Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

JUNE GIBBS BROWN 

Inspector General 

JANUARY 2000 

OEI-04-97-00340 

MANDATORY MANAGED CARE 

Changes in Medicaid Mental Health Services 
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 
TABLE OF CONTENTS 

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
EXECUTIVE SUMM ARY 

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 State’s 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. SAMHSA’s 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 
INTRODUCTION 

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, firsthand 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 Children’s 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 - Children’s 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 

President’s Council on Integrity and Efficiency. 

Mandatory Managed Care and Mental Health Services 9 OEI-04-97-00340 
FINDINGS 

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 inpatient 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 inpatient 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 readmission 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 patient’s 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 person’s 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 NonMedicaid 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 
RECOMMEND ATIONS 

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 nonMedicaid 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 
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, 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. SAMHSA’s 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

State Date 

Start 

Type 

Waiver 

Type of 

Managed Care Organization 

Coverage Area 

Initial 

Covered 

Excluded 

Services 

from MCO 

Risk 

AZ Jan 

1992 

1115 Non-profit, public sector, 

CMHCs* 

Adults 

and 

Children 

Statewide 

CO Aug 

1995 

1915(b) Most areas non-profit, public 

sector CMHCs. 

Two rural areas - partnership 

between public sector 

CMHCs and private, forprofit companies 

Adults 

and 

Children 

6 test 

areas. 

Excluded 

largest 

metro area 

State 

hospital & 

drugs 

IA Mar 

1995 

1915(b) one private for-profit 

company for whole State 

Adults 

and 

Children 

Statewide State 

hospital & 

drugs 

MA Jan 

1992 

1915(b) one private for-profit 

company for whole State 

Adults 

and 

Children 

Statewide State 

hospital & 

drugs 

NC Jan 

1994 

1915(b) Non-profit, public sector 

CMHCs 

Children 

Only 

11 

counties, 

approx 

25% of 

state 

Outpatient 

care 

UT Jul 

1991 

1915(b) non-profit, public sector 

CMHCs 

Adults 

and 

Children 

8 of 11 

areas. 

80% of 

Medicaid 

population 

State 

Hospitals 

WA Jul 

1993 

1915(b) Non-profit public sector 

system 

Adults 

and 

Children 

6 of 14 

areas. 

66% of 

Medicaid 

population 

In-patient 

care 

* 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