**Selected Case Studies of Legal Developments in State Contracting for
Managed Behavioral Health Services**

D. Richard Mauery, MPH

Sara Rosenbaum, JD

Joel Teitelbaum, JD, LLM

The George Washington University Center for Health Services Research and
Policy

**[Introduction]{.smallcaps}**

Over the last several years, as States have designed and implemented
managed behavioral health services for Medicaid beneficiaries,
controversies have arisen over what effects this transition away from
fee-for-service medicine would have on persons with significant
illnesses and conditions such as mental illness and addiction disorders.
Debates over issues such as balancing cost containment strategies
against expanding access to care, reconciling and streamlining of
multiple (and often fragmented) funding streams, the use of large risk
management corporations as health providers and the concurrent role of
community-based and safety net providers, and the allocation of
administrative and service accountability within State and local
government agencies, have been common across the 31 States that have
thusfar instituted some form of Medicaid managed care for behavioral
health services.[^1]

While the legal developments described in this paper are specific to
managed behavioral health care, it should be noted that legal disputes
in managed care generally are common, just as they were (and continue to
be) in fee-for-service medicine.[^2] However, the nature of the
litigation changes in a managed care environment, owing to the fact that
the transition from the fee-for-service health care financing and
delivery system has introduced a new form of hybrid health entity that
combines the functions of health insurance and health care into a new
service delivery model that allocates [health care]{.underline} in
accordance with [insurance]{.underline} principles.

Patients, providers, purchasers, managed care organizations (MCOs), and
other stakeholders bring different perspectives to questions about what
level and scope of care are appropriate and medically necessary and who
should provide care to which patients. Managed care is a
contractually-driven enterprise, encompassing multiple tiers of
contracts between purchasers and MCOs, between MCOs and provider groups,
between provider groups and individual health professionals, and between
MCOs and individual managed care subcontractors for specialty services
such as behavioral health. Because these contracts can and do vary
significantly in their detail and specificity, contractual ambiguities
and/or vagueness that serve to poorly define the mutual and discrete
rights and duties of each party often require parties to seek judicial
remedies when one party to the contract believes the terms of the
contracts have not been met. Therefore, it should not be surprising that
as the use of managed behavioral health care has proliferated, disputes
that result in litigation are growing at a brisk pace.

This analysis presents case studies from five States whose recent
experiences with Medicaid and private sector managed behavioral health
care illustrate the tensions that can arise during the systemic
transition currently underway. While the examples discussed have
produced no case law *per se*,[^3] they reflect the realm of potential
legal issues that can arise in a health environment in which hybrid
corporations compete for service contracts and care is allocated in
accordance with insurance principles. We examine five types of legal
disputes:

-   Claims of inappropriate denials of care and failure to provide
    patients with timely notifications and rights of appeal
    (Connecticut);

-   Claims of fraud in the State contracting process (Montana);

-   Allegations of significant deficiencies in both the design and
    implementation of a managed behavioral health service delivery
    system that led to the termination of a Section 1915(b) waiver (New
    Mexico);

-   Failure to deliver Medicaid-mandated services such as Early and
    Periodic Screening, Diagnosis, and Treatment (EPSDT) of sufficient
    level, scope, and quality (Texas); and

-   Allegations of an MCO's unlawful denials of medically necessary
    behavioral health care for children and alleged pressure to shift
    children to the juvenile justice system to avoid paying for such
    care (Minnesota).

**[Connecticut]{.smallcaps}**

Children's Medicaid Managed Behavioral Health Services

[1. Investigation of HealthRight and Value Behavioral
Health]{.underline}

In 1997, Connecticut Attorney General Richard Blumenthal began a 3-year
investigation of HealthRight, Inc. (which held the State's contract for
its Medicaid managed care program, "Husky A") and Value Behavioral
Health, which was subcontracted by HealthRight to deliver mental health
services to children. Following an examination of more than 100
enrollees' medical cases and thousands of pages of records, Blumenthal
found that HealthRight and VBH systematically denied medically necessary
inpatient treatment for children with mental illness. According to
reports, there were numerous instances of health care workers seeking
prior authorization for treatment for children who were a danger to
themselves or to others who were told that no in-patient hospitalization
was authorized. Blumenthal characterized the denials as both purposeful
and systematic, resulting in a practice that was cruel and unfair in its
harm to children. In his words, "The denial of care went beyond simple
cost-cutting and seriously reduced mental health services for the
neediest and most vulnerable of Connecticut's citizens: poor children
with mental illness." In addition, the investigation established that
the services the companies were being paid to provide under the
Department of Social Services (DSS) contract were often shifted to the
Department of Children and Families (DCF) -- thus the State paid twice
for the same services.

In January 1999, Attorney General Blumenthal announced his intention to
take legal action against HealthRight, Inc. and Value Behavioral Health
as a result of the investigation. In May 2000, a settlement agreement
was reached before the State filed suit. By this time, Value Behavioral
Health had become ValueOptions, which assumed responsibility for the
settlement terms. The State agencies that were parties to the settlement
were DSS, DCF, and the Department of Public Health. While not admitting
any wrongdoing, HealthRight and ValueOptions agreed to pay the State \$4
million in the following manner: (1) HealthRight must immediately pay
\$300,000 to the Department of Social Services to be used to fund a
study of ways to benchmark behavioral outcomes for use in the Medicaid
managed care program and to fund a task force on the status of the
State's Medicaid managed behavioral health system; (2) HealthRight must
deliver to the State \$1,200,000 in U.S. Treasury Notes payable in
four-year maturities of \$300,000; (3) ValueOptions must immediately pay
\$300,000 to the State as well as \$1,200,000 in U.S. Treasury notes
over with four-year maturities; and (4) ValueOptions must provide free
of charge \$1 million worth of room, board, and related charges for
Connecticut DCF clients at a ValueOptions facility called "The Pines" in
Portsmouth, Virginia.

[2. *Karen L. v. PHS, Inc. and Department of Social
Services*]{.underline}

On November 17, 1999, Connecticut Legal Services and the New Haven Legal
Assistance Association filed a Federal class action suit in U.S.
District Court for the District of Connecticut on behalf of a 6-year-old
girl identified as Karen L. and Grisel Hernandez against Physicians
Health Services, Inc. (PHS) and DSS alleging the PHS uses "flawed"
notification procedures which prevent patients from pursuing medically
necessary services.[^4] The complaint alleges that PHS routinely fails
to provide required written notice of all decisions which would
terminate, deny, or reduce requested or ongoing treatment, including an
explanation of the right to a hearing, how to obtain a hearing, and the
circumstances under which services are to be continued if a hearing is
requested in a timely fashion.

DSS is named in the suit because the complaint alleges that DSS has
failed to meet its contractual duty to monitor PHS's compliance with
Medicaid notification laws and contract provisions. The "class"
represents a group of 74,000 PHS Medicaid managed care enrollees. PHS is
a division of Foundation Health Services and is the third largest health
plan in the Northeast. It covers approximately 500,000 enrollees in
Connecticut (including its commercial line of business) and is the
second largest Medicaid managed care plan in the State.

At the time of this writing (February 2001), the case is still pending.
Interestingly, Attorney General Richard Blumenthal is required to defend
DSS against the allegations, while at the same time he has filed his own
class action suit against four Connecticut HMOs, including PHS, for
(among other things) inappropriate denials of care and lack of proper
notification of rights of appeal (see No. 3 below).

# *General Managed Care Legal Developments in Connecticut*

[1. Dispute Between PHS and PRO Behavioral Health]{.underline}

In June 2000, the *Hartford Courant* reported on a financial dispute
between PHS and PRO Behavioral Health, PHS's subcontractor for the
delivery of managed mental health care. The dispute has led to
significant delays in payments to contracted providers. PRO has sued PHS
in State Superior Court, accusing PHS of trying to drive it out of
business by paying unreasonably low rates; PHS claims it paid PRO the
money it was supposed to and that it is PRO's responsibility to pay the
providers. Attorney General Blumenthal is investigating what effects
this dispute may be having on access and quality of care for consumers
of mental health services. In the meantime, PHS has begun depositing
money in an escrow account that can be accessed by PRO, but only with
review and a co-sign by PHS.

[2. *State of Connecticut v. PHS, Inc.* -- Drug Formularies]{.underline}

Attorney General Blumenthal filed suit in U.S. District Court against
PHS in December 1999 alleging that PHS imposed restrictions on access to
prescription drugs that posed a threat to the health of its enrollees.
The complaint accused PHS of using price, rather than quality, to
determine which drugs to cover and that it pressured patients to use
company-preferred drugs, even when the medicine their doctors prescribed
was alleged to be "safer and more effective." The case was dismissed by
Judge Stefan R. Underhill in August 2000, who ruled that regardless of
the merits of the case, the State of Connecticut is barred from suing
HMOs under ERISA.[^5] In his words, "Congress carefully limited the
persons authorized to being an ERISA civil enforcement action, and any
such plaintiff must be either a 'participant, beneficiary or fiduciary.'
... The State does not meet any of these statutory requirements." The
decision came two months after the U.S. Supreme Court's ruling on
*Pegram v.* *Herdrich,* another case involving HMO liability and
ERISA.[^6] Attorney General Blumenthal said he would appeal the
decision.

[3. State of Connecticut v. Four HMOs]{.underline}

On September 7, 2000, Attorney General Richard Blumenthal filed a class
action suit against four Connecticut HMOs, making Connecticut the first
State to take such action. The lawsuit, filed in U.S. District Court in
Connecticut named as defendants Anthem Blue Cross and Blue Shield of
Connecticut (and its parent Anthem Health Plans, Inc.), CIGNA Healthcare
of Connecticut (and its parent CIGNA Health Plans, Inc.), Oxford Health
Plans of Connecticut, Inc. (and its parent Oxford Health Plans, Inc.),
and Physicians Health Services of Connecticut (and its parent Foundation
Health Systems, Inc.). The suit focuses on five abuses documented by the
Attorney General's office, alleging that they violate ERISA's
requirement that health plans act solely in the interest of enrollees.
Specifically, the suit alleges that:

1)  The HMOs use prescription drug formularies to obstruct patient
    access to medically necessary drugs;

2)  The HMOs fail to make timely payments to providers, thus threatening
    enrollees with loss of necessary care;

3)  The HMOs fail to respond to enrollees' written and telephone
    communications with answers that are timely, coherent, and fair;

4)  The HMOs fail to disclose to enrollees essential information about
    prescription drug coverage and the steps necessary to submit and
    appeal denials of coverage; and

5)  The HMOs use arbitrary coverage guidelines as the basis for coverage
    denials.

The suit does not seek monetary damages, according to Attorney General
Blumenthal, but rather seeks basic reforms in managed care practices to
compel compliance with ERISA requirements to act solely in the interest
of enrollees. As mentioned above, the Attorney General is party to
another suit against PHS, to the extent that as Attorney General he must
defend DSS in a class action suit brought against PHS and DSS on behalf
of Medicaid managed care enrollees served by PHS.

**Sources:**

-   "Conn. AG Looks Into Possible Abuses in Value Behavioral Medicaid
    Carve-Out," *Managed Behavioral Health News*, January 21, 1999, Vol.
    5, No. 4. In The Managed Care Liability Project. Available at
    [http://www.protectionandadvocacy.com](http://www.protectionandadvocacy.com/).

-   "HealthRight Inc. Investigated by State." Connecticut Attorney
    General's Office Press Release, January 7, 1999. Available at
    <http://www.cslnet/ctstateu.edu/attygenl/press/1999/health/htright.htm>.

-   "State Reaches \$4 Million Settlement with Mental Health
    Contractors." Connecticut Attorney General's Office Press Release,
    May 11, 2000. Available at
    [http://www.cslnet/ctstateu.edu/attygenl/press/2000/health/healthr.htm](http://www.cslnet/ctstateu.edu/attygenl/press/1999/health/htright.htm).

-   "Attorney General's Statement on the Dismissal of the State's
    Lawsuit Against PHS." Connecticut Attorney General's Office Press
    Release, July 13, 2000. Available at
    [http://www.cslnet/ctstateu.edu/attygenl/press/1999/health/phsd.htm](http://www.cslnet/ctstateu.edu/attygenl/press/1999/health/htright.htm).

-   Julien, Alexander. "U.S. Court Rejects HMO Case." *The Hartford
    Courant*. August 16, 2000.

-   Mezzy, Randi Faith. "Blumenthal Should Fight PHS on Everyone's
    Behalf, Not Just Some." *The Hartford Courant*. October 1, 2000.

-   Julien, Alexander. "HMO-Contractor Dispute Cited in Access to Care."
    *The Hartford Courant*. September 29, 2000.

-   "Attorney General Files Class Action Lawsuit Against Connecticut
    HMOs." Connecticut Attorney General's Office Press Release,
    September 7, 2000. Available at
    [http://www.cslnet/ctstateu.edu/attygenl/press/2000/health/allhmo.htm](http://www.cslnet/ctstateu.edu/attygenl/press/1999/health/htright.htm).

**[Montana]{.smallcaps}**

Allegations of Contract Award Improprieties

In early 1997, Montana awarded a contract worth \$400 million for the
provision of mental health services to all Medicaid eligibles in the
State to Montana Community Partners (MCP), a private for-profit
subsidiary of a national company, CMG Health, Inc. Three other
unsuccessful bidders for the contract -- Vista Behavioral Health
(Vista), Merit Behavioral-Blue Cross/Blue Shield of Montana, and Options
Health Care Inc.-Montana Hospital Association -- filed formal complaints
with the State alleging that MCP had been given an unfair advantage in
the contract award process. Among the specific issues in the complaint
were: (1) questions about the contract's ability to meet Federal
standards and about its validity; (2) accusations that MCP provided job
offers and "inappropriate advice" to members of the contract review
committee; and (3) evidence that MCP was allowed to submit a 150-page
proposal, despite the fact that other bidders were limited to 100 pages.

Vista filed suit in State court in Helena, Montana in March 1997. In
June 1997, MCP, while admitting no wrongdoing, reached an out-of-court
settlement with Vista in which it agreed to pay Vista \$1.2 million,
which represented some of Vista's out-of-pocket expenses incurred for
preparing its technical proposal for the contract. The settlement
further stipulated that except in the event of termination or
cancellation of MCP's contract with the State, Vista agreed not to
compete for any Montana public sector managed mental health contract nor
to solicit or accept membership in the Care Coalition of Montana or the
Board of Directors of MCP without first obtaining written permission
from CMG Health, Inc., the parent company of MCP.

MCP held the contract for only 2 years. During that time, its parent
company was bought out twice. In 1999, the State decided to end its
Mental Health Access Plan and canceled its contract with MCP. Among
MCP's failures was that it was never fully embraced by the State's
network of mental health providers and was never efficiently run as a
company. It was also undercapitalized, and care management was generally
ineffective.

*Return to Fee-For-Service Mental Health Services in Medicaid*

Following termination of the MCP contract, the State returned to
fee-for-service reimbursement for mental health services for Medicaid
enrollees. In May 2000, the Montana Department of Public Health and
Human Services (DPHHS) and the Mental Health Services Bureau contracted
with the Technical Assistance Collaborative (TAC), a non-profit
organization founded by the Robert Wood Johnson Foundation to assess and
evaluate the Montana Medicaid Mental Health Program and the Mental
Health Services Plan and to offer recommendations for program
improvements in a series of three reports. The TAC's final reports are
available on the DPHHS website at
[http://www.dphhs.state.mt.us](http://www.dphhs.state.mt.us/).

**Sources:**

-   "Montana: Companies Fight Managed Mental Health Contract," *American
    Health Line*, March 18, 1997.

-   "HMOs Settle Disputes Over Awarding of Montana's Mental Health
    Contract," *Mealey's Litigation Reports: Managed Care*, August 20,
    1997.

-   Madsen M, Abrahams J, and Dowd D. "Medicaid Contracting -- A New
    Challenge for the States," *Corporate Legal Times*, Vol. 7 No. 3,
    December 1997.

-   Lourie, Ira S. "Positive Lessons Learned Through the Mental Health
    Access Plan for Child and Adolescent Mental Health Services,"
    prepared under contract with the Addictive and Mental Disorders
    Division, Montana Department of Public Health and Human Services.
    Washington, DC. January 2000. Available at
    [http://www.dphhs.state.mt.us](http://www.dphhs.state.mt.us/).

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-   Montana Department of Public Health and Human Services. "Technical
    Assistance Collaborative Summary: Overview of Mental Health Services
    Bureau Evaluation of MHSP and MMHP." May 15, 2000. Available at
    [http://www.dphhs.state.mt.us](http://www.dphhs.state.mt.us/).

-   Montana Department of Public Health and Human Services. "TAC
    Evaluation Reports Progressing." *Mental Health Bulletin*. December
    1, 2000. Available at
    <http://www.dphhs.state.mt.us/hot/mhap/mhap_bulletins/mhap_12012000.htm>.

**[New Mexico]{.smallcaps}**

*HCFA Denial of Renewal of Waiver for Managed Behavioral Health
Services*

New Mexico began its Medicaid managed care program, known as "Salud!,"
in 1997. New Mexico was one of only two States (the other being
Tennessee) that mandated all Medicaid-eligible residents enroll in an
MCO for their behavioral health care (with the exception of Native
Americans, who can opt in to Salud! or stay in the fee-for-service
system). About 200,000 New Mexicans are covered by Salud!, which has an
annual budget of \$1.24 billion, 75% of which is provided by the Federal
government. New Mexico contracted with three MCOs, Lovelace Health
Systems, Presbyterian Health Plan, and Cimarron Health Maintenance
Organization, to deliver services under the Salud! Program. New Mexico
legislators attempted to carve out behavioral health services during the
rollout of Salud!, However, Governor Gary Johnson vetoed the measure.
The provision of managed behavioral health services entailed a
three-level administrative structure: the Salud! MCOs subcontracted with
behavioral health organizations, such as ValueOptions, which then
contracted with Regional Care Coordinators (RCCs) at the local level.
These latter organizations functioned both as referral agencies for
consumers and as direct providers of behavioral health services.

The Bazelon Center for Mental Health Law's involvement in studying New
Mexico's problems began early after Salud!'s implementation. In August
1998, the Bazelon Center co-signed a letter with the New Mexico Alliance
for the Mentally Ill recommending that the Health Care Financing
Administration (HCFA) investigate access to behavioral health services
for Salud! enrollees. In March 2000, the Bazelon Center urged HCFA not
to renew New Mexico's request for a renewal of the behavioral health
component of its Section 1915(b) waiver. On July 5, 2000, the Interim
Health and Human Services Committee of the New Mexico Legislative
Council held a hearing to identify problems with, and recommendations
for, Salud!'s delivery of mental health services. Rafael M. Semansky,
MPP, a policy research analyst with the Bazelon Center in Washington,
D.C. provided testimony based on a series of analyses Bazelon had
conducted of Salud!'s operations. The committee also heard testimony
from a grassroots organization known as the "Human Needs Coordinating
Council," a coalition of 600 health and human services clients,
advocates, providers and organizations. At the request of U.S. Senator
Jeff Bingaman (D-NM), HCFA sent a team to attend the hearing.

In Semansky's testimony before the committee in July 2000, he compared
the problems with Salud! to the experience of TennCare, the only other
State Medicaid managed care program to require immediate statewide
enrollment rather than phasing eligibility groups in over time.
According to his testimony, there were five general problematic issues
shared by TennCare and Salud!:

1.  An inadequate capitation rate for the expanded benefits and the
    larger population covered;

2.  Insufficient and non-uniform data from the health plans that
    hindered evaluations of quality and performance;

3.  Weak enforcement of contract requirements by the Medicaid agency;

4.  Lack of behavioral health providers willing to participate in
    Salud!; and,

5.  Limited access to community-based mental health services, despite
    declining rates of inpatient psychiatric services.

Specific findings from the Bazelon Center's analyses related to the
access, cost, and quality of behavioral health services for Salud!
enrollees. Semansky found that the rate of community mental health
service authorizations declined precipitously for the RCCs; for example,
Presbyterian Medical Services rate per 1,000 members of authorizations
for child and adolescent community based services dropped from 1,000 in
August 1999 to 300 in February 2000. ValueOptions, Presbyterian's BHO,
decreased utilization of inpatient psychiatric services without an
offsetting increase in community-based services. The analysis also found
that the utilization of inpatient psychiatric services by youth in
juvenile justice custody doubled under Salud!, leading Semansky to
conclude that Salud! behavioral health services for children and
adolescents were inadequate, theorizing that youths become involved in
the juvenile justice system because they have insufficient access to
preventive services.

In addition, the three-layer administrative system proved difficult to
operate, given that a large percentage of New Mexicans live in rural and
frontier areas with limited numbers of providers. This both increased
costs and contributed to administrative inefficiencies brought about by
different health plan requirements for authorizations, billings, and
claims procedures. The analysis found that excessively high
administrative costs for behavioral health care amounted to 51 cents of
each dollar, though State officials disputed this figure. Many
behavioral health providers dropped out of participation in Salud!,
citing low reimbursement rates and high costs of administrative
compliance. The Bazelon Center testimony called into question the
validity and usefulness of the encounter data collected by the State,
concluding it was insufficient to enable the Medicaid agency to monitor
program performance.

Furthermore, excessive wait times and delays in completing follow-up
visits after psychiatric hospitalization were cited as evidence of
access barriers in the program. While the National Committee for Quality
Assurance national average for visits within seven days following
discharge is 45%, the highest average among the three Salud! MCOs was
26.44% and the low was 14.63%. Similar figures for discharge within 30
days are 68% nationally, with Salud! MCOs ranging from a high of 42.31%
to a low of 27.13%.

The Bazelon Center report also found that Medicaid case management
services were virtually nonexistent, that children with serious
emotional disturbances were not able to access intensive services, that
management of antidepressant medications was inadequate, and that
overall consumer satisfaction with the quality of Salud! behavioral
health services was low. The report also found that enrollee grievance
and appeal procedures were poorly designed and advertised, and that
utilization review decisions were untimely, resulting in delays in
enrollees receiving care.

On October 19, 2000, HCFA's then-Director Timothy Westmoreland wrote to
Robert T. Maruca, Director of New Mexico's Medical Assistance Division,
notifying him that the State's request to renew its Medicaid section
1915(b) two-year waiver had been approved for the delivery of physical
health services but not for behavioral health services. The letter
instructed the State to transition all behavioral health care services
from managed care to the fee-for-service system within 90 days from the
date of the letter. The State was also required to submit a transition
plan describing how it would communicate and facilitate the transition
as well as how continuity of care would be maintained. HCFA noted it
would continue to monitor the experience of the delivery of behavioral
health services during and after the transition to fee-for-service.
State officials negotiated a delay in the transition until February
2001.

**Sources:**

-   Guthrie, Patricia. "N.M. Medicaid changes worry advocates for the
    mentally ill." *Albuquerque Tribune*. August 21, 1996. p. A6.

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-   "In a letter to HCFA, the Bazelon Center for Mental Health Law
    'strenuously' urges HCFA not to renew New Mexico's Medicaid managed
    care program, Salud!" *Managed Medicare and Medicaid.* No. 13, Vol.
    6; p. 7.

-   Hummels, Mark. "Group directs more criticism at state health plan."
    *The Santa Fe New Mexican.* April 25, 2000.p. B-5.

-   Fecteau, Loie. "Input wanted in Medicaid debate." *Albuquerque
    Journal*. July 7, 2000. p. D3.

-   "Salud! Medicaid Managed Care Behavioral Health Funding: State
    Fiscal Years 1998 and 1999." New Mexico Department of Human
    Services. August 2000. Available at
    <http://www.state.nm.us/hsd/home.html>.

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-   Jadrnak, Jackie. "Managed Medicaid called cumbersome." *Albuquerque
    Journal*. September 6, 2000. p A1.

-   Testimony of Rafael M. Semansky, MPP, Policy Research Analyst,
    Bazelon Center for Mental Health Law, before the New Mexico
    Legislative Council Interim Health and Human Services Committee on
    the Subject of Salud!'s Delivery of Mental Health Services: Problems
    and Recommendations." July 5, 2000. Available at
    [http://www.bazelon.org](http://www.bazelon.org/).

-   The Bazelon Center for Mental Health Law. "Documented Problems with
    New Mexico's Medicaid Behavioral Health Care." and "Problems with
    Salud!, New Mexico's Managed Health Care Program: Information Sheet
    #2: HEDIS Data and Additional Member Survey Data." (undated).
    Available by request from Bazelon by contacting Ms. Lee Carty,
    Communications Director, 1101 15^th^ Street NW, Suite 1212,
    Washington, D.C. 20005. E-mail <leec@bazelon.org>.

-   Letter from Timothy Westmoreland, HCFA Director, to Robert T.
    Maruca, Director of New Mexico's Medical Assistance Division.
    October 19, 2000. Available at
    http://www.bazelon.org/westmorelandltr.html.

**[Texas]{.smallcaps}**

Violations of 1996 EPSDT Consent Decree: Managed Care Aspects

On August 14, 2000, U.S. District Judge William Wayne Justice ruled that
Texas was in violation of several orders contained in a 1996 consent
decree to provide EPSDT services to more than 1.5 million children
eligible for Texas Medicaid, including mental health and developmental
screenings (109 F. Supp. 2d 579; 2000 U.S. Dist.). The consent decree
stemmed from a 1993 class action suit, *Frew et al v. Gilbert et al*
(Civil Action No. 3:93CA65), which was filed by San Antonio lawyer Susan
Zinn of the Texas Rural Legal Aid organization. Judge Justice found that
the State failed to meet its requirements in several areas: (1) failure
to provide dental checkups; (2) failure to provide sufficient staff to
inform eligible recipients about services; (3) failure to provide needed
transportation to clinics and hospitals; and (4) failure to provide
adequate care to enrollees of Texas' Medicaid managed care program,
known as STAR. EPSDT services are provided through STAR's Texas Health
Steps program.[^7]

The STAR program began in 1993 in Travis County and in the Gulf Coast
area in and around Galveston. By 1999, it was expanded to include
Southeast, Bexar, Tarrant, Lubbock, Dallas, Harris and El Paso areas and
enrolled about 346,000 Medicaid recipients. In 1997, 83% of STAR
enrollees were under the age of 20. The Texas legislature declared a
moratorium on new enrollment as of 1999, but future continuation of the
rollout of managed care is considered likely. The plaintiffs' complaints
regarding the managed care system can be grouped into four areas: (1)
the receipt of services, including mental health services, by class
members enrolled in managed care; (2) the treatment of the children of
migrant workers enrolled in managed care; (3) the training of health
care providers employed by managed care systems; and (4) the timeliness
and quality of data obtained from the STAR managed care organizations
used to monitor the access, quality, and cost of services.

The court held that the STAR program impedes class members' access to
mental health services. It cited the words of a physician and member of
the Tarrant regional advisory committee on managed care:

They are losing services that were available three years ago; there are
fewer hospital beds for children and adolescents. ... Mental health is
the least served area. If there is high demand, then the providers can
select their patients. They're going to select patients where they will
get reimbursed appropriately. Taking a system that is weak to start with
in its reimbursement and making it more difficult to administer, places
further demands on those providers. They are going to drop out of the
system.

The court also cited the Dallas committee's concerns about "the adequacy
of the mental health network for children, especially children with
complex needs." In one particular case, that of "C.H. and Sons," an
enrollee's experiences with Americaid, one of the STAR MCOs, were
described. One of C.H.'s sons, James, had mild mental retardation,
asthma, oppositional defiant disorder, and affective disorder. The
psychiatrist who had been treating James decided to "drop all his
Medicaid patients." Americaid initially told C.H. that she did not need
a referral code to take James to a new psychiatrist. The company then
later refused to pay for his care because C.H. "did not follow procedure
about getting a referral code."

Judge Justice reiterated the consent decree's provision that,
"Defendants may contract with individuals and entities to provide EPSDT
services. But, Defendants remain ultimately responsible for the
administration of the EPSDT program in Texas and compliance with Federal
EPSDT law." He further noted that a 1998 Texas Health Quality Alliance
report that found that one-half of the STAR MCOs did not substantially
meet the requirement that they have systems in place to ensure the
delivery of Texas Health Steps services. The defendants argued that 42
U.S.C. §1396u-2 only requires the State to ensure that EPSDT services
are "offered," not that such services are received.[^8] Judge Justice
disagreed, stating that "Section 1396-u2 permits the States to utilize
managed care to meet their obligations under the Federal EPSDT statute;
it does not free them from those obligations, or limit their
responsibilities to managed care enrollees."

Further, "Defendants have a duty under 42 U.S.C. §1396 to inform 'all'
EPSDT eligible participants about the program and to provide services to
those who request them after being informed."[^9]

Judge Justice concluded by ordering that the State provide to the court
and the plaintiffs a series of proposed corrective action plans for each
of the violations of the decree by October 14, 2000. Texas Attorney
General John Cornyn filed an appeal requesting a stay of the judges'
order, which was granted by the 5^th^ U.S. Circuit Court of Appeals in
New Orleans on October 18, 2000. Most recently, in early January 2001,
the plaintiffs have added two more complaints to the suit: that the
State has not enrolled enough dentists in the Medicaid program and that
ill children are not treated in a reasonable amount of time as Federal
law requires. State health officials have requested a \$44 million
increase for 2002 for children's Medicaid programs, including \$13
million to increase reimbursements to participating dentists. The
current program outlay is \$237 million.

**Sources:**

-   Linda Frew, *et al.*, Plaintiffs, v. Don Gilbert, *et al*,
    Defendants. Civil Action No. 3:93CA65. United States District Court
    for the Eastern District of Texas, Paris Division. 109 F. Supp. 2d
    579; 2000 U.S. Dist. LEXIS 12410; 70 Soc. Sec. Rep. Service 439.

-   "Federal Court Finds Texas Violated Decree to Improve Health of Poor
    Children." *Health Law Litigation Reporter*. Vol. 8; No. 2; Pg. 3.
    September 2000.

-   Dubose, Louis. "Justice Delayed? The Governor's Response to a
    Federal Judge's Decision Angers Two Democratic Legislators." *The
    Austin Chronicle*. September 22, 2000.

-   Dubose, Louis. "Justice vs. Cornyn." *The Austin Chronicle*.
    September 22, 2000.

-   "Delay OK." *Texas Lawyer*, October 23, 2000. p. 3.

-   Russell, Jeanne. "Dental Care May Be Added to Children's Medicaid
    Suit." *San Antonio Express-News*. January 4, 2001.

**[Minnesota]{.smallcaps}**

*Allegations of Improper Denials of Medically Necessary Children's
Behavioral Health Services*

On October 3, 2000, Minnesota Attorney General Mike Hatch filed suit
against Blue Cross/Blue Shield of Minnesota (BCBSM) on behalf of the
State in Hennepin County District Court. In his complaint, Hatch alleged
that BCBSM, through its mental health subsidiary Behavioral Health
Services, Inc., unlawfully denied medically necessary mental health,
eating disorder, and chemical dependency treatment for children and
young adults. The complaint stated six specific areas of BCBSM's alleged
"pattern and practice of misconduct" with respect to the coverage of
this treatment:

1.  "Shifting costs to taxpayers and/or families by telling subscriber's
    children to seek help through the juvenile justice system rather
    than receive health care treatment that is covered under the
    subscribers' policies with BCBSM;

2.  Shifting costs to taxpayers and/or families by refusing or
    significantly delaying coverage for court-ordered treatment in the
    face of recommendations by treating physicians that the treatment is
    medically necessary;

3.  Denying or limiting coverage for medically necessary treatment after
    mere 'paper reviews,' contradicting the sound judgements and
    recommendations of the only physicians who have ever actually
    examined and treated the patients;

4.  Delaying coverage by forcing subscribers into unwarranted appeals of
    denials of coverage for medically necessary and pre-authorized
    treatment;

5.  Misrepresenting and omitting material facts regarding its coverage
    of authorized treatment; and

6.  Hiding from subscribers the true conditions, standards, and criteria
    for its denials of coverage, which among other things, places
    subscribers at an unfair disadvantage during the appeal process."

Attorney General Hatch stated that while the suit names BCBSM, other
major health care companies engage in similar practices. His decision to
pursue BCBSM was based on the potential for "generating more consumer
complaints," but he warned that if the other companies did not "clean up
their acts" he would sue them as well.

The complaint describes the experiences of six anonymous child and
adolescent patients with serious mental health conditions, eating
disorders, and chemical dependency problems who had BCBSM coverage. The
cases are used to illustrate one or more of the six points above as
examples of the effects on their health as a result of BCBSM's allegedly
improper coverage and treatment denials. In his five-count complaint,
Attorney General Hatch alleged that BCBSM violated various Minnesota
statutes regulating false and deceptive advertising practices and also
the provision of information concerning the basis for the denial of
beneficiaries' insurance claims. Hatch's suit seeks to have BCBSM
enjoined from engaging in such activities, to require BCBSM pay
restitution to those affected by its practices, and to require BCBSM to
pay civil penalties, attorneys' fees, and court costs. He has stated
that BCBSM's actions have cost Minnesota taxpayers at least \$11
million.

BCBSM filed its answers to the complaint with the court on October 27,
2000 denying all charges. The company stated that: (1) its definition of
medical necessity is consistent with the State's definition at Minnesota
Statute § 62Q.60; (2) it has implemented a "rigorous set of practices
designed to apply conscientious medical review" to mental health
services that complies with State requirements; (3) its coverage and
treatment decisions regarding the six anonymous individuals were
appropriate; (4) it does not inappropriately refer subscribers to the
juvenile justice system; and (5) it routinely pays for virtually all
(more than 94%) of requested treatment, whether reviewed or not.

In January 2001, in advance of a scheduled February 21, 2001 hearing,
Attorney General Hatch demanded that BCBSM turn over thousands of
documents related to behavioral health claims, which the company said
would be a violation of the medical privacy of its members since these
individuals had not authorized the release of their records. In a press
statement BCBSM said, "Instead of working with Blue Cross within the
rules of the court, Attorney General Mike Hatch has unfortunately chosen
to try this case through press conferences and has consistently refused
to provide authorization Blue Cross legally needs to comply with his
request."

As the events of this case were unfolding, a Minnesota legislative
auditor released preliminary findings from a study of health insurers'
payments of behavioral health insurance claims. The study found that the
State's insurers have refused to pay for \$28.5 million for claims of
behavioral health treatment administered by State agencies. The report
characterized the State's mental health system as "fragmented and rife
with conflict and dissatisfaction." According to the report, of
Minnesota's \$941 million annual expenditure for behavioral health care,
two-thirds is paid for by the public sector. The remaining third, \$310
million, is paid by private insurance companies, even though they insure
or manage care for two-thirds of the population. The report's authors
stated that their findings were limited by the availability of adequate
data, but that concerns about the inappropriate shifting of costs to the
public sector appear to merit further study.

**Sources:**

-   *State of Minnesota v. Blue Cross and Blue Shield of Minnesota*.
    Case No. CT00-014012. District Court, Fourth Judicial District,
    Hennepin County. Available at
    [http://www.ag.state.mn.us](http://www.ag.state.mn.us/).

-   Answer of Blue Cross and Blue Shield of Minnesota to *State of
    Minnesota v. Blue Cross and Blue Shield of Minnesota*. Available at
    <http://www.bluecrossmn.com/main/media/Answer10-00.pdf>.

-   Marcotty J. "Blue Cross Sued in Minnesota." *Minneapolis-St. Paul
    Star Tribune*. October 4, 2000.

-   "Minnesota Blues Defends Against AG's Allegations on Mental Health
    Coverage." *BNA Health Law Reporter*. Vol. 9, No. 44. November
    11, 2000. pp. 1708-1709.

-   "Statement by Blue Cross and Blue Shield of Minnesota CEO Mark
    Banks, M.D. Regarding Attorney General Hatch's Allegations." *PR
    Newswire*, January 31, 2001.

-   Marcotty J, and Howatt G. "Who Pays When Treatment is Court-Ordered?
    Auditor's Report Finds Insurers Shift Costs of Mental Health to
    State." *Minneapolis-St. Paul Star Tribune*. February 10, 2001.

[^1]: "Effective Public Management of Mental Health Care: Views from
    States on Medicaid Reforms that Enhance Service Integration and
    Accountability." The Bazelon Center for Mental Health Law and the
    Milbank Memorial Fund. Washington, D.C. May 2000. Available at
    [http://www.milbank.org](http://www.milbank.org/).

[^2]: See, *e.g.,* the vast body of fee-for-service case law in chapters
    2 and 3 of Rosenblatt R, Law S, and Rosenbaum S. [Law and the
    American Health Care System. (1997; 1999-2000
    Supplement)]{.underline}. Foundation Press. New York.

[^3]: See accompanying review of recent managed care-related case law in
    Rosenbaum S, "An Overview of Legal Developments in Managed Care Case
    Law." This report presents analyses of case law in the areas of: (1)
    claims brought by managed care enrollees against managed care
    companies and health plans; (2) cases related either directly or
    indirectly to managed care and brought by both beneficiaries and
    MCOs against State Medicaid agencies and other public agencies
    engaged in the purchase of managed care; and (3) cases brought by
    individual health professionals against MCOs.

[^4]: *Karen L. v Physicians Health Services Inc*., D. Conn., No 3:99 CV
    2244, complaint filed 11/17/99.

[^5]: See accompanying discussion of case law regarding the effect of
    ERISA preemption on the liability of HMOs in Rosenbaum S, "An
    Overview of Legal Developments in Managed Care Case Law."

[^6]: See accompanying summary of *Pegram v. Herdrich* in Rosenbaum S,
    "An Overview of Legal Developments in Managed Care Case Law."

[^7]: TennCare in Tennessee has also been the subject of numerous class
    action suits and consent decrees concerning the delivery of
    behavioral health services for children, particularly under the
    Medicaid EPSDT benefit. See, for example, *John B. v. Menke*, CA No.
    98-0168 (M.D. Tenn.), *Daniels v. Wadley*, CA No.96-5887, 926 F.
    Supp. 1305; 1996 U.S. Dist., and *Grier v. Wadley*, CA No. 79-3107.
    Further information can be obtained from the Tennessee Justice
    Center at [http://www.tnjustice.org](http://www.tnjustice.org/).

[^8]: Title 42 U.S.C. §1396-u2(b)(5) states: "Demonstration of adequate
    capacity and services: Each Medicaid managed care organization shall
    provide the State and the Secretary with adequate assurances (in a
    time and manner determined by the Secretary) that the organization,
    with respect to a service area, has the capacity to serve the
    expected enrollment in such service area, including assurances that
    the organization - (A) offers an appropriate range of services and
    access to preventive and primary care services for the population
    expected to be enrolled in such service area, and (B) maintains a
    sufficient number, mix, and geographic distribution of providers of
    services."

[^9]: Title 42 U.S.C. §1396-u2(a)(5)(B) states: "Information to
    enrollees and potential enrollees: Each managed care entity that is
    a Medicaid managed care organization shall, upon request, make
    available to enrollees and potential enrollees in the
    organization\'s service area information concerning the following:
    (i) Providers: The identity, locations, qualifications, and
    availability of health care providers that participate with the
    organization. (ii) Enrollee rights and responsibilities: The rights
    and responsibilities of enrollees. (iii) Grievance and appeal
    procedures: The procedures available to an enrollee and a health
    care provider to challenge or appeal the failure of the organization
    to cover a service. (iv) Information on covered items and services:
    All items and services that are available to enrollees under the
    contract between the State and the organization that are covered
    either directly or through a method of referral and prior
    authorization. Each managed care entity that is a primary care case
    manager shall, upon request, make available to enrollees and
    potential enrollees in the organization\'s service area the
    information described in clause (iii)."