many private sector managed behavioral health organization (MBHO) contracts, can minimize the need for extensive negotiations when costs are reconciled at the end of the fiscal year.

c. Case-Rate Payment

Case rates are used most often to pay service providers, either when the service providers are functioning as an MCO or when they are subcontracting to an MCO. Under the case-rate model of payment, the purchaser of managed care pays a fixed rate for each "case," that is, each designated individual who enters the system and uses services.

The case-rate approach to payment was developed in part because of the difficulty of accurately estimating service users per 1,000 enrollees. The case rate is calculated by estimating the expected average expenditures for service users only. Thus, a case rate is typically higher than a full capitation rate, because a pure capitation rate is calculated as an average of expected expenditures over a population of enrollees that includes both service users and nonusers.

Calculating case rates. The following basic formula can be used to develop a baseline case rate for a defined event:

Case rate per defined event = (Cost per day/visit) × (Mean length of stay/mean

frequency of visits)

This baseline rate can then be adjusted as desired by included service(s), definition of the episode or time, user characteristics, region, and so forth. When setting case rates, the purchaser should make every effort to obtain all relevant national and regional data to begin to establish norms. Determining what case rates to pay is difficult given the paucity of national cost and utilization data on both substance abuse and mental health services. The paucity of data is particularly acute in the addiction field.

In the context of managed behavioral health care, case rates can be formulated to cover either a defined episode of care or a defined period of time (see Table VII-2):

- Case rate for a defined episode of care: The case rate covers a precisely defined episode of care for an individual with either a single level of care (e.g., a detoxification or intensive outpatient treatment episode) or multiple levels of care (e.g., detoxification plus outpatient services). Case rates for discrete treatment episodes (e.g., detoxification) are the easiest to design. Alternatively, an episode of care can begin with an acute treatment experience (generally requiring continuing care afterwards) and continue until the consumer has no treatment episodes for a specified period (e.g., 8 to 12 weeks).

- Case rate for a defined period of time: The case rate covers a defined period of time (e.g., 6 months, 1 year) for an individual with multiple levels of care (e.g., all covered levels of care per individual per year). Precise definitions are needed regarding all responsibilities. For instance, a provider could be responsible for the provision of all detoxification and outpatient treatment for a specified individual for 1 year.

Whether based on an episode of care or a period of time, case rates can be based on either a single case rate unadjusted for level(s) of care, severity of illness, or region; or a stratified case rate adjusted by a defined variable or variables (e.g., level of care, severity of illness, region, or all combined).

Distinctions between case rates for substance abuse and mental health services. In considering case rates, it is important to make a distinction between case rates for mental health services, case rates for substance abuse services, and case rates for combined behavioral health services. In comparison with substance abuse services, mental health services (both for Medicaid and non-Medicaid funded services) generally can be more easily blended into actuarial processes and development of case rates. In comparison to substance abuse, mental health cases generally:

- Are associated with less frequent admissions, discharges, and readmissions (and thus have more predictable treatment costs);

- Involve more medical personnel and related medical services and are thus more comparable with case-rate experience in the medical sector;

- Have more frequently been offered in the context of managed care; and

- Are more likely to have more predictable expenditures because of the larger database on mental health services.

The case-rate data established for mental health services may prove neither valid nor helpful when trying to establish appropriate case rates for substance abuse services.

Monitoring and managing case rates. Purchasers should be aware that a case-rate system can encourage an increase in outreach services, thereby increasing access of certain subgroups into the service system, because the MCO or provider receives a full case-rate payment for each service user. A case-rate system provides strong economic incentives for the MCO or provider to identify people who need mental health and/or substance abuse treatment, some of whom might not have been enrolled or diagnosed in the same way if the MCO or provider were under a different payment system. Careful monitoring of service patterns is therefore a crucial component of effectively managing this type of payment. Similarly, MCOs and providers have incentive in a case-rate system to restrict ongoing care.

In unregulated, unmanaged circumstances, there is also considerable danger that an MCO or provider will seek out individuals who are users but have the least severity of illness (see Chapter II on enrollment). Purchasers must analyze the inherent incentives of each case-rate variation and take steps to avoid problems (e.g., independent gate keepers, random assignments, case mix adjustments).

One way for a purchaser to guard against inappropriate identification of cases is to perform periodic clinical audits of cases to assess service appropriateness, and/or create guidelines or criteria that enrollees must meet to enter the service system (e.g., no case-rate payment will be given for detoxification if this service is not followed by other services). If MCOs and providers with case-rate arrangements have an incentive to enter enrollees in the treatment system, but not necessarily to keep them there or ensure that the appropriate type or amount of services are provided, such clinical audits would identify them, putting them at high risk of losing their contracts in the future.

Other strategies that a purchaser can use to provide an incentive for MCOs or providers to give enrollees appropriate care under case-rate payment arrangements include blending some degree of fee-for-service reimbursement into the model. For instance, the entity could be paid on a fee-for-service basis until the reimbursable amount totaled the amount of the case rate. Alternatively, the purchaser could pay for discrete amounts of services (e.g., pay for first five outpatient visits, then for the next five, etc.) up to the case rate.

Case-rate contracts can cover both administrative and service costs, or they may be structured to cover only service costs, with administrative costs paid for separately by the purchaser. Typically, different case rates are used for different diagnoses or eligibility categories; different rates might be used for enrollees categorized as having SPMI children in foster care, and women with dependent children. In Delaware, for example, the Medicaid program pays a case rate to the Department of Children and Families to provide services to children with moderate to severe emotional disorders.

In analyzing options and making decisions regarding the use of case rates, it may be easiest to develop baseline data around utilization of specific levels of care (e.g., mean cost-per-detoxification or intensive-outpatient episode). Case rates which cover a broad range of services for an individual over an extended period of time are probably the most difficult to determine accurately.

Determining the number of distinct rates. When choosing a risk-transfer payment system, purchasers of managed behavioral health services must determine how many distinct subpopulations, and thus distinct rates, to develop. Some purchasers have chosen a single rate blended for all enrollees, while others have used several different rate categories. When more than one rate category is used, they can be based on many different types of variables. In many situations, the purchaser may also want to divide the total population of eligible persons and services into two or more different risk-sharing arrangements (e.g., adults with serious and persistent mental illness [SPMI], children with serious emotional disorder [SED], chronically addicted individuals). Indeed, using multiple categories of rates can result in more appropriate matching of payment to estimated costs of service provision, and, ideally, can be used to mitigate incentives for the MCO to undertreat those with highest needs.

The use of several categories, however, can also be cumbersome, and some States that initially used such an approach later simplified or abandoned it (e.g., Washington and Tennessee) because it was too difficult to be properly programmed or administered. Artificial boundaries drawn to divide responsibility for care based on anticipated costs or needs (i.e., stratifying enrollees by diagnoses, costs, or needs) can lead to problems with continuity of care and cause the system to lose focus on meeting the overall needs of the enrollee population. Multiple categories based on diagnosis or severity of illness also provide incentives for unethical MCOs on providers to claim that enrollees are more severely ill than they actually are or try to classify them in a different, more profitable rating category in order to receive higher payment rates.

d. Fee-for-Service Payment

Fee-for-service payment systems generally are not used to prospectively pay an MCO, but may be used by a prospectively paid MCO to pay its providers. This system shifts risk from the purchaser and providers to the MCO. Here fee-for-service payment systems provide an interesting legal issue. The fee-for-service payment to providers gives them economic incentives to provide access to the delivery system to enrollees because the provider is paid a fee each time the enrollee accesses the system. The issue that must be addressed is whether the purchaser or MCO can determine by a review of records whether a medically necessary treatment was paid for. The contract must allow for such a review and for the purchaser's or MCO's ability to recover funds spent for services other than those the purchaser or MCO determine were not medically necessary.

General Financial Requirements and Risk-Sharing Arrangements. Purchasers may wish to address the following in the RFPs and contracts:

Include all applicable Federal, State, and local accounting and actuarial requirements, including analysis of the financial stability of the vendor and its financial reserves.

Stipulate, where appropriate, that all payments are "subject to available funds" of the purchaser.

Indicate how often, when, and how the MCO will be paid, including any incentives.

Stipulate separation or integration of administrative and service costs and the basis for each.

If using an ASO arrangement, specify the frequency and method of fee payment and include performance guarantees.

For case rates and capitated payments, indicate the criteria an enrollee must meet to be considered for a certain rate category (e.g., by severity of illness, age, gender).

Clearly explain all parameters of a partial capitation arrangement, including risk-sharing ratios and risk-free corridors.

If using an individual stop-loss arrangement, indicate how and when the MCO would be paid for costs above the stop-loss, or what reinsurance arrangements the MCO must make.

If reinsurance is to be required, indicate the exact level of insurance the MCO is expected to have, what form of proof of insurance is necessary, and the renewal period of the reinsurance policy; include a requirement for providing proof of reinsurance.

Indicate what process is to be used for reconciling costs at the end of the contract year (e.g., calculation of claims incurred, but not reported and a method of accounting for any adjustments of errors).

Specify what is to be done with savings and their potential reinvestment in needed State, county, or local services (such as financing and development of housing for people with severe and persistent mental illness that may be outside of the scope of the contract) or expansion of the eligible population.

Stipulate the right of the purchaser to audit.

Establish whether--and if so, to what degree--financial and clinical risk may be transferred from the MCO to providers.

Require the MCO to be in compliance with the physician incentive plan prohibitions against financial incentives to reduce care, the provision of stop-loss coverage, and disclosure of the incentive plan and stop-loss arrangements.

Ensure that all legal, financial, and clinical responsibilities related to the risk agreement between the MCO and the subcapitated provider are precise, specific, and publicly available.

Specify insurance coverage requirements, if any, for providers assuming risk.

Establish what types of incentives and incentive structures for providers are allowed.

Require that, if the MCO places providers at risk, data must be submitted and reviewed that indicates the risk-bearing capabilities of those providers.

Require purchaser approval of financial arrangements between the MCO and providers, including rates, payment terms, risk arrangements, and other terms.

Require the MCO to seek approval from the purchaser for subcapitation or rate-setting policies.

Mandate that in capitated subcontract arrangements, MCOs must receive detailed reports from providers, which will enable the MCO to provide adequate information to the purchaser.

B. Applying Incentives and Sanctions to MCOs

Financial incentives and sanctions can be used by a purchaser to shape an MCO's behavior in desired directions, such as toward cost containment. Financial incentives and sanctions are common in commercial sector managed care contracts, but the use of incentives and sanctions to achieve a managed care initiative's goals in a publicly funded behavioral health system is in its infancy, though likely to grow rapidly. As of 1996, only a few States--Massachusetts, Arizona, and Hawaii--included incentives in their contracts with MCOs (Frank & McGuire, 1995; Huskamp, 1996; IOM, 1996). Pennsylvania permits its counties to include incentives in their contracts with MCOs.

1. Specifying Standards and Associated Incentives or Sanctions

As discussed in Chapter IV and elsewhere, standards can be created to measure the performance and timeliness of various administrative, management, or clinical functions performed by an MCO (e.g., completion of financial reports, claims processing accuracy, or collections from third-party payers) and to measure quality of and access to care (e.g., hospital and admission rates, homelessness, criminal justice involvement, suicide-related behaviors, access to newer psychotropic medications, follow-up after inpatient discharge). Once the purchaser sets a standard, it can assign an incentive or sanction to that standard or to a group of standards. Standardized definitions and measurements should be used whenever feasible.

Incentives and sanctions usually take one of two forms:

• A flat dollar amount for failure to meet the standard (e.g., a $1,000 penalty if a report is not submitted by a specified deadline) or for exceeding the standard (e.g., a $1,000 penalty for too high a call abandonment rate); or
• A percentage of the MCO's fee (e.g., the MCO loses 2 percent of its fee for each percentage point the level of enrollee satisfaction falls below the standard of a selected percent).

A significant challenge for the purchaser will be determining the dollar amount of financial incentives and sanctions. Amounts should be large enough to influence behavior but not so large as to be unfeasible. Unfortunately, no solid guidelines exist at this time on determining the ideal amount of an incentive or sanction.

Some managed behavioral health contracts place limits on the level of penalties that can be incurred by the MCO. For example, a purchaser can specify various sanctions based on performance standards, but note that the total penalty incurred for all performance standards combined cannot exceed 20 percent of the MCO's ASO fee. In this scenario, regardless of how poor the MCO's performance is with respect to the standards, the MCO could never earn less than 80 percent of its administrative fee.

Performance standards, together with financial penalties or rewards, can help to align the MCO's goals for administrative performance, quality of care, and access to care with those of the purchaser. However, choosing appropriate standards and definitions can be difficult, particularly standards that accurately, validly, and reliably measure quality and access to care (see Chapter VI).

Another way of handling incentives and sanctions is "withholding"--which involves establishing a percentage of the MCO's fees, such as 10 to 15 percent, and withholding that amount and placing it in a reserve. The monies held are then paid out if and when the MCO has met a specified performance standard. However, the provisions of the contract must be negotiated carefully to ensure that the parties understand when an incentive payment is necessary or when a sanction is to be withheld. The contract must clearly define a measurable event that results in an incentive payment or sanction and must specify which party determines that the event has occurred.

2. Contract Termination

In the event that the MCO's poor performance becomes so persistent and serious that corrective action is no longer possible, purchasers should have the option of termination. There are two key issues in relation to contract language and termination:

• How and under what circumstances the contract can be terminated; and
• The effect of State or other laws and regulations on contract provisions about termination.

Virtually all purchasers provide for contract termination in the event of nonperformance (Rosenbaum et al., 1997). Included in some termination provisions are descriptions of events or circumstances that could trigger termination and the termination process, including timelines and notice provisions.

In some States, purchasers are confronted with the problem that a State law or constitution limits the operation of contract clauses. This situation sometimes arises when the law treats MCOs as providers and regards them as having due process property rights in the contract and in the enrollees. That treatment prevents purchasers from terminating contracts with an MCO until the MCO has had an opportunity to exercise all of its pretermination hearing rights under State law.

It is important to note that not all State purchasers face this external legal constraint. But States that do may experience the paradox of being treated as a private party (with none of the favorable presumptions that would be given to a government agency in the construction of the duties of the MCO) while at the same time bearing the legal burden of State action in attempting to terminate the contract. States that find themselves in this situation need to explore legal avenues for expediting pretermination review, as well as general limits due to emergency on the scope of State due process law. In fact, the court in the MedCare HMO v. Bradley case described above specifically noted the lack of any facts suggesting an emergency (Rosenbaum et al., 1997). States may also wish to revise State law on due process in the context of contracts with MCOs to ensure that contract terms enable termination (Rosenbaum et al., 1997).

Incentives and Sanctions. Purchasers may wish to address the following in RFPs and contracts:

Specify, where possible, the measures and standards for all requirements in the contract; sanctions and/or incentives should be attached as appropriate.

Specify the manner in which, and at what intervals, incentives and sanctions will be applied, and when and by whom performance will be measured.

Incorporate a set of incentives and sanctions that can be incrementally applied to exert increasing influence and that allow some flexibility in their application.

Specify actual measures, the means to determine compliance with these measures, and the triggers for incentive payments and sanctions.

Specify the amount, if any, to be withheld, reserved, or refunded from the MCO's fees.

Select a sufficient number of standards to motivate performance but not so many that interpretation or prioritization becomes prohibitive.

Specify who will be the auditor or evaluator.

Clarify the degree of the purchaser's flexibility (if any) regarding application of incentives/sanctions.

C. Dealing With Third-Party Payments

The management of third-party payments is an important financial issue for a purchaser contracting with an MCO. If sources of support (e.g., commercial insurance) must be exhausted before the purchaser must pay for services, the purchaser must clarify this in the contract. For instance, because Medicaid is generally a payer of last resort (an important exception being with respect to school-based services), all other sources of support must be exhausted before the purchaser can access Medicaid payments. In a Medicaid managed care initiative, the MCO will have to bill Medicare or any commercial insurers before it can pay for services. Procedures for ensuring appropriate billing sequences must be in place prior to implementation of any managed care program.

The purchaser also should ensure that the MCO has an incentive to pursue third-party payment aggressively. In the case of Medicaid, the Health Care Financing Administration (HCFA) requires that certain documentation be submitted for dually eligible individuals (those eligible for both Medicaid and Medicare) prior to the payment of Federal claims, and that third-party payments be collected in order to offset the Federal Medicaid costs. Only then will the purchaser receive the Federal "match." To document exhaustion of these third-party sources, HCFA requires the purchaser (and the purchaser generally requires the MCO) to submit an "explanation of benefits" (EOB) with a denial of services, including the reasons for the denial by the third-party payer or Medicare.

The purchaser must consider the relative costs and benefits of holding the MCO responsible for collecting third-party payments. If the capitation payments to the MCO include an allowance for anticipated collection of third-party payments, then the MCO bears the risk for these payments.

Purchasers and MCOs should require providers to obtain documentation of denied claims and/or benefit limitations. When using these third-party payments to help finance the managed care system, a purchaser has two basic options:

The purchaser may subtract the anticipated amount of third-party recovery from the capitation payment, and then, to rid itself of this responsibility, contractually require the MCO or providers to collect these payments. This is sometimes referred to as a "net out" contract style. The anticipated amount must be reasonable, documented, and based on historical collection rates. It should be noted that the MCO and/or provider may or may not want to devote the necessary resources to collecting these monies, but it is important both that (1) there be a clear understanding about any role of these funds in the planned income stream of the MCO; and (2) responsibilities are clearly stated.

The purchaser can pay the MCO up front for the full cost of services, including anticipated or historical levels of third-party payments, and then either adjust future payments based on actual collections, or retain the responsibility for collecting these payments itself. This style of contract (sometimes called "pay and chase") provides less incentive for the MCO to ensure that providers will obtain the documentation needed to collect third-party revenue or to seek payment from third-party payers. Experience across the country with such contracts has shown that collection of third-party revenues is lower than those under other payment arrangements. The purchaser can provide financial incentives for recovery of third-party payments, including bonuses and penalties for certain performance targets.

Third-Party Payments. Purchasers may wish to address the following in RFPs and contracts:

Explain the responsibility and process for collecting third-party payments.

Require the MCO to pursue third-party payments, if applicable.

Mandate that the MCO require providers to secure documentation for payment denial (and of coverage, in general) based on third-party liability.

Indicate the process for reconciliation of third-party payments.

Require the MCO to document its third-party collection capability, subject to audit.

D. Making Decisions About Copayments and Deductibles

Many commercial managed care plans require that consumers contribute a copayment ("flat," scaled to income, or a percentage of charges) or be financially responsible for a certain deductible, both of which must usually be paid upon receipt of services. A primary purpose of copayments and deductibles (and sliding fees in the public sector) is to discourage the unnecessary use of services (e.g., inappropriate emergency room utilization). Public purchasers can sometimes adopt such requirements. However, copayments and deductibles should be designed and implemented carefully so they are high enough to limit unnecessary use of services but low enough so they do not inhibit access to services for low-income individuals.

Collecting copayments and deductibles from low-income individuals is often difficult or impossible. Indeed, it is important to note, regarding insurance copayments in general, that many providers of services, whether dentistry, chiropractic, or auto body repair, routinely waive the copayment, making the impact of having a copayment at all somewhat moot. In some States, however, waiving copayments is illegal. Generally, providers' only recourse if a low-income individual does not pay a copayment or deductible is to stop treatment. Stopping treatment may exacerbate the conditions of seriously ill individuals and is likely to be counter to the public policy intent of a public managed program. Providers are often reluctant (or prohibited by statute) to discontinue treatment for such individuals. Because providers often end up responsible for footing the bill for them, copayments and deductibles are sometimes categorized as a "provider tax" rather than a cost-sharing mechanism for consumers.

Copayments and Deductibles. Purchasers may wish to address the following in RFPs and contracts:

Indicate whether and how copayments, deductibles, and/or sliding fee scales will be used and for which services and settings.

Specify the dollar amount(s) of any copayments, deductibles, and/or sliding fee scales.

Specify the copayments, deductibles, and/or sliding fees that are permitted and indicate how and when consideration will be given to waiving any such requirements.

Stipulate the allowable limits of copayments and deductibles and the structure of sliding scales and the actions that may be taken if consumers do not pay.

Specify which entity has responsibility for collection of such payments.

Include information regarding any copayments and deductibles in consumer and provider handbooks with the rationale for copayments explained.

Specify whether the provider or the MCO is allowed to keep the copayment.

E. Managing Cash Flow

The timing of risk-transfer payments affects the purchaser's and MCO's cash flow management and is another financial issue that should be addressed in the managed care contract. In fee-for-service payment arrangements, purchasers usually pay vendors up to 30 days after services are invoiced, which occurs only after the actual delivery of services. In many public sector arrangements, payments are made in advance. Thus, advance payments to the MCO may have the effect of increasing cash requirements on the part of the purchaser in any fiscal year by 1 to 2 months' worth of total expenditures. In general, capitation payments are made one month in arrears, after the number of eligibles is known.

In addition, interest earned by an MCO from payments made to it by the purchaser, but not yet forwarded to providers, can be a substantial source of revenue for the MCO and can create a loss of revenue to the purchaser. In this case, the purchaser can require that the MCO use these funds to offset future premiums, to reinvest in community-based services (see section on reinvestment requirements below), or as refunds to the purchaser. If the MCO is allowed to retain the interest, that revenue should be considered in determining the reasonableness of the profits of the MCO. To minimize the interest received by the MCO, the purchaser can delay the payment of fees until providers are scheduled to be paid.

Fees paid by the purchaser can also be deposited into a special account maintained by the MCO as a resource or trust account. Depositing the fees permits easier reconciliation of payments, avoids many of the reserve accounting requirements associated with States' insurance regulations, and minimizes the risk of loss of funds in the event of MCO bankruptcy or termination of contract.

Managing Cash Flow. Purchasers may wish to address the following in RFPs and contracts:

Stipulate the timing of capitation payments to the MCO.

Indicate rules for the use of interest earned by the MCO from payments made to it by the purchaser.

Specify the use of a reserve account to simplify reconciliations and minimize the risk of the recovery of these funds by other creditors in the event of bankruptcy.

Stipulate the date by which the MCO must reimburse providers each month.

Specify banking and accounting standards, subject to audit.

F. Specifying Reinvestment Requirements for MCOs

The purchaser must make a decision early in the design stages of the managed care program concerning the MCO's reinvestment of money into the delivery systems. The RFP and contract must clearly specify whether the MCO is expected or required to place any portion of profits back into the delivery system. If the MCO is required to place profits back into the delivery system, the contract should address how the money is spent and what programs may be affected. Merely agreeing to agree is not sufficient. The purchaser will have to make a policy decision concerning how much input it desires in the process and whether it has final authority over the reinvestment.

One of the legal concerns a State Medicaid agency must consider is whether the use of such reinvestment violates Medicaid law in that it diverts money from the Medicaid program in violation of the waiver approved by the Federal Government. The Federal Government may assert that any savings attributable to Medicaid money belongs to it. The contractual terms between the purchaser and MCO should reflect the Government's authority in such situations, if applicable.

Finally, the purchaser must ensure that contractual provisions do not appear to violate the kickback provisions of the Federal Medicaid program. The reinvestment of Medicaid money cannot appear to be a kickback for withholding medically necessary care. Further, some are developing arguments to support the proposition that the use of managed care may violate the False Claims Act when underutilization is proven. The argument exists that the failure to make a claim for services that were medically necessary in order to achieve a profit under a capitated system amounts to a false claim in violation of the Federal False Claims Act. Purchasers should be aware of possible contractual provisions that appear to further incentives not to make a claim.

HCFA's reimbursement rules mandate that the Federal Government recover its share of cost savings due to savings related to managed care, unless the reimbursement procedures and the contract specify that savings are to be reinvested in other, specified services. (Under certain Medicaid waivers, HCFA has permitted alternative services, such as various types of self-help programs, to be funded from savings in the plan.) In a managed care initiative, purchasers may decide to expand old and/or develop new, alternative services, in lieu of the more medically oriented programs that are traditionally covered by Medicaid.

For example, in Iowa, the MCO that provided behavioral health services had $1 million in allowable profits in its first year and planned to forward the additional profits to the purchaser. But, rather than refunding the profits to the State and eventually to HCFA, the purchaser directed the MCO to reinvest the money in new services within the plan, i.e., to put the money back into the delivery system. The purchaser effectively made arrangements so that the State never took possession of this money. Such an arrangement can be used with or without capitation. The method Iowa used required a HCFA waiver.

Reinvestment Requirements. Purchasers may wish to address the following in RFPs and contracts:

Establish requirements for returning savings to the purchaser.

Set up parameters for reinvestment of savings in building the service array to ensure timely and effective startup of new programs.

Specify responsibilities for identifying, approving, and auditing the investment, the timing of actions to be taken, the methods of starting up programs (seed money, grants, etc.), and the amount of money (a percentage of savings) available for reinvestment.

Clearly explain any requirements for the use of savings on the part of the MCO (e.g., administration, salaries, services).

Solicit stakeholder input on how reinvestment funds will be used.

G. Requiring Financial Reports by MCOs

The ability of a managed care system to operate is grounded on the financial stability of the MCO as well as the delivery system used by that organization. The contract should provide for financial reporting based on both the provider's and the MCOs' needs. The purchaser's only means of ensuring the continued financial stability of the managed care program may be its ability to review current financial data. The contract should include specific provisions for reporting the financial condition of the entities involved in the plan at established intervals. This includes reports concerning utilization, denial of claims, denial of services, requests for payment, and requests for authorization--just to identify a few. The contract should clarify what information must be included and the timeframes for submission of different types of reports. Sanctions should be available to the purchaser in the event that the reports are not submitted in a timely fashion or do not include the information required. Depending on the circumstances of the particular public purchaser, the managed care contract may be subject to the financial reporting requirements included in the public purchaser's insurance regulations. Whenever feasible, accountability can be immeasurably enhanced by the linking of financial and clinical data.

Financial Reporting. Purchasers may wish to address the following in RFPs and contracts:

Indicate all Federal, State, and county insurance and other regulations related to financial reporting.

Clearly indicate deadlines and required format for all financial reports.

Clearly spell out the requirements for reporting financial expenditures for both administrative and service costs.

Require reporting of program administrative costs pursuant to OMB Circular A-87 and the principles for cost accounting in OMB Circular A-133, which require the reporting of costs by program and set standards for the allocation of overhead and shared administrative costs.

Specify different reporting requirements for each of the applicable funding sources (e.g., Medicaid, block grants, State funds).

Specify audit procedures and selection of auditor.

Determine which organization is responsible by statute for assuring fiscal solvency (in addition to the purchaser).

Specify an action plan if the MCO experiences financial problems with contract delivery.

Specify reporting requirements of expenditures for both substance abuse and mental health services as a percentage of premium spent for integrated health/behavioral health plans.

^1. Maintaining a competitive position may provide incentive to the MCO to control service cost.

^2. Economists would call this add-on to the payment a "risk premium."

Last Updated 11-7-02