Department of Health and Human Services 
OFFICE OF 
INSPECTOR GENERAL 
MANDATORY MANAGED CARE 
Changes in Medicaid Mental Health Services 
JUNE GIBBS BROWN 
Inspector General 
JANUARY 2000 
OEI-04-97-00340  OFFICE OF INSPECTOR GENERAL 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, as 
amended by Public Law 100-504, is to protect the integrity of the Department of Health and Human 
Services programs as well as the health and welfare of beneficiaries served by them. This statutory 
mission is carried out through a nationwide program of audits, investigations, inspections, sanctions, and 
fraud alerts. The Inspector General informs the Secretary of program and management problems and 
recommends legislative, regulatory, and operational approaches to correct them. 
Office of Evaluation and Inspections 
The Office of Evaluation and Inspections (OEI) is one of several components of the Office of Inspector 
General. It conducts short-term management and program evaluations (called inspections) that focus 
on issues of concern to the Department, the Congress, and the public.  The inspection reports provide 
findings and recommendations on the efficiency, vulnerability, and effectiveness of departmental 
programs. 
OEI's Atlanta Regional Office prepared this report under the direction of Jesse J. Flowers, Regional 
Inspector General, and Christopher H. Koehler, Deputy Regional Inspector General.  Principal OEI 
staff included: 
REGION  HEADQUARTERS 
Dwayne Grant, Lead Analyst  Alan Levine, Program Specialist

Betty Apt  Barbara Tedesco

Josiah Townsel  Brain Ritchie

Janet Miller  Joan Richardson

To obtain copies of this report, please call the Atlanta Regional Office at 404-562-7723.  Reports are

also available on the World Wide Web at our home page address:

http://www.dhhs.gov/progorg/oei  T A B L E  O F  C O N T E N T S  
PAGE

EXECUTIVE SUMMARY ......................................................1

INTRODUCTION .............................................................4

FINDINGS

Expanded Services ......................................................10

Reduced Costs  .........................................................12

Health Impact Not Quantified  .............................................13

Savings Not Always Used to Improve Mental Health Services .................... 16

RECOMMENDATIONS  ...................................................... 18

AGENCY COMMENTS  ...................................................... 19

APPENDICES

A: Summary of First Year Contracts ........................................21

B: Agency Comments  ...................................................22

HCFA ..........................................................23

SAMHSA .......................................................26

ENDNOTES ................................................................30
 E X E C U T I V E  S U M M A  R Y  
PURPOSE 
To provide an early look at the changes that mandatory managed care had on State Medicaid 
mental health services for persons with serious mental illnesses. 
BACKGROUND 
States are increasingly converting their Medicaid programs from traditional fee for service 

models to managed care models.  Nearly every State has implemented, or is planning to

implement, mandatory managed care for Medicaid beneficiaries who require mental health

services.  The increased use of this emerging form of care has generated interest within the

Substance Abuse and Mental Health Services Administration and the Health Care Financing

Administration, particularly care for persons with serious mental illnesses.

We used a case study approach for reviewing mandatory mental health managed care

programs in seven States.  We integrated, compared, and summarized documentary and

testimonial evidence obtained from State Medicaid managed care offices and mental health

departments.  We also interviewed managed care organization officials, mental health providers

and stakeholders. We did not validate the testimonial evidence, but we believe it provides a

first hand view of this emerging form of care by program operators and stakeholders who have

a strong interest in program effectiveness.

FINDINGS 
Services Expanded 
Managed care allowed States to offer more specialized and creative out-patient services. 
Further, States said overall use of mental health services increased.  Four of 7 States 
documented increased utilization ranging from about one to 2 percent after conversion to a 
managed care system. 
Costs Reduced 
States converted to managed care primarily to reduce skyrocketing mental health costs.  States 
reduced cost by setting limits for mental health costs in managed care contracts. They also 
achieved program savings by shifting care from in-patient to out-patient settings. 
Stakeholders, however, expressed concern that lower average length of stays and increased 
readmission rates may indicate that persons with serious mental illnesses are being released 
from in-patient care too quickly. 
Mandatory Managed Care and Mental Health Services  1  OEI-04-97-00340  Health Impact Not Quantified 
No State had working outcome measures in place. Beneficiary satisfaction surveys and 
grievances may inaccurately reflect the level and quality of care received. 
Savings Not Always Used to Improve Mental Health Services 
Consistent with existing regulations, States returned off the top savings to the States General 
Fund. States also used savings resulting from managed care operations to expand services to 
non-Medicaid eligible persons, and to help fund managed care administration.  However, four 
States did not have the appropriate Medicaid waiver to use operational savings in this manner. 
RECOMMENDATIONS 
While States reported that managed care programs have expanded out-patient services, and 
reduced costs, the overall effect on the health of persons with serious mental illnesses was not 
quantified.  However, resolution of several important concerns could significantly improve 
Medicaid mental health programs as more States convert to mandatory managed care. 
Accordingly, we recommend that: 
<	 HCFA work with SAMHSA to develop outcome measurement systems that can be 
used as a condition of waiver approval. 
<	 HCFA encourage States to establish independent, third-party mental health systems for 
conducting beneficiary satisfaction surveys. 
<	 HCFA ensure that States obtain the required 1115 waiver before using savings from 
managed care operations to expand services to non-Medicaid populations. 
AGENCY COMMENTS 
Both HCFA and SAMHSA commented on our draft report. 
HCFA disagreed with our draft recommendation to require States to develop outcome measures as a 
condition of waiver approval.  While recognizing the importance of outcome measures, HCFA said no 
reliable and cost-effective outcome measurement system currently exists and that requiring States to 
develop such a system would stall the waiver process. We continue to believe that without an outcome 
measurement system States and HCFA have no way of determining the effectiveness of managed care 
services.  However, based on HCFA comments we modified our draft recommendation to encourage 
HFCA and SAMHSA to work together to develop outcome measurements that can be used as a 
condition of waiver approval. 
Mandatory Managed Care and Mental Health Services  2  OEI-04-97-00340  HCFA agreed that States need to improve systems for measuring and promoting beneficiary 
satisfaction, and that the neutrality of people involved in the complaint process is important.  However, 
they disagreed with our recommendation to require the use of such third parties in State appeal and 
grievance systems. They noted that appeal and grievance systems were mandated in the Balanced 
Budget Act of 1997. We recently started an evaluation of these systems; therefore, we are holding in 
abeyance our draft recommendation until we complete the evaluation of State Medicaid managed care 
grievance and appeal systems. 
HCFA disagreed with our recommendation that States have an approved 1115 waiver before using 
savings resulting from managed care operations to expand services to non-Medicaid populations. 
HCFA stated that no such waivers are required since States can use their own share of savings to 
provide additional services of any kind including services for non-Medicaid eligible persons.  We agree 
with HCFA that States are free to use off the top State savings to fund services for non-Medicaid 
eligible persons.  However, we are referring to savings within the managed care program itself, including 
the Federal share of these savings.  Our understanding is that use of such savings for that purpose 
would require a 1115 waiver. We modified the text of our report to make this distinction clearer. 
SAMHSA commented that a number of our recommendations were useful, but expressed concern 
about our drawing conclusions from what they believe is a study method that is not scientific.  We 
wish to emphasize that we used a case study method for our inspection. In describing our methodology 
we included a detailed explanation of the advantages and limitations of our case study approach.  The 
limitations which we point out are similar to those described by SAMHSA.  Our goal, however, was to 
take advantage of the early experience of some States to guide implementation of other States who are 
using a managed care approach for mental health services. We are confident that our readers will 
interpret our findings in the context of the methodology which we described. SAMHSAs thoughtful 
comments will also help our readers avoid the pitfalls of over generalization. 
SAMHSA expressed concern about States offering mental health services under Medicaid managed 
care that are not authorized under traditional fee for service Medicaid. It was not the purpose of this 
study to determine if States were complying with Medicaid rules regarding allowable services. Rather, 
we were more interested in the general trends and practices of mental health services in a managed care 
environment. 
Additionally, SAMHSA expressed concern that we may not have adequately included the views of 
State mental health staff and stakeholders. As shown in our methodology, we considered input from 
such groups as highly important.  To illustrate, we interviewed at least 37 State mental health staff and 
stakeholders. 
We also made several technical changes suggested by SAMHSA. 
The full text of HCFA and SAMHSA comments are in Appendix B. 
Mandatory Managed Care and Mental Health Services  3  OEI-04-97-00340  I N T R O D U C T I O N  
PURPOSE 
To provide an early look at the changes that mandatory managed care had on State Medicaid 
mental health services for persons with serious mental illnesses. 
BACKGROUND 
States are increasingly converting their Medicaid programs from traditional fee for service 
models to managed care models.  As of June 1998, more than 16.5 million Medicaid 
beneficiaries were participating in some type of managed care program. This represents over 
53 percent of the Medicaid population.1 
Nearly every State has implemented, or is planning to implement, mandatory managed care for 
Medicaid beneficiaries who require mental health services.  As of July 1998, 36 States have 
implemented mandatory mental health managed care programs.2  The increased use of this 
emerging form of care has generated interest within the Substance Abuse and Mental Health 
Services Administration and the Health Care Financing Administration, particularly care for 
persons with serious mental illnesses. 
Within the Department of Health and Human Services, the Substance Abuse and Mental Health 
Services Administration (SAMHSA) is responsible for improving quality and availability of 
prevention, treatment, and rehabilitation services for mental illnesses. The Health Care 
Financing Administration (HCFA) is responsible for administrating the Medicaid program 
through the various States. 
Mental Illnesses 
Adults, age 18 and over, who currently or any time in the past year have had a diagnosable 
mental, behavioral, or emotional disorder that results in functional impairment which 
substantially interferes with or limits one or more major life activities is defined as seriously 
mentally ill.3  The annual prevalence of serious mental illness in the United States is estimated to 
be about 5 percent, or 10 million people.4  Some of the more commonly recognized disabling 
types of serious mental illnesses include schizophrenia, bipolar disorder, major depression, 
obsessive-compulsive disorder, and panic disorder. 
Children, up to age 18, with the same diagnosis, are classified as seriously emotionally 
disturbed. An estimated 1 in 10 children are reported to have a serious emotional disturbance 
at any given time.5  In fact, the estimated prevalence rate of serious emotional disturbances for 
children - about 9 percent - is higher than the prevalence rate of serious mental illnesses for 
adults.6 
Mandatory Managed Care and Mental Health Services  4  OEI-04-97-00340  In addition to the disorders that effect adults, children with a serious emotional disturbance may 
also be commonly diagnosed with attention deficit disorder, autism, pervasive development 
disorder, or Tourette's syndrome. 
Managed Care 
Managed care is a broad term used to describe a variety of approaches for delivering health 
care.  Managed care is characterized by an emphasis on preventive care, elimination of 
unnecessary services, negotiated price discounts, smaller co-payments and deductibles, and 
substitution of lower-cost services for higher-cost services. Historically, it has been commonly 
found in private sector health insurance programs. 
Typically, managed care involves paying a contractor a fixed, or capitated, amount per month, 
per patient to provide all agreed upon health care. The contractor, commonly referred to as the 
managed care organization, then bears a financial risk of ensuring that all medically necessary 
services are provided. To remain solvent, a managed care organization must ensure that the 
cost of services does not exceed the total capitated amount. 
Managed care is a sharp contrast to the traditional fee for service delivery system where 
providers are reimbursed for each authorized service.  In a fee for service system, consumers 
have open access to services, within limits set by their insurance. 
Medicaid Managed Care Carve Outs Preferred for Mental Health Care 
Carve out is a term used to describe a health care service or population that has been 
separated, or carved out, from other general health services or populations.  When State 
Medicaid programs convert to managed care, they typically chose to separate, or carve-out, 
mental health delivery systems from other general health services. All States in our study used a 
full or partial carve-out arrangement to deliver mental health services to Medicaid beneficiaries. 
Theoretically, carve outs allow health plans to offer Medicaid beneficiaries access to the best 
available specialists, treatments, and technologies. 
Carve outs also reduce risk to managed care organizations by separating speciality treatments 
that typically require a high level of care and cost.  Carving out high-cost services and providing 
a higher capitated rate for individuals requiring those speciality services is intended to reduce 
incentives for managed care organizations to limit services. A carve out also enhances the 
ability of Medicaid agencies to ensure that funding is used to provide speciality services 
because funds are separated from general health funding. 
Mandatory Medicaid Managed Care 
Historically, State Medicaid programs could only offer managed care as an option to traditional 
fee for service.  States could not mandate managed care enrollment without first obtaining a 
Mandatory Managed Care and Mental Health Services  5  OEI-04-97-00340  waiver from HCFA. The most common waiver requests are those permitted by Section 
1915(b) and Section 1115 of the Social Security Act. 
<	 Section 1915(b) permits waiver of the Medicaid freedom-of-choice provision.  This 
waiver allows States to mandate enrollment in managed care plans.  This type of waiver 
is used more commonly than Section 1115 waivers. Of the 36 States that have 
implemented mandatory managed care as of July 1998, 27 have 1915(b) waivers.7 
<	 Section 1115 permits large-scale demonstration projects, waiving numerous aspects of 
Federal Medicaid law.  Those aspects include rules on eligibility, benefits, provider 
qualifications, payment rules, and administrative requirements. 
In order for a State to receive either of these waivers, they must document that managed care 
costs will not exceed those had the program continued under its present fee for service 
reimbursement system. 
Certain provisions of the Balanced Budget Act of 1997 were intended to allow States to 
implement mandatory managed care without a waiver under certain conditions.  However, the 
complexity of carving out and mandating managed care for all populations with serious mental 
illnesses still generally requires a waiver. 
METHODOLOGY 
State Selection 
We reviewed mental health managed care programs for seven States. They were Arizona, 
Massachusetts, North Carolina, Utah, Washington, Iowa, and Colorado.  We selected all 
States (five) that had been under a mandatory managed care program for persons with serious 
mental illnesses for at least three years as of April 1997.8  We selected the remaining two 
States, Iowa and Colorado, at the request of HCFA. Although Iowa and Colorado had only 
been under managed care for about two years at the time of our inspection,9 HCFA staff said 
they were generally recognized as having innovative programs. 
The mental health managed care programs operated by the seven selected States were similar 
in many respects, but they also differed in some notable ways. For example, each State 
program, except one, included adults and children.  The one exception, North Carolina, 
included only children.10 
The State programs also represented a mixture of managed care contracts.  Four States 
contracted with only non-profit managed care organizations. Those managed care 
organizations were formed by existing public mental health providers. Two of the remaining 
three States contracted with for-profit managed care organizations.  The final State contracted 
with a combination of non-profit and for-profit managed care organizations. 
Mandatory Managed Care and Mental Health Services  6  OEI-04-97-00340  Finally, the States implemented mandatory managed care programs in a  variety of ways.  For 
example, four States initially only implemented programs in selected counties and regional 
communities--test geographical areas.  The remaining three implemented State-wide programs. 
For comparison purposes, we provided a general description of each selected State first year 
program in Appendix A. 
Document Review 
At each selected State, we reviewed key Medicaid and mental health program documentation 
showing program implementation, status and operations impact on persons with serious mental 
illnesses. To illustrate, we analyzed the first year managed care contract for each selected 
State. We also analyzed request for proposals, managed care waiver requests, State progress 
reports, internal and external studies and reviews on program operations, beneficiary 
satisfaction survey results, complaint and grievance reports, in-patient care data and reports, 
mental health program costs, and records on beneficiary utilization. 
We also conducted an Internet search to identify managed care research involving persons with 
serious mental illnesses. Finally, we reviewed professional journals, studies and publications on 
State Medicaid programs and mental illnesses. 
Interviews 
We interviewed 23 State Medicaid managed care department and mental health office staff in 
our survey. From those officials, we obtained an understanding of individual State implemented 
and operated Medicaid programs. Finally, we obtained the views of State Medicaid and 
mental health staff on program changes for persons with serious mental illnesses. 
Also, we interviewed 16 managed care officials, and  mental health care providers, as well as 
21 mental health stakeholders to obtain their views on program operations.  We were 
particularly interested in their views on the impact of converting State mental health programs 
from a fee for service system to a mandatory managed care system. We selected managed 
care organization officials, mental health providers, and stakeholders based on 
recommendations from State Medicaid staff. 
Advantages and General Limitations 
We used a case study approach in analyzing the changes in services on persons with serious 
mental illnesses.  The advantage of this approach was that it allowed us to gain first-hand 
experiences from State officials, managed care organization representatives, mental health 
providers, and stakeholders. Our methods have general limitations in that the States or sites 
selected may not be typical, and we did not verify the testimonial information they provided to 
us. The information is also limited, because it reflects operations that occurred over a 2 to 3-
year time period starting with each States first year contract. We are aware that State 
Mandatory Managed Care and Mental Health Services  7  OEI-04-97-00340  Medicaid managed care systems have continued to evolve with each new contract and waiver 
renewal, and that the structure of our surveyed States today may be quite different from their 
initial managed care contracts. 
The differences in individual State programs, and inconsistent data reporting limited our ability 
to generalize across State programs. For example, each State Medicaid program collects and 
reports data differently. To illustrate, one State tracks psychiatric hospital readmission rates 
within 30 days of release, but another State used a 90-day criteria. However, where utilization 
data was available, it is included in our report. 
Finally, a few mental health stakeholders asked us to include in our study an analysis of several 
general mental health concerns, such as housing, formulary restrictions, and involuntary 
commitments. Such issues have existed for years under previous, traditional fee for service 
systems, and will likely exist under new managed care systems. We believe they are valid, 
important issues, but we did not include them in the scope of this study. Such issues are not the 
result of State Medicaid conversion to mandatory managed care.  Further, we expect to 
continue our analysis of mental health care in the future. These and other important issues are 
likely topics for those inspections. 
Despite the general limitations of our inspection, we believe this report provides good, first-
hand information on the changes to Medicaid mental health services resulting from mandatory 
managed care enrollment.  This type of information could be useful when first implementing a 
new system of care. 
Definitions 
Seriously Mentally Ill - For purposes of this report, the seriously mentally ill population refers to 
both adults and children, unless otherwise stipulated. 
Stakeholders - For the purpose of this report, stakeholders include persons with an serious 
mental illness, family members of persons with a serious mental illness, and State and national 
mental health organizations representing persons with serious mental illnesses.  The 
organizations include such groups as the National Alliance for the Mentally Ill, The America 
Psychiatric Association, and The Federation of Families for Childrens Mental Health. 
Companion Reports 
This report is one of three on mandatory managed care and Medicaid mental health services. It 
provides an early look at the changes that mandatory managed care had on State Medicaid 
mental health services for persons with serious mental illnesses. 
While doing this study, we observed several common program characteristics and 
implementation practices that we believe would be valuable to other State Medicaid programs 
that plan to convert to a mandatory managed care system for mental health services, or any 
Mandatory Managed Care and Mental Health Services  8  OEI-04-97-00340  other specialty services.  We present the common characteristics and practices in a companion 
report titled Mandatory Managed Care - Early Lessons Learned by Medicaid Mental Health 
Programs (OEI-04-97-00343). 
We also observed that children often face different challenges accessing mental health care than 
do adults. The differences that can effect children are presented in a companion report titled 
Mandatory Managed Care - Childrens Access to Medicaid Mental Health Care (OEI-04-97-
00344). 
_____  ____  ____  _____ 
We did our field work between May 1997 and July 1997.  While conditions regarding mental 
health services in managed care settings may have changed since then, our report reflects 
conditions and patterns of care in the first few years of converting fee for service programs to 
managed care. Wherever possible we have updated our background information. We 
conducted the inspection in accordance with Quality Standards for Inspections issued by the 
Presidents Council on Integrity and Efficiency. 
Mandatory Managed Care and Mental Health Services  9  OEI-04-97-00340  F I N D I N G S  
Services Expanded 
New Services 
All States told us that managed care allowed them to offer more specialized out-patient services 
than they could offer under their prior fee for service system.  State Medicaid officials, along 
with several mental health stakeholders, described several examples of successful new services 
as a result of converting to managed care. The examples are highlighted below. 
<	 Residential Services: Services typically involve a group home concept that 
encourages and develops independent living. 
<	 Vocational Services: Vocational services involve job training and placement.  Such 
services increase financial stability, self-esteem, and independent living. Also, 
employment opportunities have been found to reduce hospitalization, shorten in-patient 
lengths of stay, and reduce the need for clinical services in general. 
<	 Respite Care Services: Respite services provide temporary care for beneficiaries so 
that primary care givers may have time away and relief from stress. 
<	 In-Home Programs: These programs assist and support beneficiaries to function 
independently in their own home. The services are available 24 hours daily for persons 
who agreed to the program as an alternative to in-patient care. 
<	 Club House/Day Services: This program is intended to provide a structured day for 
beneficiaries.  It is often run by beneficiaries with minimum provider oversight.  The 
program objective is to develop and encourage independent living and responsibility. 
<	 Personal Services: The objective is to assist beneficiaries with personal care and daily 
living activities, such as shopping, cleaning, banking, and picking up prescriptions. 
<	 Evaluation and Treatment Centers: These are low-cost, in-patient care facilities that 
are limited to less than 16 beds. Stays are typically short-term. The objective is to 
return beneficiaries to a community setting as quickly as possible. 
State officials cited the flexibility to provide services such as those described above as one key 
advantage of managed care over their previous fee for service system.  They said that such 
services generally would not have been offered by States under fee for service. 
Mandatory Managed Care and Mental Health Services  10  OEI-04-97-00340  Innovative Interventions 
The flexibility afforded by managed care allow States to be more creative in how they strive to 
improve the mental health of Medicaid beneficiaries.  To illustrate, 
<	 One State provided residential phone service for a beneficiary in an isolated, rural area. 
The phone allowed the person to easily call managed care providers and support 
networks. Thus, State officials told us that the phone helped prevent costly visits to the 
hospital emergency room. 
<	 Another State built a fence around the home of a person with a serious mental illness. 
The fence reduced paranoia episodes and allowed the person to feel more secure in his 
home. As a result, the person was able to remain actively employed in the community 
and out of the hospital. 
Medicaid funding for innovative interventions such as the above two examples would not have 
been possible under the previous fee for service system, according to State Medicaid officials. 
Increased Use 
The seven States in our study told us that converting to managed care increased overall use of 
mental health services. Four of the seven States documented that the number of Medicaid 
beneficiaries who used mental health services increased about 1 to 2 percent after conversion. 
This increase was corroborated by States that initially converted to mandatory managed care in 
test areas (counties and regions). They said the increased use of mental health services in the 
test areas was greater than that in counties and regions that continued to use fee for service 
systems. 
Historically, Medicaid mental health fee for service systems centered around expensive in-
patient treatment. Managed care shifted the focus towards more community-based, out-patient 
care. Community-based out-patient care is generally acknowledged by both State Medicaid 
officials and stakeholders as being less costly, and more effective than in-patient care for the 
long-term treatment of persons with serious mental illnesses. While States reported decreased 
use of in-patient care, they reported larger increases of out-patient care. 
Importantly, several States noted that the time beneficiaries had to wait to receive services was 
less under managed care than it was under their prior fee for service plan. For example, one 
State reported a 25 percent decrease in the number of beneficiaries that were required to wait 
2 weeks or more for out-patient services. 
Mandatory Managed Care and Mental Health Services  11  OEI-04-97-00340  Costs Reduced 
Contracted First Year Savings 
Medicaid officials in all seven States said their primary reason for converting to managed care 
was to reduce skyrocketing mental health costs. For example, one State reported that 
Medicaid mental health costs had increased by almost 20 percent annually over the past several 
years under fee for service. State Medicaid staff told us they could gain better control over 
Medicaid mental health costs by contracting with managed care organizations under capitated 
arrangements. 
One way that States gained control over costs was by setting the contracted capitation rate 
lower than the anticipated fee for service rate.  For example, one State stipulated that contract 
bids could not exceed 95 percent of the anticipated fee for service rate.  Four of the seven 
States we studied said such off the top savings from setting contract limits ranged from 4 to 
12 million dollars in the first year11. The remaining three States allowed contracted rates to 
match expected fee for service levels.  Therefore, while not realizing a cost savings, they said 
their costs remained stable. 
Reduced In-Patient Care Lowered Costs 
The seven States we studied all claimed dramatic declines of in-patient (hospitalization) costs. 
Under their previous fee for service systems, State Medicaid staff said in-patient costs typically 
represented over half of their mental health service expenditures.  Most of the State Medicaid 
staff said that they cut the percentage of in-patient costs nearly in half by converting to managed 
care. For example, one State Medicaid official said that in-patient care costs were reduced 
from 51 percent of mental health costs to only 17 percent one year after conversion to managed 
care. 
The States managed care programs achieved cost reductions largely by shifting care from in-
patient to out-patient settings. The decrease of in-patient use allowed States to completely 
close some State psychiatric hospitals and significantly reduce total available beds for mental 
health care. Medicaid staff in two States, for example, said they experienced a reduction of 40 
to 50 percent in available psychiatric hospitals beds. 
Finally, State managed care organizations achieved cost savings by reducing hospital length of 
stay. Commonly, State Medicaid staff told us the average length of stay was reduced by as 
much as 50 percent after converting to managed care. Medicaid staff in one State, for 
example, said their average length of stay dropped from about 12 days to 6 days after 
converting to managed care. Staff in another State reported a drop from about 30 days to 
under 20 days. 
Conversely, State Medicaid staff noted that the psychiatric hospital re-admission rate was 
generally higher under managed care than it was under their previous fee for service system. 
Mandatory Managed Care and Mental Health Services  12  OEI-04-97-00340  Increases in re-admission rates generally ranged from about 4 to 9 percent, although one State 
saw no noticeable increase. 
Stakeholders generally agreed with State Medicaid staff on the effectiveness of out-patient 
treatment. However, stakeholders in several States expressed concern that possibly too many 
hospital beds are being eliminated too quickly from the public mental health system  Further, 
these stakeholders expressed concern that lower average length of stays, and increased re-
admission rates may indicate that persons with serious mental illnesses are being released from 
in-patient care too quickly. 
Health Impact Not Quantified 
No Systematic Measures of Clinical Outcomes 
Is managed care improving the health of persons with serious mental illnesses?  This is a very 
serious and important question for HCFA, SAMHSA, States, managed care organizations, and 
stakeholders.  However, none of the States included in our study had working outcome 
measures in place before or after they converted to managed care. Even basic utilization data, 
such as lengths of hospital stays, and number of visits, was inconsistently reported by States. 
Therefore, HCFA and States have no systematic way to determine the impact of managed care 
on the health of persons with serious mental illnesses. 
However, State officials, mental health providers, and stakeholders in all States said they 
believe that overall mental health care has improved as a result of converting to mandatory 
managed care. Supporters of managed care could supply only anecdotal evidence.  Likewise, 
critics of managed care presented similar anecdotal evidence for their views.  Given the lack of 
supporting, compelling evidence from either supporters or critics, there is little quantifiable proof 
on whether mental health care has gotten better or worse. 
One way to determine if a patients health improved is to analyze the results achieved by a 
specific type of treatment or system of care. This is commonly referred to as measuring clinical 
outcomes. Clinical outcomes are critical when trying to determine if services and programs are 
effective.  However, clinical outcomes are also the most difficult type to determine, particularly 
when it involves serious mental illnesses because each persons treatment plan is unique, and it 
is often difficult to determine which intervention brought about improvement. Further, mental 
illness may be influenced by environmental factors, such as poverty, and family situations. 
Medicaid staff in all States that participated in our study said they need to develop and 
implement clinical outcome tracking systems. They also said they were in the process of 
developing and testing such systems. According to the State officials, once their systems are 
completed, they will be able to gather and study data to determine clinical outcomes for persons 
with serious mental illness. 
Mandatory Managed Care and Mental Health Services  13  OEI-04-97-00340  In the interim, States use various service indicators to judge the quality of managed care.  For 
example, they include specific standards in their managed care organization contracts such as 
re-admissions rates, speed in which phones are answered, and the timeliness in which payments 
are made to providers.  Some States also specify bonuses and penalties in their managed care 
contracts to encourage meeting the standards. State officials agree, however, that while such 
measures are important, they do not allow States to determine if people with serious mental 
illnesses are getting better faster, and staying well longer. 
Beneficiary Satisfaction Measures May Be Misleading 
Where available, we compared the results of managed care organization beneficiary satisfaction 
surveys with results of similar surveys conducted by States prior to their conversion to managed 
care. Our comparisons showed no significant changes in satisfaction resulting from 
implementation of managed care. Medicaid beneficiaries seemed generally satisfied with care 
and services both before and after the States converted to managed care. 
Stakeholders, however, expressed concern about the results of managed care organization 
conducted beneficiary satisfaction surveys. Stakeholders argued that the surveys may be an 
inaccurate reflection of the experiences and opinions of managed care organization beneficiaries 
with serious mental illnesses. The stakeholders gave several examples to illustrate their 
concern. 
First, managed care organizations were generally responsible for conducting all surveys of 
persons with serious mental illnesses to determine managed care service satisfaction. The 
managed care organizations were typically required to report survey results to the States. 
Because the managed care organization that provided the services also conducts the survey, 
stakeholders said that persons with serious mental illnesses were often afraid to criticize the 
services they received. They noted that in most instances, persons with serious mental illnesses 
had no where else to go for needed services. 
Second, persons with serious mental illnesses, due to the very nature of their illness, were often 
not able to accurately comment on the level or benefits of care they received. Further, in some 
instances, they were not aware of services or treatment options available to them. 
Finally, stakeholders noted that persons with serious mental illnesses were often unable to 
complete survey instruments independently. In some such instances, they said it was common 
practice for providers to assist beneficiaries in completing surveys. Therefore, according to the 
stakeholders, it was unlikely that beneficiaries would openly criticize providers who were 
helping them complete a survey. 
Several States have tried to lessen stakeholder concern about the fox guarding the hen house 
by creating Ombudsman programs, and by contracting with consumer groups to conduct 
satisfaction surveys.  In States where satisfaction surveys were conducted by parties other than 
Mandatory Managed Care and Mental Health Services  14  OEI-04-97-00340  managed care organizations, stakeholders said consumers were more comfortable voicing their 
true opinions without fear of reprisal, whether real or perceived. 
However, even in States that used third parties to conduct satisfaction surveys, stakeholders still 
questioned their impartiality when the third party relied on funding from the managed care 
organization. 
Grievances May Not Be a Reliable Measure 
Grievances may not be a reliable measure of health impact for two reasons.  First, States told

us they received very few formal grievances.  Therefore, they assumed that beneficiary care

was adequate. In fact, Medicaid officials in one State said that they had never received a

compliant about mental health care provided by a managed care organization. 

Generally, complaints or grievances that arose were resolved at the managed care organization

level. Typically, managed care organizations have first level responsibility for handling

consumer and provider grievances.  If managed care organizations cannot satisfactorily resolve

a grievance, the consumer can elevate it to the State. 

Second, stakeholders expressed an overall feeling that beneficiaries rarely used the grievance

process. They said beneficiaries were not fully aware of their grievance rights and procedures. 

Stakeholders complained that grievance procedures for managed care organizations were not

always well publicized. They told us that although beneficiaries typically were given brochures

explaining grievance procedures, they seldom read or understand the information. 

Stakeholders also believed that beneficiaries did not file grievances because they were afraid it

would effect the services they receive.

In general, providers filed more complaints and grievances than did beneficiaries. Further, most

of the complaints and grievances were filed against for-profit managed care organizations rather

than non-profit managed care organizations. In most instances, the complaints and grievances

involved financial issues or perceived limits on provider authority to provide service. 

To add credibility to the grievance process, two States added a contract provision that required

an independent Ombudsman program to assist beneficiaries who had complaints and

grievances.  This was expected to improve beneficiary support and education.  However,

stakeholders argued that if an Ombudsman program is used it should be funded directly by the

States.

The complaint and grievance procedures under managed care were similar to the prior fee for

service systems. Beneficiaries brought few formal complaints or grievances to the State. They

were resolved at the lowest possible level--usually the provider.  However, there was one

important difference, beneficiaries had an option. They could vote with their feet, and go to

another provider.  This is not always an option for beneficiaries receiving services through a

mandatory managed care system.

Mandatory Managed Care and Mental Health Services  15  OEI-04-97-00340  Savings Not Always Used to Improve Mental Health Services 
Off The Top Contract Savings Were Returned to State General Fund 
Four States achieved cost savings by setting contract limits for managed care. They returned 
these savings to the State General Fund.  The State then re-directed the savings to other State 
activities. 
While Federal requirements do not limit the use of such off-the-top program savings for other 
purposes, the practice of using the fee for services to managed care conversion process as an 
opportunity to reduce mental health program costs was a great concern to stakeholders, such 
as State officials for the National Alliance of the Mentally Ill.  The stakeholders preferred 
awarding managed care mental health contracts at 100 percent of the estimated fee for service 
level. They argued that this would allow States to expand alternative programs for persons with 
serious mental illnesses. 
However, State Medicaid officials viewed the reductions as a necessary action to roll back 
overall mental health costs that for years had skyrocketed out of control under the fee for 
service system. By effecting large cost reductions through the contracting process, States 
reduced their overall mental health costs, as well as matching Federal expenditures. Further, 
neither stakeholders nor State officials have shown a deterioration in service for people with 
serious mental illnesses after the conversion. 
Three States did award contracts at 100 percent of estimated fee for service levels. Those 
States seemed to enjoy higher support by stakeholders for their managed care conversion. 
Savings Resulting From Managed Care Operations Were Used to Expand Non-
Medicaid Services 
Five of seven States reported operational savings.  Operational savings result when money paid 
to a managed care organization to provide care is not spent during the course of the year. This 
residual money is considered to be savings resulting from managed care operations. States said 
that operational savings result from implementation of managed care practices such as greater 
use of out-patient care and reductions in length of hospital stays, or from less than anticipated 
utilization of services. 
According to State Medicaid staff, managed care organizations in four of the States used such 
operational savings to expand services to non-Medicaid eligible populations. The other State 
deposited its operational savings into the General Fund. 
Using such operational savings to expand services to non-Medicaid persons is permitted by 
waiver under Section 1115 of the Social Security Act. However, States are first required to 
ensure that all necessary services are provided to Medicaid beneficiaries. Of the four States in 
Mandatory Managed Care and Mental Health Services  16  OEI-04-97-00340  our study that reported using operational savings to expand services to non-Medicaid

populations, only one had the required Section 1115 waiver. 

The other three States that expanded services to non-Medicaid populations, and the one State

that returned operational savings to the State General Fund, only had a 1915(b) waiver. 

However, a 1915(b) waiver does not allow States to use operational savings to provide

services for non-Medicaid populations.  It only allows States to use operational savings to

provide Medicaid beneficiaries with additional services. Using managed care operational

savings to provide services to non-Medicaid populations or depositing such savings in the State

General Fund are not inappropriate when the original funding included Federal dollars.

Another issue is that States provided little oversight on how managed care organizations used

operational savings. In addition to using such savings to expand services to non-Medicaid

populations, some managed care organizations used operational savings for administrative

purposes.  For example, some used the savings for financial reserves, administrative salary

increases, mortgage payments, and facility development. State request for proposals gave only

general guidance over how savings could be used. Typically, no prior approval was required,

and spending of operational savings was left up to the discretion of the managed care

organization.

Mandatory Managed Care and Mental Health Services  17  OEI-04-97-00340  R E C O M M E N D  A T I O N S  
While States reported that managed care programs have expanded out-patient services, and reduced 
costs, the overall effect on health of persons with serious mental illness was not quantified.  However, 
resolution of several important concerns could significantly improve Medicaid mental health programs 
as more States convert to mandatory managed care. Accordingly, we recommend that 
HCFA work with SAMHSA to develop outcome measurement systems that 
can be used as a condition of waiver approval.  Most State contract request for 
proposals require managed care organizations to develop and implement an outcome 
measurement system.  However, at the time of our study, no State could produce any 
measurement results. 
We recognize how difficult the development of outcome measures can be, particularly in the 
area of mental health where it is often difficult to determine which intervention brought about 
relief. Also, the lack of standardized data reporting and tracking systems can make determining 
successful practices difficult.  However, as difficult as it is to develop working outcome 
measurements, HCFA should continue to work with SAMHSA, States, and stakeholders to 
develop and implement working outcome measurement systems. 
HCFA encourage States to establish independent, third-party mental health 
systems for conducting beneficiary satisfaction surveys.  Funding should come 
from the State Medicaid program rather than directly from managed care organizations, so that 
the program can operate more independently. Such a program will improve consumer 
confidence, and promote more open, honest feedback. 
HCFA ensure that States obtain the required 1115 waiver before using 
savings resulting from managed care operations to expand services to non-
Medicaid populations.  Three States that only had a 1915(b) waiver used operational 
savings to expand services to non-Medicaid populations. Another State returned operational 
savings to its General Fund based only on a 1915(b) waiver. State General Funds can be used 
for various activities such as building roads or providing mental health services to non-Medicaid 
populations.  However by statute, a 1115 waiver is needed to use savings from managed care 
operations to expand services to non-Medicaid populations. 
Mandatory Managed Care and Mental Health Services  18  OEI-04-97-00340  A G E N C Y  C O M M E N T S  
Both HCFA and SAMHSA commented on our draft report. 
HCFA disagreed with our draft recommendation to require States to develop outcome measures as a 
condition of waiver approval.  While recognizing the importance of outcome measures, HCFA said no 
reliable and cost-effective outcome measurement system currently exists and that requiring States to 
develop such a system would stall the waiver process. We continue to believe, however, that without 
an outcome measurement system, States and HCFA have no way of determining the effectiveness of 
managed care services. However, based on HCFA comments we modified our recommendation to 
encourage HFCA and SAMHSA to work together to develop outcome measurements that can be 
used as a condition of waiver approval. Further, Section 438.340 of the proposed managed care 
regulation for the Balanced Budget Act of 1997 requires States to develop outcome measures. 
HCFA agreed that States need to improve systems for measuring and promoting beneficiary 
satisfaction, and that the neutrality of people involved in the complaint process is important.  However, 
they disagreed with our recommendation to require the use of such third parties in State appeal and 
grievance systems. They noted that appeal and grievance systems were mandated in the Balanced 
Budget Act of 1997. We recently started an evaluation of these systems; therefore, we are holding in 
abeyance our draft recommendation until we complete the evaluation of State Medicaid managed care 
grievance and appeal systems. 
HCFA disagreed with our recommendation that States have an approved 1115 waiver before using 
savings resulting from managed care operations to expand services to non-Medicaid populations. 
HCFA stated that no such waivers are required since States can use their own share of savings to 
provide additional services of any kind including services for non-Medicaid eligible persons.  We agree 
with HCFA that States are free to use off the top State savings to fund services for non-Medicaid 
eligible persons.  However, we are referring to savings within the managed care program itself, including 
the Federal share of these savings.  Our understanding is that use of such savings for that purpose 
would require a 1115 waiver. We modified the text of our report to make this distinction clearer. 
SAMHSA commented that a number of our recommendations were useful, but expressed concern 
about our drawing conclusions from what they believe is a study method that is not scientific.  We 
wish to emphasize that we used a case study method for our inspection. In describing our methodology 
we included a detailed explanation of the advantages and limitations of our case study approach.  The 
limitations which we point out are similar to those described by SAMHSA.  Our goal, however, was to 
take advantage of the early experience of some States to guide implementation of other States who are 
using a managed care approach for mental health services. We are confident that our readers will 
interpret our findings in the context of the methodology which we described. SAMHSAs thoughtful 
comments will also help our readers avoid the pitfalls of over generalization. 
Mandatory Managed Care and Mental Health Services  19  OEI-04-97-00340  SAMHSA expressed concern about States offering mental health services under Medicaid managed 
care that are not authorized under traditional fee for service Medicaid. It was not the purpose of this 
study to determine if States were complying with Medicaid rules regarding allowable services. Rather, 
we were more interested in the general trends and practices of mental health services in a managed care 
environment. 
Additionally, SAMHSA expressed concern that we may not have adequately included the views of 
State mental health staff and stakeholders. As shown in our methodology, we considered input from 
such groups as highly important.  To illustrate, we interviewed at least 37 State mental health staff and 
stakeholders. 
We also made several technical changes suggested by SAMHSA. For example, we clarified the 
increase of both out-patient, and overall service utilization under managed care. We also clarified 
Appendix A to show services that were excluded from risk by managed care organizations during their 
first year contracts. 
We present the full text of HCFA and SAMHSA comments in Appendix B. 
Mandatory Managed Care and Mental Health Services  20  OEI-04-97-00340  APPENDIX A 
Summary: First Year Medicaid Managed Care Mental Health Contracts

Start  Waiver  Initial  Services 
State  Date  Type  Type of  Coverage  Area  Excluded 
Managed Care Organization  Covered  from MCO 
Risk 
AZ  Jan  1115  Non-profit, public sector,  Adults  Statewide 
1992  CMHCs*  and 
Children 
CO  Aug  1915(b)  Most areas non-profit, public  Adults  6 test  State 
1995  sector CMHCs.  and  areas.  hospital & 
Two rural areas - partnership  Children  Excluded  drugs 
between public sector  largest 
CMHCs and private, for- metro area 
profit companies 
IA  Mar  1915(b)  one private for-profit  Adults  Statewide  State 
1995  company for whole State  and  hospital & 
Children  drugs 
MA  Jan  1915(b)  one private for-profit  Adults  Statewide  State 
1992  company for whole State  and  hospital & 
Children  drugs 
NC  Jan  1915(b)  Non-profit, public sector  Children  11  Outpatient 
1994  CMHCs  Only  counties,  care 
approx 
25% of 
state 
UT  Jul  1915(b)  non-profit, public sector  Adults  8 of 11  State 
1991  CMHCs  and  areas.  Hospitals 
Children  80% of 
Medicaid 
population 
WA  Jul  1915(b)  Non-profit public sector  Adults  6 of 14  In-patient 
1993  system  and  areas.  care 
Children  66% of 
Medicaid 
population 
* Community Mental Health Centers 
Mandatory Managed Care and Mental Health Services  21  OEI-04-97-00340  APPENDIX B 
Agency Comments 
Health Care Financing Administration (HCFA)

Substance Abuse and Mental Health Services Administration (SAMHSA)

Mandatory Managed Care and Mental Health Services  22  OEI-04-97-00340         ENDNOTES 
1. National Summary of Medicaid Managed Care Programs and Enrollment, Medicaid Managed Care 
Enrollment Report, The Health Care Financing Administration, June 30, 1998 
2. State Profiles on Public Sector Managed Behavioral Health Care and Other Reforms.  Managed 
Care Tracking System, Substance Abuse and Mental Health Services Administration, July 31, 1998 
3. Federal Register, Volume 58, Number 96, May 20, 1993 page 29425 
4.  The 12-Month Prevalence and Correlates of Serious Mental Illness (SMI).  Mental Health, United 
States, 1996. Center for Mental Health Services, Substance Abuse and Mental Health Services 
Administration, 1996 
5. Prevalence of Serious Emotional Disturbance in Children and Adolescents.  Mental Health, United 
States, 1996. Center for Mental Health Services, Substance Abuse and Mental Health Services 
Administration, 1996 
6. ibid 
7. State Profiles on Public Sector Managed Behavioral Health Care and Other Reforms.  Managed 
Care Tracking System, Substance Abuse and Mental Health Services Administration, July 31, 1998 
8.  Oregon and Tennessee have been under managed care for a minimum of 3 years, but did not phase 
in their seriously mentally ill populations until January 1995 and July 1996 respectively. 
9. Iowa implemented March 1995. Colorado implemented July 1995. 
10. In February 1999, North Carolina requested to withdraw its 1915(b) waiver extension of the 
Carolina Alternatives Program. The State proposes to move all recipients back to a fee for service 
system on or before June 30, 1999. 
11.  One State reported first year cost savings of about $47 million.  However, this included both 
mental health and substance abuse managed care savings. The State was unable to report mental health 
cost savings only. 
Mandatory Managed Care and Mental Health Services  30  OEI-04-97-00340