CHAPTER III--Coverage

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

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

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

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

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

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

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

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

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

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

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

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

1. Defined Benefit Contracts

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

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

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

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

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

2. Defined Contribution Contracts

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

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

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

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

B. Developing Service Definitions

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

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

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

1. Typologies of Substance Abuse and Mental Health Services

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

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

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

The IOM typology divides services into the following three categories:

Preventive interventions;

Treatment interventions; and

Maintenance interventions.

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

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

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

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

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

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

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

Pretreatment;

Level I, Outpatient Services;

Level II, Intensive Outpatient/Partial Hospitalization Services;

Level III, Residential/Inpatient Services; and

Level IV, Medically Managed Intensive Inpatient Services.

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

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

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

2. Wraparound or Ancillary Services

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

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

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

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

Identify wraparound services to be financed within the benefit package.

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

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

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

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

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

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

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

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

C. Defining and Operationalizing Medical Necessity

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

1. Importance of Defining Medical Necessity for Public Sector Populations

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

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

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

2. Evidentiary Issues in Medical Necessity Decisionmaking

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

a. The Concept of Evidence-Based Medical Necessity Determinations

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

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

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

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

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

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

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

3. Drafting Medical Necessity Contract Provisions

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

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

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

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

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

These issues are discussed in the sections below.

a. The Standard of Coverage

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

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

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

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

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

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

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

b. Purchaser Authority To Review the MCO's Determinations

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

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

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

c. Evidence and Processes in Making Determinations

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

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

d. Coverage in the Event of Administrative or Judicial Order

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

a. Utilization Management (UM)

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

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

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

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

b. Clinical Practice Guidelines

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

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

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

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

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

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

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

Require purchaser approval of UM guidelines.

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

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

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

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

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

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

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

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

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

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

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

D. Funding Streams and Their Impact on Coverage

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

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

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

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

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

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

1. Medicaid

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

a. Medicaid Coverage Requirements

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

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

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

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

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

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

b. Definition of Emergency Services

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

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

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

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

c. Medicaid's Test of Reasonableness

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

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

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

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

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

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

d. Issues in Medicaid Coverage

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Ensure that MCO exclusions are consistent with Federal Medicaid law.

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

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

2. The Substance Abuse and Mental Health Block Grants

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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