THE MONEY WOES IN MEDICAID MANAGED CARE STATES | Behavioral Healthcare Executive Skip to content Skip to navigation


June 1, 2006
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Providers facing rate cuts are employing several strategies

While many mental health stakeholders question how Medicaid reform may affect the future of public mental health funding levels, recent federal regulatory changes already have resulted in funding cuts that are threatening the viability of community mental health programs in a number of states. As providers work to promote person/family-centered care, increase the use of evidence-based treatments, and commit to continuous improvement, they will need to address funding challenges on several levels. This article examines the immediate funding threat and provides examples of steps being taken by provider organizations to protect scarce public mental health resources.


Since the 1980s, states that adopted Medicaid mental health managed care waivers have operated under a financing model in which Medicaid payments were capped in exchange for a guaranteed funding level and significant flexibility in the types of services states could provide. To support this flexibility, many Medicaid mental health plans paid providers using case rates, subcapitation, and other alternatives to the fee-for-service model. These approaches supported innovations such as prevention and early intervention, as well as community-based and wraparound services that might not have been reimbursable or affordable under previous fee-for-service payment mechanisms. Plans also supported a recovery-based approach to care because they eliminated service-driven revenue incentives, as the focus shifted to service outcomes.

In August 2003, a new Medicaid managed care “rule book” issued by the Centers for Medicare and Medicaid Services went into effect with the implementation of the Balanced Budget Act of 1997. This has turned flexibility upside down and has moved the Medicaid program back to being a service-driven model in managed care states. Under the new rules, the guaranteed funding levels for states have been replaced with the requirement for states to set “actuarially sound capitation rates.”

To set these capitation rates, states are required to hire actuarial firms such as Milliman and Mercer Government Human Services Consulting to count historical services, multiply them by a rate for each service, and add or subtract adjustments for inflation and expected changes in utilization. Only services listed in the state's approved Medicaid plan, provided to Medicaid-eligible persons, properly recorded by clinicians, and successfully transmitted to the Medicaid mental health plan are included in the calculation of future rates by the actuaries.

The Problem

For those who work in fee-for-service states where Medicaid mental health plans never moved into managed care, these rules describe how business always has been done: They provide services to Medicaid enrollees, record and bill the services, and are paid. But in managed care states, a much more complicated process has been at work.

Over the past decade the alternative payment methods in managed care states created the unintended consequence of reducing the number of “countable” Medicaid claims. Providers expanded the care they provided beyond the state's approved Medicaid plan. They also became less rigorous about ensuring that service data and progress notes were submitted for every clinical activity. Because providers were not being paid based on a fee-for-service model, these operating changes had no effect on an agency's revenue stream but often resulted in a 15 to 25% drop in Medicaid claims.

In this environment, actuaries are producing studies suggesting that historical capitation rates are too high. Oregon has the distinction of being the first state where Medicaid mental health managed care capitation rates have been cut twice—by 16.5% in round one and by 12.1% in round two, the latter having gone into effect in January. Washington, another managed care state, implemented a 17% cut in July 2005 based on its actuarial study.

Unfortunately, many Medicaid mental health plans in managed care states have not retooled their systems to adapt to the new regulations and continue to pay providers using alternative payment methods, which is perpetuating the cycle of Medicaid capitation rate cuts. Unfortunately, many of the people who run state mental health authorities and local mental health plans have strong clinical backgrounds but weak financial backgrounds. Other factors contribute to this situation, as well, such as denial, the inability to effect change, political resistance, etc. The question is, how many Medicaid mental health managed care rate cuts will occur before states and regional Medicaid mental health plans are able to reverse the downward trend?

Providers React

A number of community mental health centers (CMHCs) in managed care states are developing strategies to continue innovative care and protect their funding base. The four strategies described below should be considered by providers in all managed care states.

Fee for service. In several communities in Washington and Oregon, CMHCs have taken the counterintuitive step of encouraging their Medicaid mental health plans to implement modified fee-for-service payment systems that bring the local system into alignment with fiscal realities. In the North Central Washington Regional Support Network, a rural three-county Medicaid mental health plan in Eastern Washington, providers have been working with the plan to phase in a modified fee-for-service model over 12-months. They have helped to develop a fee schedule that supports the work they're doing including a 25% add-on for community-based services.