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Contracting for Managed Substance Abuse and Mental Health Services: A Guide for Public Purchasers

Technical Assistance Publication Series

22

October 23, 1998

U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES

Public Health Service

Substance Abuse and Mental Health Services Administration

Center for Substance Abuse Treatment

Rockwall II, 5600 Fishers Lane

Rockville, MD 20857

Foreword

During this time of financial uncertainty and change in the Nation's health care systems, the Center for Substance Abuse Treatment (CSAT) is proud to provide the substance abuse and mental health fields with this Technical Assistance Publication (TAP), Contracting for Managed Substance Abuse and Mental Health Services: A Guide for Public Purchasers. The document is a comprehensive guide for public purchasers and others interested in influencing the development of requests for proposals (RFPs) and contracts in managed behavioral health care. Experts in both the substance abuse and mental health fields collaborated in its development.

It is generally agreed that strong contracts between purchasers of health care services and managed care organizations (MCOs) form the foundation upon which managed behavioral health systems are built. Unfortunately, some public purchasers have left themselves and their clients vulnerable to poor quality services and restricted access due to poorly conceptualized and poorly written RFPs and contracts. This guide provides information that will help public purchasers develop RFPs and contracts for managed behavioral health care so as to achieve programmatic success. Although this guide is intended to assist public purchasers in their managed care contracting efforts it should not be used as a substitute for expert legal or financial guidance. Any recommendations put forth here should be carefully considered by purchasers and adapted with appropriate guidance to meet the needs of the specific State or locality.

This TAP is targeted most specifically to State and county substance abuse and mental health authorities, State Medicaid authorities, and other payers and purchasers of managed mental health and/or substance abuse services. CSAT hopes, however, that substance abuse and mental health treatment providers, MCOs, consumer groups, advocacy groups, academicians, and researchers will find the document an informative discussion of the essential elements of managed care contracting for substance abuse and mental health services.

This document was developed by CSAT using national experts as an advisory panel. Once published, TAPs generally are not revised, and the development process ends. Traditional ways of developing and disseminating knowledge are changing, though, and CSAT recognizes that a document on a topic as dynamic as managed care contracting must be very accessible and continually updated if it is to continue to be useful. Therefore, CSAT has made this TAP available on the Internet and plans to update the information contained within it on a regular basis. Internet accessibility will provide readers of this TAP with a mechanism for asking questions, contributing new material, and providing ongoing feedback on the guide. We hope that this document will serve as a model for developing and disseminating essential information in an online, interactive, and continually updated manner.

CSAT invites you to use this guide to better understand how to develop RFPs and contracts for managed behavioral health care systems that live up to their promise of providing state-of-the-art services to people with mental health and addictive disorders. We further invite you to use your knowledge and experience to contribute to its continual evolution so that it may better serve others.

Nelba Chavez, Ph.D.
Administrator
Substance Abuse and Mental Health Services Administration

Camille T. Barry, Ph.D., R.N.
Acting Director
Center for Substance Abuse Treatment

Acknowledgments

This document reflects the efforts of many contributors: national experts in the fields of substance abuse, mental health, Medicaid, child welfare, consumer advocacy, and the attorneys who represent these fields. The need for managed care contracting information in State and local agencies and the desire to make this document a state-of-the-art guide to contracting for managed care services for people with addictive and mental health disorders brought together individuals and organizations from diverse fields, with affiliations in Federal, State, county, and local governments and in both the public and private sectors.

Oversight, guidance, and support for this publication was provided by a Development Panel made up of experts in managed care contracting for substance, abuse, mental health, and medical services from across the country. Development Panel members attended the initial concept meeting, developed outlines, drafted chapters, offered consultation, and provided comments throughout a long and challenging development process. They were very generous with their time, and their knowledge and dedication helped ensure that this document would have a practical application to public managed care contracting. A special debt of gratitude is owed to Development Panel members Sara Rosenbaum, who provided substantive knowledge of the legal aspects of managed care contracting, contributed the bulk of the sample contract language, and reviewed the entire document for accuracy; Paul Litwak, who played a formative role throughout the project and contributed substantially to the chapters on developing a managed care initiative and management information systems; Rick Ramsey, who played an active leadership role throughout and contributed to many chapters; Robert Mirel and Steve Wood, who made invaluable contributions to the chapter on management information systems; Neal Cash, for sharing his first-hand experience with provider-sponsored networks; and Richard Dougherty, Haiden Huskamp, and Tony Broskowski, for sharing their expertise on financial issues.

Important contributions were also made by the staff and constituents of several national organizations and government agencies, including the National Association of State Alcohol and Drug Abuse Directors, the National Association of State Mental Health Program Directors, the National Association of County Behavioral Health Directors, the American Public Welfare Association, and the Health Care Financing Administration. These stakeholders provided guidance early in the development process, making recommendations concerning what they sw s the most-needed information as they confront the challenges associated with developing managed care contracts.

More than 50 field reviewers representing the mental health, Medicaid, substance abuse, and managed care fields offered extensive feedback on the document and in many ways shaped its focus. The collective input form these individuals-was invaluable.

Finally, thanks go to the dedicated staff of Health Systems Research, Inc., including Project Director Stephen Moss, William Ford, Kathy Jacquart, Dhlia Shaewitz, Cathy Corder, and Daniel Kent; and to consultant editors Constance Gartner, Betsy Earp, Kerry Kemp, and Carolyn Davis.

Development Panel

Jim Bixler
President
JBX & Associates, Inc.
Springfield, Illinois

Anthony Broskowski, Ph.D.
President
Pareto Solutions, L.C.
West Palm Beach, Florida

Neal Cash, M.A.
Executive Director
CODAC Behavioral Health Services, Inc.
Tucson, Arizona

Richard Dougherty, Ph.D.
President
Dougherty Management Associates, Inc.
Lexington, Massachusetts

Deb Ekstrom
Consultant
Waltham, Massachusetts

William Ford, Ph.D.
Project Director
Health Systems Research, Inc.
Washington, DC

Suzanne Gelber, Ph.D.
Consultant
SGR Health, Ltd.
Wilton, Connecticut

Haiden Huskamp, Ph.D.
Assistant Professor of Health Economics
Harvard Medical School
Department of Health Care Policy
Boston, Massachusetts

Chris Koyanagi
Acting Executive Director
The Bazelon Center
Washington, DC

Jeff Kushner, M.H.R.A.
Drug Court Administrator
Twenty-Second Judicial Circuit
St. Louis, Missouri

Paul Litwak, J.D.
Attorney & Counselor at Law
Virginia Beach, Virginia

Robert Mirel, M.S.W.
Systems Resource Group, Inc.
Bala Cynwyd, Pennsylvania

Stephen Moss, Ph.D.
Project Director
Health Systems Research, Inc.
Washington, DC

Hernando J. Posada
Assistant Director

Ohio Department of Alcohol and Drug
  Addiction Services
Columbus, Ohio

Richard Ramsay, J.D.
Attorney
Proskauer Rose, L.L.P.
Washington, DC

Sara Rosenbaum, J.D.
Director
Center for Health Policy Research
Washington, DC

Barbara Smith, J.D.
Senior Research Staff Scientist
Center for Health Policy Research
Washington, DC

Tom Stanitis, M.S., M.H.S.
Consultant
Columbia, Maryland

Cynthia Turnure, Ph.D.
Director
Minnesota Department of Human Services
Chemical Dependency Program Division
St. Paul, Minnesota

Daniel Walsky
Executive Director
New Jersey Division of Medical
  Assistance and Health Services
Trenton, New Jersey

Stephen Wood
Partner
Healthcare Perspective
Pickerington, Ohio

CHAPTER I

Introduction

Key issues in this chapter: The managed care trend Challenges for managed care initiatives in the public sector The critical importance of a good contract Uses and limitations of this guide

In recent years, State Medicaid agencies and other public sector entities--in particular, State, county, and local substance abuse and mental health authorities--have increasingly been taking the initiative to purchase substance abuse and mental health managed care services from private sector organizations or specialized nonprofit agencies. Developing requests for proposals (RFPs)(1) and then contracting for outside managed care services is a significant vehicle for introducing managed care into the public sector while responding to complex financial and political pressures. In most States, the State Medicaid agencies or other public purchasers have already begun contracting with managed care organizations (MCOs), and in many other States managed care initiatives are under way or are being considered.

This document is a practical guide for public purchasers and others involved in the design and development of managed care initiatives involving substance abuse and/or mental health services. The Center for Substance Abuse Treatment (CSAT), the Center for Mental Health Services, and their parent agency, the Substance Abuse and Mental Health Services Administration (SAMHSA), developed this publication to help State Medicaid agencies, State substance abuse and mental health authorities, and other public purchasers translate rapidly evolving policy goals into effective RFPs and contracts that are the basis for sound managed care initiatives. To develop this document, CSAT, the Center for Mental Health Services, and SAMHSA sought guidance and direction from an expert panel and field reviewers that included State Medicaid agencies, substance abuse and mental health authorities, managed care contracting experts, health care attorneys, providers, and consumers.

Chapters II through VIII of this guide describe several important issues pertaining to contracts for managed behavioral health care:

Chapter II discusses the process of designing, procuring, and implementing a managed care system--from preliminary design, through development of an RFP, through the signing and subsequent monitoring of the contract.

Chapter III considers the essential decisions concerning the services to be covered in a managed care plan, medical necessity, and the impact of funding streams on coverage.

Chapter IV examines the establishment and maintenance of provider networks, including network design, selecting network providers, ensuring enrollees' access to services, subcontracting with network providers, establishing provider standards, and monitoring provider performance.

Chapter V concentrates on the key features of a management information system (MIS) that would be most effective in a managed care system, including data requirements and hardware and software needs.

Chapter VI addresses issues pertaining to quality of care, including measures of quality, accreditation standards, report cards, measures of consumer satisfaction, and internal and external quality management systems for MCOs.

Chapter VII examines different aspects of financing in a managed care environment, including such topics as risk-sharing arrangements, incentives and sanctions, third-party reimbursement, copayments and deductibles, cash flow management, reinvestment requirements, and financial reporting.

Chapter VIII provides an examination of important consumer protection issues, including various consumer rights and the complaints, grievances, and appeals process.

At the end of the document, there is a resource list with the names, addresses, and phone numbers of a variety of organizations involved in the fields related to managed behavioral health care. There is also a comprehensive glossary of terms.

In a single generation, we have witnessed a major transformation of the public and private health insurance system in the United States. Twenty-five years ago, thousands of small and mid-sized public and private health care providers sold health services to individuals with commercial health insurance, charging what they believed was appropriate and rendering treatment in accordance with individual professional judgment. The insurance companies then paid the health care providers' bills (either fully or nearly completely) and did not question the providers' practice style. Medicaid and Medicare operated in a similar fashion.

Today more than three-quarters of commercially insured persons, more than 12 percent of Medicare beneficiaries, and almost 40 percent of Medicaid beneficiaries get their health coverage from managed care enterprises that combine the financing of health care services with their delivery. Managed care entities affiliate with networks of hospitals, community-based organizations, pharmacies, physicians, and/or other health care professionals and limit payment for covered services to services provided through those networks. The selection of providers for an MCO's network is primarily the responsibility of the MCO, although the purchaser of managed care services can influence these choices. For providers, membership in an MCO's network is dependent upon both an adherence to the MCO's practice requirements and the acceptance of financial risk and/or stringent payment controls.

A growing number of State, county, and local agencies are now developing or contracting with MCOs to manage substance abuse and/or mental health (i.e., behavioral health) services for their populations. Approximately 20 States have implemented some form of managed behavioral health care for Medicaid recipients, serving approximately 5 million enrollees, and the number continues to climb. Many MCOs, which formerly focused only on private sector health care, are eager to enter this emerging and lucrative market in the public sector.

Many State, county, and local agencies have successfully reorganized their infrastructure to implement certain managed care principles and technologies. Yet numerous agencies have chosen to contract externally with MCOs to manage the delivery of some or all substance abuse and mental health services. In many cases, the movement toward the purchase of behavioral health care is part of a broad trend to transfer the management and delivery of Medicaid, Medicare, and other publicly funded services to MCOs.

As State, county, and local agencies have come to realize the potential value of contracting with MCOs, many have developed specific goals for improving their systems through managed care. These goals often include the following:

To improve coordination of and access to a full continuum of substance abuse and mental health treatment and prevention services;

To improve the quality of services for populations that have substance use and/or mental health disorders;

To allocate limited financial resources more efficiently and effectively;

To improve the predictability of costs, thereby increasing the accuracy of budgets;

To integrate the delivery of general medical and primary health care with behavioral health care;

To expand coverage to a larger proportion of the population; and

To increase accountability for and systematically improve consumer outcomes.

Well-designed managed care systems can best achieve these goals when purchasers and MCOs clearly understand the needs of the population served, the unique requirements imposed by the fiscal and political environment, and the most effective managed care practices. To meet these conditions, purchasers must use the contract development process and the contract to maximize their control over the design, award, operations, and outcomes of the managed care system.

There are several challenges faced by those attempting to build successful managed care initiatives in the public sector:

• The populations served by Medicaid and other public sector service systems tend to be poorer and sicker than populations with commercial insurance, and MCOs may have little experience with these populations.
• Federal, State, and local substance abuse and mental health authorities have little experience with managed care practices and must operate under statutory and regulatory limitations not found in the private sector.
• Many State and local service delivery systems are fragmented, in part because different agencies handle different populations, and separate funding streams for designated populations have created different sets of structures and incentives.

The populations served by public sector service systems pose unique challenges to the success of managed health care initiatives because public sector populations generally require a far broader range of services than individuals with commercial health insurance and also tend to make greater use of "wraparound" services, such as child care, housing assistance, and vocational training. Many people served in the public sector are poor, elderly, undereducated or uneducated, and/or members of disadvantaged ethnic or linguistic minorities. Many of them seek services only when they are already at a late stage of disability. Individuals depending on publicly funded treatment often have the most debilitating addictions and/or the most serious mental illnesses, as well as co-occurring medical complications. Furthermore, the public sector population includes children with the most serious emotional disorders requiring a broad range of specialized services.

MCOs seeking to contract with public sector agencies often have worked exclusively with commercially insured populations consisting primarily of employed adults and their families. The approaches and regimens developed by these MCOs may not fit the special behavioral health care needs of the public sector population. Meeting the ongoing rehabilitation and recovery needs of individuals with the most serious substance abuse and mental health disorders is expensive, and some services do not meet the sometimes restrictive "medical necessity" criteria imposed by MCOs (see medical necessity discussion in Chapter III). In addition, many MCOs may have limited experience with the types of prevention services mandated for individuals served by public sector systems.

Differences between traditional public service systems and private sector methods of operation pose another challenge to public sector managed care initiatives. As Federal, State, and county substance abuse and mental health authorities move away from their former roles as administrators of grants and contracts into new roles as purchasers of managed systems of care, they must work within governmental limitations that are not found in the commercial sector. These include legislative and statutory restrictions, such as mandated services for special populations, restrictions on what types of providers can be utilized, set percentages of funding that must be spent in certain areas (e.g., prevention services) or for specified populations (pregnant women), and underfunding.

Another challenge to a successful managed behavioral health care system is the fragmentation of service delivery systems that characterizes many State and local systems and causes duplication of and gaps in the service continuum. This fragmentation is due in part to a lack of coordination between agencies and separate funding streams that are designated only for specific populations. This lack of integrated services has additional implications for cost and quality of care for individuals with the most severe illnesses, such as seriously and persistently mentally ill persons. Complicating matters further is the fact that many individuals in public substance abuse and mental health treatment are also served by other public agencies and systems, some of which, like the child welfare system, are setting up their own service management systems.

Sound contracts are at the foundation of successful public sector managed care initiatives, which are likely to consume literally billions of dollars in public financing. A contract defines the expectations of the purchaser, the obligations of the MCO and its network of providers, and the rights of consumers. A contract embodies legally enforceable sets of promises that are crucial to accountability. Therefore, it is essential that the contract clearly state what duties are delegated to the MCO and what duties remain with the public purchaser of managed care services.

Public sector managed care contracts are collectively forming a critical component of the legal framework in which public services are delivered. To some degree, the contract and its associated documents (such as RFPs) are the only existing legal framework (Rosenbaum et al., 1997). Because a contract, by definition, constitutes a legally enforceable promise, virtually every issue addressed in it has legal implications in terms of whether the promise is worded in a way that can be enforced by a court of law.

When a contract is poorly drafted, the financial consequences can be enormous, because under the principles of contract law, a contract will be interpreted by the courts against the drafter. In the case of public managed care procurements under Federal and State law, the public agency is the drafter. An unfavorable court ruling can leave the agency legally and financially exposed for services that it assumed were part of the contract but that in fact fall outside the scope of the agreement because of vague or erroneously drafted terms.

The contract is the means by which compliance with applicable Federal and State mandates and regulations can be established. The Federal laws and regulations governing Medicaid, the Federal Community Mental Health Services (CMHS) Block Grant (Public Law 102-321; 42 U.S.C. §300x-7-§§300x-8), and the Substance Abuse Prevention and Treatment (SAPT) Block Grant (Public Law 102-321; 42 U.S.C. §300x-21-§§300x-35), for example, specify requirements for coverage; if the responsibility for meeting these requirements is not specifically delegated to the MCO in the contract, that obligation remains with the purchaser and may result in unanticipated costs.

In addition, contracts can address such issues as: the relationship between the contract and the RFP; the relationship between the contract and local, State, and Federal law; the MCO's subcontracts with providers; indemnification; the MCO's accountability and reporting responsibilities; and conditions of contract termination in the event of nonperformance. These issues are discussed in later chapters of this document.

A recent analysis of dozens of State Medicaid contracts covering prevention and treatment services for mental and addictive disorders showed that most had significant weaknesses that may leave the purchaser at financial risk and consumers at clinical risk (Rosenbaum et al., 1997). These weaknesses can be attributed to many factors. Strong contracts for managed care are intricate and difficult to write. Purchasers must define a benefit package that meets the special needs of diverse populations and then clearly describe the package in specific contract language. In many cases, the purchaser must translate oftentimes arcane regulatory language into precise, legally binding contract provisions. In addition, under a managed care system, the purchaser must address numerous gray areas that are not covered by existing State regulations. Therefore, strong contracting expertise, an understanding of Federal and State laws and regulations, and public input in the contracting process are crucial as purchasers develop contracts that provide effective services and minimize the purchaser's financial risk.

Contracting for Managed Substance Abuse and Mental Health Services: A Guide for Public Purchasers is intended to provide guidance from both policy and legal perspectives on developing RFPs and contracts between public purchasers and MCOs. This guide is designed to provide strategies for managed care contracting efforts but does not prescribe how these efforts should be developed. Although targeted primarily toward State and county substance abuse and mental health authorities, Medicaid agencies, and other public purchasers of managed care services, this document will prove useful to treatment providers, MCOs, academicians, researchers, consumers, and other stakeholders who will find that it addresses the most pertinent issues in managed behavioral health care contracting. The reader of this document can gain the following:

Familiarity with designing and procuring, and implementing managed care systems, including a review of options for consideration, problems that may be encountered, and key legal issues;

Knowledge of RFP and contract issues related to sound clinical care, network development, quality assurance, management information systems, financing, and consumers' rights; and

Understanding of the importance of developing a comprehensive set of well-conceptualized and well-written RFP and contract provisions to provide a strong structure for public sector managed care initiatives.

Given the rapid evolution of managed care and the many variations with which States and localities are experimenting, no single approach to behavioral managed care contracting can be recommended for all public purchasers. This guide suggests a number of specific issues that purchasers may wish to consider when developing RFPs and controls for behavioral managed care initiatives. Purchasers are cautioned that this document is no substitute for expert legal and other analytic consultation in developing RFPs and contracts; and it does not eliminate the need for legal, actuarial, or other expert assistance (e.g., clinical matters, organizational public policy) in designing the RFP, conducting the procurement, or negotiating the contract. Purchasers are strongly urged by the project's Development Panel to secure the assistance of legal counsel and of actuarial, financial, and managed care experts throughout the design, procurement, and contract implementation processes.

Managed behavioral health care contracting in the public sector is changing rapidly, and to be responsive to public sector purchasers as the field continues to change, Contracting for Managed Substance Abuse and Mental Health Services: A Guide for Public Purchasers is designed as a "living" document. Publishing the guide in a looseleaf modular format makes it possible to periodically update key content areas and contract language to reflect state-of-the-art expertise. In addition, readers will have access to an interactive, electronic version of this guide, located on CSAT's Web site (www.treatment.org).⁽²⁾

The electronic version will contain linkages to other Web sites that will allow readers to explore related contracting issues in more depth. Readers will also be able to review contracts developed by public purchasers, exchange information in an online "chat room," and submit comments and local examples of contract-related experiences, which may be included in later revisions of the document.

^1.  An RFP is a solicitation document issued to obtain offers from contractors that propose to provide products or services under a contract to be awarded using the process of negotiation.

^2.  Readers may find it helpful to note that specific examples of contract language used in States' Medicaid managed behavioral health care contracts are available through the SAMHSA Web site: www.SAMHSA.gov

CHAPTER II

Designing, Procuring, and Implementing a Managed Care System

As a result, competitive procurements create complex organizational and legal tasks for purchasers as they move toward acquiring behavioral managed care services. MCOs treat competitive procurements as an extremely serious legal matter and do not hesitate to challenge a process they consider tainted.

As discussed in this chapter, writing and negotiating a managed care contract is actually one of the later phases in a complex design and procurement process. In most circumstances, the final managed care contract is based on the results of several efforts:

Preparation by the purchaser of a request for proposal (RFP)--that is, a solicitation document issued to obtain offers from contractors that propose to provide products or services under a contract to be awarded using the process of negotiation;

The submission of proposals by bidders;

Selection of the successful bidder; and

Negotiations between the purchaser and the successful bidder that take place after the contract has been awarded but not yet signed.

Public purchasers of managed care, and the environments within which they operate, vary tremendously, and these differences have a substantial influence on design, procurement, and implementation of a managed care system. The public purchaser itself--for example, the State Medicaid agency or State substance abuse or mental health authority-- may have highly variable purchasing power depending on the size, scope, and expenditure level of the program under which it operates. Differences in the local availability of clinical services and financial and staff resources may affect the procurement process. The political environment, population demographics, and geographic factors also affect the procurement process. Thus, each purchaser of managed care faces a unique set of challenges.

This chapter uses an adaptation of the 10-step model developed by the Federal Center for Mental Health Services to address issues at various stages in managed behavioral health care procurement process (Dougherty, 1996). It also identifies some of the types of legal challenges a purchaser may face when developing a managed care system. As illustrated in Exhibit II-1, the 10 steps in the model used to organize the discussion in this chapter can be grouped into three major stages: (1) designing a managed care system; (2) procuring managed care services (includes issuing an RFP, selecting a vendor, and awarding a contract); and (3) implementing a managed care system (includes implementing the contract and subsequent monitoring and evaluation).

Understanding the tasks and challenges of each stage is essential to designing a clinically sound and cost-effective managed care model, establishing a successful and legally defensible RFP and contract development process, and implementing an effective managed health care system.

A purchaser can expect that political pressures from stakeholders will be brought to bear on the process. Some political pressures are likely to come from within the purchaser's agency and others from external government agencies or officials. There are also likely to be pressures from consumers and their families, local health care providers, and MCOs. A purchaser should weigh the amount of influence each of these entities should have on the design of the managed care system, because politics can irreparably taint the entire managed care procurement process. If adequate safeguards are not taken, political pressures both from within the agency and from outside sources may affect selection of the vendor and allow legal challenges from unsuccessful bidders. Purchasers must carefully monitor the managed care selection process to ensure that no State, Federal, or other procurement laws are violated.

Stage 1: Designing a Managed Care System

a. Qualifications of the Development Team

Development team members should be carefully selected on the basis of their individual skills and potential contributions. Key attributes include a detailed understanding of the needs of the enrollee population; writing, analytic, and financial abilities; a clear understanding of the opportunities, risks, and challenges inherent in developing a managed care system; an understanding of the needs of the stakeholder community; an understanding of the service delivery system; and the capacity to be absolutely discreet. The purchaser's development team should generally be small--some would say a core of six to eight members--but should be able to call on other individuals as needed. These other experts can be brought into the planning process when they can make an important contribution. Too large a core group will increase the risk of inappropriate disclosures that can taint the procurement process.

The development team should also identify staff members from various agencies with interest or expertise in the services to be purchased. For example, when the purchaser is a State Medicaid agency, the team may immediately want to bring in staff from the State substance abuse and/or mental health agencies because of the relevance of their expertise in the delivery of these services and their familiarity with the organizational and political matters that may arise during the overall process. The team should be given sufficient time and resources to participate in the planning and implementation process.

b. Qualifications of the Development Team Leader

The leader of the purchaser's development team should have a thorough understanding of the purchaser's needs and staff resources and be able to assemble and manage a very strong team. The team leader should be the senior executive of the purchasing entity or another person designated by the purchaser. The team leader has tremendous responsibilities for the success of the procurement. He or she should have managed care experience or extensive training in issues concerning managed care, as well as sufficient authority to shape and lead the development team in issues of importance to the purchaser. Ideally, the team leader either should have a background in procurement law or should appoint a legal advisor to the team at its inception. The stronger the team is in the area of procurement law, the more likely the purchaser will withstand a legal challenge to the procurement, a reality in any purchasing endeavor of this magnitude.

c. Qualifications of Bid Evaluators

Bid evaluators are also critical contributors to the procurement process. The purchaser must rely on the evaluators to assess bidders in a fair and impartial manner and make recommendations to the selection team.

The purchaser will need to know that the evaluators:

Possess sufficient background and evaluation skills;

Are free of conflicts of interest in relation to the bidders (and that they have fully disclosed any information regarding their contacts with bidders before and/or during the selection process);

Are fair and impartial;

Understand the scoring processes and tools used in the evaluation process;

Are given sufficient time to adequately evaluate all the bids submitted.

The purchaser should take into account all possible issues that could affect the purchaser's confidence in the bid evaluator panel's recommendations. (These issues are discussed further in Step #7 below.)

d. The Use of Expert Consultants

Expert consultants can significantly increase the chances of a successful process. The team should consider the use of expert consultants who are able to bring a wealth of expertise from other managed care efforts but do not pose a conflict of interest. The consultants should be chosen carefully, and their references and reputations regarding ethics, expertise, and judgment should be thoroughly reviewed. Using consultants does not in any way diminish the knowledge or talents of staff involved with the effort.

e. Legal Precautions

Purchasers who design a managed care system may have little or no direct legal expertise in procurement, but many factors in the procurement process put the purchaser at legal risk. Thus, legal experts are essential to the core team to scrutinize the plan's design and identify any possible legal ramifications of policy decisions.

In a legally defensible design and procurement process, information is shared fairly among all prospective bidders and the process contributes to the procurement of quality services at a fair price. Any failure on the part of the purchaser or purchaser's agents to be even-handed, or any act that raises questions of fairness, can result in a legal challenge. A legal challenge can be very expensive and troublesome for a purchaser even if it is ultimately unsuccessful.

To avoid such a challenge, the purchaser should adopt strict standards regarding how team members, as well as evaluators, expert consultants, and others, may interact with other employees of the purchaser, potential bidders, and the general public. Any contact between the bidder and the purchaser's employees and evaluation team opens the door for legal problems. The purchaser can avoid some problems by setting forth standards for these communications in the RFP and adhering to them strictly. Guidelines concerning communications with bidders should be developed for purchasing agency staff, also. All communications with bidders should be noted, and any information given to one bidder should be given to all. If the procurement is challenged, such documentation will provide support for the purchaser's argument that all bidders were treated equally and fairly.

From the outset, the purchaser should clearly describe the ground rules to be followed by purchaser staff, consultants, and advisors during the procurement process, including situations to be avoided (e.g., paying or accepting payment for meals, gifts over a specified amount, tickets to events) and policies to guide communications with potential bidders and other interested groups. All team members, stakeholders, and consultants should understand and be held accountable for these policies. During the pre-RFP period, prospective bidders often send teams to work in the State and may spend considerable time and money acquainting themselves with all players and potential partners. Because of the large size of managed care contracts, the temptation for prospective bidders to do more than assess "the lay of the land" during this period is very strong. Contacts during this time by the purchaser's staff, consultants, or advisory committee members should be carefully monitored to avoid the appearance or reality of conflict of interest.

The purchaser should obtain complete disclosure from all involved consultants and consultant groups regarding their ownership and any formal and informal relationships to MCOs. A consultant or consultant group that has direct interactions with an MCO should be disqualified. Similarly, a consultant or consultant group that has indirect interactions with an MCO--for example, provides services to a firm designing a management information system (MIS) for the MCO--should also be disqualified.

The development team's membership may change or team members may leave the agency during the design process, and the purchaser should take steps to protect the confidentiality of any relevant material and concepts. These protections may be in the form of confidentiality statements signed by employees or requirements in the RFP for bidders to disclose hiring or any use of a former employee of the purchaser.

f. Use of a Final Design Team

Although team members may change, at some point a final group must be formed to make recommendations to the purchaser on the scope of services and benefits. Forming a final design team with limited membership may help the purchaser guard against conflicts of interest and protect the legitimacy of the procurement process because communications will be limited to a select few.

g. Stakeholder Involvement With the Team

Representatives from relevant public agencies, stakeholder groups other than bidders, potential bidders, actual or potential subcontractors to bidders, and consumers and their families should have the opportunity to provide input during the design phase and to develop a strong stake in the plan. The timing of stakeholder involvement will vary according to circumstances, but it should generally begin very early so that stakeholders understand the rationale behind decisions and the opportunities and challenges of the evolving plan.

Step #2: Develop the Initial System Design

a. Clarifying Objectives

An essential step in the initial design phase is an analysis of the strengths and weaknesses of the current system and the identification of goals and objectives for the managed care initiative. These can be expected to vary according to local circumstances. The goals and objectives of managed care initiatives often include, but are not limited to, the following:

Containing or reducing costs for substance abuse and mental health services;

Privatizing public services or redefining the role of government;

Expanding coverage to new populations;

Improving access to services;

Achieving parity between physical and behavioral health benefits.

Improving the allocation of resources;

Shifting utilization patterns or level of care patterns;

Integrating separate funding or service systems;

Redressing historical underfunding of public substance abuse and mental health services;

Protecting special populations and funding dedicated to these populations;

Correcting financial or managerial corruption; and

Resolving conflicts between government jurisdictions regarding the provision of services, funding streams, populations served, or outcomes measured.

Clarifying the objectives for redesigning or restructuring the existing system requires a systematic assessment of the purchaser's needs and capabilities and the identification of problems and strengths in the current system. The team can then target opportunities for improvement, consider solutions, discuss potential barriers to success, establish measurable short-, intermediate-, and long-term goals, and select indicators to measure success. Because the design of the new system will have far-reaching ramifications, planners should ensure that this phase of the process is not hurried or skewed by political demands. It is equally important that this phase include stakeholders, such as representatives of other key agencies, providers, and consumers and their families.

b. Using Requests for Information (RFIs) To Enhance Design

Purchasers are increasingly using RFIs to solicit input from all interested individuals on the design of the managed care plan--from consumers to providers to other agency heads to MCO bidders. Developing and disseminating an RFI can be a very useful strategy for purchasers in the early stages of the design process. Stakeholders tend to take a great interest in RFIs and often provide a substantial amount of useful input. Responses to the RFI may offer detailed suggestions about system design and can also help the purchaser anticipate unforeseen problems and opportunities. However, purchasers should consider advice from bidders cautiously and take great care to avoid even the appearance of any impropriety or conflict of interest. (The use of RFIs is discussed further in the section on the "Bidder Qualification Process" in Step #6 below.)

How a purchaser uses the information supplied by outside entities has the potential to lead to a legal challenge of the purchaser's procurement. Designing a managed care system to incorporate or address issues that have been supplied by bidders in responding to an RFI may lead to a dangerous legal pitfall. Should the purchaser make changes in the managed care plan that appear to favor one particular bidder, legal challengers may argue that certain bidders had an unfair advantage. Thus, if an RFI is used, it must be structured to allow the purchaser to receive comments from all interested parties but to reserve final judgment about the comments received until all responses are in--with an eye toward avoiding the appearance of favoritism.

Although an RFI can provide the purchaser with valuable information, the RFI process adds additional time to the design effort. The purchaser should build the timeframe for the RFI into the procurement timetable and cost estimations. Failure to allow for delays that may be caused by this process and attempting to get a managed care system up and running in a shorter timeframe increases the possibility that mistakes will be made. Such shortcuts often set the stage for legal problems.

Step #3: Analyze Historical Costs and Project Future Costs of the Initial Design

Analyzing historical costs to accurately project future costs is a crucial task for the development team, because potential bidders will rely heavily on these projections in developing their bids. Accurate data are necessary for bidders to develop well-informed pricing proposals--unless the purchaser is setting the rates without asking for bids (see below, Step #4). Analyzing historical costs may be difficult because of insufficient data; in traditional systems, individuals are often not tagged by a unique identifier and thus their costs in different systems cannot be determined. The expertise of actuaries or others experienced in analyzing variance levels is necessary to determine whether historical unit cost data can be relied upon for estimating future rates. These analyses generally involve compiling claims data or other reimbursement data from a representative time period.

For programs funded with non-Medicaid funds--for example, with Community Mental Health Services (CMHS) Block Grants, Substance Abuse Prevention and Treatment (SAPT) Block Grants, or discretionary State funds⁽¹⁾ -- historical cost data will generally not be available in the same claim-based format as the Medicaid data. To the extent possible, data for programs with non-Medicaid funding should be summarized in a format similar to that of Medicaid data to make it easier to collate. The summaries should be done by staff who can understand the information fields used in other insurance claims, State reports, or utilization reports.

An ongoing effort to gather information in the data collection and analysis phase is needed to assure the development team that the problems identified have been properly understood and that the goal of the initiative is properly targeted. All data related to cost analysis and projections should be checked by several individuals in the field for accuracy and completeness before release. Assistance from actuaries, health economists, or highly trained claims data staff is essential. If the data are inaccurate or if some component is missing, the payment rates will likely be inadequate and could provide the basis for later lawsuits.

Financing and risk in managed care contracting are discussed at length in Chapter VII. One of the points made in that chapter is that there is a continuum of risk-transfer financing models for managed care contracts. The different risk-transfer financing models--including a global budget, capitation payment arrangements, case-rate payments, and fee-for-service payment--apportion the major types of financial risk between the purchaser of managed care and an MCO in very different ways.

Various approaches to establishing capitation payment rates are discussed in Chapter VII. RFPs that call for managed care entities submitting bids to propose a capitation rate generally require claims data that include the number of recipients for each service type by any applicable eligibility category (e.g., families formerly covered by Aid to Families With Dependent Children or Supplemental Security Income recipients); costs; units of services; and any other relevant pricing factors. Determining the number and types of eligible recipients is essential to the establishment of a capitation rate. In non-Medicaid initiatives, where accurate numbers of eligible residents may be difficult to obtain, the number of individuals who are eligible for services can be estimated from census data or from data from epidemiological studies.

The purchaser's development team must understand clearly which covered benefits and services will be included in the contract and which will remain the direct financial and coverage obligation of the purchaser. A Medicaid managed care contract, for example, may cover short-term hospitalization for children with mental illness but not long-term stays; in this situation, some portion of a seriously ill child's hospitalization would remain the direct obligation of the State, because under Medicaid law the child is entitled to medically necessary hospitalization regardless of the fact that the managed care contract covers only a portion of the necessary care. Thus, the State Medicaid agency should retain sufficient funding to pay for these services that are required by law but that are not included in the managed care contract.

The development team also must know the cost per unit of service that is included in the contract. Publicly funded systems have historically paid an all-inclusive rate to many classes of providers. Few data exist about the costs of subcomponents of "bundled" services, which has led to wide cost variations among providers, even when claims data are available. The problem of the bundled rate may make development of reliable rates for managed care impossible until the service can be unbundled and data collected on the cost and utilization of the service subcomponents. Purchasers should consult with actuaries or other financial experts about whether available historical cost data are reliable measures of the cost of future capitation arrangements.

To identify trends in utilization and enrollment reflecting changes in the economy, eligibility levels, and services, it is best to use 3 or more years of data. The more precise the count of covered individuals, the more accurate the cost estimates will be and the more on target the final payment rate is likely to be.

The purchaser should call upon actuaries to ensure the purchaser that the rates to be paid to the MCO are sufficient to support the desired level of utilization in the managed care system and the associated costs. When a large proportion of the data needed to establish payment rates is not current, are inaccurate, or otherwise perceived to be weak, one option is for the State or county to share some of the financial risk with the MCO (see Chapter VII). Another option is to consider methods of financing (e.g., interim payments with cost settlement) other than risk-transfer payment until adequate baseline data can be developed.

Actuarial analyses of historical data must also take into account anticipated savings from implementation of the managed care plan, including reductions in the cost of certain services (e.g., medical/surgical costs) by increasing the availability of another service (e.g., substance abuse prevention or treatment). Oregon officials, for instance, calculated the anticipated savings in medical services that would result from an increase in the availability of substance abuse services, and then used this information to affect actuarial results and significantly improve the priority of substance abuse services in that State's health care reform initiative.

Purchasers should be aware that transferring historical cost data directly into future capitation rates without adjusting for these cost savings can result in overallocation of resources for managed care services, and high profit margins for MCOs.

If key data are missing, or if it is necessary to make too many assumptions to cover missing data fields, then planners should consider adjusting the timeframes of the initiative until adequate information can be developed, collected, and analyzed. One option sometimes used by States and counties in this situation is initially to establish a contract with an MCO or other organization to provide specified administrative services only (ASO) in a contracting arrangement that passes no financial risk for the cost of health services to the organization providing administrative services (see Chapter VII). Such an arrangement can help institute needed management reforms and permit collection of baseline data for a year or more before some or all system funds are put into a risk-bearing arrangement.

In order to develop a reasonable cost proposal, bidders may find information on the following useful:

Incidence and prevalence of substance use and mental health disorders;

Utilization rates by service type;

Acute inpatient readmission rates;

Length of stay per admission per level of care;

Outpatient sessions per defined treatment episode;

Analysis of utilization patterns, including high users of services and their associated costs;

Descriptions of the demographic, diagnostic, and utilization characteristics of high users;

Analysis and identification of gaps in the treatment continuum, including input from consumers and advocates;

Description of known needs and demands for services;

Designation of clinical and financial responsibility for pharmacy, laboratory, and emergency room costs; and

Identification of service costs that have been supplemented by the following:

- Foundation and other philanthropic sources;

- Federal, State (e.g., Department of Corrections), and local funds and whether or not these arrangements will apply to the MCO;

- Interagency agreements; and

- Identification of barriers to current treatment or planned treatment services (waiting lists, pharmacy integration, exclusionary diagnoses).

Step #4: Determine Optimal Financing Mechanisms, Payment Methods, and Financial Risk Level

The managed care purchaser's selection of financing and payment methods should be decided based on the goals and objectives of the managed care program. A purchaser whose main priority is to increase accountability, enhance quality, and/or improve efficiency, for instance, might establish a flat payment fee and then challenge bidders to compete based on access and quality of care issues. A purchaser whose main priority is to maximize cost savings and strictly control its financial risk, on the other hand, may want to use financially competitive processes and risk-transfer payment systems.

When a quality competition is used alone, (i.e., prices are set and bidders compete on the basis of quality of care), the purchaser must be exceedingly clear about the standards it uses to differentiate one bidder from another because price effectively has been removed as a competitive factor. When the competition includes both price and quality, the purchaser may want to establish clear internal evaluation safeguards so that the award does not automatically go to the lowest bidder. Even in States in which procurement law requires the award of a contract to the lowest bidder, such a law applies only to the lowest qualified bidder. This legal caveat permits the buyer to use measures of quality to select its bidder, even when price may be a driving issue. A purchaser using price competition should know from its actuaries what the lowest reasonable price is and should design a bid evaluation system that makes price only one of several components. When price competition is used, purchasers must recognize that in some systems or for some populations, the chances of obtaining significant savings may be very slim owing to prior cost reductions, the inherent cost of treatment for the target population, or other factors such as extremely low budgets for services.

One of the most substantial challenges for the purchaser's development team is to balance the purchaser's objectives and strategic alternatives with financial incentives that best fit the situation. One method that States have used to solicit price reductions has been to award their default enrollment population (i.e., individuals who are required to select a plan but fail to do so after being given the opportunity to make an informed choice) to the lowest bidder. Other States have used arrangements that have involved the separate bidding of the State's default business.

Step #5: Build Stakeholder Consensus

One of the first tasks of the development team is to create and implement a strategy that solicits the input of stakeholders early in the managed care system design process to build a sense of collaboration and partnership and identify troublesome issues. Any managed care initiative undertaken in the public sector will have a substantial clinical, financial, and political impact on a wide variety of individuals and organizations including the following:

The public purchaser (e.g., a State Medicaid agency; a State, county, or local substance abuse or mental health authority; an American Indian or Alaskan Native tribe or tribal organization);

Managed care entities (e.g., managed behavioral health care organizations, HMOs, counties, provider-sponsored organizations);

Health care providers (e.g., treatment agencies, individual providers, State and county direct service employees, hospitals, nursing homes);

Consumers and their families (e.g., individuals, families, guardians);

Consumer advocates;

Government agencies (e.g., legislative committees, child welfare and special education, social services, corrections, housing agencies, State vocational rehabilitation agencies, State and county substance abuse and mental health agencies); and

Regulators and policymakers.

If stakeholders such as these are to be involved in basic design decisions, the purchaser must take steps to guard against conflicts of interest, as noted above. MCOs may face serious antitrust consequences if they organize to provide a collective response to a State's request for comments. Involving health providers in the design of the managed care system may raise some of the same conflict-of-interest and antitrust issues that arise with MCOs.

The purchaser's development team may want to create an advisory group consisting of representatives of various stakeholder groups who have the ongoing opportunity to make suggestions, voice concerns, and/or participate in the process of decisionmaking. Some modest financial support may be necessary to involve certain low-income stakeholders. It may also be advisable to meet with some stakeholders separately to discuss issues of concern to them, such as design elements related to children in foster care. When assembling an advisory group, conflicts of interest are natural and inevitable and are best discussed openly and directly.

Consumers and family members or guardians can offer an especially valuable perspective during the early design and planning phase of the managed care initiative. Many consumers and their families have become very resourceful in obtaining information and services on their own because they have all too often encountered a lack of resources, fragmented systems, and providers who are ill informed about their needs. As a result, some consumers and family members may be more knowledgeable about treatments, services, and system problems than are purchasers, providers, MCOs, or other stakeholders. (A more detailed examination of the optimal roles of consumers is presented in Chapter VIII.)

In some cases, achieving consensus from a wide variety of stakeholders about the underlying principles and operations that will guide the managed care initiative is very difficult or impossible. Conducting public meetings or hearings and providing the larger community with an opportunity to comment on drafts of documents is one way to help build consensus. A balance must be struck, however, between ensuring the opportunity for sufficient input and creating unnecessary burdens for the development team. Soliciting input from potential competitors and their subcontractors is particularly challenging since the manner in which this occurs can affect the legality of the entire procurement. Regardless of the methods used to build consensus, purchasers should be cautioned that the failure to solicit early input from key stakeholders in a meaningful way can create very serious problems throughout the design, procurement, and implementation phases. In some cases, lack of consensus has derailed otherwise well-designed programs.

Special Issues Encountered in the Design Stage

The primary tasks of the design stage have been outlined above. In the discussion that follows, issues pertaining to decisions about major aspects of the managed care system design phase are highlighted:

• Decisions about eligibility criteria;
• Decisions about enrollment strategies;
• Decisions about disenrollment protections;
• Decisions about what services to cover in the benefits package; and
• Decisions about joint purchasing of services (i.e., whether to purchase substance abuse services and mental health services separately or jointly) and decisions about the degree to which managed behavioral health care is to be integrated with general health care (i.e., whether it is to be "carved in" with general health care or "carved out").

Given the current trend toward more integrated systems, it may be advantageous to develop models of managed care systems that will facilitate greater coordination of Medicaid and other funding streams (see discussion of funding streams in Chapter VII). One challenge would be to determine the range of services and level of access that the purchaser would like to provide and then to identify the funding streams that can be accessed when creating that package.

Combining funding streams for managed care initiatives is a very challenging task. The Medicaid program, for example, is subject to numerous statutory requirements that do not disappear simply because a State Medicaid agency decides to use a private contractor to perform some of its functions. In trying to pool funds from two or more sources, consideration should be given to the fact that eligibility rules, enrollment practices, and services covered vary tremendously across different government-funded programs. Also, the statutory and regulatory provisions vary across government programs and are very different from each other and from the provisions governing Community Mental Health Services (CMHS) and Substance Abuse Prevention and Treatment (SAPT) Block Grants (for further discussion, see Chapter III).

a. Decisions About Eligibility Criteria

The criteria that will be used to determine who is eligible for managed care services may be based on a host of clinical, financial, and political considerations that vary in different States, counties, and localities. The development of a managed care system can be an opportunity to establish more uniform policies on eligibility for services to special populations that require access to multiple government-funded programs. The attempt to streamline processes and coordinate care within Medicaid could include a consolidation of access requirements under the direction of a case manager. Targeted case management is a mandatory Medicaid benefit for Medicaid-eligible children and an optional benefit for adults. At the very least, designers will want to ensure the development of policies that promote efficient referral between the managed behavioral health program and other government-funded service delivery systems. Some factors upon which eligibility can be based include the following:

Insurance status;

Diagnosis (i.e., level of functional impairment);

Severity of illness;

Risk factors;

Income and/or asset level;

Age;

Geographic variables;

Specific clinical subtypes;

Disability status; and

Involvement in specified systems or groups (e.g., criminal justice system, child welfare system).

Once the eligibility criteria have been established, it will be possible to develop a thoroughly researched estimate of the number of likely subgroups, the number of eligible individuals in each, and their probable geographic distribution. If the estimated number of eligible persons or their distribution is unacceptable because of cost or other considerations, the purchaser may decide to adjust the eligibility criteria.

The final eligibility criteria and estimate of the size of the eligible population will enable potential bidders to submit informed proposals. Great care should be taken to ensure that eligibility data are as accurate and complete as possible. In some situations, certain eligibility groups may have access to services not available to other groups, for example, when another entity is sharing the cost of designated services (e.g., educational training, social skills training). That may be the case particularly when the same contract is used to enroll Medicaid beneficiaries and persons whose enrollment is sponsored by other programs (e.g., the CMHS Block Grant), because Medicaid beneficiaries may be entitled to a far broader array of services.

b. Decisions About Enrollment Strategies

The development team must decide whether enrollment in managed care can be required, allowed, or prohibited for particular subgroups. Because of the clear financial consequences of providing services to someone no longer eligible for services, it also is important to specify how promptly the MCO can disenroll members.

Eligible individuals can join a managed care plan in person, over the telephone, by mail, or by the recommendation of a designated enrollment counselor. Typically, they enroll in a managed care plan in one of two ways. The first is to enroll in a specific plan and complete the enrollment process within the timeframe established by the State (e.g., 45 days from a designated date). The second, for individuals who enroll late or do not make an enrollment selection, is to be randomly assigned to a plan (autoenrolled) with no personal input into the enrollment decision.

People suffering from severe mental and/or addictive disorders may have substantially greater difficulties than healthier people in meeting a short deadline and therefore are likely to be overrepresented in autoenrolled groups. If these individuals are helped by guardians or caseworkers, they may not have as much difficulty in meeting the deadline.

Dissemination of information about enrollment is critical, and active outreach efforts to enroll eligible individuals should be planned. Outreach may be most needed with populations that are legally vulnerable, such as illicit drug users and drug-addicted women with children.

Default enrollment may increase the chances that individuals actively receiving services for mental or addictive disorders will be forced to terminate treatment because their usual provider(s) is not a member of the assigned plan. Such disruptions in the treatment process can lead to significant therapeutic losses and confusion, increased difficulties in treatment compliance, and uncertain transitions to new and unfamiliar providers.

Purchasers can avoid this problem by adding contract provisions for out-of-plan referral benefits or for highly specific, time-limited transfer activities. In such instances, purchasers may want to develop detailed transition policies for those in treatment, during enrollment or disenrollment, transfers, or at re-enrollment. For example, the MCO could be required to authorize out-of-network payments for a designated period of time for individuals who must continue care while making the transition to new service providers. Purchasers can ameliorate the impact of involuntary default assignments by assigning certain providers or outreach workers to search for individuals who have not made selections, ensuring that every reasonable effort is made to contact them and help them select an appropriate provider.

The child welfare system operates on a no-reject, no-eject policy. Purchasers of child welfare managed care services must be sensitive to the potential impact of the autoenrollment requirement inherent in the statutory mandate to serve and protect all children deemed abused and/or neglected. However, once a child is enrolled in a plan, it is permissible to offer the child different benefits or services intended to protect and facilitate permanency for the child and family in a timely manner.

Another enrollment issue arises when purchasers contract for behavioral health services with more than one plan, providing enrollees with several options for substance abuse and mental health services. When many MCOs compete for enrollees, there may be incentives for adverse selection, meaning that plans may compete for the healthiest people and try to avoid enrolling people with the most expensive treatment needs. This practice is referred to as "cherry picking." It is relatively easy for an MCO to cherry pick among persons with mental and addictive disorders--for example, the MCO could adapt policies to decrease the number of individuals with high rates of mental health care utilization based on the knowledge that the use of mental health services in a year is highly predictive of high levels of physical health service use in that year and of high mental health service use in the next year. Thus, purchasers who develop contracts with several MCOs that will compete for a finite pool of enrollees should create strong protections against cherry picking.

Purchasers must also take into account changes in public policy that affect eligibility and enrollment procedures, such as the new Supplemental Security Income (SSI) eligibility criteria for children, as contained in the Personal Responsibility and Work Opportunity Act of 1996.

Depending on the circumstances, purchasers may want to consider using health benefits managers or enrollment brokers who implement and manage the enrollment function. Examples of the use of health benefits managers are found in Pennsylvania, Massachusetts, Maryland, and Nebraska. If a health benefits manager is used, the prime contract between the purchaser and the MCO should clarify who pays for this service, how disagreements between the MCO and health benefits manager are resolved, health benefits manager responsibilities and restrictions, the MCO's responsibilities for providing the health benefits manager with information, and the processes by which the MCO and the health benefits manager are to communicate (Horvath and Kaye, 1995). A health benefits manager can reduce cherry picking or other hazards of aggressive MCO marketing and reduce the use of default assignment by actively seeking out eligible individuals and assisting them in making the best choice based on their circumstances.

Enrollment practices should be closely monitored. If significant enrollment problems occur, such as those described above, enrollment may need to be suspended. A suspension option should therefore be incorporated into the contract. Since such a suspension has serious financial consequences for the MCO and service consequences for individuals, this option should be used only if there appears to be no other recourse.

In sum, several issues are inherent in any voluntary enrollment situation. To prevent an MCO from cherry picking, some type of independent entity is often needed to ensure a degree of control over who is, or is not, determined eligible. Care must also be taken when transitioning individuals already in treatment into the MCO provider network. This may require authorization of services with the enrollee's current provider and/or establishment of timelines for transition planning. These strategies can be very important for vulnerable populations to ensure that an individual's condition does not deteriorate because medications or other key services are not accessible during the transition to a new system.

c. Decisions About Disenrollment Protections

Individuals with substance use and mental health disorders need contractual protections from disenrollment because they often receive services through managed care systems that are permitted to disenroll them for noncompliance. Some MCOs have used various operational definitions of noncompliance to contain costs, such as failing to follow instructions, being generally uncooperative, or failing to regularly keep appointments.

The nature of substance use and mental health disorders makes it likely that some individuals who have these disorders will not comply with either general health or behavioral health service requirements. Many consumers with behavioral health problems are noncompliant with treatment due to symptoms of their illnesses or side effects of their medications. Court-ordered clients and other involuntary recipients of care may also be vulnerable to charges of noncompliance.

The incentive to disenroll people with substance use and mental health disorders for cause is great, because these individuals tend to have very high health care utilization rates. Individuals with alcoholism use health care services at two to four times the rate of the general population, and family members of individuals with alcoholism use health care services at a rate two to three times that of the general population.

The purchaser of a managed care system can discourage the clinically unsound practices of disenrolling people with mental and substance use disorders for noncompliance. One way is to require that the MCO obtain the purchaser's approval before disenrollment for cause can occur (this approach was used in Oregon for substance use treatment enrollees). Another way is to offer specialized enrollment procedures for different categories of individuals (such as those currently hospitalized or non-English-speaking individuals), provide opportunities for families to enroll in a plan as a family unit and be eligible for a package of benefits and coordinated case management services, or develop effective stop loss policies or risk corridors (see chapter VII) that place limits on the amount of losses that can occur. The purchasers may wish to contractually prohibit some or all "cause-based" disenrollments initiated by the MCO.

The capacity to offer portability of coverage to enrollees is a critical decision for public purchasers if they wish to minimize disruption in services when enrollees move. Decisions about portability may influence design considerations that affect location of services, such as the choice between statewide and regional networks. (Chapter VIII provides a more detailed examination of disenrollment and contract development options.)

d. Decisions About Covered Services

In addition to determining who is eligible for the program, the development team must articulate clinical and other services to be included in the benefits package. Before this can be done, the purchaser must assess the adequacy of available funding. Furthermore, because managed care adds an extra layer of administrative costs compared with an unmanaged system, there is less funding available for clinical services. Thus the purchaser must analyze the eligible population, expected use patterns, and the costs of supporting those patterns and begin to make fundamental decisions about what types of services to offer and how access to those services will be managed.

This step requires the development of precise service definitions, which may never have been done before, and the inclusion of these definitions in the RFP and the contract. The package generally describes the following aspects of coverage (Rosenbaum et al., 1997):

The categories and types of covered and excluded services, providers, and populations, including a description of coordination issues between covered and excluded services;

Permissible limits on the amount, duration, and scope of services;

Benefit and service definitions; and

Definitions and standards for determining medical, clinical, and psychosocial necessity and other means of determining eligibility for a unit of service.

The benefit package is the heart of the system. In the case of Medicaid, States remain financially liable for services that are included in the State plan but are not covered in the contract. If services are not described well, MCOs can make excessive profits because they are contractually liable for fewer services than the premium assumes. Poorly described services can also result in unanticipated costs for the State (see discussion in Chapter III). The types and extent of covered services may vary considerably between plans due to differences in existing service structures, regulatory guidelines for units of service (e.g., Title IV-E dollars in the children's system may be used to pay for board and maintenance only), budget considerations, and available funding streams in a given State or county. Requirements attached to funding streams can have a profound impact on the services that can be purchased. See Chapter III for a more detailed explanation of issues pertaining to covered services.

e. Separate vs. Joint Purchasing of Services and "Carve-In" ⁽²⁾ vs. "Carve-Out" Models

Embedded in decisions about which services to include and the criteria for determining eligibility are four options that may have some of the greatest long-term ramifications for the evolving system:

Whether the purchaser opts to buy mental health services only, substance abuse services only (treatment and/or prevention), or both;

Whether to blend behavioral health services with physical health services in a carve-in (integrated health care) purchase, separate these services from general health care and build a "carve-out" system, or build a carve-out system with planned and effective coordination between medical and behavioral health;

Whether to blend behavioral health services with services from other systems of care in a comprehensive delivery package (e.g., for children and their families); and

Whether or not to carve in, carve out, and/or phase in coverage for specified subgroups (e.g., children and/or families, adults with severe mental illness, all SSI recipients).

Empirical data may drive decisions about those options to some extent, but the four decisions are often largely based on the fundamental beliefs and system philosophies of the development team and other decisionmakers about how health care systems are optimally organized. While an in-depth discussion of these design decisions is beyond the scope of this document, some of the key points for consideration are identified below.

• Joint or Separate Purchase of Substance Abuse and Mental Health Services. A far-reaching design decision is whether to combine the purchase of substance abuse and mental health services in the RFP under the umbrella of behavioral health or whether these two specialty services will be purchased separately. Jointly purchased substance abuse and mental health services can be managed very closely as one program or alternatively, managed as distinct and separate programs. Many factors can drive the decision to separate, combine, or coordinate the service packages of these disciplines, including the existing organizational structure of government, the relative cost of each benefit, political and personal relationships between officials and departments, conceptual viewpoints of leading decisionmakers, the readiness of either system to be effectively managed, and the perspective and strength of advocacy groups (Moss, 1995).

The relationship between the substance abuse and mental health fields is complex. Professionals in both fields often have deeply held sentiments and philosophies about the most appropriate way to structure the functional relationship between the systems. Views can differ substantially with respect to the most appropriate governmental organization structures, treatment philosophies, and optimal business relationships with each other in a managed care marketplace. These views can play a large role in all levels of decisionmaking. There are also substantial differences between the two fields in the areas of health care conditions addressed, the emphasis on treatment and prevention services, and the provider systems used.

A significant factor encouraging greater coordination of services is the large number of persons with co-occurring mental and substance use disorders found in both treatment systems, but especially the mental health system. Results of such studies as the Epidemiologic Catchment Area study of the National Institute of Mental Health and the National Comorbidity Survey suggest that there are approximately 10 million Americans with co-occurring substance use and mental disorders (Regier et al., 1990).

Possible advantages and disadvantages of purchasing substance abuse and mental health services together are listed in Exhibit II-2.

• Carve-In and Carve-Out Models. Purchasers must make decisions regarding the degree to which managed substance abuse and mental health services are to be integrated with general health care. Most often, managed behavioral health care is carved out from general health care and managed care separately. This usually occurs in one of two ways: (1) a purchaser contracts directly with a managed behavioral health organization (MBHO) to manage the substance abuse and mental health services; or (2) full service MCOs subcontract these services to MBHOs.

Officials in New Mexico, for example, wished to foster integration between behavioral and general health care services but feared that behavioral health dollars might be siphoned away to fund general health care. Consequently, they developed a modified carve-in model that requires HMOs to contract with an independent MBHO for the management of behavioral health services but establishes mechanisms to create an impenetrable barrier between general health and behavioral health dollars.

The decision about whether to develop a carve-out model or a more integrated carve-in model is affected by several factors that vary substantially from purchaser to purchaser. These include the general makeup of the existing health care system, the market penetration of managed care, the availability of HMOs or full-service MCOs in the local health care environment, the ability of these organizations to meet appropriately the behavioral health needs of the eligible population, cost considerations, and the opinions and perspectives of key decisionmakers.

It should be noted, however, that a recent survey of 11 large full-service HMOs showed that all but two provided substance abuse and mental health services by purchasing services from wholly-owned behavioral health subsidiaries or independent vendors (Rudd, 1997). Even the two HMOs that provided some services inhouse used outside contracted vendors for Medicaid enrollees. Designers should carefully consider the type and degree of integration desired if carve-in models are being considered, since often the HMO will carve out behavioral health services.

Ensuring that behavioral health services are effectively linked with primary health care remains a substantial challenge in designing managed care systems. Regardless of whether they choose a carve-in or carve-out model, purchasers must develop parameters in the contract that specify any primary care linkages, including performance standards that monitor the degree to which expectations are met. Purchasers opting to buy substance abuse and mental health services using an integrated carve-in model should closely monitor both substance abuse and mental health benefits to ensure that the utilization of these services is comparable to the utilization of physical health benefits provided in the package. Purchasers of substance abuse and mental health carve-outs should devote substantial resources to ensuring that there is an adequate link to primary health care services.

The potential advantages and disadvantages of the carve-in model for substance abuse and mental health benefits are shown in Exhibit II-3; the potential advantages and disadvantages of the carve-out model are shown in Exhibit II-4.

Stage 2: Procuring Managed Care Services

It is also important that the procurement process conform to applicable laws and regulations. All States must comply with relevant Federal laws, but each State has specific requirements--such as general purchasing rules and required contract language--that will affect the development of the RFP and contract provisions and, in many cases, the entire procurement process. State insurance and HMO regulations, which vary widely, may also dictate the structure and content of the RFP and contract. These laws and regulations often address fiscal solvency, network requirements, reporting requirements, certificates of authority to operate within the State, and so forth. Other laws address consumer protections, such as specific grievance procedures, marketing rules, definitions of emergency care, and quality of care issues.

It is essential that planners ascertain relevant State requirements early in the process of planning a managed care initiative and that any necessary amendments to State law be accomplished so that they can be reflected in the RFP and finalized before contract startup (Horvath and Kaye, 1995; Rosenbaum et al., 1997). Planners should also assess the need for changes in legislation and/or regulations that will make desired reforms possible. New legislation is often necessary for Medicaid waivers, changes in procurement, licensure, or government personnel approvals before it is possible to implement the changes planned.

Step #6: Write the RFP

The requirements spelled out in the RFP form the philosophical and operational basis for the contract, while simultaneously protecting the clinical, legal, and financial interests of the purchaser. A study by the National Alliance for the Mentally Ill clearly showed that there is a great need for carefully constructed RFPs (Huskamp, 1996). Bidders tailor proposals specifically to the RFP requirements, and RFP responses may well become attachments to the managed care contract. (Sample specifications, characteristics, and components contained in a standard RFP are presented in Appendix A.)

A clear definition of the reform goals planned for under the contract and the problems to be addressed should be clearly stated in the RFP. Because the primary purpose of an RFP is to generate sufficient information to facilitate selection of the best bidder(s) to manage enrollee care, a primary objective of any RFP is to define a system that is reasonable enough to attract a sufficient number of responsible, qualified bidders. The RFP should outline financially reasonable terms that address the legitimate interests of all parties. Neither the purchaser, the MCO, nor consumers win if competent companies don't bid because the program requirements and/or RFP terms are seen as unreasonable, or if the contracted MCO becomes financially unable to meet enrollees' needs because of inaccurate data in the RFP. Although the contract must protect the legal rights of the purchaser, the goal is not necessarily to gain complete legal advantage over a vendor or over other types of outside or internal partners. One-sided RFPs and contracts may not attract desirable bidders.

a. State Bidding Procedures

Prior to final design of the managed care program, a purchaser should review State bidding procedures to ensure compliance. For example, State law may address required preferences for minority and small businesses. State law may also address preferences for "home State" businesses. Purchasers must review all aspects of the bidding procedure to ensure that any required preferences or scoring techniques are followed. This includes a review of any legislation that may relate to the selection process. A purchaser should be mindful of legislative directives, as dissatisfied bidders may use legislative language to try to prove that a procurement did not proceed according to State directives.

b. State Administrative Procedures Act

Bidding procedures that are affected by State law may be subject to a State's administrative procedures act, which ensures that State functions are carried out in accordance with concepts of due process. Generally, a State's administrative procedures act may permit judicial review of discretionary acts (i.e., procurement) performed by a State agency. If the procurement conducted by the purchaser falls within the confines of discretionary acts, it may be subject to judicial review.

A legal challenge of a procurement based on a State's administrative procedures act may lead the court to examine whether the procurement conducted by the State agency was conducted arbitrarily or capriciously. In the context of this guide, the term "arbitrary and capricious" refers to procurements in which the standards to be applied were either unclear or unfairly applied or the process was tainted by conflicts, or both. The result is considered arbitrary and capricious because the standards were meaningless and/or because the process was unfair. The court may also examine whether the purchaser can produce adequate evidence to substantiate the selection of a particular vendor. Thus, the purchaser must fully document procurement procedures and selection criteria to ensure sufficient evidence to support its final decision.

c. Federal Procurement Law

If a purchaser is using Federal money to operate the managed care plan, not only State procurement laws but Federal procurement laws may apply. Special Federal acquisition regulations from the Code of Federal Regulations should be referenced by the purchaser.

d. Precision and Specificity of the RFP and Contract

Determining the optimal level of detail in the RFP and contract is a fundamental decision for the purchaser. At one end of the spectrum, purchasers may wish to be very prescriptive in order to clearly convey in objective, measurable ways their expectations of the MCO. Some argue that, in the attempt to prevent the MCO from inept or avaricious behavior, this level of prescriptive detail will eliminate creativity or input from the MCO. If the RFP is too detailed and prescriptive, the responder need only "parrot" the questions in their response. Those advocating for more broadly worded contracts believe that the customer would be better served by engaging the services of a legitimate and ethical MCO and then working out the details of the program collaboratively.

Some purchasers may want one RFP process that leads to two contracts with the selected MCO in order to prevent the RFP from being overly detailed and prescriptive. One contract period would be for planning and development and the other for operations. To be most helpful, the RFP should describe particular programmatic and policy issues that the purchaser has identified. Formats that request the responder to delineate a plan to deal with the programmatic and policy issues provide the opportunity for vendors to differentiate themselves for the customer.

The purchaser's critical task is clearly to articulate specifications of overriding importance and to include with each of these specifications a mechanism for measuring the MCO's performance. When the State/purchaser does not have sufficient information to give precise direction to its contractor, it is perfectly acceptable to permit the contractor to develop its own approach, as long as the purchaser understands that in such a situation it is effectively defaulting to the industry or contractor standard. For example, a purchaser may want extreme clarity about which services are covered and which are not. On the other hand, the purchaser may elect to give the seller broad latitude to select the provider network.

If the purchaser negotiates with a vendor to fill in gaps or address issues that should have been included in the RFP during the negotiation phase, there may be legal impediments to the addition of services to the vendor's bid. If the purchaser negotiates for more or different services than originally outlined, legal challengers may argue that the purchaser did not follow procurement guidelines or the law.

RFPs that provide detailed program definitions, specific contractor requirements, and expected outcomes will more readily be incorporated into the contract. Because the RFP and the proposal submitted by the winning contractor are often wholly or partially incorporated into the contract, the importance of these documents should not be underestimated. In some cases, the RFP, with the proposal and other attachments referenced, becomes the contract itself (Rosenbaum et al., 1997). In such cases, the contents of the RFP should explicitly mirror the contract that purchasers expect will eventually be signed.

The RFP must specify the format and content of the proposal. In general, the RFP must provide a clear and detailed picture of the evolution and structure of the health care system, the short- and long-term goals of the new managed care program, the population(s) to be covered, and the values that underlie the public system. It must be comprehensive and include detailed descriptions of eligibility and enrollment of consumers, access requirements, the nature of the program, the scope of the benefit plan, and consumer rights. It also should outline the processes to be followed in terms of managing utilization and quality, standards for the provider network, the system of grievance and appeals, and how claims are to be paid.

The purchaser must outline the methods and standards for payment of the contractor, including rate-setting methods, requirements for the management of funds, and banking and accounting requirements. Measures of performance should be included with each specification, and the contract should have rules that impose intermediate sanctions in nonperformance. In addition, the purchaser must define the minimum qualifications of the contractor, including financial condition, independence requirements, licensure, and other experience. This definition is necessary because the firms in this industry change so frequently that information that is valid one month may easily be out of date the next. In addition, there should be provisions concerning what should happen if there is a change in vendor ownership. Some purchasers, to protect the consumer and the public trust, may wish to define allowable limits on profits and/or to establish guidelines for how a defined percentage or amount of profits are to be reinvested in the system.

The RFP should also include definitions and levels of service and should indicate the expected timeframe and transition requirements for implementing the program. It must also describe the process by which some bidders are asked to submit their "best and final" offers if these are allowed in the State; this process must be carefully documented and able to withstand a legal challenge. Purchasers must understand that some private sector firms are accustomed to substantive, last-minute financial negotiations done in the purchaser's best interest. In the public sector, the opportunity for such changes usually must be provided to all finalists and not just to one favored entity, as is often done in the private sector. Vendors who have been selected for best and final offers will generally not press for equitable treatment of their competitors; ensuring fairness and even-handed treatment is the responsibility of the purchaser, as several State courts have found.

The development team should use the most knowledgeable staff and/or consultants available to form a writing team for the RFP. This often involves a chief drafter and a small group to review drafts and provide comments and input. After a thorough review of model contracts, RFPs, and other State procurement documents, the writing team should begin by developing a general outline for the RFP subject to review and approval by the development team. Stakeholders may also be allowed to provide input on the outline and/or language at this early stage of the process. Consultants with expertise in RFP preparation and other skilled writers are potential resources that the purchaser should use wisely. Because the RFP is often incorporated into the contract, RFP provisions should be drafted in precise language that is not subject to different interpretations. Attorneys can be helpful in this drafting process. However, the State must take care to fully brief any writers or consultants on all of the key decision points, if these individuals have not been part of the planning process. Purchasers may also find it useful to write the RFP and the draft contract at the same time. Any contract language required in State or local regulations should be included in the RFP, including requirements for Medicaid (if applicable). Contract requirements for Medicaid-covered services are outlined in the applicable Medicaid regulations (45 C.F.R. Part 74) and are further described in the Medicaid Manual in Section 2087. These sections should be reviewed for possible inclusion in RFPs and resulting contracts.

e. Bidder Qualification Process

As discussed earlier in this chapter, prior to issuing the RFP, it is often advisable to issue an RFI for review and comment by all interested parties. One purpose of this short evaluation is to ascertain the number of interested bidders and to develop a mailing list of qualified bidders. Thus, the purchaser must decide how to qualify bidders. Ideally, key stakeholders should come to a consensus on these criteria. Bidders who fail to meet qualification criteria via the RFI process should be acknowledged but excluded from the bidding process. Failure to conduct the RFI process may lead to an excess of unacceptable proposals to evaluate and costly use of staff or consultant time. Some State vendor selection processes that have ended in litigation could have been solved by eliminating some less qualified competitors at the outset. Qualification requirements have been widely used in the private sector and include organizational features such as the following:

Auspices (for profit or not for profit), independence, and ownership;

Geographic location;

Minimum financial disclosure/financial resources baseline;

Minimum years in operation;

Acceptable references from key clients in similar States;

Minimum size, including covered lives, network size, and revenue;

Minimum management information system capability;

Acceptable audited financial statements;

Accreditation;

Evidence of current liability insurance and history of malpractice litigation;

Minimal prior litigation history; and

Evidence of stable organizational leadership and ownership.

Managed care vendors that pass these tests and sign confidentiality and conflict-of-interest statements can safely be sent RFPs. Although potential bidders frequently ask for exceptions to allow them to enter the process after it has begun, such exceptions should rarely be made.

f. Letters of Intent and Transmittal

Submission of a letter of intent to compete in the RFP process should be a prerequisite for the submission of a proposal if this is part of the established process in the State. The letter of intent provides the purchaser a written opportunity to:

Identify all potential bidders;

Manage all contacts by potential bidders with officials within the agency; and

Produce accurate records of distribution of material from the purchaser to the bidders.

The letter of intent must have an original signature. Depending on State law, proposals may not be accepted from bidders who fail to submit a letter of intent by the date established in the RFP. The letter should contain the bidder's name, title, mailing address, telephone number, statement of intent to compete for the contract, and authorizing signature. Senior team members should be available throughout the entire process to answer procedural questions.

In addition, each bidder's transmittal letter should contain assurances for the purchasing agency. (The recommended statements and assurances that a bidder's transmittal letter should contain are presented in Appendix B of this guide.)

Step #7: Establish Fair and Legally Sound Procurement and Evaluation Procedures

a. The Selection Committee

The selection committee that reviews the submitted proposals should be small enough for effective functioning and may include key internal staff, representatives from the appropriate State (or county) substance abuse and mental health authorities, consumer and family representatives, and outside consultants. This committee is usually chaired by the manager responsible for program operations or a designated senior staff member. The selection committee's responsibilities and goals may vary but may include selecting acceptable and unacceptable candidates, ranking of acceptable applications, identifying strengths and weaknesses, conducting orals, reviewing references, development of a unanimous recommendation, and/or making recommendations to the decisionmaker. Although often there are pitfalls associated with outside evaluation, the existing stakeholder advisory group or a similar group can provide input to the selection committee. Caution should be exercised because some of those who offer input may be providers associated with the MCO or others with conflicts of interest.

The purchaser may wish to consider liaisons with other government agencies. For example, a child welfare liaison may be needed to ensure the adequacy of MCOs' plans with regard to care coordination pathways for children and families involved with both the child welfare department and the Medicaid managed care program. This decision is particularly critical for States in which some child welfare services have been paid for with Medicaid funds. In such cases, there is a need to ensure continuity in the content and range of services, and these design issues are probably best reviewed by a child welfare professional.

b. Validity of Tools Used in the Evaluation Process

When the selection committee is charged with recommending and/or selecting the successful bid, the validity of the evaluation tool, analysis guidelines, and scoring process is critical. These tools should be developed and published before the RFP is issued. In particular, the evaluation tool is critical in determining the successful bidder. The tool should be designed to fairly and adequately score the bids submitted. It should not be so complicated that the evaluation panel cannot understand and use it. During the RFP process, the development team should have the evaluation tool reviewed by appropriate legal and technical experts. Generally, rankings and scores on specific areas of a bidder's proposal should be based on consensus score; individual scoring should be used only for notes and planning purposes.

Evaluators should be instructed to keep exhaustive notes so that their ratings of bidders can be understood and compared for uniformity of approach. For example, when evaluators rank one bidder high and another low on network, their notes should reflect what was meant by a "good" network (e.g., many providers located in areas of high need, an adequate array of specialists, the inclusion of network members with special skills in treating non-English-speaking members). Evaluators should receive exhaustive guidance from the purchaser regarding the criteria they will be expected to apply in evaluating each element of the contract.

All notes and documents created during the selection process, such as ratings, rationales, advisory presentations, and areas of disagreement when unanimity cannot be achieved, should be kept and presented to the director of the purchasing agency. These documents should be reviewed for accuracy by legal counsel as well as procurement staff and should become part of a permanent record. Purchasers should be aware that some RFPs and Federal and State laws allow for a review by the purchasing agency of the decision to select a particular bidder. This also allows a dissatisfied bidder to review the agency's decisionmaking process. In the bidder review, all applicable administrative procedures used by the purchaser may be subject to scrutiny, and score sheets, evaluation tools, and even personal notes may be accessible to an unsuccessful bidder.

c. Conducting a Fair Procurement

Litigation challenging the legality of procurement processes is becoming increasingly common (see "Case Histories in Managed Care Procurement" on page 39). Because purchasers usually select only one vendor in a procurement, competition between MCOs can be intense. Many MCOs are attempting to establish or strengthen their market position. Moreover, proposal development by an MCO is very expensive. Consequently, losing bidders may have multiple incentives to litigate if they believe they have any chance of success. If they are successful, they may be awarded the contract or at least have another opportunity to compete if the contract is rebid. In addition, the ability to delay a competitor's startup may enhance their own market share. In a Medicaid procurement process, the legal implications of program design center on "free and open competition" as discussed in the Federal acquisition regulations (48 C.F.R. §9.504).

The procurement process is not completely quantifiable, and where there is room for interpretation, there is room for challenge. MCOs are under tremendous financial pressure to win contracts, and challenging a contract award can result in a profitable reversal of a decision. As noted above, unsuccessful bidders in several States (e.g., Iowa, Montana, Colorado, and Ohio) have challenged the legality of the procurement process for Medicaid managed behavioral health care contracts. These challenges have led to costly litigation and delays and project revocation. In finding reasons to challenge the process, aggressive MCOs can often capitalize on State officials' relative lack of knowledge, expertise, and skill in conducting procurements of this magnitude. The fundamental lesson learned in these various lawsuits has been the need for using well-trained staff and precise procurement procedures from the beginning of the process.

Step #8: Select a Vendor, Negotiate Issues of Contention, and Award the Contract

Once a bidder has been selected, a number of issues must be addressed before the contract is finalized. Most are related to reconciling the RFP, the MCO's proposal, and the frequently divergent "understandings" that have developed between key individuals but not recorded. The resolution of these and other issues can lead to best and final negotiations that usually take 1 to 2 months, sometimes longer. Best and final negotiation parameters should be clearly addressed in the RFP, because legal issues abound when bids or the RFP are altered. These negotiations may or may not be possible depending on the procurement laws in the State. When not allowable, it is possible to build a "clarification process" of technical issues before award of a contract. For instance, before the award, the purchaser can require oral and written clarification of technical issues or a carefully planned visit to a site where the MCO is operating to observe operations and/or discuss issues.

Any final negotiations should ensure that the contract between the purchaser and the MCO provides a solid clinical, operational, and legal foundation upon which the managed care system can be built. All responsibilities identified and agreed to by both parties should be precisely described, because legal disputes between the contractor and the purchaser will be decided on the basis of these provisions and will generally hold the drafter (i.e., purchaser) responsible for clarifying its requirements (Bazelon Center for Mental Health Law, 1995; Horvath and Kaye, 1995).

To support the contractor's adherence to the implementation schedule and a smooth transition, detailed objectives and requirements should be included in the RFP, the contractor's proposal, and the contract. Contractors usually begin work immediately in order to be fully operational in a relatively short time. The purchaser should allow at least 3 to 4 months from the contract award before operations formally begin. In anticipation of a signed contract, memoranda of understanding between the purchaser and the contractor are sometimes developed to provide a formal understanding of preparation processes and activities (e.g., development of management information systems, staff recruitment). The purchaser and the contractor should assign project officers to conduct activities during the implementation process. It may also be useful to place performance guarantees around the efficiency of the contractor's implementation process. Doing so, however, assumes that State personnel have fulfilled their scheduling and resource commitments to the contractor.

In general, the managed contract should achieve the following goals:

Form an operational basis for the relationship between the purchaser and contractor;

Define the specific responsibilities of all parties;

Establish clear standards for the discharge of these responsibilities;

Establish incentives for performance and sanctions for noncompliance;

Define and establish the payment mechanism(s);

Establish the financial basis for the relationship, what will be delivered, what will be paid, and under what schedule;

Delineate the goals and philosophy of the program, as well as its key operational and policy components;

Provide structures to resolve disputes, enforce contract provisions, and apply damages;

Protect the rights of enrollees and providers;

Establish a timetable for discharge of key responsibilities during the implementation period, including appropriate incentives and sanctions tied to deliverables;

Establish organizational and staffing requirements;

Establish a process for operations;

Establish a set of performance measures and minimum standards;

Establish specific fees for specific tasks, as appropriate; and

Specify requirements for making the system culturally accessible.

The remaining chapters of this document discuss options for meeting these specific goals.

Stage 3: Implementing a Managed Care System

During the first weeks and months of the managed care initiative's implementation, the purchaser will be setting a precedent for the manner in which it will handle its relationship with the MCO. For that reason, it is important to manage the implementation process thoughtfully. Weekly project management meetings in which problems are discussed and deliverable tasks are assigned and monitored can provide a solid framework upon which to build the relationship.

Like the RFP, the contract should include detailed implementation plans. The bidder's response to the RFP regarding program implementation should provide a useful plan of tasks and timeframes for making the transition to the new system. In addition, bidders should be required to provide a detailed and specific workplan when they become finalists. The purchaser should examine each bidders' workplan to determine its feasibility and reasonableness, and the purchaser should then provide input and convey acceptance of a final workplan in writing. The most immediate tasks faced by the MCO may include adaptations to the existing claims system; grandfathering of existing contracts; development of a deliverable schedule; development, refinement, or expansion of MIS capacity; and recruitment or reassignment of staff.

Although the responsibilities and timeframes for the transition period should have been covered by the RFP and the successful bidder's response to the RFP, there is sometimes a need to develop a written agreement during the transition from award to contract signing. As mentioned earlier in this section, a memorandum of understanding with the MCO can provide the necessary legal framework for implementation preparation to begin while the details of a contract are finalized. The memorandum of understanding should summarize key points of agreement and include the stipulation that the MCO covers startup costs if negotiations fail. Points of contact should be identified by both the purchaser and the MCO, including project officers who are authorized to bind each party to agreements and decisions. Some States see startup costs as an investment made by the MCO. In these cases, the State's payment is in the form of capitation only after the program is operational. The rationale behind this model is that it provides a very strong incentive for the MCO to get the program up and running. A memorandum of understanding should be carefully reviewed by legal counsel as it is a binding contract and can create substantial problems if no contract is finalized.

During negotiations, the purchaser may choose to revisit the issue of staff credentialing and to monitor the hiring process to ensure that the MCO staff reflect both the anticipated level of competence and the diversity of the population being served. This is the time to make sure that specialists, in areas such as child and family, and substance abuse are on board or being pursued by the MCO. To ensure continuity of coverage for enrollees during the transition to the managed care plan, purchasers may direct MCOs to develop and utilize short-term provisional contracts with current providers as needed to allow sufficient time for contracting and credentialing and to facilitate smooth and clinically appropriate transitions for consumers.

Preoperational tasks include developing educational materials for recipients (consumer and family advocacy organizations such as the Federation of Families for Children's Mental Health [FFCMH] and State-level affiliates of the National Alliance for the Mentally Ill [NAMI] can assist); establishing a provider network; developing training and instructional materials for providers and their staff; establishing and testing of the enrollment process; installing a management information system (MIS); installing telephone systems; establishing intake and referral procedures, and hiring and training staff.

Other tasks and deliverables that can be undertaken at this time include the following:

Making final decisions about MCO staff;

Testing functions and features of the MIS;

Making final decisions about software used to analyze geographic access to services based on population distribution;

Performing a readiness review to look at staff, enrollee services, the claims processing system, and the ability to transmit data to the purchaser;

Developing written material such as consumer-reviewed enrollee handbooks , marketing information, and provider handbooks; and

Preparing reports on ongoing meetings between the MCO and the purchaser and other key groups (i.e., CEO meetings, marketing staff meetings, medical director meetings, advisory group meetings, and chief financial officer meetings).

A file of deliverables, recorded receipt dates, and completion levels should be maintained throughout the project. This record should be set up as the repository of all materials that might be relevant if the purchaser wants to implement penalties for inadequate performance or, in severe cases, terminate the contract.

Step #10: After Procurement, Monitor, Audit, and Evaluate Performance Under the Managed Care Contract

Three different and distinct activities are crucial in the postprocurement review period: monitoring, auditing, and evaluating. Each of these activities has a different but essential role in the review process. (Monitoring and quality assurance issues are discussed at greater length in Chapter VI.)

a. Monitoring

Necessary formal monitoring strategies include regular reporting, formal and informal site visits, ad hoc requests for information from the MCO, and information gathered from staff providers and external agencies. Formal monitoring meetings or visits should be scheduled in advance and focus on specific areas of project performance. The purchaser should use these processes to set a clear precedent for the MCO to expect followup on deliverables and a sharp focus on completing tasks in a timely manner. Informal monitoring might include casual conversation, attendance at provider meetings, and involvement in consumer and family advocacy meetings. Observation of MCO activities, to witness firsthand the MCO's manner in a variety of situations, can be extremely helpful in anticipating and managing problematic issues.

In addition, the purchaser should specify required reports and establish a schedule for receipt and response to those reports. Purchasers should be cautious not to overwhelm the MCO with report requests. Reporting requirements should be realistic in scope and based on information that the purchaser will actually use, consistent with the ability of the MCO's MIS to generate the reports. These requirements should also be sensitive to the burden that reporting requirements can place on providers, recipients, and the MCO.

The purchaser may also consider a role here for other government agency liaisons. For example, a child welfare liaison may meet regularly with the MCO and the purchaser to monitor the implementation of mutually agreed-upon care, such as coordination pathways for children and families involved with both the child welfare and the Medicaid managed care programs.

b. Auditing

Unannounced audit activities include formal reviews in which programmatic and financial data are collected in a systematic manner following predetermined protocols. While financial audits should be conducted by a certified public accountant, programmatic audits may be conducted by the purchaser directly or by an independent quality review organization, such as the National Committee on Quality Assurance. Some advantages of independent audits are the perceived objectivity of the findings and the ability to compare the MCO's performance with that of other MCOs.

The purchaser may want to audit the potential for cost shifting early in the project. For example, have child welfare costs increased as Medicaid spending on inpatient care decreased? Has Medicaid spending on outpatient care increased and child welfare expenditures for community-based care decreased as the managed care effort offers more intensive outpatient services for all children? Have State mental health hospital costs risen due to overly restrictive clinical practices by the MCO? Monitoring for potential cost shifting should be planned well in advance. The process requires significant time to negotiate because of the need to develop data exchange agreements and protocols among government agencies and with private vendors. Health economists are not used to examining societal cost offsets, as would be called for here, and the selection of an experienced and knowledgeable auditor is critical.

c. Evaluating Performance

Evaluations of the MCO's performance should be performed on an ongoing basis and, if possible, should be based on a valid set of baseline data. The evaluations should be designed to provide the purchaser with useful data, without being too resource intensive, and should be an integral part of a larger overall monitoring system. While evaluation projects can be large or small, purchasers should bear in mind that the cost of such projects may be minor when compared with the overall cost of the project.

Evaluations during the postprocurement period should focus on the most critical issues that are measurable and that can generate information in a fairly short period of time. Longer term program evaluations, such as those required by the Health Care Financing Administration (HCFA) at the end of any 2-year Section 1915(b) Medicaid waiver and those that are an integral part of any Section 1115 Medicaid waiver, are generally used to determine whether the waiver program has met access, quality, and effectiveness objectives and is therefore eligible for renewal.

For waiver renewal evaluations, the purchaser may want to consider obtaining consultation or services from independent contractors with evaluation expertise who can provide an objective, scientific assessment of purchaser-determined access, quality, or outcome measures in the new system and help identify and solve implementation problems. Purchasers may want to contract with an evaluator entity early in the project and begin to design the evaluation model. Whenever possible, ongoing evaluation efforts should be blended with larger, long-term studies.

Purchasers should be very careful, however, in choosing such technical assistance, especially for Medicaid evaluations. Only a few universities and research firms have experienced conducting large-scale evaluations of Medicaid medical and behavioral health programs. It may be advisable to check with appropriate Federal resources to ascertain the location of the centers with experience doing such evaluations. Regardless of the approach used by the purchaser to evaluate the MCO's performance, the monitoring and evaluation of consumer and system outcomes should begin early in the process and continues.

^1. Medicaid managed care purchasing is governed by detailed Federal statutory and regulatory requirements, so purchasers of behavioral managed care services are cautioned against combining several sources of public funding into a single procurement unless all funds are subject to Medicaid requirements. Even in this situation, non-Medicaid sources of funding, such as the CMHS and SAPT Block Grants, may have their own requirements regarding use of funds (for further discussion, see Chapter III).

^2. In some contexts, the term "carve-in" technically refers to a reintegration of previously carved out services, back into an integrated health care model. In this document, the term carve-in refers to an integration of behavioral health care services with general health care, whether or not they were previously carved out.

^3. These features apply only to managed care systems that do not subcontract for behavioral health services.

CHAPTER III

Coverage

Because of resource limitations and political issues, many managed behavioral health benefit plans developed for the public sector include only a portion of the full range of services needed to prevent, treat, and provide rehabilitation for mental and addictive disorders. Thus, in many States, the responsibility for delivery of behavioral health services is divided between the purchaser and the MCO(s). Without careful planning and delineation of service responsibilities, this splitting of the full continuum of care can lead to cost shifting, a fragmented delivery system, and lack of any meaningful accountability.

MCOs operate in a competitive environment and generally are eager to satisfy purchasers' needs and desires; however, they typically have multiple "books of business" and thus may be reluctant or unwilling to tailor their operations and their standard benefit package. A State Medicaid agency or other public purchaser charged with service responsibilities beyond those that any MCO is willing or able to assume retains residual coverage responsibilities and must ensure that it has sufficient funds to properly execute these responsibilities.

Special industry practice guidelines offer a particularly good view of what the managed behavioral health care industry considers standard coverage. Accreditation guidelines also offer insight into what is currently considered standard operating practice for the industry. Purchasers making coverage determinations should familiarize themselves with these documents so that they can better understand the extent to which their purchasing expectations align with or depart from industry standards.

This chapter covers several topics of importance to developing and defining the scope of a coverage agreement between a purchaser of managed behavioral health care and an MCO:

Coverage options under managed care--namely, defined benefit contracts and defined contribution contracts;

Developing definitions for services to be covered--including preventive, treatment, rehabilitation, and ancillary social and rehabilitative support (or "wraparound") services--and incorporating these definitions into the contract;

Defining the critical concept of medical necessity in public sector managed care contracts and operationalizing this concept through means such as MCOs' utilization management (UM) practices; and

Writing contracts to ensure that coverage complies with Federal statutory and regulatory provisions governing the various funding streams used to purchase behavioral managed care services--in particular, Medicaid and the Substance Abuse Prevention and Treatment (SAPT) Block Grant (Public Law 102-321; 42 U.S.C. §§300x-21-300x-35) and the Community Mental Health Services (CMHS) Block Grant (Public Law 102-321; 42 U.S.C. §§300x-7-300x-8).⁽²⁾

A. Coverage Options Under Managed Care: Defined Benefits vs. Defined Contributions

Purchasers can contract for the provision of coverage to enrollees in two ways. They may either buy a defined set of benefits or they may elect to buy a defined contribution.

Defined benefit contracts specify a defined set of benefits that managed care enrollees are eligible to receive. A contract for a Medicaid managed care initiative is typically a defined benefit contract.

Defined contribution contracts entitle no individual enrollee to any particular service; the MCO's duty is to the covered group as a whole. A managed care contract using State block grant funds is usually a defined contribution contract.

1. Defined Benefit Contracts

Managed care products customarily consist of a defined set of benefits that enrollees are eligible to receive if the benefits are determined to be "medically necessary." Several factors affect the definition, scope, and "usability" of a defined benefit in practice.

Under certain circumstances, an MCO may wish to exclude coverage for a defined covered benefit because the MCO considers delivery of the service to be the responsibility of another entity and not a medical treatment. For example, the MCO may wish to exclude a type of treatment ordered by a court or recommended in a student's Individualized Education Plan. An MCO may also wish to exclude a covered benefit if it is considered experimental under the MCO's definition (Rosenblatt, Law, & Rosenbaum, 1997).

An MCO may also want to deny coverage if the requested service is for a condition that does not fall within the traditional range of insurable risks--that is, if it is not seen as medically necessary for the restoration of normal functioning after an illness or injury. Thus, treatments for chronic disabling conditions with little chance of improvement may be denied altogether as not covered. More commonly, the service requested may be covered by the MCO, but only up to a certain amount (e.g., 20 outpatient mental health visits per year) in order to avoid covering services for consumers who may have chronic and incurable disorders and high needs for services.

Because of the structure of the Medicaid program and its requirements of State agencies, a Medicaid managed care contract must be drafted as a defined benefit agreement,⁽³⁾ although the contract may contain memberwide service goals and outcomes, as in a defined contribution agreement. An example of such goals are the measures included in the Health Plan Employer Data and Information Set (HEDIS 3.0) developed by the National Committee for Quality Assurance (NCQA) (NCQA, 1997), which are discussed in Chapter VI of this document. A State may also use funds from the SAPT and CMHS Block Grants to purchase defined benefits. However, unless the State elects to use significant funds for relatively few members or adds appreciably to the block grant allotment out of its own funding, it is likely that a benefit package financed with block grant funds will be far narrower than one sponsored by Medicaid.

Finally, the MCO retains the discretion (and the duty under most contracts) to make medical necessity determinations. In the absence of an explicit contractual agreement to the contrary, an MCO will apply its own set of criteria in medical necessity determinations.

2. Defined Contribution Contracts

A purchaser may elect to buy a defined contribution benefit rather than a defined service benefit. A defined contribution contract entitles no individual member to any particular service; instead the MCO owes a duty to the covered group as a whole. For example, a defined contribution plan is similar to the State's giving a grant to a community mental health center (CMHC) or addiction treatment center in exchange for performing a specified set of services. The clinic's service obligation is toward the residents of its service area as a group, and there is no enforceable individual right to any level of benefit.

The difference between a community clinic grant and a defined contribution managed care plan is that in the former case, the contractor's duty is generally to all the individuals in its service area, while in the latter case, the grantee's duty is confined to its members. In both cases, however, the purchaser asks the seller to take on certain broad tasks for the group as a whole and/or to accomplish certain goals for the eligible population. The purchaser may impose limitations on how the goals are reached (e.g., "Do not spend less than 20 percent of the funds on preventive services, as defined in this agreement").

In the case of a community clinic grant, however, the grantee may be forced to reduce or alter services if patients consume a greater than expected level of care or if there is an unanticipated increase in the number of community residents seeking care. This is not true in a defined contribution managed care contract; a contractor is at risk for fulfilling the duties it assumed for the term of the agreement. The purchaser cannot, however, expect the contractor to furnish additional services for the same payment, nor can it expect the contractor to alter its service mix in order to reach additional residents of its service area who are not members of the plan.

The State may also use block grant funds to purchase a defined contribution plan under which it pays a certain amount per member per month to finance general activities for members. Under such a plan, performance is best measured by broad intermediate service goals and overall health care outcomes, such as receipt of preventive services by a certain proportion of all members, or a percentage decline in school absentee rates among plan members who are children with a serious emotional disturbance. In addition, a State could use its block grant funds to provide at least some level of benefit or contributed coverage to enrollees during periods when their Medicaid eligibility lapses. Finally, block grant funds also might be used to finance activities that do not constitute medical assistance under the Medicaid statute or for which payment is prohibited (e.g., services to residents of institutions for mental disease [IMDs]).

B. Developing Service Definitions

The purchaser of managed behavioral health care services must precisely define the substance abuse and/or mental health services to be covered by the MCO. In a study of State Medicaid managed care contracts, Rosenbaum and her associates (1997) found that different terms are often used to describe the same types of services and that there is inconsistency among the States in their definitions of federally defined services. Given such variability in definitions of substance abuse and mental health services and the fact that the terms for services are often used inconsistently across regions and by behavioral health professionals, it is essential that the purchaser of managed care services clearly define the substance abuse and/or mental health services it wants to cover in both the RFP and the contract.

A purchaser can either develop its own definitions of substance abuse and/or mental health services or reference other documents with definitions. The substance abuse and mental health fields have both made efforts to define services (see definitions of both types of services in Appendix C). In addition, purchasers may seek assistance from a variety of Federal and State agencies, national associations, and credentialing organizations for assistance in developing definitions of substance abuse and mental health services: the Council on Accreditation of Services for Families and Children (COA), the Family Treatment Association (FTA), the National Association of State Mental Health Program Directors (NASMHPD), the National Alliance for the Mentally Ill (NAMI), the Federation of Families for Children's Mental Health (FFCMH), the National Association of State Alcohol and Drug Abuse Directors (NASADAD), and the American Public Welfare Association (APWA), the Joint Commission on Accreditation of Health Care Organizations (JCAHO), and the Committee for Accreditation of Rehabilitation (CARF).

It is usually safest for a purchaser to adopt very precise descriptions of substance abuse and mental health services, but the definitions should not unduly impede or prohibit the MCO and its provider network from delivering individualized, person-centered care in a flexible and creative manner, especially in risk-based payment systems. All service definitions developed by an MCO should be subject to the purchaser's approval prior to implementation.

1. Typologies of Substance Abuse and Mental Health Services

For purchasers considering what types of substance abuse and mental health services to include in a managed care contract, two existing typologies of services--one published by the Institute of Medicine (IOM) and the other by the American Society of Addiction Medicine (ASAM)--may offer a useful conceptual framework.

a. The Institute of Medicine's (IOM) Typology

The Committee on Prevention of Mental Disorders (IOM, 1994) proposed a classification system for the full spectrum of services addressing mental disorders, including addictive disorders. This typology has been adopted by the National Institute on Drug Abuse (NIDA) and the Center for Substance Abuse Prevention (CSAP), among other organizations, and is rapidly gaining adherents among State agencies. (See Appendix C for SAPT primary prevention definition.)

The IOM typology divides services into the following three categories:

Preventive interventions;

Treatment interventions; and

Maintenance interventions.

Preventive interventions are services designed to reduce the probability of development of clinically demonstrable substance abuse and mental health problems. They consist of (1) universal interventions targeted to a population group that has not been identified on the basis of individual risk (e.g., substance abuse prevention curricula required of all public school students); (2) selective interventions targeted to individuals or a subgroup of the population whose risk of developing clinical problems is significantly higher than average (e.g., bereavement support groups for low-income widows and widowers, life skills programs for chronically truant students); and (3) indicated interventions for individuals with minimal but detectable signs or symptoms foreshadowing mental or substance use disorders (e.g., parent-child interaction training for children identified as having persistent conduct problems).

Treatment interventions are therapeutic services designed to reduce the length of time a disorder exists, halt its progression of severity, or if not possible, increase the length of time between acute episodes. The IOM typology divides treatment into the categories of (1) case identification; and (2) treatment for the identified disorder, to include interventions to reduce the likelihood of future co-occurring disorders.

Maintenance interventions are generally supportive, educational, and/or pharmacological in nature and are provided on a long-term basis to individuals who have met DSM diagnostic criteria and whose underlying illness continues. The two components of maintenance interventions are (1) the provision of rehabilitative aftercare; and (2) support of patients' compliance with long-term treatment to prevent recurrence of acute incidents.

Public purchasers of managed care have most frequently purchased services labeled treatment services in the IOM continuum, but an increasing number are purchasing prevention and maintenance services. Thus, for example, public sector agencies have negotiated separate arrangements with such community-based organizations as Oxford houses, halfway houses, and support groups to provide maintenance interventions for individuals recovering from drug addiction. Similarly, the public sector frequently has maintained contracts or grants with community-based providers to undertake preventive interventions through outreach to the general population or to high-risk individuals. These arrangements can be funded separately but coordinated with the MCO, or can be included as part of the defined benefit package. In either case, purchasers may benefit by analyzing the costs and potential benefits of providing adequate funding for certain preventive and maintenance interventions, in addition to treatment.

b. The American Society of Addiction Medicine's (ASAM) Typology

The substance abuse field has made substantial progress over the past decade in developing a formal structure that systematically organizes commonly used treatment interventions. In an ongoing effort to establish national standards for defining (1) a continuum of substance abuse prevention, treatment, and rehabilitative services; and (2) a set of admission, continuing care, and discharge criteria for each level of service intensity, ASAM, with nationwide input from treatment professionals and others, has been developing Patient Placement Criteria for the Treatment of Substance-Related Disorders. The second edition of this publication, referred to as ASAM PPC-2, was published in 1996 (ASAM, 1996).

The criteria in ASAM PPC-2 are the most widely used and comprehensive national guidelines for placement, continued stay, and discharge of patients with alcohol and other drug problems. ASAM PPC-2 specifies five levels of treatment services:

Pretreatment;

Level I, Outpatient Services;

Level II, Intensive Outpatient/Partial Hospitalization Services;

Level III, Residential/Inpatient Services; and

Level IV, Medically Managed Intensive Inpatient Services.

ASAM PPC-2 also describes a range of resources to be used by individuals at each level depending on continual assessment of six dimensions: the individual's need for detoxification services, medical complications, emotional/behavioral complications, treatment acceptance or resistance, relapse potential, and recovery/living environment.

To delineate various intensities of services within a particular level, ASAM PPC-2 introduced the concept of "gradient intensities." Thus, for example, a residential or inpatient program (Level III) with ready availability of onsite psychiatrists, a nursing staff, and a high staff-to-consumer ratio might be categorized as Level III.7. Another Level III residential program with minimal on-call medical support might be categorized as Level III.1. ASAM PPC-2 also addresses the increasing need to separate or "unbundle" the treatment modality and intensity of service from the treatment setting. Thus, for instance, detoxification, which was once regarded as an inpatient procedure, can be administered in a variety of settings at all levels of care, ranging from hospital-based programs to outpatient clinics and even in the home.

ASAM PPC-2 is copyrighted, and purchasers should beware that ASAM historically has denied all requests to modify the criteria. ASAM's literature has made it very clear that the organization intends to maintain and protect its copyright in order to safeguard the integrity of the text. States and other entities may publish supplemental material to augment the criteria in ASAM PPC-2 but may not identify such material as ASAM criteria.

2. Wraparound or Ancillary Services

Individuals with mental or addictive disorders served in the public sector often require a wide range of social and rehabilitative support services, commonly referred to as wraparound or ancillary services (see Exhibit III-1), and it is critical to address these services in the RFP and contract for managed care. Ensuring the availability of transportation, child care, employment-related services, and other ancillary services is challenging because such services are usually not funded as health care services; such services generally are funded, managed, and under the jurisdiction of several agencies in different government departments, a situation that can result in significant barriers to access.

The purchaser should analyze the current systems of care to determine how existing wraparound services can be accessed and how the managed care initiative can be used to improve service access and coordination. In Medicaid initiatives, the purchaser may consider establishing contractual arrangements with wraparound service providers and paying for some of these services with the Medicaid optional services called rehabilitation services and targeted case management.

Consumers' complex service needs can be very challenging (see case example in box), and the purchaser must carefully consider the optimal arrangements for meeting these needs. Many questions must be answered: Will the most frequently required wraparound services be included in the RFP? Is there sufficient funding to support these services? Is the MCO responsible for providing case management to help enrollees gain access to needed services? If so, is this cost included in the payment to the MCO? The overriding question is whether well-conceptualized and well-written contracts, combined with strong financial incentives and an MCO's capacity to track and manage services, can create the foundation necessary to successfully coordinate needed services and eliminate fragmentation.

The purchaser may use the opportunities inherent in managed care initiatives to lower interagency barriers or to broaden its definition of health care and include financing for selected wraparound services in the managed care plan. In most States, experienced community-based providers are well positioned to provide wraparound services because they have been serving this population for years and have developed coordination mechanisms to overcome interagency barriers. This is particularly true in rural areas where substance abuse treatment agencies and mental health programs are often in the same or adjacent facilities.

Identify wraparound services to be financed within the benefit package.

Establish expected utilization rates for wraparound services and the means for monitoring this utilization.

Specify who is responsible for financing the cost of these services.

Direct the MCO to develop a plan for purchaser review and approval to improve and coordinate access to wraparound services.

Specify wraparound services to which the MCO should systematically build access.

Identify specific agencies, government departments, and other relevant organizations with which the MCO should coordinate services.

Direct the MCO to develop detailed memoranda of understanding, in active collaboration with the purchaser and with purchaser-specified agencies regarding wraparound services.

Describe network providers' responsibilities for providing and/or referring to wraparound services.

Describe systems to monitor, measure, and evaluate successful access to and coordination of these services.

C. Defining and Operationalizing Medical Necessity

The determination of medical necessity is the process by which a specific service is judged to be necessary in the clinical care of a patient. Services judged necessary are eligible for reimbursement by the payer. Such determinations often have a subjective component, and differences in interpretation of this concept can be conceptualized along a continuum. At one end is a strict biological interpretation of medical necessity that excludes most psychosocial factors from consideration and does not recognize several prevention, remediation, rehabilitation, and recovery service needs. At the other end, psychosocial factors are seen as essential considerations in determining whether a service is necessary. For a discussion of issues related to medical necessity in managed mental health services, see Ford (1998).

1. Importance of Defining Medical Necessity for Public Sector Populations

Purchasers of managed behavioral health care for public sector populations with needs for multiple types of services must understand the importance of the concept of medical necessity and thoughtfully integrate this understanding into the RFP and managed care contract. How the contract addresses medical necessity and clarifies the application of this concept in clinical decisionmaking will have a profound impact on access to and quality of treatment. In addition, any ambiguity in the contractual definition of medical necessity can leave the purchaser clinically and financially liable for certain types of care. Clinically inappropriate interpretations of medical necessity driven by purchaser imprecision in contract language, insufficient understanding of enrollee needs, or a need to achieve short-term cost savings have sometimes led to unsound restrictions on access to substance abuse and mental health services and a fragmented and incomplete approach to client care.

In past contracts for managed care, most States and counties have provided only basic descriptions of what they consider to be medically necessary services, using language modeled on private contracts for managed behavioral health care. This approach grants MCOs considerable discretion in determining when a covered service will be deemed appropriate for a particular individual. Purchasers who wish to more clearly influence how medical necessity is operationalized can use the RFP and contract to specify who may make medical necessity determinations, the basis for making determinations, the role of scientific evidence, public and proprietary clinical practice protocols, the relevance of the provider's clinical judgment, and the extent of retention of judgment permitted to the MCO. An emerging approach is to adopt a broad description of medical necessity, drawing from existing State and/or county rules about when a publicly funded service is reimbursable. This approach helps ensure that an MCO will not limit access by using a strict biological interpretation of medical necessity (Bazelon Center for Mental Health Law, 1997; CSAT, 1995c).

In a few States, some MCOs view court-ordered services as not medically necessary. The contract should address the process to be followed when an MCO is ordered by the court to provide treatment that the MCO believes is inappropriate.

2. Evidentiary Issues in Medical Necessity Decisionmaking

Evidentiary issues are a central aspect of medical necessity decisionmaking. Traditionally, review of the appropriateness of medical coverage has included consideration of accepted standards of medical practice, other evidence of usual and customary practice, and the recommendations of a patient's treating health professional. The use of evidence from controlled randomized clinical trials has been considered relevant in determining whether to move a specific treatment from experimental to accepted practice status, but such evidence has traditionally played very little role in medical necessity determinations (in part because few medical treatments have been evaluated for efficacy in randomized clinical trials). However, in recent years, leaders in the managed care industry have increasingly promoted a concept known as "evidence-based medical necessity." See Eddy (1994, 1996) for further discussion.

a. The Concept of Evidence-Based Medical Necessity Determinations

The concept of evidence-based necessity determinations was developed in response to mounting evidence of widespread and potentially unjustifiable variation in medical practices. In evidence-based medical necessity determinations, no weight is given to informal clinical experience, the standards of health professionals, and the opinion of an individual's treating physician. Instead, the decisionmaker relies on evidence gleaned from controlled randomized clinical trials, with coverage based on quantitative evidence of efficacy resulting from the trials.

Despite the appeal of making decisions on the basis of evidence-based medical necessity, the related issues are quite complex and can be troublesome upon closer examination. Even when the task at hand is to determine whether a certain practice is experimental or accepted, courts have frowned on a decisionmaker's relying solely on quantitative data, particularly when the coverage agreement itself calls for consideration of existing community practice standards in determining the extent of coverage.⁽⁴⁾ When the coverage at issue involves a customarily accepted procedure, application of evidence-based decisionmaking effectively would result in denial of benefits. Because there are so few data on which to base coverage determinations, it is possible that application of evidence-based decisionmaking would in fact eliminate coverage for most care and services. At some point, the test, if unjustifiable because of the absence of quantitative data, might be considered unreasonable under the Medicaid coverage standards described later in this chapter.

b. An Evidence-Based Medical Necessity Test in a Contract

At least one State--Nebraska--has specifically incorporated evidence-based tests of medical necessity in its Medicaid managed care contract (Rosenbaum et al., 1997). The portions of the contract highlighted in bold below (items 3 and 7) are references to evidence-based tests of medical necessity:

The term "medical necessity" and "medically necessary" with reference to a covered service means health care services and supplies which are medically appropriate and (1) necessary to meet the basic health needs of the client; (2) rendered in the most cost effective manner and type of setting appropriate for the delivery of the covered services;(3) consistent in type, frequency and duration of treatment with scientifically based guidelines or national medical, research or health coverage organizations or governmental agencies; (4) consistent with the diagnosis of the condition; (5) required for reasons other than the convenience of the client of his or her physician; (6) no more restrictive than necessary to provide a proper balance of safety, effectiveness, and efficiency;(7) of demonstrated value; and (8) a no more intense level of services than can be safely provided. The fact that the physician has performed or prescribed a procedure or treatment or the fact that it may be the only treatment for a particular injury, sickness or mental illness does not mean that it is medically necessary.

The Nebraska medical necessity standard cited above applies to all requests for coverage; it is not restricted to cases in which the decisionmaker is called on to decide whether the treatment in question is experimental. Moreover, under the Nebraska standard, a party claiming that a service is medically necessary is effectively required to offer evidence from national organizations or agencies that the sought-after service is consistent with the work of national agencies and is of demonstrated value. The decisionmaker also is free to disregard the opinion of the treating physician.

The Nebraska contract is unique because it expressly incorporates an evidence-based medical necessity test. However, such tests may be used increasingly by MCOs. Because the legality of an evidence-based medical necessity in a Medicaid context has not yet been measured, permitting its use either expressly or through silence on the matter may create an unanticipated liability on the part of the State in the event that the test is found to violate Medicaid reasonableness rules. For instance, since there is very little quantitative evidence where medical care is concerned, it is possible that a court might invalidate the approach as an unattainable standard of proof. To the extent that a State does decide to permit use of the test under at least some circumstances (e.g., when the service in question is considered experimental, or for certain services that are of high cost and marginal utility), the State may want to retain the authority, as discussed above, to override specific coverage decisions under its own evidentiary test. Moreover, the State may want to provide that regardless of the test used by the company, any administrative or judicial decision ordering a State to provide coverage will also bind the MCO to the extent that the service at issue falls into one of the coverage listings in the contract.

3. Drafting Medical Necessity Contract Provisions

In drafting medical necessity provisions of a managed care contract, purchasers will have to address the following critical questions:

Will the MCO be required to use the purchaser's existing standard of coverage for determining medical necessity or some other standard developed by the State for the contract?

Will the purchaser retain the right to reverse the MCO's determination when review under its own standards finds that the service is necessary?

What evidence will the MCO be required to consider, and what process will it be required to follow, in making coverage determinations?

Will the MCO be bound to pay for contract services that are determined to be covered by a court in a judicial proceeding?

These issues are discussed in the sections below.

a. The Standard of Coverage

A State may elect to require the MCO to apply specified definitions of medical necessity. For example, the California contract incorporates into the agreement the State's relatively strict existing standard of medical necessity, which has been upheld in the case of adult services in Medicaid litigation (Rosenbaum et al., 1997). The California standard is as follows:

Medically necessary means reasonable and necessary services to protect life, prevent significant illness or significant disability, or to alleviate severe pain through the diagnosis or treatment of disease, illness or injury.

Alternatively, a State could elect to direct the MCO to follow more comprehensive practice guidelines and treatment protocols that have been developed to guide the conduct of health care professionals in specific areas of practice. Assuming that the benefits that are needed to institute such programs are covered under the State's contract, these protocols and guidelines might be considered as specifications regarding the treatment of persons with these conditions.

The Federal Early and Periodic Screening, Diagnosis, and Treatment (EPSDT) Program provides for coverage of preventive services to children covered by Medicaid. The EPSDT program also specifically provides for coverage to "ameliorate" an illness or condition. Pennsylvania's 1996 RFP contains a comprehensive definition of medical necessity that would satisfy the Medicaid reasonableness test for both children and adults (Rosenbaum et al., 1997). Following the language of the EPSDT program closely, the Pennsylvania RFP stipulates that one of the following standards must be met:

The service or benefit is reasonably expected to prevent the onset of an illness, condition, or disability.

The service or benefit will, or is reasonably expected to, reduce or ameliorate the physical, mental, or developmental effects of an illness, condition, injury or disability.

The service or benefit will assist the individual to achieve or maintain maximum functional capacity in performing daily activities, taking into account both the functional capacity of the individual and those functional capacities that are appropriate for individuals of the same age.

b. Purchaser Authority To Review the MCO's Determinations

When a purchaser has particular concerns about an MCO's coverage of certain benefits, one approach may be to provide in the contract as follows:

The agency reserves the right to review Contractor's coverage determinations with respect to the services and items which, under the State's interpretation of this agreement, are enumerated under this contract; and furthermore, to require that the Contractor provide coverage in those instances in which, in the opinion of the State, coverage is medically necessary in accordance with standards and procedures used by the State.

This type of provision is common in MCO contracts. While presumably such a provision is used somewhat sparingly, it serves as an important "backstop" for the coverage determination process.

c. Evidence and Processes in Making Determinations

In making a medical necessity determination, the decisionmaker considers certain evidence and uses certain procedures. Such procedures and their timelines can be highly important. For example, an MCO might require prospective or concurrent review of services furnished outside the scope of normal clinical activities. In certain instances, however, the use of prior authorization is expressly prohibited by Federal law. For example, MCOs cannot subject emergency services to prior authorization requirements, and State Medicaid agencies (and therefore their contractors) cannot require prior authorization for EPSDT periodic or as-needed screens for children. Furthermore, the Medicaid statute contains certain rules regarding limitations on coverage of drugs. States may use prior authorization for outpatient drugs but only if the prior authorization system is able to provide for a 24-hour response by telephone or telecommunication device. Moreover, with the exception of certain drugs enumerated in the Medicaid statute, the agency must provide for "the dispensing of at least a 72-hour supply of a covered outpatient prescription drug in an emergency situation" (42 U.S.C. 1396r-8(d)(5)).

To ensure compliance with these requirements, contracts should identify instances in which prior authorization cannot be used or where interim services (as in the case of prescribed drugs) must be made available.

d. Coverage in the Event of Administrative or Judicial Order

A State may want to protect itself in the event that an MCO makes a medical necessity determination that denies coverage for a class of service listed in the contract and either a court or an administrative agency rules that the service is required to be covered under Federal law or the State plan. The State might consider inserting the following clause into the contract:

In the event that the State is ordered by a court or an administrative agency to cover a service which, under the State's interpretation of this agreement, falls within one or more classes of services or items covered under this agreement, Contractor shall be responsible for payment for such service under such terms and conditions as may be prescribed by the court or agency.

Drafting Medical Necessity Contract Provisions.Purchasers may wish to address the following in RFPs and contracts:

Ensure that all terms in the definition of medical necessity are operationally precise to avoid any ambiguities in the interpretation by the MCO.

Ensure that the definition provides clear direction to the MCO regarding utilization review policies and procedures, including the procedures for members to file grievances and appeals.

Establish that medical necessity determinations should include consideration of psychosocial factors.

Ensure that medical necessity definitions and criteria in the prime contract are included in subcontracts with network providers.

Establish the purpose of providing particular services (e.g., assess, diagnose, treat symptoms; prevent progression; rehabilitate; promote recovery) and its relationship to medical necessity determinations.

Establish standards for service delivery (i.e., need for an individualized service plan, consumer involvement in treatment planning, consumer choice of service, cultural relevance, least restrictive setting, continuity of care, confidentiality, consistency with national standards of practice, referrals to other appropriate agencies, etc.).

Ensure that services accommodate the needs of persons with disabilities (physical and mental) in accordance with the Americans With Disabilities Act.

Proceed cautiously in establishing requirements for demonstrated effectiveness or cost effectiveness.

Reference external criteria, such as formal patient placement criteria, for establishing medical necessity standards.

Ensure that medical necessity criteria and definitions of services for children and adolescents are age appropriate, given the many different factors related to providing care to children (i.e., role of the family, developmental stages and rapid changes as children age, need for parental or guardian consent for treatment, different goals for treatment, greater need for early intervention and prevention of future disability, etc.).

Ensure that medical necessity criteria take into account exceptions to regulations on access, such as dangerous disease clauses for teenagers interested in obtaining certain types of medical and mental health support services without parental or guardian consent.

Ensure that the final step in the clinical appeals process is a review by the purchaser (or delegated State or county agency) so that any inappropriate decisionmaking processes can be understood and addressed directly (rather than only through subsequent policy changes or contract revisions).

4. Processes for Operationalizing Medical Necessity: Utilization Management and Clinical Practice Guidelines

Even when a purchaser of behavioral managed care services provides clear definition and guidance regarding medical necessity in the contract, the interpretation of this definition in daily practice is ultimately what determines the services received by enrollees. Two fundamental processes by which medical necessity is interpreted and operationalized--utilization management (UM) and clinical practice guidelines--are discussed below.

a. Utilization Management (UM)

UM is the means by which an MCO monitors and manages service utilization by enrollees. Utilization patterns can be managed in several different ways. The most common UM methods include: (1) using utilization review staff to monitor the appropriateness of admission into particular levels of care and the duration of treatment at that level of care; (2) delegating UM to network providers; and (3) using a database of profiles of network providers describing their patterns of delivering care.

It should be noted that the UM process in public sector managed care differs from the UM process as defined in commercial managed care contracts. Public sector UM typically includes some case management services in addition to field or provider-based case managers whose job it is to improve the delivery system. In the commercial sector, UM generally relies on the consumer's calling the MCO for authorizations of care; in the public sector, however, authorization for care is typically pursued by a provider on behalf of a consumer who is too impaired to pursue authorization.

Public purchasers can use the contract to influence UM functions. For example, they may wish to contractually address the qualifications of utilization reviewers, their supervision and the qualifications of the supervisor, and the range of their authority (e.g., a physician may be required to deny authorization).

Purchasers of managed care services may want to encourage, mandate, or reserve approval rights for the MCO's use of patient placement criteria and clinical practice guidelines. Such guidelines are, in effect, the operational definitions of medical necessity on which assessment, placement, and treatment decisions are based. A purchaser may require the MCO and network providers to adhere to purchaser-approved sets of guidelines and to be capable of producing auditable trails of data used in making individual UM decisions. Such data can form the basis for measuring performance and outcomes.

b. Clinical Practice Guidelines

Clinical practice guidelines, sometimes referred to as practice or treatment protocols, provide systematic recommendations for treating specific health disorders, with the goal of standardizing treatment and increasing the likelihood of good outcomes. Purchasers and MCOs often require providers to adhere to specific guidelines that they believe to be consistent with their medical necessity practices. These guidelines are usually based on some combination of current research findings and expert opinion. For example, the American Psychiatric Association has recently begun to publish a series of clinical practice guidelines, including those for substance use disorders, depression, eating disorders, and schizophrenia.

The Federal Center for Substance Abuse Treatment (CSAT) of the Substance Abuse and Mental Health Services Administration (SAMHSA) has developed a series of Treatment Improvement Protocols (TIPs) to facilitate the transfer of state-of-the-art guidelines for the treatment of alcohol and other drug abuse from acknowledged clinical, research, and administrative experts. Using a Federal resource panel to review the state-of-the-art in treatment and program management, recommendations from this panel are sent to a second non-Federal consensus panel of experts. A chair for the panel is appointed and is responsible for ensuring that the resulting protocols reflect true group consensus. This group meets and makes recommendations, defines protocols, and arrives at agreement on protocols. These recommendations are then reviewed by a third group whose members serve as expert field reviewers. Once their recommendations and responses have been reviewed, the chair approves the document for publication. CSAT has published over 25 TIPs on topics ranging from State methadone treatment guidelines to treatment for HIV-infected alcohol and other drug abusers. These TIPs may be ordered by contacting the National Clearinghouse for Alcohol and Drug Information at (800) 729-6686 (www.health.org/) or for TDD, (800) 847-4889; through the National Library of Medicine (http://text.nlm.nih.gov/); or through the CSAT Treatment Information Exchange forum (www.samhsa.gov/csat/).

Some MCOs have also developed practice guidelines that are specific to the diagnostic categories in the American Psychiatric Association's Diagnostic and Statistical Manual, 4^th edition (DSM-IV).

Operationalizing Medical Necessity. Purchasers may wish to address the following in RFPs and contracts:

Specify the process by which the purchaser will monitor the MCO's implementation of medical necessity.

Require the MCO to solicit the input of providers and consumers and their families when developing and refining utilization management (UM) guidelines.

Require that the MCO's guidelines be published and available for public review and comment.

Require purchaser approval of UM guidelines.

Require the development of written policies and procedures governing all aspects of the UM process and require that the UM agent maintain and make available a written description of these procedures to enrollees and providers.

Establish guidelines regarding any restrictions on financial incentives to the UM agent to deny or curtail approvals for services.

Require that guidelines be developed and used for screening and diagnosis, remediation, treatment, and rehabilitation for children eligible for the EPSDT program under Medicaid and that the guidelines also address long-term care issues for children, including access to medications.

Require the provision of rehabilitation and supportive services for persons with severe and persistent mental illnesses, chronic substance use disorders, and co-occurring mental illnesses and substance use disorders.

Establish the right of the purchaser to audit performance and to ensure that guidelines and UM criteria are being used appropriately.

Ensure that UM procedures are individualized to consumers' needs and are not allowed to create de facto limits on lengths of any specific treatments (for managed care systems without formal upper limits on specified services imposed by the payer).

Require sufficient provision of training in the use of the UM guidelines to UM clinicians, providers, designated representatives, government officials, consumer representatives, primary care representatives, and specified others.

Establish minimum requirements for UM staff in terms of education, professional experience, training, and/or relevant life experiences.

Require that the UM guidelines be consistent with other purchaser-specified guidelines.

Require that the guidelines for placement or discharge reflect an understanding of conditions relevant to public sector populations, including homelessness, inadequate or pathological family/social support systems, and coexisting medical conditions.

Specify whether the MCO's UM program must be accredited by the National Committee for Quality Assurance (NCQA) or the Utilization Review Accreditation Committee (URAC).

D. Funding Streams and Their Impact on Coverage

Funds from a variety of Federal and other sources (see Exhibit III-2) can be used to purchase and/or support substance abuse and mental health services for adults and children. There are requirements attached to each source of funds that can have a significant impact on the services that can be purchased. When a public purchaser contracts with an MCO to deliver managed behavioral health care services using funds from one of these sources, it may delegate responsibility for complying with all relevant requirements to the MCO. For that reason, it is essential that purchasers understand the requirements attached to various funding streams.

Most current managed care initiatives in the public sector use Medicaid funds; and Medicaid managed care purchasing is governed by detailed Federal statutory and regulatory requirements. Increasingly, however, Federal CMHS and SAPT Block Grants are being used to fund managed behavioral health care services.⁽⁵⁾ The statutes and regulations governing Medicaid impose very different duties on States and create dramatically different rights and expectations in the individuals who are assisted than do the statutes and regulations governing the two block grant programs. Whenever a State or county agency enters into a service agreement with a private company to perform Federal statutory duties, it retains the duty to adhere to Federal law. Thus, a State agency must ensure that any MCO with which it contracts performs the agency's duties under each program in a manner consistent with Federal legal requirements.

The statutes and regulations governing funding streams have a great deal of influence on the day-to-day operations of MCOs and services provided. Recent statutory changes have radically reshaped the way that government programs pay for and deliver health and human services; these changes will have a significant impact on the design and implementation of managed care initiatives in the public sector. Thus, for example, purchasers of behavioral health services must consider new Supplemental Security Income (SSI) eligibility issues that have resulted from welfare reform because they affect eligibility for Medicaid services. They also must consider reforms that introduced the possibility of contracting with for-profit organizations to deliver children's residential treatment services.

In States that use Federal Medicaid funds and the SAPT and CMHS Block Grants to purchase managed care, an enrollee may move from Medicaid sponsorship to sponsorship under one or both block grant programs over the course of a single period of enrollment. (Medicaid coverage is quite unstable; in the absence of "bridge" financing, a member will be involuntarily disenrolled following the loss of Medicaid.) Moreover, an individual's coverage may be financed by more than one sponsor; for example, SAPT Block Grant funds may be used to finance the portion of the premium that covers services not allowable under Medicaid, such as services to residents of IMDs.

It is important to note that purchasers of managed care services paid for from pooled funding should carefully research the legal obligations entailed in delegating full control and/or risk to a private entity for discrete types of public sector services. Some regulations restrict the role of private entities in the administration of certain Federal programs, like child welfare. When possible, purchasers may want to consider the desirability of applying for waivers or modifying State Medicaid plans to lift these restrictions.

Purchasers also must be aware of the funding ramifications that exist under the Individuals With Disabilities Education Act. Children with an Individualized Education Plan under this act are entitled to a full spectrum of community-based services to help them attain their academic potential. Other relevant regulations for children, such as permanency planning, generally support managed care principles in that they encourage short lengths of stay in out-of-home placements. Avoidance of institutional care is a priority, and there is emphasis on family strengthening, family reunification, and community-based, family-driven service delivery.

1. Medicaid

Medicaid is a Federal entitlement program authorized by Title XIX of the Social Security Act and operated by participating State and territorial governments that provides medical benefits for eligible aged, blind, disabled, and low-income persons. Subject to broad Federal guidelines, States determine who is eligible, benefits covered, rates of payment for providers, and methods of administering the program. The costs of the Medicaid program are shared by the Federal Government and the States. It is important to note that Medicaid is always the payer of last resort. Medicaid, insurance coverage, and other funding are to complement/supplement Medicaid payment. These other sources of funds for which a Medicaid recipient is eligible must discharge liability before a claim for payment will be accepted by Medicaid.

a. Medicaid Coverage Requirements

States are required by Federal law and regulations to provide Medicaid beneficiaries coverage for specified services. Minimum coverage requirements vary depending on whether a beneficiary is "categorically needy" (i.e., qualifies for Medicaid because he or she meets certain income and other requirements) or "medically needy" (i.e., qualifies for Medicaid because he or she meets certain medical requirements) (42 U.S.C. §1396a(a)(10)). The discussion here focuses on required coverage for categorically needy Medicaid beneficiaries, who constitute the bulk of Medicaid managed care enrollees. (Most medically needy Medicaid beneficiaries use the program as a catastrophic coverage program for long-term care.)

Mandatory Medicaid services for categorically needy beneficiaries are identified in Exhibit III-3A; Medicaid services that States may cover at their option are identified in Exhibit III-3B. The Medicaid law requires that the amount, duration, and scope of a service be sufficient to achieve its stated purpose. If Medicaid funds are used for managed care, this standard requires the explicit delegation of this responsibility to the MCO. If the State does not explicitly delegate this responsibility, it may unknowingly retain residual clinical and financial liability--and enrollees may not get services to which they are entitled.

Exhibit III-3A. Mandatory Medicaid Services Used To Provide Substance Abuse and Mental Health (SA/MH) Services and Relevant Federal Regulations

Inpatient hospital services 1905(a)(1) 42 C.F.R. 440.10 (excluding institutions for mental disease [IMDs]) Outpatient hospital services 1905(a)(2) 42 C.F.R. 440.20 Physician services 1905(a)(5) 42 C.F.R. 440.50 EPSDT (Early and Periodic Screening, Diagnosis, and Treatment) services for children 1905(a)(4) 42 C.F.R. 440.40b

May be used to provide inpatient psychiatric services or American Society of Addiction Medicine (ASAM) Level IV addiction services. May be used to provide a variety of outpatient behavioral health services in hospital settings. May be used to provide various psychiatric services, including medication management and psychopharmacological assessment. May be used to provide a wide range of SA/MH services (antidiscrimination provisions state that general services--including SA/MH services--must be covered) for eligible children, including the following requirements: Periodic assessments of a child's "mental health development"; Provision of necessary diagnostic services; and Appropriate SA/MH treatment services to address issues identified in EPSDT screens. May also be used to provide transportation vouchers to assist families and their children in accessing treatment.

Exhibit III-3B. Optional Medicaid Services Used To Provide Substance Abuse and Mental Health (SA/MH) Services and Relevant Federal Regulations

Rehabilitative services 1905(a)(13) 42 C.F.R. 440.130 Clinic services 1905(a)(9) 42 C.F.R. 440.90 Inpatient psychiatric services for individuals under age 21 1905(a)(16); 1905h; 42 U.S.C. 1369d; 42 C.F.R. 441.151-182; 42 C.F.R. 440.160 Services of other health professionals 1905(a)(6) 42 C.F.R. 440.60 Prescription drugs 1905(a)(12) 42 C.F.R. 440.120 Targeted case management services 1905(a)(19); 1915g Personal care services 1905(a)(4)

May be used to provide a broad and flexible range of services, including assessments; psychosocial rehabilitation services; day treatment; life skills training; drug abuse treatment; training and education on medication issues; and crisis intervention services. These may be provided in any setting, including homes, schools, clinics, and/or group homes. May be used to provide a broad range of SA/MH services, including individual, group, and family counseling; physician services; medication management; and emergency/crisis services from a wide variety of agencies and clinics. May be used to provide services in IMDs for children and adolescents with serious emotional disturbances who require acute inpatient care to ensure their safety and/or address serious SA/MH problems. May be used to purchase services of other health care professionals, such as psychological testing or psychiatric social work services. May be used to provide psychotropic medications, methadone/LAAM, and other prescription drugs used in the somatic treatment of behavioral health disorders. May be used to provide case management services to assist enrollees in gaining access to needed medical, social, educational, and other services that are called for in the treatment plan. May be targeted to high-risk geographic areas and population groups. May be used to provide services for individuals who require this type of support, such as those suffering from severe psychiatric disorders or those debilitated by HIV/AIDS.

Certain services are particularly complex, because although they are described as a single benefit, they are actually a "bundled benefit," each component of which is a service requirement. Examples are Medicaid's mandatory EPSDT benefit for children under 21 and mandatory services provided by federally qualified health centers and the rural health clinics (see Exhibit III-4). Both of these benefits have direct implications for children and adults with mental illness and addictive disorders.

Exhibit III-4. Mandatory Services Under Medicaid's EPSDT Program for Children and Services Provided by Federally Qualified Health Centers and Rural Health Clinics

Mandatory Services Under Medicaid's EPSDT Program for Children (42 U.S.C. §1396d(r)) Periodic and as-needed screening services, including a comprehensive health and developmental history; a comprehensive unclothed physical examination; appropriate immunizations according to the Federal schedule established by the Centers for Disease Control and Prevention (CDC); laboratory tests, including testing for elevated blood lead levels; and health education, including anticipatory guidance Vision care, including periodic and as-needed exams, diagnosis, and treatment, and eyeglasses Dental care to relieve pain and infections, restore teeth, and maintain dental health Hearing services, including periodic and as-needed exams, diagnosis, and treatment (including hearing aids) All medically necessary health care, diagnosis, services, treatment, and other measures described in 42 U.S.C. §1396d(a)) to "correct or ameliorate physical and mental illnesses and conditions discovered by the screening services," whether or not such services are covered under the State plan Mandatory Services Provided by Federally Qualified Health Centers and Rural Health Clinics (42 U.S.C. §1395x(aa)) Physicians' services and services and supplies incident to a physician's services Services furnished by physician assistants or nurse practitioners, clinical social workers, and clinical psychologists Home health and intermittent nursing care in areas designated as having a shortage of such services

The rules that apply to Medicaid coverage make the transition to managed care particularly challenging. Medicaid is a third-party financing program; it is not an insurance program, nor does it operate by insurance rules. When purchasing Medicaid managed care, however, State Medicaid agencies use their funds to buy coverage from MCOs that, in the absence of regulatory or contractual modifications, operate according to standard and somewhat restrictive insurance principles rather than the broader and deeper coverage rules that govern Medicaid.

Because States retain full residual liability for all Federal administrative and coverage obligations, their choice is either to require MCOs to carry out these obligations as required under law or to retain a significant level of residual and direct responsibility for covered care and services. States and counties throughout the country are struggling with these issues. Moreover, contracts that are unclear or ambiguous about the allocation of responsibilities can lead not only to less coverage for enrollees, but also to an unanticipated

level of direct responsibility on the part of the State for benefits that are covered under the State plan but that inadvertently are not addressed in the contract (Rosenbaum et al., 1997).

b. Definition of Emergency Services

The State of Florida has attempted in its mental health contract to develop a specific definition of emergency tailored to individuals with serious mental illness (Rosenbaum et al., 1997):

Emergency mental health services are those services required to meet the needs of an individual who is experiencing an acute crisis which is at a level of severity that would meet the requirements for involuntary hospitalization pursuant to [Florida law] and who, in the absence of a suitable alternative, would require hospitalization.

Note that regardless of the definition, in the case of a particular individual, it is the MCO that decides what meets the definition. The MCO's decision about this is a coverage determination and thus triggers both HMO grievance and Medicaid fair hearing provisions.⁽⁶⁾

In deciding coverage cases, courts look to the Federal definition of services to gauge whether a limitation is reasonable. Therefore, it is important for purchasers to incorporate applicable Federal definitions into their contract with an MCO so that, in the event of a coverage dispute, the MCO's liability will be coextensive with that of the State and the State can seek recovery in the event that it is ordered to pay for a service.

c. Medicaid's Test of Reasonableness

Under Federal law, States are prohibited from using Federal Medicaid funds to pay for "medically unnecessary" care (42 U.S.C. §1396a(a)(30)). Federal regulations do not define what is medically unnecessary, although they do place certain limitations on a State's discretion to establish its own version of medical necessity standards in establishing benefits. The regulations apply to the definition of medical necessity for a specific benefit and is not applicable to a medical necessity determination of an individual enrollee. The regulations establish a test of "reasonableness" for Medicaid coverage, with reasonableness defined in direct relation to the purpose of the benefit for which coverage is sought. The regulations provide as follows:

Each [covered] service must be sufficient in amount, duration and scope to reasonably achieve its purpose; . . . The Medicaid agency may not arbitrarily deny or reduce the amount, duration or scope of a required service because of the diagnosis, type of illness or condition (42 C.F.R. §440.230 (1997)).

As can be seen, the regulations also prohibit the use of coverage limitations that would result in discrimination in the provision of care on the basis of a condition. Medicaid does not permit the types of distinctions between recoverable illness and nonrecoverable chronic conditions that are a traditional part of insurance theory and practice.

In its structure and operation, Medicaid is meant to function as a program not only for healthy low-income persons but also for persons who have chronic disabilities. Therefore, the rules that govern private insurance decisionmaking have only limited application to Medicaid. Thus, for example, a State Medicaid agency cannot deny the services of a nursing facility to an infant after surgery for a severe congenital condition from which a full recovery might never occur, while permitting such coverage for a 50-year-old recovering from a stroke.

Medicaid's unique approach to coverage is particularly notable in the case of children. Over 30 years, Medicaid's test of reasonableness has been interpreted by courts to require a preventive standard of coverage in the case of children entitled to benefits under the EPSDT. Because the purpose of EPSDT is to finance early diagnosis and treatment of physical and mental conditions before they become serious, limitations that restrict coverage to cases of severe or extreme necessity have been ruled unlawful in the case of children (Rosenblatt, Law, and Rosenbaum, 1997). For example, restricting dental care except in emergency situations or providing medical benefits only when an individual is severely ill is unlawful. Consequently, coverage limitations that would be permissible in the case of adults are not permissible for children if the result is to reduce medical assistance to a level that would defeat the preventive purpose of the EPSDT benefit.

Finally, courts have ruled that at least in the case of adults, the Medicaid program's medical necessity test of reasonableness permits the imposition of across-the-board limitations on coverage of benefits as long as the resulting benefit is sufficient to satisfy the needs of the great majority of recipients. Thus, for example, limiting physician visits to three per month except in emergency situations has been upheld, as have across-the-board limitations on inpatient hospital coverage (Rosenblatt, Law, and Rosenbaum, 1997). However, such across-the-board limitations are not allowed in the case of children, who are entitled to all services determined to be medically necessary regardless of limits that otherwise would apply to adults (42 U.S.C. §1396d(r)).

d. Issues in Medicaid Coverage

To meet the challenges raised by the coverage provisions of the Federal Medicaid statute, a State must address several issues. Each of the issues listed below is discussed in the following sections.

Classes of covered services. The State must decide which classes of covered services will be included in the contract and which will remain the direct responsibility of the State agency.

The amount, duration, and scope of contract services. The State must decide what across-the-board limits are permitted on covered classes of services, particularly those services for which such across-the-board limits are impermissible under Federal law and for which the State therefore would retain residual coverage responsibility.

Service definitions. To guard against unanticipated residual responsibilities, the State must ensure that the coverage definitions used in the contract (or by the MCO) are consistent with the definitions that exist under Federal Medicaid law.

Medical necessity. The State must consider the definition of medical necessity used by the MCO in order to determine whether the definition will or could create unanticipated residual responsibilities for the State because of Medicaid requirements. If it does, the State must decide the extent to which it wants to modify the MCO's definition or retain the authority to override certain coverage determinations by the MCO.

Limitations and exclusions. The State must consider whether the limitations and exclusions generally used by the MCO can or could result in the exclusion of services that are covered under Federal Medicaid law and, if so, whether to override them in the contract. Conversely, the State must ensure that the MCO honors the exclusions that exist in the Medicaid statute, such as the IMD exclusion.

Classes of covered services. In developing a contract for Medicaid enrollees, a State must decide which of the classes of covered services included in its plan will also be included in its contracts. When a single service in the State plan is in fact a bundled service, care must be taken to distinguish which elements of the bundled service will be included in the contract and which will be left as the direct responsibility of the State. The EPSDT benefit is a particularly good example of a benefit that includes numerous service subcategories. Many State contracts contain significant ambiguities regarding the scope of the MCO's duties, or else they appear to leave many covered categories of services uncovered, and thus the responsibility of the State (Rosenbaum et al., 1997).

The following is an example of an ambiguous definition of the classes of EPSDT services. This example is taken from a request for information (RFI) issued by the State of Maine (Rosenbaum et al., 1997).

The preliminary comprehensive benefit package places a special emphasis on preventive care, including EPSDT services. EPSDT is a federally mandated program of informing/outreach activities and benefits targeted to Medicaid beneficiaries up to age 21. An effective EPSDT program assures the health problems found are diagnosed and treated early before they become more complex and their treatment more costly. MCOs will be required to have written policies and procedures for an EPSDT program. This should include conducting EPSDT screens on all members age 21 to identify health and developmental problems.

Under this definition, it is impossible to tell which screening services (periodic or as needed) are covered. It is also not possible to tell which classes of covered services are covered under the contract other than "screens" a term which itself is ambiguous. Nor is it possible to tell which screening elements are required at each screen. On the other hand, the Massachusetts contract contains detailed appendices that list each category of screening (periodic and as needed), diagnostic, and treatment service that is the responsibility of each participating contractor and each required element of the EPSDT screen (Rosenbaum et al., 1997).

In the treatment of complex conditions such as mental illness or addiction, care should be taken to include every class of service that is covered under the plan and that conceivably could be part of an appropriate treatment regimen. This is not to suggest that services should be covered up to an unlimited level, but only that no essential class of service should be omitted from the contract unless this is the intent of the drafter. Rosenbaum and her colleagues (Rosenbaum, et al. 1997) noted wide variation in the classes of covered services related to the treatment of mental illness and addiction. The variations in coverage include services that are covered in virtually all State plans. The wide variation suggests a lack of consensus among States regarding the classes of services that might be used to diagnose, treat, and prevent such conditions. The variation also suggests that States are willing to leave as a direct benefit certain services that are necessary for the treatment of mental and addictive disorders (e.g., prescribed drugs, long-term residential care or inpatient psychiatric care for children with severe mental illness). This variation also leaves it to the MCO industry to determine whether certain classes of services (e.g., preventive health services) should be offered to individuals with these conditions.

Amount, duration, and scope of covered services. Contracts that permit across-the-board limitations on one or more covered services should clearly identify and describe these limitations. Thus, for example, in the case of nonhospital residential detoxification, the Connecticut Medicaid contract specifies that (Rosenbaum et al., 1997):

Services under the Medicaid program shall be for alcohol dependent individuals and shall be limited to (1) the acute and evaluation phase of the treatment program and (2) a 10-day period for each occurrence.

The Connecticut contract expressly omits detoxification for individuals who are dependent on substances other than alcohol. Moreover, the contract limits coverage for persons with alcohol dependency to one short-term treatment per occurrence. To the extent that the State Medicaid plan covers additional levels of treatment, payment for such service would be the responsibility of the State. For instance, this additional payment responsibility might arise in the case of alcohol-addicted children, whose treatment would be considered an EPSDT service and thus not subject to such across-the-board limits if the resulting limitations reduced coverage below medically necessary levels.

Service definitions. As noted, the Federal Medicaid statute and regulations contain numerous examples of service definitions. When a contract deviates from Federal law in defining a service, the State retains residual coverage responsibility up to the Federal definition. For example, the District of Columbia's contract defines maternity coverage as follows (Rosenbaum et al., 1997):

Prenatal care, examination, tests and education, hospital and delivery services, newborn care, and postpartum care.

This definition departs from the Federal definition in its omission of pregnancy-related services. Thus, services for women whose eligibility is based on their pregnancy could be limited to prenatal, delivery, and postpartum care; the contractor could conceivably eliminate coverage of services to treat an underlying health problem or an addiction. If a State intends to retain such direct responsibilities, such an omission makes sense. But when the State has calibrated its premium to the Federal definition, the omission leaves the State vulnerable to additional and unanticipated costs.

Medical necessity. As noted, State Medicaid agencies have had to develop medical necessity standards, because Federal Medicaid funds cannot be used for medically unnecessary services. The issue of medical necessity within Medicaid constitutes one of the most difficult challenges in shaping a Medicaid contract with an MCO. Insurance approval of reimbursement for services provided is generally based on proven eligibility and demonstrated medical necessity. When medical necessity is inappropriately applied, it can lead to problems of access to and duration of treatment services, access to prevention, remediation, rehabilitation, and chronic care, and to nontraditional services and service providers. The issue of medical necessity is discussed at length earlier in this chapter.

Limitations and Exclusions. As noted, insurance plans traditionally limit or exclude coverage for certain types of services, even when they fall into a covered category of service and are otherwise considered medically necessary. Three important categories of such services for individuals with mental illness or addictive disorders are court-ordered care, services provided in schools, and services provided in accordance with a written plan of treatment prepared by a child welfare agency, an early intervention agency, or another agency with a legal obligation to provide or arrange for services. States vary widely in their approaches with respect to coverage of these services, with some electing (either intentionally or as a result of failing to override the industry practice) to retain a direct obligation to pay for the service, and others providing for coverage by the MCO.

In the case of members enrolled in multiple treatment systems, contracts should reflect the State's express decisions regarding whether to require the MCO to provide services that are enumerated in the contract and that are found to be necessary by another agency. The contract language should delineate for the contractor: (a) the extent to which the contractor will be required to cover a particular service or a service furnished in a particular setting, (b) the right of the contractor to exclude certain services; and (c) the extent to which the contractor is bound by the opinion of the agency ordering provision of the service. For example, it is not enough to merely state that an MCO must cover services specified in an Individualized Education Plan. If the State wishes to make the school district's decision to provide a service legally binding on the MCO, it must specify this in the contract. If, on the other hand, the State simply wants the MCO to take the other agency's views into account in reaching its coverage determination, then this fact needs to be specified.

Delaware has decided to specifically limit the contractor's responsibility for services related to education and early intervention that are covered under the State Medicaid plan (Rosenbaum et al., 1997). Delaware's RFP states the following:

The MCO will be responsible for: (a) encouraging PCPs [primary care physicians] to participate in multidisciplinary assessment teams and coordinating assessments and services with the Department of Health and Social Services; (b) reimbursement of necessary treatments and medically necessary early intervention services identified during the assessment process and approved by the child's PCP.

The MCO will not be financially responsible for therapy services (PT, OT, SP) included in an Individual Family Service Plan and provided in the public school setting. However, MCOs will be required to coordinate with [the Department].

This provision permits the MCO to limit coverage to services that it (rather than the early intervention agency) approves, and excludes liability altogether for school services, direct payment responsibilities which are retained by the State. (The Medicaid statute prohibits denial of coverage for services on the grounds that they are included in a child's Individualized Education Plan or Individual Family Service Plan (42 U.S.C. 1396b(e)).

Coverage Under Medicaid. Purchasers may wish to address the following in RFPs and contracts:

Ensure that the delegation of Medicaid amount, duration, and scope requirements are clearly delineated.

Clarify whether the contractor carries out all Federal administrative and coverage obligations.

Ensure that there are no coverage limitations in the contract that would result in discrimination in the provision of care on the basis of a medical condition.

Ensure that if coverage limitations appear in the contract they will still be sufficient to meet the needs of the great majority of recipients.

Ensure that any across-the-board limitations are clearly identified and defined.

Ensure that there are no across-the-board limitations for children.

Ensure that the contract definition of medical necessity does not create unanticipated residual responsibilities for the State.

Ensure that MCO exclusions are consistent with Federal Medicaid law.

Ensure that the contract includes applicable Federal definitions so that MCO liability is coextensive with that of the State.

Ensure that contract language reflects the MCO's responsibility to cover services which arise from the actions of third parties.

2. The Substance Abuse and Mental Health Block Grants

The Substance Abuse Prevention and Treatment (SAPT) Block Grant (42 U.S.C. §§300x-21- 300x-35) and the Federal Community Mental Health Services (CMHS) Block Grant (Public Law 102-321; 42 U.S.C. §§300x-7-300x-8) programs provide funding to States to support activities related to the diagnosis, treatment, and prevention of mental illness and addictive disorders. Unlike Medicaid, these block grants do not establish an entitlement to coverage for eligible persons. The laws specify broadly how the block grant funds are to be used, but they give States considerable latitude in determining how best to serve the targeted populations.

Neither statute prohibits agencies from providing care through Fisk-transfer contracts with for-profit companies. Regardless of whether a State contracts with an MCO for certain benefits or services, State and county substance abuse and mental health agencies are responsible for ensuring that funds are spent in compliance with Federal law. Key provisions of the CMHS and SAPT laws that are relevant to managed care contracting are outlined below.

a. The Substance Abuse Prevention and Treatment (SAPT) Block Grant

Much as the CMHS Block Grant does, the SAPT Block Grant law (Public Law 102-321; 42 U.S.C. §§300x-21-300x-35) has certain minimum service requirements:

Not less than 35 percent of the grant can be spent on prevention and treatment activities related to alcohol, and not less than 35 percent on activities related to drugs.

Not less than 20 percent can be spent on substance abuse education and counseling and other risk reduction services, with priority given to population groups at risk for substance abuse.

A minimum portion of a State's Federal allocation must be spent on treatment for pregnant women and women with dependent children (this provision can be waived in States that can demonstrate that they are providing an adequate level of treatment services as indicated by a comparison of the number of such women seeking services with the available service capacity).

The statute specifies treatment timelines for individuals requesting treatment for injection drug use; an individual must be admitted to treatment within 14 days after the request, or 120 days in the event that treatment programs funded under the act have reached capacity (42 U.S.C. §300x-23(a)). In the case of pregnant women, stricter treatment timelines are established, and preference is given to them when facilities have limited capacities (42 U.S.C. §300x-27).

The statute requires entities receiving funds to routinely make available tuberculosis services to each individual receiving substance abuse treatment. The term "tuberculosis services" means counseling, testing and providing such services (42 U.S.C. §300x-24(a)).

The statute requires designated States to carry out one or more projects to make available to individuals early intervention services for HIV disease at the sites at which individuals are undergoing treatment for substance abuse. The term "early intervention services for HIV disease" refers to appropriate pretest counseling; testing to confirm the presence of HIV; tests to diagnose the extent of the deficiency in the immune system; tests to provide information on appropriate therapeutic measures for preventing and treating conditions arising from the disease; and appropriate posttest counseling. The term "designated States" refers to States with an AIDS case rate of 10 or more such cases per 100,000 individuals (as reported to and confirmed by the Director of the Centers for Disease Control and Prevention for the most recent calendar year for which such data are available). The law exempts a State from having to offer these services through at least one rural site if there is "insufficient" demand (42 U.S.C. §300x-24(b)).

The statute contains third-party liability recovery provisions that prohibit payment if payment has been made or can reasonably be expected to be made under Medicare or Medicaid programs or another insurance program (42 U.S.C. §300x-31(a)).

The SAPT Block Grant places several important limitations on a State's discretion to contract with an MCO for the delivery of services financed in whole or in part with block grant funds. Unlike the CMHS Block Grant (see below), the SAPT statute does not delineate "qualified providers," nor does it mandate an open-door policy. However, the law does provide for minimum service allotments (e.g., for pregnant women). This provision limits a State's ability to use funds to sponsor enrollment of other individuals unless the State can document that other funds are available to adequately serve the target population.

The SAPT Block Grant has other restrictions. Funds may not be used to pay for inpatient hospital services, to make cash payments to intended recipients of services, to make capital or major equipment improvements, to satisfy non-Federal spending requirements under any other Federal program, or for care and services not authorized under the Ryan White Act. Finally, the SAPT Block Grant also places a 5 percent limitation on a State's use of Federal funds for administrative purposes, and these limitations would have to be reflected in the administrative payment components of the premium.

Purchasers can review services and activities included in the benefit plan and then make a determination about the components of the SAPT statutes and regulations that are relevant. Several States (e.g., Iowa, Minnesota, Oregon, Colorado, Montana, and Maryland) have experience developing RFPs, reviewing contractor proposals, negotiating and awarding contracts, and monitoring MCO performance in relation to SAPT Block Grant funds. (Appendix D provides an example of SAPT Block Grant funding contract language used by Colorado.)

b. The Community Mental Health Services (CMHS) Block Grant

The Community Mental Health Services Act (Public Law 102-321; 42 U.S.C. §§300x-7-300x-8) specifies that Federal CMHS Block Grant funds should be allocated to meet the needs of adults with a serious mental illness and children with a serious emotional disturbance (see definitions in Appendix E), but it does not regulate how States should spend CMHS Block Grant funds. This law gives the Federal Government less authority over States in terms of shaping contracting practices than the SAPT Block Grant law does.

To establish a framework for how CMHS Block Grant funds should be used, the Federal Center for Mental Health Services developed a set of 12 "criteria" or goals. When States use CMHS Block Grant funds to purchase mental health services from an MCO, they must determine which CHMS criteria apply and ensure that the contract clarifies how the MCO will address the criteria. The Center for Mental Health Services enters into contracts with teams of experts to monitor use of CMHS Block Grant funds by the MCO and its network providers. The Center for Mental Health Services has recently consolidated its 12 criteria for how CMHS Block Grant funds should be used to five criteria. Complying with the new set of criteria is optional until current reauthorization legislation takes effect and mandates compliance by fiscal year 1999 (see Appendix F for a list of the 12 old and 5 new criteria).

The Center for Mental Health Services emphasizes that services should be targeted to populations based on the presence of functional impairment that substantially interferes with or limits the performance of one or more major life activities, in addition to a qualifying diagnosis. As examples of target populations, the Center for Mental Health Services cites the most seriously disturbed adults with serious mental illness and children with a serious emotional disturbance and their families, individuals with schizophrenia and major mood disorders, and individuals with serious mental illness who are homeless or involved with the criminal justice system.

The Community Mental Health Services Act sets forth a series of limitations on how CMHS Block Grant funds can be used:

The State must spend funds on "adults with a serious mental illness" and "children with a serious emotional disturbance" (42 U.S.C. §300x-1(a)). The Secretary of Health and Human Services is required to define these populations in regulations (see definitions in Appendix E).

Minimum allocation requirements for services to children with serious emotional disturbances must be met.

The contract must be developed as part of a "plan for the development and implementation of an organized community based system of care," which includes "quantitative targets" regarding the number of individuals to be served and the services provided.

At a minimum, the contract arguably must provide case management as a service benefit, since case management is the one service that is identified as required in the State plan (42 U.S.C. §300x-1(b)(7)). (Of course, the State could carve out case management and continue to purchase these services from noncontractor providers, but presumably case management services are at the core of this type of contract.)

The contract must be part of an overall plan that includes at least some level of service to persons who are homeless.

The contract must be part of a plan that "provides for a system of integrated social services, educational services, juvenile services, and substance abuse services for children with serious emotional disorders, along with mental health services."

The contract must be part of a plan that targets defined geographic areas for service.

Most notably, perhaps, States are restricted to providing services with funds appropriated under the law "only through appropriate qualified community programs (which may include community mental health centers [CMHCs], child mental health programs, psychosocial rehabilitation programs, mental health peer-supported programs, and mental health primary consumer directed programs)" (42 U.S.C. §300x-2(b)).

To the extent that CMHCs are part of a State's treatment system, the centers must meet certain minimum qualification criteria (42 U.S.C. §300x-2). These criteria include certain minimum service requirements within a geographically defined service area, including outpatient services for target populations, 24-hour-a-day emergency care services, day treatment, and preadmission patient screening services. Services must be provided (within the limits of the capacities of the centers) to any individual residing or employed in the service area of the center "regardless of ability to pay."

As broadly as it is drafted, the Community Mental Health Services Act appears to place some limitations on a State's discretion to spend service funds through managed care contracts. First, it appears to limit services to those provided through qualified community programs. This requirement appears to limit a State to drafting contracts in which Center for Mental Health Services-financed services are offered through a network that consists only of providers with appropriate "community program" attributes, as the term is used in the statute. This restriction does not exist in Medicaid managed care contracting, where freedom of choice on the part of plans is a primary component of the law.

Second, the act appears in effect to limit a State to drafting contracts to provide services to uninsured persons rather than to provide supplemental services to Medicaid beneficiaries. This is because the required services that must be furnished by qualified community programs are all currently or potentially reimbursable under Medicaid. It is possible, of course, that a State's Medicaid plan would not cover these basic services, although when unbundled, virtually all of the minimum services represent mandatory Medicaid services (i.e., they consist of physician services, outpatient hospital care, emergency hospital care, and services for children). Consequently, since CMHS Block Grant-sponsored managed care contracts must cover these services if a State is to be in compliance with Federal requirements, then presumably block grant funds would be used to buy enrollment for uninsured persons rather than to fill service gaps for Medicaid beneficiaries (unless, of course, the overall funding made available through the block grant surpasses the amount needed to make the required services available in the contractor's service area).

Finally, reconciling the "open-door" policy of the Community Mental Health Services Act with the fundamental principles of managed care is not a simple task. The statute requires CMHCs to serve all residents in their service area without regard to their ability to pay. On the other hand, a managed care service agreement by definition covers specific members, not a geographic area. An open-door policy is fundamentally inconsistent with the notion of plan membership and risk contracting.

Contracts sponsored with CMHS Block Grant funds could be financed through a small amount of funding set aside for use to purchase membership. It would appear, however, that the State would have to retain funds to pay CMHCs directly in order to sustain their required open-door policy to nonmembers. In the alternative, the State's contract could include a charitable services provision that effectively requires the MCO to maintain its CMHC provider network members in "open-door mode" with respect to the mandatory minimum services enumerated in the statute. Because this type of requirement would be fundamentally inconsistent with the principles of managed care, its utility is questionable.

In addition to these considerations, certain State expenditures under the CMHS Block Grant statute are not permissible. Impermissible activities include inpatient care, cash payments to intended recipients of care, purchase or improvement of land or other major capital construction or equipment purchase, or to supplant non-Federal spending requirements. Thus, a contract should specify these activities as excluded from the scope of the agreement.

While the CMHS Block Grant statute and regulations are often ambiguous, they do contain a prohibition against using block grant funds "to provide financial assistance to any entity other than a public or nonprofit private entity." In addressing questions regarding the use of these funds to purchase services from a for-profit company, legal counsel from the Substance Abuse and Mental Health Services Administration (SAMHSA) has determined that the contracts would appear to be appropriately referred to as a "procurement contract," rather than a form of "financial assistance." Consequently, when a purchaser is seeking to acquire the services of a managed care company to carry out functions that it would otherwise perform under the block grant, the statutes would not appear to act as a bar to contracting.

Finally, States are prohibited from spending more than 5 percent of their CMHS Block Grant funds on administrative expenses. MCOs' administrative costs are considerably higher than this. Thus, in drafting a managed care contract, a State should clarify that the portion of the premium used by the MCO to administer the plan is derived from separate State funds rather than from the Federal allocation.

SAPT and CMHS Block Grants. Purchasers may wish to address the following in RFPs and contracts:

Specifically identify all statutory and regulatory requirements of the block grant that the MCO is obligated to fulfill, including how relevant criteria are to be addressed.

Establish the MCO's reporting responsibilities so that reports will be sufficient to fulfill the purchaser's monitoring responsibilities and Federal oversight needs.

Define the MCO's responsibility for any administrative fees related to the management of the grant.

Specify a plan for mediating the differences between the confidentiality regulations of CSAT, the Center for Mental Health Services, and Medicaid, noting that the CSAT guidelines are the most stringent and therefore are the easiest to adhere to universally when administering an integrated system.

Determine whether block grant requirements will be met in the aggregate or on a statewide basis or passed on to providers in subcontracts.

Specify that all services purchased by the MCO with identified block grant funds must be provided by public agencies or private nonprofit entities.

Require that the MCO make a separate accounting for these funds to allow the purchaser to determine and demonstrate they were expended in accordance with Federal requirements.

^1. Residual responsibility is a hallmark of Medicaid managed care purchasing. Since the Medicaid program is far broader and deeper in its coverage than any traditional insurance product, no matter how comprehensive, there are some responsibilities that no MCO is willing or able to take on. These responsibilities, which remain with State Medicaid program purchasing services from the MCO, are called "residual" responsibilities.

^2. As discussed later in this chapter, Medicaid and theSubstance Abuse Prevention and Treatment (SAPT) and Community Mental Health Services (CMHS) Block Grants have their own requirements regarding use of funds.

^3. One State, Oregon, received waivers of Federal Medicaid coverage rules under Section 1115 of the Social Security Act in order to conduct a demonstration under which plans are paid a defined contribution for their services and may vary the Federal Medicaid benefit package in accordance with a special State priority-setting system. No other State's Section 1115 demonstration includes waivers of the defined benefit structure of Medicaid, although certain States may provide fewer defined benefits for their demonstration-eligible populations (Rosenbaum and Darnell, 1997).

^4.  See, for example, Adams vs. Blue Cross/Blue Shield of Maryland [757 F. Supp. 661 (D. Md., 1991)].

^5. Because of Federal statutory and regulatory requirements governing Medicaid managed care purchasing, purchasers of behavioral managed care services are cautioned against combining several sources of public funding into a single procurement unless all funds can be subject to Medicaid requirements. Even in this situation, non-Medicaid sources of funding, such as the CMHS and SAPT Block Grants, have their own requirements regarding use of funds.

^6. A State agency may require first exhausting a plan's grievance process. All Medicaid beneficiaries, regardless of their managed care status, however, are entitled to a fair hearing when they are aggrieved by any decision of the State. Since the MCO is making decisions on the State's behalf, enrollees in a managed care plan have the right to a fair hearing. The State's duty to provide a constitutional-level fair hearing is not delegable to an informal grievance system that is part of the plan (Wadley v. Daniels, 926 F. Supp. 1305; (M.D.Tenn., 1996); J. K. v. Dillenberg, 836 F. Supp. 694 (D. Ariz., 1993)).

CHAPTER IV

Contracting for Network Services

Key issues in this chapter: Specifying the capacity and composition of the MCO's provider network Selecting providers for the network Ensuring enrollees' access to network services Subcontracting with providers Establishing qualification standards for provider staff Monitoring providers' performance

The basis of a managed care initiative is often the delivery of contracted services through a network of participating providers, so careful selection of providers in the network is critical. A fundamental feature of virtually all State and county contracts with managed care organizations (MCOs) is the MCO's ability to demonstrate an adequate provider network. However, some States and counties permit the MCOs that win the contract to finalize their provider networks between the time of contract award and actual implementation. This chapter discusses several aspects of the development of effective provider networks: Specifying the capacity and composition of the MCO's provider network; Selecting providers for the network; Ensuring enrollees' access to network services;