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SAMHSA News - January/February 2005, Volume 13, Number 1

Financing Health Care: Understanding Medicaid

In the past, many providers of public mental health services simply avoided Medicaid.

"They didn't like the paperwork, didn't like Medicaid's orientation to services, that sort of thing," said Jeffrey A. Buck, Ph.D., Associate Director for Organization and Financing in SAMHSA's Center for Mental Health Services (CMHS). "Now it's impossible for providers in most states to think they're going to be able to remain in business and get along nicely without in some way dealing with Medicaid."

Today, Medicaid—the Federal/state partnership that pays the medical and long-term care expenses of many of the Nation's most vulnerable people—has become the largest payer of public mental health services.

Providers need to acknowledge the program's growing prominence, Dr. Buck said. They need to be aware of emerging trends and new regulations that may affect their provision of services to both Medicaid recipients and non-recipients alike. And they should know about resources available from SAMHSA and other organizations that can help them navigate this complex program (see Medicaid-Related Resources).

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A Safety Net

Created in 1965 as part of the Social Security Act, Medicaid is basically a health insurance program for certain individuals and families who lack the income or resources to pay for medical care. The program covers doctor and hospital bills, prescription drug costs, and other medical expenses, providing payment directly to health care providers.

Medicaid is financed jointly by the Federal Government and state governments, with the Federal Government matching the amount that states spend.

The Federal Government sets broad standards; states decide the details. Subject to Federal approval, states decide who is eligible for the program, what services the program will cover, how much providers will be paid, and so forth. While the Federal Government requires states to offer coverage for such basic services as doctor visits and inpatient hospital stays, for example, states can also offer certain optional services. This flexibility means that eligibility, services, and other details may vary from state to state and from year to year.

It's important to keep in mind that Medicaid is primarily a medical program, emphasized Dr. Buck. "People sometimes expect Medicaid to pay for everything," he said, citing as examples some advocates' calls for housing and educational support to be covered. "But Medicaid is intended to be a medical assistance program similar to other kinds of health insurance."

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A Growing Role

Mental health service providers need to be aware of several trends, according to Dr. Buck and other Medicaid experts.

The most important of these trends is Medicaid's increasingly dominant role in the provision of mental health services. Over the last 10 or 15 years, said Dr. Buck, a major shift took place in the way that states fund, organize, and deliver public mental health services. In the old days, he explained, state mental health authorities set their own policies and paid designated providers directly for the services they provided. Now that system is being displaced by state Medicaid programs, which are more like health insurance plans in their approach to organization and financing.

"States have moved more and more services into Medicaid that weren't Medicaid services before," said Dr. Buck, noting that the budget crunch affecting many states has accelerated the trend. Coupled with changes that broadened eligibility in the late 1980s, this trend led to explosive growth in the size of state Medicaid programs.

"Medicaid is already the largest single payer of mental health services in the United States," CMHS Director Kathryn Power, M.Ed., told participants at the 2004 Invitational Conference on Medicaid and Mental Health Services in Baltimore, MD, last October. "It's larger than private insurers. Larger than Medicare. Larger than all other state and local payers combined!"

Medicaid already funds more than half of all public mental health services that states provide, Ms. Power noted. And if current trends continue as predicted, that number could jump to two-thirds over the next 10 to 15 years.

This growing dominance also makes Medicaid a key player in another trend—the call to transform the mental health system, issued by the President's New Freedom Commission on Mental Health. "Medicaid figures so prominently in the transformation equation that without Medicaid on board, transformation will not happen," Ms. Power told the audience in Baltimore.

SAMHSA has already launched a number of projects designed to ensure that the mental health system's transformation takes Medicaid into account.

One key activity is data collection and analysis. For the first time ever, for example, SAMHSA is developing comprehensive statistics on Medicaid mental health services in every state. SAMHSA is also surveying state Medicaid authorities about how they administer mental health services, developing profiles of all Medicaid-funded mental health programs, and working with one state to develop a program for integrating de-institutionalized patients back into the community with Medicaid's help.

Collaboration between SAMHSA and the Centers for Medicare & Medicaid Services (CMS) is also critical. The agencies will be working together to help states develop plans for financing mental health services that take into account the growing role that Medicaid plays. SAMHSA and CMS are also collaborating on technical assistance papers about specific Medicaid policies.

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Recent Changes

In addition to these broad trends, there have been several recent changes that affect the provision of mental health services by state Medicaid programs.

The Balanced Budget Act (BBA) of 1997 institutionalized the use of managed care in Medicaid and applied specific beneficiary protections. States continued to require waivers for services to disabled children and children's mental health programs.

One important change concerns calculating capitation rates, the fixed amount that a provider receives per patient over a set period of time, no matter how much or how little service that patient actually receives. Pre-BBA, states paid capitated providers in the form of an upper payment limit based on the traditional Medicaid funding. Post-BBA, capitation rates must be "actuarially sound," or based on the actual cost of services provided in the managed care setting. Regardless of how the rates were set, pre-BBA or post-BBA, all Medicaid funds were to be spent only on Medicaid services to Medicaid enrollees.

"Before the BBA, a lot of states thought they didn't have to track every unit of service," Dale Jarvis, C.P.A., managing consultant and Director at Seattle's MCPP Healthcare Consulting, Inc., told the Baltimore conference participants. "Folks assumed that under managed care, there was added flexibility to give clients what they need, even if it didn't fit into a defined service code, and recording and tracking every unit of service was not as important as ‘doing the right thing' for the client."

The shift to actuarial soundness also inadvertently revealed cases of the improper use of Medicaid. This means more careful recordkeeping for some providers.

"We discovered that Medicaid funds were being used inappropriately," explained Brenda Jackson, M.P.P., a health insurance specialist in the Kansas City, MO, CMS Regional Office.

Some states were using their savings—the difference between a $1 capitation rate and the 80 cents actually spent—on non-eligible services to non-eligible individuals. Furthermore, some states used leftover money to enhance their overall system for non-Medicaid eligibles. One state used the Medicaid mental health money to purchase county sheriff cars.

The increased awareness of the inappropriate uses of Medicaid funds may mean budget trouble ahead for some states that used Medicaid to fund public systems for non-Medicaid enrollees. Before this recent change, for example, a state might have received a capitation rate of $1 per patient per month but only spent 80 cents on Medicaid services to Medicaid eligibles. Under the new regulations requiring that capitation rates must be actuarially sound, that state would receive only 80 cents from Medicaid the following year. Even before this change, some states were already trimming services, eligible populations, or both.

Another piece of legislation that may have an impact on the provision of state mental health services is the Medicare Modernization Act, which provides a prescription drug benefit to Medicare beneficiaries.

Although the legislation focuses on Medicare—the Federal Government's health care program for older Americans and some people with disabilities—it will affect some beneficiaries who are eligible for both Medicare and Medicaid. These "dual-eligibles" may see changes in what they pay for their medications, where they obtain them, and whether they have access to specific drugs at all—a big concern for those who depend on psychotropic medications.

"The Medicare prescription drug benefit is the most significant thing coming down the pike," said Dr. Buck. "But since the rules are still in development, it's difficult to say what the potential impact will be." End of Article

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SAMHSA News - January/February 2005, Volume 13, Number 1

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