Special Report
Contracting for Public Mental Health
Services Opinions of Managed
Behavioral Health Care Organizations
Financial Requirements and Reimbursement
Financial issues possibly represent the area of greatest concern
among the MBHO representatives. The nature of public sector
contracts, the contracting process, and the inherent financial
risk associated with these contracts is quite different from the private
sector contracting environment. In the public sector, the
procurement process is much more onerous and the program design
more complex. Furthermore, the requirements concerning benefit package,
quality assurance, member services, provider contracting, and
other components are much more detailed than in the commercial sector.
From a financial perspective, State and local payers often set capitation
rates rather than soliciting price bids. The study participants
found that many payers provide insufficient information to evaluate the
adequacy of the capitation rates. Furthermore, requirements designed
to ensure fiscal soundness often go far beyond those required under
State licensure specifications.
One of the most significant issues in the
financial area identified by study participants
is the need to recognize that financial risk for
a program must be tied to control of the
delivery system and the care management
processes. The representatives reported that
they often encounter an RFP that seeks a
fully capitated contractor but applies
provider guarantees, prohibitions on limitations
for a range of services, requirements to
expand the benefit package within existing
funding levels, and detailed specifications on
operational procedures. According to the
MBHOs, financial risk must be combined
with sufficient decision-making authority to
manage financial outcomes
Another major concern is the sufficiency of
the funding levels for the service and administration
requirements described in the contract.
Focus group participants observed that
public payers often overestimate the extent of
managed care savings achievable through utilization
management or have unrealistically
low expectations of the costs of new services
and administrative requirements. Participants
suggested that, before procurement, payers
should develop models to project the anticipated
costs of the benefit package and the
administrative functions. They must then
compare these costs to the initial capitation
rates developed for the program. Final capitation
rates must be sufficient, based on reasonable assumptions of utilization rates
and administrative services.
The third major concern voiced by the
MBHO representatives was the limits that
public payers often place upon MBHO
profits. Public payers consider acceptable
levels of profit to be less than 5 percent,
far less than MBHOs’ expectations in
commercial contracts. Compounding this
problem, program designs can include
much greater "upside" risk for the MBHO.
MBHOs are often unable to get sufficient
data from the payer to perform actuarial
analyses, and the public payer will not
divulge the methods used to establish the
capitation rates. Consequently, the MCO
may not realize that the capitation rates
are insufficient to cover the cost of the program
required in the RFP until significant
losses have accrued.
As constraints on profit become more
pervasive and upside risk remains high,
study participants warned that the number
of bidders will fall. Participants pointed to
examples of recent procurements that generated
little or no interest among experienced
MBHOs. They indicated that their organizations
are requiring thorough analyses of
the business risk involved in pursuing each
public sector contract. As new situations
arise in which MBHOs lose money on public-
managed behavioral health contracts,
particularly for MBHOs that are otherwise
performing well, the pressure increases to
revisit the decision to pursue public sector
business.
Participants suggested that public payers
should more appropriately concentrate on
applying performance measures to MBHOs
rather than focusing on ways to constrain
profitmaking. In some cases, however, the
political environment requires limitations
on profit. Here, public payers must devise
a measurement approach that recognizes
the costs associated with providing those
services required in the contract that are
not necessarily clinical in nature. The application
of minimum "medical loss ratios"
(i.e., medical expenses divided by total revenues)
to devise maximum profit thresholds
fails to distinguish between administrative
costs and profit.8
In programs that impose restrictions on
the medical loss ratio, the definition of
administrative activities becomes very
important. Participants contend that many
costs treated by public payers as administrative
are actually costs associated with direct
provider services. Although State mental
health authorities often employ case management
staff and consider them to be service
providers, some public agencies treat the
MBHO’s case managers as administrative
staff. Agencies are often unwilling to recognize
case management as a legitimate service
cost.
Participants identified several areas of
activity required by public payers that
involve supplemental efforts or retrofitting
existing functions to meet those requirements.
The resources needed to accommodate
these requirements must be recognized
as legitimate service costs in any profit meas-urement
approach. Such areas include the
following:
- Provider education and outreach.
- Access and triage.
- Case management.
- Quality improvement requirements.
- Clinical appeals processes.
- Information systems.
The issue of increasing requirements to
ensure financial viability is related to the
sufficiency of funding levels. These assurances
may include requirements related to
the maintenance of minimum reserve levels,
acquisition of reinsurance coverage, required
financial ratios, performance bonds, and
hold-harmless clauses in provider contracts.
Such assurances have become more numer-ous
and sometimes, over time, duplicative.
Some RFPs have combined specifications
requiring significant investment in start-up
activities with high restricted reserve levels
(in some cases without allowing for a sufficient
phase-in period to reach a fully funded
reserve level) and strict limitations on profit.
MBHOs with multiple public sector contracts
may find themselves "investing" in
multiple restricted reserve funds, thereby
losing access to these funds and becoming
unable to achieve a reasonable profit.
In an environment in which public payers
want to protect consumers’ choices and attract
multiple qualified bidders to a program, such
burdensome financial conditions will restrict
competition to only the very largest MBHOs
or to organizations of dubious qualifications.
Although they may otherwise be qualified,
start-up organizations formed by community-based
providers may be unable to demonstrate
the resources necessary to meet the conditions.
All aspects of the financial structure and
reimbursement approach must "work" within
the basic program design. The level of administrative
investment in information services,
provider and member services, and other
areas of the administrative infrastructure must
be warranted by the size and length of the
contract. Without a sufficient number of covered
lives and length of the contract term, the
fixed administrative costs associated with
start-up and operation of an at-risk program
may be too great for an MBHO to absorb.
8 Some public payers require that an MCO’s medical
loss ratio not fall below a specified level, perhaps
0.85 or even as high as 0.90. This requirement
leaves only 15 or 10 percent of the capitation payments,
respectively, to cover administrative expenses
(which are often formidable in public programs)
and profit.
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