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Contracting for Managed Substance Abuse and Mental Health Services: A Guide for Public Purchasers

Technical Assistance Publication Series

22

October 23, 1998

U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES

Public Health Service

Substance Abuse and Mental Health Services Administration

Center for Substance Abuse Treatment

Rockwall II, 5600 Fishers Lane

Rockville, MD 20857

Foreword

During this time of financial uncertainty and change in the Nation's health care systems, the Center for Substance Abuse Treatment (CSAT) is proud to provide the substance abuse and mental health fields with this Technical Assistance Publication (TAP), Contracting for Managed Substance Abuse and Mental Health Services: A Guide for Public Purchasers. The document is a comprehensive guide for public purchasers and others interested in influencing the development of requests for proposals (RFPs) and contracts in managed behavioral health care. Experts in both the substance abuse and mental health fields collaborated in its development.

It is generally agreed that strong contracts between purchasers of health care services and managed care organizations (MCOs) form the foundation upon which managed behavioral health systems are built. Unfortunately, some public purchasers have left themselves and their clients vulnerable to poor quality services and restricted access due to poorly conceptualized and poorly written RFPs and contracts. This guide provides information that will help public purchasers develop RFPs and contracts for managed behavioral health care so as to achieve programmatic success. Although this guide is intended to assist public purchasers in their managed care contracting efforts it should not be used as a substitute for expert legal or financial guidance. Any recommendations put forth here should be carefully considered by purchasers and adapted with appropriate guidance to meet the needs of the specific State or locality.

This TAP is targeted most specifically to State and county substance abuse and mental health authorities, State Medicaid authorities, and other payers and purchasers of managed mental health and/or substance abuse services. CSAT hopes, however, that substance abuse and mental health treatment providers, MCOs, consumer groups, advocacy groups, academicians, and researchers will find the document an informative discussion of the essential elements of managed care contracting for substance abuse and mental health services.

This document was developed by CSAT using national experts as an advisory panel. Once published, TAPs generally are not revised, and the development process ends. Traditional ways of developing and disseminating knowledge are changing, though, and CSAT recognizes that a document on a topic as dynamic as managed care contracting must be very accessible and continually updated if it is to continue to be useful. Therefore, CSAT has made this TAP available on the Internet and plans to update the information contained within it on a regular basis. Internet accessibility will provide readers of this TAP with a mechanism for asking questions, contributing new material, and providing ongoing feedback on the guide. We hope that this document will serve as a model for developing and disseminating essential information in an online, interactive, and continually updated manner.

CSAT invites you to use this guide to better understand how to develop RFPs and contracts for managed behavioral health care systems that live up to their promise of providing state-of-the-art services to people with mental health and addictive disorders. We further invite you to use your knowledge and experience to contribute to its continual evolution so that it may better serve others.

Nelba Chavez, Ph.D.
Administrator
Substance Abuse and Mental Health Services Administration

Camille T. Barry, Ph.D., R.N.
Acting Director
Center for Substance Abuse Treatment

Acknowledgments

This document reflects the efforts of many contributors: national experts in the fields of substance abuse, mental health, Medicaid, child welfare, consumer advocacy, and the attorneys who represent these fields. The need for managed care contracting information in State and local agencies and the desire to make this document a state-of-the-art guide to contracting for managed care services for people with addictive and mental health disorders brought together individuals and organizations from diverse fields, with affiliations in Federal, State, county, and local governments and in both the public and private sectors.

Oversight, guidance, and support for this publication was provided by a Development Panel made up of experts in managed care contracting for substance, abuse, mental health, and medical services from across the country. Development Panel members attended the initial concept meeting, developed outlines, drafted chapters, offered consultation, and provided comments throughout a long and challenging development process. They were very generous with their time, and their knowledge and dedication helped ensure that this document would have a practical application to public managed care contracting. A special debt of gratitude is owed to Development Panel members Sara Rosenbaum, who provided substantive knowledge of the legal aspects of managed care contracting, contributed the bulk of the sample contract language, and reviewed the entire document for accuracy; Paul Litwak, who played a formative role throughout the project and contributed substantially to the chapters on developing a managed care initiative and management information systems; Rick Ramsey, who played an active leadership role throughout and contributed to many chapters; Robert Mirel and Steve Wood, who made invaluable contributions to the chapter on management information systems; Neal Cash, for sharing his first-hand experience with provider-sponsored networks; and Richard Dougherty, Haiden Huskamp, and Tony Broskowski, for sharing their expertise on financial issues.

Important contributions were also made by the staff and constituents of several national organizations and government agencies, including the National Association of State Alcohol and Drug Abuse Directors, the National Association of State Mental Health Program Directors, the National Association of County Behavioral Health Directors, the American Public Welfare Association, and the Health Care Financing Administration. These stakeholders provided guidance early in the development process, making recommendations concerning what they sw s the most-needed information as they confront the challenges associated with developing managed care contracts.

More than 50 field reviewers representing the mental health, Medicaid, substance abuse, and managed care fields offered extensive feedback on the document and in many ways shaped its focus. The collective input form these individuals-was invaluable.

Finally, thanks go to the dedicated staff of Health Systems Research, Inc., including Project Director Stephen Moss, William Ford, Kathy Jacquart, Dhlia Shaewitz, Cathy Corder, and Daniel Kent; and to consultant editors Constance Gartner, Betsy Earp, Kerry Kemp, and Carolyn Davis.

Development Panel

Jim Bixler
President
JBX & Associates, Inc.
Springfield, Illinois

Anthony Broskowski, Ph.D.
President
Pareto Solutions, L.C.
West Palm Beach, Florida

Neal Cash, M.A.
Executive Director
CODAC Behavioral Health Services, Inc.
Tucson, Arizona

Richard Dougherty, Ph.D.
President
Dougherty Management Associates, Inc.
Lexington, Massachusetts

Deb Ekstrom
Consultant
Waltham, Massachusetts

William Ford, Ph.D.
Project Director
Health Systems Research, Inc.
Washington, DC

Suzanne Gelber, Ph.D.
Consultant
SGR Health, Ltd.
Wilton, Connecticut

Haiden Huskamp, Ph.D.
Assistant Professor of Health Economics
Harvard Medical School
Department of Health Care Policy
Boston, Massachusetts

Chris Koyanagi
Acting Executive Director
The Bazelon Center
Washington, DC

Jeff Kushner, M.H.R.A.
Drug Court Administrator
Twenty-Second Judicial Circuit
St. Louis, Missouri

Paul Litwak, J.D.
Attorney & Counselor at Law
Virginia Beach, Virginia

Robert Mirel, M.S.W.
Systems Resource Group, Inc.
Bala Cynwyd, Pennsylvania

Stephen Moss, Ph.D.
Project Director
Health Systems Research, Inc.
Washington, DC

Hernando J. Posada
Assistant Director

Ohio Department of Alcohol and Drug
  Addiction Services
Columbus, Ohio

Richard Ramsay, J.D.
Attorney
Proskauer Rose, L.L.P.
Washington, DC

Sara Rosenbaum, J.D.
Director
Center for Health Policy Research
Washington, DC

Barbara Smith, J.D.
Senior Research Staff Scientist
Center for Health Policy Research
Washington, DC

Tom Stanitis, M.S., M.H.S.
Consultant
Columbia, Maryland

Cynthia Turnure, Ph.D.
Director
Minnesota Department of Human Services
Chemical Dependency Program Division
St. Paul, Minnesota

Daniel Walsky
Executive Director
New Jersey Division of Medical
  Assistance and Health Services
Trenton, New Jersey

Stephen Wood
Partner
Healthcare Perspective
Pickerington, Ohio

CHAPTER I

Introduction

Key issues in this chapter: The managed care trend Challenges for managed care initiatives in the public sector The critical importance of a good contract Uses and limitations of this guide

In recent years, State Medicaid agencies and other public sector entities--in particular, State, county, and local substance abuse and mental health authorities--have increasingly been taking the initiative to purchase substance abuse and mental health managed care services from private sector organizations or specialized nonprofit agencies. Developing requests for proposals (RFPs)(1) and then contracting for outside managed care services is a significant vehicle for introducing managed care into the public sector while responding to complex financial and political pressures. In most States, the State Medicaid agencies or other public purchasers have already begun contracting with managed care organizations (MCOs), and in many other States managed care initiatives are under way or are being considered.

This document is a practical guide for public purchasers and others involved in the design and development of managed care initiatives involving substance abuse and/or mental health services. The Center for Substance Abuse Treatment (CSAT), the Center for Mental Health Services, and their parent agency, the Substance Abuse and Mental Health Services Administration (SAMHSA), developed this publication to help State Medicaid agencies, State substance abuse and mental health authorities, and other public purchasers translate rapidly evolving policy goals into effective RFPs and contracts that are the basis for sound managed care initiatives. To develop this document, CSAT, the Center for Mental Health Services, and SAMHSA sought guidance and direction from an expert panel and field reviewers that included State Medicaid agencies, substance abuse and mental health authorities, managed care contracting experts, health care attorneys, providers, and consumers.

Chapters II through VIII of this guide describe several important issues pertaining to contracts for managed behavioral health care:

Chapter II discusses the process of designing, procuring, and implementing a managed care system--from preliminary design, through development of an RFP, through the signing and subsequent monitoring of the contract.

Chapter III considers the essential decisions concerning the services to be covered in a managed care plan, medical necessity, and the impact of funding streams on coverage.

Chapter IV examines the establishment and maintenance of provider networks, including network design, selecting network providers, ensuring enrollees' access to services, subcontracting with network providers, establishing provider standards, and monitoring provider performance.

Chapter V concentrates on the key features of a management information system (MIS) that would be most effective in a managed care system, including data requirements and hardware and software needs.

Chapter VI addresses issues pertaining to quality of care, including measures of quality, accreditation standards, report cards, measures of consumer satisfaction, and internal and external quality management systems for MCOs.

Chapter VII examines different aspects of financing in a managed care environment, including such topics as risk-sharing arrangements, incentives and sanctions, third-party reimbursement, copayments and deductibles, cash flow management, reinvestment requirements, and financial reporting.

Chapter VIII provides an examination of important consumer protection issues, including various consumer rights and the complaints, grievances, and appeals process.

At the end of the document, there is a resource list with the names, addresses, and phone numbers of a variety of organizations involved in the fields related to managed behavioral health care. There is also a comprehensive glossary of terms.

In a single generation, we have witnessed a major transformation of the public and private health insurance system in the United States. Twenty-five years ago, thousands of small and mid-sized public and private health care providers sold health services to individuals with commercial health insurance, charging what they believed was appropriate and rendering treatment in accordance with individual professional judgment. The insurance companies then paid the health care providers' bills (either fully or nearly completely) and did not question the providers' practice style. Medicaid and Medicare operated in a similar fashion.

Today more than three-quarters of commercially insured persons, more than 12 percent of Medicare beneficiaries, and almost 40 percent of Medicaid beneficiaries get their health coverage from managed care enterprises that combine the financing of health care services with their delivery. Managed care entities affiliate with networks of hospitals, community-based organizations, pharmacies, physicians, and/or other health care professionals and limit payment for covered services to services provided through those networks. The selection of providers for an MCO's network is primarily the responsibility of the MCO, although the purchaser of managed care services can influence these choices. For providers, membership in an MCO's network is dependent upon both an adherence to the MCO's practice requirements and the acceptance of financial risk and/or stringent payment controls.

A growing number of State, county, and local agencies are now developing or contracting with MCOs to manage substance abuse and/or mental health (i.e., behavioral health) services for their populations. Approximately 20 States have implemented some form of managed behavioral health care for Medicaid recipients, serving approximately 5 million enrollees, and the number continues to climb. Many MCOs, which formerly focused only on private sector health care, are eager to enter this emerging and lucrative market in the public sector.

Many State, county, and local agencies have successfully reorganized their infrastructure to implement certain managed care principles and technologies. Yet numerous agencies have chosen to contract externally with MCOs to manage the delivery of some or all substance abuse and mental health services. In many cases, the movement toward the purchase of behavioral health care is part of a broad trend to transfer the management and delivery of Medicaid, Medicare, and other publicly funded services to MCOs.

As State, county, and local agencies have come to realize the potential value of contracting with MCOs, many have developed specific goals for improving their systems through managed care. These goals often include the following:

To improve coordination of and access to a full continuum of substance abuse and mental health treatment and prevention services;

To improve the quality of services for populations that have substance use and/or mental health disorders;

To allocate limited financial resources more efficiently and effectively;

To improve the predictability of costs, thereby increasing the accuracy of budgets;

To integrate the delivery of general medical and primary health care with behavioral health care;

To expand coverage to a larger proportion of the population; and

To increase accountability for and systematically improve consumer outcomes.

Well-designed managed care systems can best achieve these goals when purchasers and MCOs clearly understand the needs of the population served, the unique requirements imposed by the fiscal and political environment, and the most effective managed care practices. To meet these conditions, purchasers must use the contract development process and the contract to maximize their control over the design, award, operations, and outcomes of the managed care system.

There are several challenges faced by those attempting to build successful managed care initiatives in the public sector:

• The populations served by Medicaid and other public sector service systems tend to be poorer and sicker than populations with commercial insurance, and MCOs may have little experience with these populations.
• Federal, State, and local substance abuse and mental health authorities have little experience with managed care practices and must operate under statutory and regulatory limitations not found in the private sector.
• Many State and local service delivery systems are fragmented, in part because different agencies handle different populations, and separate funding streams for designated populations have created different sets of structures and incentives.

The populations served by public sector service systems pose unique challenges to the success of managed health care initiatives because public sector populations generally require a far broader range of services than individuals with commercial health insurance and also tend to make greater use of "wraparound" services, such as child care, housing assistance, and vocational training. Many people served in the public sector are poor, elderly, undereducated or uneducated, and/or members of disadvantaged ethnic or linguistic minorities. Many of them seek services only when they are already at a late stage of disability. Individuals depending on publicly funded treatment often have the most debilitating addictions and/or the most serious mental illnesses, as well as co-occurring medical complications. Furthermore, the public sector population includes children with the most serious emotional disorders requiring a broad range of specialized services.

MCOs seeking to contract with public sector agencies often have worked exclusively with commercially insured populations consisting primarily of employed adults and their families. The approaches and regimens developed by these MCOs may not fit the special behavioral health care needs of the public sector population. Meeting the ongoing rehabilitation and recovery needs of individuals with the most serious substance abuse and mental health disorders is expensive, and some services do not meet the sometimes restrictive "medical necessity" criteria imposed by MCOs (see medical necessity discussion in Chapter III). In addition, many MCOs may have limited experience with the types of prevention services mandated for individuals served by public sector systems.

Differences between traditional public service systems and private sector methods of operation pose another challenge to public sector managed care initiatives. As Federal, State, and county substance abuse and mental health authorities move away from their former roles as administrators of grants and contracts into new roles as purchasers of managed systems of care, they must work within governmental limitations that are not found in the commercial sector. These include legislative and statutory restrictions, such as mandated services for special populations, restrictions on what types of providers can be utilized, set percentages of funding that must be spent in certain areas (e.g., prevention services) or for specified populations (pregnant women), and underfunding.

Another challenge to a successful managed behavioral health care system is the fragmentation of service delivery systems that characterizes many State and local systems and causes duplication of and gaps in the service continuum. This fragmentation is due in part to a lack of coordination between agencies and separate funding streams that are designated only for specific populations. This lack of integrated services has additional implications for cost and quality of care for individuals with the most severe illnesses, such as seriously and persistently mentally ill persons. Complicating matters further is the fact that many individuals in public substance abuse and mental health treatment are also served by other public agencies and systems, some of which, like the child welfare system, are setting up their own service management systems.

Sound contracts are at the foundation of successful public sector managed care initiatives, which are likely to consume literally billions of dollars in public financing. A contract defines the expectations of the purchaser, the obligations of the MCO and its network of providers, and the rights of consumers. A contract embodies legally enforceable sets of promises that are crucial to accountability. Therefore, it is essential that the contract clearly state what duties are delegated to the MCO and what duties remain with the public purchaser of managed care services.

Public sector managed care contracts are collectively forming a critical component of the legal framework in which public services are delivered. To some degree, the contract and its associated documents (such as RFPs) are the only existing legal framework (Rosenbaum et al., 1997). Because a contract, by definition, constitutes a legally enforceable promise, virtually every issue addressed in it has legal implications in terms of whether the promise is worded in a way that can be enforced by a court of law.

When a contract is poorly drafted, the financial consequences can be enormous, because under the principles of contract law, a contract will be interpreted by the courts against the drafter. In the case of public managed care procurements under Federal and State law, the public agency is the drafter. An unfavorable court ruling can leave the agency legally and financially exposed for services that it assumed were part of the contract but that in fact fall outside the scope of the agreement because of vague or erroneously drafted terms.

The contract is the means by which compliance with applicable Federal and State mandates and regulations can be established. The Federal laws and regulations governing Medicaid, the Federal Community Mental Health Services (CMHS) Block Grant (Public Law 102-321; 42 U.S.C. §300x-7-§§300x-8), and the Substance Abuse Prevention and Treatment (SAPT) Block Grant (Public Law 102-321; 42 U.S.C. §300x-21-§§300x-35), for example, specify requirements for coverage; if the responsibility for meeting these requirements is not specifically delegated to the MCO in the contract, that obligation remains with the purchaser and may result in unanticipated costs.

In addition, contracts can address such issues as: the relationship between the contract and the RFP; the relationship between the contract and local, State, and Federal law; the MCO's subcontracts with providers; indemnification; the MCO's accountability and reporting responsibilities; and conditions of contract termination in the event of nonperformance. These issues are discussed in later chapters of this document.

A recent analysis of dozens of State Medicaid contracts covering prevention and treatment services for mental and addictive disorders showed that most had significant weaknesses that may leave the purchaser at financial risk and consumers at clinical risk (Rosenbaum et al., 1997). These weaknesses can be attributed to many factors. Strong contracts for managed care are intricate and difficult to write. Purchasers must define a benefit package that meets the special needs of diverse populations and then clearly describe the package in specific contract language. In many cases, the purchaser must translate oftentimes arcane regulatory language into precise, legally binding contract provisions. In addition, under a managed care system, the purchaser must address numerous gray areas that are not covered by existing State regulations. Therefore, strong contracting expertise, an understanding of Federal and State laws and regulations, and public input in the contracting process are crucial as purchasers develop contracts that provide effective services and minimize the purchaser's financial risk.

Contracting for Managed Substance Abuse and Mental Health Services: A Guide for Public Purchasers is intended to provide guidance from both policy and legal perspectives on developing RFPs and contracts between public purchasers and MCOs. This guide is designed to provide strategies for managed care contracting efforts but does not prescribe how these efforts should be developed. Although targeted primarily toward State and county substance abuse and mental health authorities, Medicaid agencies, and other public purchasers of managed care services, this document will prove useful to treatment providers, MCOs, academicians, researchers, consumers, and other stakeholders who will find that it addresses the most pertinent issues in managed behavioral health care contracting. The reader of this document can gain the following:

Familiarity with designing and procuring, and implementing managed care systems, including a review of options for consideration, problems that may be encountered, and key legal issues;

Knowledge of RFP and contract issues related to sound clinical care, network development, quality assurance, management information systems, financing, and consumers' rights; and

Understanding of the importance of developing a comprehensive set of well-conceptualized and well-written RFP and contract provisions to provide a strong structure for public sector managed care initiatives.

Given the rapid evolution of managed care and the many variations with which States and localities are experimenting, no single approach to behavioral managed care contracting can be recommended for all public purchasers. This guide suggests a number of specific issues that purchasers may wish to consider when developing RFPs and controls for behavioral managed care initiatives. Purchasers are cautioned that this document is no substitute for expert legal and other analytic consultation in developing RFPs and contracts; and it does not eliminate the need for legal, actuarial, or other expert assistance (e.g., clinical matters, organizational public policy) in designing the RFP, conducting the procurement, or negotiating the contract. Purchasers are strongly urged by the project's Development Panel to secure the assistance of legal counsel and of actuarial, financial, and managed care experts throughout the design, procurement, and contract implementation processes.

Managed behavioral health care contracting in the public sector is changing rapidly, and to be responsive to public sector purchasers as the field continues to change, Contracting for Managed Substance Abuse and Mental Health Services: A Guide for Public Purchasers is designed as a "living" document. Publishing the guide in a looseleaf modular format makes it possible to periodically update key content areas and contract language to reflect state-of-the-art expertise. In addition, readers will have access to an interactive, electronic version of this guide, located on CSAT's Web site (www.treatment.org).⁽²⁾

The electronic version will contain linkages to other Web sites that will allow readers to explore related contracting issues in more depth. Readers will also be able to review contracts developed by public purchasers, exchange information in an online "chat room," and submit comments and local examples of contract-related experiences, which may be included in later revisions of the document.

^1.  An RFP is a solicitation document issued to obtain offers from contractors that propose to provide products or services under a contract to be awarded using the process of negotiation.

^2.  Readers may find it helpful to note that specific examples of contract language used in States' Medicaid managed behavioral health care contracts are available through the SAMHSA Web site: www.SAMHSA.gov

CHAPTER II

Designing, Procuring, and Implementing a Managed Care System

As a result, competitive procurements create complex organizational and legal tasks for purchasers as they move toward acquiring behavioral managed care services. MCOs treat competitive procurements as an extremely serious legal matter and do not hesitate to challenge a process they consider tainted.

As discussed in this chapter, writing and negotiating a managed care contract is actually one of the later phases in a complex design and procurement process. In most circumstances, the final managed care contract is based on the results of several efforts:

Preparation by the purchaser of a request for proposal (RFP)--that is, a solicitation document issued to obtain offers from contractors that propose to provide products or services under a contract to be awarded using the process of negotiation;

The submission of proposals by bidders;

Selection of the successful bidder; and

Negotiations between the purchaser and the successful bidder that take place after the contract has been awarded but not yet signed.

Public purchasers of managed care, and the environments within which they operate, vary tremendously, and these differences have a substantial influence on design, procurement, and implementation of a managed care system. The public purchaser itself--for example, the State Medicaid agency or State substance abuse or mental health authority-- may have highly variable purchasing power depending on the size, scope, and expenditure level of the program under which it operates. Differences in the local availability of clinical services and financial and staff resources may affect the procurement process. The political environment, population demographics, and geographic factors also affect the procurement process. Thus, each purchaser of managed care faces a unique set of challenges.

This chapter uses an adaptation of the 10-step model developed by the Federal Center for Mental Health Services to address issues at various stages in managed behavioral health care procurement process (Dougherty, 1996). It also identifies some of the types of legal challenges a purchaser may face when developing a managed care system. As illustrated in Exhibit II-1, the 10 steps in the model used to organize the discussion in this chapter can be grouped into three major stages: (1) designing a managed care system; (2) procuring managed care services (includes issuing an RFP, selecting a vendor, and awarding a contract); and (3) implementing a managed care system (includes implementing the contract and subsequent monitoring and evaluation).

Understanding the tasks and challenges of each stage is essential to designing a clinically sound and cost-effective managed care model, establishing a successful and legally defensible RFP and contract development process, and implementing an effective managed health care system.

A purchaser can expect that political pressures from stakeholders will be brought to bear on the process. Some political pressures are likely to come from within the purchaser's agency and others from external government agencies or officials. There are also likely to be pressures from consumers and their families, local health care providers, and MCOs. A purchaser should weigh the amount of influence each of these entities should have on the design of the managed care system, because politics can irreparably taint the entire managed care procurement process. If adequate safeguards are not taken, political pressures both from within the agency and from outside sources may affect selection of the vendor and allow legal challenges from unsuccessful bidders. Purchasers must carefully monitor the managed care selection process to ensure that no State, Federal, or other procurement laws are violated.

Stage 1: Designing a Managed Care System

a. Qualifications of the Development Team

Development team members should be carefully selected on the basis of their individual skills and potential contributions. Key attributes include a detailed understanding of the needs of the enrollee population; writing, analytic, and financial abilities; a clear understanding of the opportunities, risks, and challenges inherent in developing a managed care system; an understanding of the needs of the stakeholder community; an understanding of the service delivery system; and the capacity to be absolutely discreet. The purchaser's development team should generally be small--some would say a core of six to eight members--but should be able to call on other individuals as needed. These other experts can be brought into the planning process when they can make an important contribution. Too large a core group will increase the risk of inappropriate disclosures that can taint the procurement process.

The development team should also identify staff members from various agencies with interest or expertise in the services to be purchased. For example, when the purchaser is a State Medicaid agency, the team may immediately want to bring in staff from the State substance abuse and/or mental health agencies because of the relevance of their expertise in the delivery of these services and their familiarity with the organizational and political matters that may arise during the overall process. The team should be given sufficient time and resources to participate in the planning and implementation process.

b. Qualifications of the Development Team Leader

The leader of the purchaser's development team should have a thorough understanding of the purchaser's needs and staff resources and be able to assemble and manage a very strong team. The team leader should be the senior executive of the purchasing entity or another person designated by the purchaser. The team leader has tremendous responsibilities for the success of the procurement. He or she should have managed care experience or extensive training in issues concerning managed care, as well as sufficient authority to shape and lead the development team in issues of importance to the purchaser. Ideally, the team leader either should have a background in procurement law or should appoint a legal advisor to the team at its inception. The stronger the team is in the area of procurement law, the more likely the purchaser will withstand a legal challenge to the procurement, a reality in any purchasing endeavor of this magnitude.

c. Qualifications of Bid Evaluators

Bid evaluators are also critical contributors to the procurement process. The purchaser must rely on the evaluators to assess bidders in a fair and impartial manner and make recommendations to the selection team.

The purchaser will need to know that the evaluators:

Possess sufficient background and evaluation skills;

Are free of conflicts of interest in relation to the bidders (and that they have fully disclosed any information regarding their contacts with bidders before and/or during the selection process);

Are fair and impartial;

Understand the scoring processes and tools used in the evaluation process;

Are given sufficient time to adequately evaluate all the bids submitted.

The purchaser should take into account all possible issues that could affect the purchaser's confidence in the bid evaluator panel's recommendations. (These issues are discussed further in Step #7 below.)

d. The Use of Expert Consultants

Expert consultants can significantly increase the chances of a successful process. The team should consider the use of expert consultants who are able to bring a wealth of expertise from other managed care efforts but do not pose a conflict of interest. The consultants should be chosen carefully, and their references and reputations regarding ethics, expertise, and judgment should be thoroughly reviewed. Using consultants does not in any way diminish the knowledge or talents of staff involved with the effort.

e. Legal Precautions

Purchasers who design a managed care system may have little or no direct legal expertise in procurement, but many factors in the procurement process put the purchaser at legal risk. Thus, legal experts are essential to the core team to scrutinize the plan's design and identify any possible legal ramifications of policy decisions.

In a legally defensible design and procurement process, information is shared fairly among all prospective bidders and the process contributes to the procurement of quality services at a fair price. Any failure on the part of the purchaser or purchaser's agents to be even-handed, or any act that raises questions of fairness, can result in a legal challenge. A legal challenge can be very expensive and troublesome for a purchaser even if it is ultimately unsuccessful.

To avoid such a challenge, the purchaser should adopt strict standards regarding how team members, as well as evaluators, expert consultants, and others, may interact with other employees of the purchaser, potential bidders, and the general public. Any contact between the bidder and the purchaser's employees and evaluation team opens the door for legal problems. The purchaser can avoid some problems by setting forth standards for these communications in the RFP and adhering to them strictly. Guidelines concerning communications with bidders should be developed for purchasing agency staff, also. All communications with bidders should be noted, and any information given to one bidder should be given to all. If the procurement is challenged, such documentation will provide support for the purchaser's argument that all bidders were treated equally and fairly.

From the outset, the purchaser should clearly describe the ground rules to be followed by purchaser staff, consultants, and advisors during the procurement process, including situations to be avoided (e.g., paying or accepting payment for meals, gifts over a specified amount, tickets to events) and policies to guide communications with potential bidders and other interested groups. All team members, stakeholders, and consultants should understand and be held accountable for these policies. During the pre-RFP period, prospective bidders often send teams to work in the State and may spend considerable time and money acquainting themselves with all players and potential partners. Because of the large size of managed care contracts, the temptation for prospective bidders to do more than assess "the lay of the land" during this period is very strong. Contacts during this time by the purchaser's staff, consultants, or advisory committee members should be carefully monitored to avoid the appearance or reality of conflict of interest.

The purchaser should obtain complete disclosure from all involved consultants and consultant groups regarding their ownership and any formal and informal relationships to MCOs. A consultant or consultant group that has direct interactions with an MCO should be disqualified. Similarly, a consultant or consultant group that has indirect interactions with an MCO--for example, provides services to a firm designing a management information system (MIS) for the MCO--should also be disqualified.

The development team's membership may change or team members may leave the agency during the design process, and the purchaser should take steps to protect the confidentiality of any relevant material and concepts. These protections may be in the form of confidentiality statements signed by employees or requirements in the RFP for bidders to disclose hiring or any use of a former employee of the purchaser.

f. Use of a Final Design Team

Although team members may change, at some point a final group must be formed to make recommendations to the purchaser on the scope of services and benefits. Forming a final design team with limited membership may help the purchaser guard against conflicts of interest and protect the legitimacy of the procurement process because communications will be limited to a select few.

g. Stakeholder Involvement With the Team

Representatives from relevant public agencies, stakeholder groups other than bidders, potential bidders, actual or potential subcontractors to bidders, and consumers and their families should have the opportunity to provide input during the design phase and to develop a strong stake in the plan. The timing of stakeholder involvement will vary according to circumstances, but it should generally begin very early so that stakeholders understand the rationale behind decisions and the opportunities and challenges of the evolving plan.

Step #2: Develop the Initial System Design

a. Clarifying Objectives

An essential step in the initial design phase is an analysis of the strengths and weaknesses of the current system and the identification of goals and objectives for the managed care initiative. These can be expected to vary according to local circumstances. The goals and objectives of managed care initiatives often include, but are not limited to, the following:

Containing or reducing costs for substance abuse and mental health services;

Privatizing public services or redefining the role of government;

Expanding coverage to new populations;

Improving access to services;

Achieving parity between physical and behavioral health benefits.

Improving the allocation of resources;

Shifting utilization patterns or level of care patterns;

Integrating separate funding or service systems;

Redressing historical underfunding of public substance abuse and mental health services;

Protecting special populations and funding dedicated to these populations;

Correcting financial or managerial corruption; and

Resolving conflicts between government jurisdictions regarding the provision of services, funding streams, populations served, or outcomes measured.

Clarifying the objectives for redesigning or restructuring the existing system requires a systematic assessment of the purchaser's needs and capabilities and the identification of problems and strengths in the current system. The team can then target opportunities for improvement, consider solutions, discuss potential barriers to success, establish measurable short-, intermediate-, and long-term goals, and select indicators to measure success. Because the design of the new system will have far-reaching ramifications, planners should ensure that this phase of the process is not hurried or skewed by political demands. It is equally important that this phase include stakeholders, such as representatives of other key agencies, providers, and consumers and their families.

b. Using Requests for Information (RFIs) To Enhance Design

Purchasers are increasingly using RFIs to solicit input from all interested individuals on the design of the managed care plan--from consumers to providers to other agency heads to MCO bidders. Developing and disseminating an RFI can be a very useful strategy for purchasers in the early stages of the design process. Stakeholders tend to take a great interest in RFIs and often provide a substantial amount of useful input. Responses to the RFI may offer detailed suggestions about system design and can also help the purchaser anticipate unforeseen problems and opportunities. However, purchasers should consider advice from bidders cautiously and take great care to avoid even the appearance of any impropriety or conflict of interest. (The use of RFIs is discussed further in the section on the "Bidder Qualification Process" in Step #6 below.)

How a purchaser uses the information supplied by outside entities has the potential to lead to a legal challenge of the purchaser's procurement. Designing a managed care system to incorporate or address issues that have been supplied by bidders in responding to an RFI may lead to a dangerous legal pitfall. Should the purchaser make changes in the managed care plan that appear to favor one particular bidder, legal challengers may argue that certain bidders had an unfair advantage. Thus, if an RFI is used, it must be structured to allow the purchaser to receive comments from all interested parties but to reserve final judgment about the comments received until all responses are in--with an eye toward avoiding the appearance of favoritism.

Although an RFI can provide the purchaser with valuable information, the RFI process adds additional time to the design effort. The purchaser should build the timeframe for the RFI into the procurement timetable and cost estimations. Failure to allow for delays that may be caused by this process and attempting to get a managed care system up and running in a shorter timeframe increases the possibility that mistakes will be made. Such shortcuts often set the stage for legal problems.

Step #3: Analyze Historical Costs and Project Future Costs of the Initial Design

Analyzing historical costs to accurately project future costs is a crucial task for the development team, because potential bidders will rely heavily on these projections in developing their bids. Accurate data are necessary for bidders to develop well-informed pricing proposals--unless the purchaser is setting the rates without asking for bids (see below, Step #4). Analyzing historical costs may be difficult because of insufficient data; in traditional systems, individuals are often not tagged by a unique identifier and thus their costs in different systems cannot be determined. The expertise of actuaries or others experienced in analyzing variance levels is necessary to determine whether historical unit cost data can be relied upon for estimating future rates. These analyses generally involve compiling claims data or other reimbursement data from a representative time period.

For programs funded with non-Medicaid funds--for example, with Community Mental Health Services (CMHS) Block Grants, Substance Abuse Prevention and Treatment (SAPT) Block Grants, or discretionary State funds⁽¹⁾ -- historical cost data will generally not be available in the same claim-based format as the Medicaid data. To the extent possible, data for programs with non-Medicaid funding should be summarized in a format similar to that of Medicaid data to make it easier to collate. The summaries should be done by staff who can understand the information fields used in other insurance claims, State reports, or utilization reports.

An ongoing effort to gather information in the data collection and analysis phase is needed to assure the development team that the problems identified have been properly understood and that the goal of the initiative is properly targeted. All data related to cost analysis and projections should be checked by several individuals in the field for accuracy and completeness before release. Assistance from actuaries, health economists, or highly trained claims data staff is essential. If the data are inaccurate or if some component is missing, the payment rates will likely be inadequate and could provide the basis for later lawsuits.

Financing and risk in managed care contracting are discussed at length in Chapter VII. One of the points made in that chapter is that there is a continuum of risk-transfer financing models for managed care contracts. The different risk-transfer financing models--including a global budget, capitation payment arrangements, case-rate payments, and fee-for-service payment--apportion the major types of financial risk between the purchaser of managed care and an MCO in very different ways.

Various approaches to establishing capitation payment rates are discussed in Chapter VII. RFPs that call for managed care entities submitting bids to propose a capitation rate generally require claims data that include the number of recipients for each service type by any applicable eligibility category (e.g., families formerly covered by Aid to Families With Dependent Children or Supplemental Security Income recipients); costs; units of services; and any other relevant pricing factors. Determining the number and types of eligible recipients is essential to the establishment of a capitation rate. In non-Medicaid initiatives, where accurate numbers of eligible residents may be difficult to obtain, the number of individuals who are eligible for services can be estimated from census data or from data from epidemiological studies.

The purchaser's development team must understand clearly which covered benefits and services will be included in the contract and which will remain the direct financial and coverage obligation of the purchaser. A Medicaid managed care contract, for example, may cover short-term hospitalization for children with mental illness but not long-term stays; in this situation, some portion of a seriously ill child's hospitalization would remain the direct obligation of the State, because under Medicaid law the child is entitled to medically necessary hospitalization regardless of the fact that the managed care contract covers only a portion of the necessary care. Thus, the State Medicaid agency should retain sufficient funding to pay for these services that are required by law but that are not included in the managed care contract.

The development team also must know the cost per unit of service that is included in the contract. Publicly funded systems have historically paid an all-inclusive rate to many classes of providers. Few data exist about the costs of subcomponents of "bundled" services, which has led to wide cost variations among providers, even when claims data are available. The problem of the bundled rate may make development of reliable rates for managed care impossible until the service can be unbundled and data collected on the cost and utilization of the service subcomponents. Purchasers should consult with actuaries or other financial experts about whether available historical cost data are reliable measures of the cost of future capitation arrangements.

To identify trends in utilization and enrollment reflecting changes in the economy, eligibility levels, and services, it is best to use 3 or more years of data. The more precise the count of covered individuals, the more accurate the cost estimates will be and the more on target the final payment rate is likely to be.

The purchaser should call upon actuaries to ensure the purchaser that the rates to be paid to the MCO are sufficient to support the desired level of utilization in the managed care system and the associated costs. When a large proportion of the data needed to establish payment rates is not current, are inaccurate, or otherwise perceived to be weak, one option is for the State or county to share some of the financial risk with the MCO (see Chapter VII). Another option is to consider methods of financing (e.g., interim payments with cost settlement) other than risk-transfer payment until adequate baseline data can be developed.

Actuarial analyses of historical data must also take into account anticipated savings from implementation of the managed care plan, including reductions in the cost of certain services (e.g., medical/surgical costs) by increasing the availability of another service (e.g., substance abuse prevention or treatment). Oregon officials, for instance, calculated the anticipated savings in medical services that would result from an increase in the availability of substance abuse services, and then used this information to affect actuarial results and significantly improve the priority of substance abuse services in that State's health care reform initiative.

Purchasers should be aware that transferring historical cost data directly into future capitation rates without adjusting for these cost savings can result in overallocation of resources for managed care services, and high profit margins for MCOs.

If key data are missing, or if it is necessary to make too many assumptions to cover missing data fields, then planners should consider adjusting the timeframes of the initiative until adequate information can be developed, collected, and analyzed. One option sometimes used by States and counties in this situation is initially to establish a contract with an MCO or other organization to provide specified administrative services only (ASO) in a contracting arrangement that passes no financial risk for the cost of health services to the organization providing administrative services (see Chapter VII). Such an arrangement can help institute needed management reforms and permit collection of baseline data for a year or more before some or all system funds are put into a risk-bearing arrangement.

In order to develop a reasonable cost proposal, bidders may find information on the following useful:

Incidence and prevalence of substance use and mental health disorders;

Utilization rates by service type;

Acute inpatient readmission rates;

Length of stay per admission per level of care;

Outpatient sessions per defined treatment episode;

Analysis of utilization patterns, including high users of services and their associated costs;

Descriptions of the demographic, diagnostic, and utilization characteristics of high users;

Analysis and identification of gaps in the treatment continuum, including input from consumers and advocates;

Description of known needs and demands for services;

Designation of clinical and financial responsibility for pharmacy, laboratory, and emergency room costs; and

Identification of service costs that have been supplemented by the following:

- Foundation and other philanthropic sources;

- Federal, State (e.g., Department of Corrections), and local funds and whether or not these arrangements will apply to the MCO;

- Interagency agreements; and

- Identification of barriers to current treatment or planned treatment services (waiting lists, pharmacy integration, exclusionary diagnoses).

Step #4: Determine Optimal Financing Mechanisms, Payment Methods, and Financial Risk Level

The managed care purchaser's selection of financing and payment methods should be decided based on the goals and objectives of the managed care program. A purchaser whose main priority is to increase accountability, enhance quality, and/or improve efficiency, for instance, might establish a flat payment fee and then challenge bidders to compete based on access and quality of care issues. A purchaser whose main priority is to maximize cost savings and strictly control its financial risk, on the other hand, may want to use financially competitive processes and risk-transfer payment systems.

When a quality competition is used alone, (i.e., prices are set and bidders compete on the basis of quality of care), the purchaser must be exceedingly clear about the standards it uses to differentiate one bidder from another because price effectively has been removed as a competitive factor. When the competition includes both price and quality, the purchaser may want to establish clear internal evaluation safeguards so that the award does not automatically go to the lowest bidder. Even in States in which procurement law requires the award of a contract to the lowest bidder, such a law applies only to the lowest qualified bidder. This legal caveat permits the buyer to use measures of quality to select its bidder, even when price may be a driving issue. A purchaser using price competition should know from its actuaries what the lowest reasonable price is and should design a bid evaluation system that makes price only one of several components. When price competition is used, purchasers must recognize that in some systems or for some populations, the chances of obtaining significant savings may be very slim owing to prior cost reductions, the inherent cost of treatment for the target population, or other factors such as extremely low budgets for services.

One of the most substantial challenges for the purchaser's development team is to balance the purchaser's objectives and strategic alternatives with financial incentives that best fit the situation. One method that States have used to solicit price reductions has been to award their default enrollment population (i.e., individuals who are required to select a plan but fail to do so after being given the opportunity to make an informed choice) to the lowest bidder. Other States have used arrangements that have involved the separate bidding of the State's default business.

Step #5: Build Stakeholder Consensus

One of the first tasks of the development team is to create and implement a strategy that solicits the input of stakeholders early in the managed care system design process to build a sense of collaboration and partnership and identify troublesome issues. Any managed care initiative undertaken in the public sector will have a substantial clinical, financial, and political impact on a wide variety of individuals and organizations including the following:

The public purchaser (e.g., a State Medicaid agency; a State, county, or local substance abuse or mental health authority; an American Indian or Alaskan Native tribe or tribal organization);

Managed care entities (e.g., managed behavioral health care organizations, HMOs, counties, provider-sponsored organizations);

Health care providers (e.g., treatment agencies, individual providers, State and county direct service employees, hospitals, nursing homes);

Consumers and their families (e.g., individuals, families, guardians);

Consumer advocates;

Government agencies (e.g., legislative committees, child welfare and special education, social services, corrections, housing agencies, State vocational rehabilitation agencies, State and county substance abuse and mental health agencies); and

Regulators and policymakers.

If stakeholders such as these are to be involved in basic design decisions, the purchaser must take steps to guard against conflicts of interest, as noted above. MCOs may face serious antitrust consequences if they organize to provide a collective response to a State's request for comments. Involving health providers in the design of the managed care system may raise some of the same conflict-of-interest and antitrust issues that arise with MCOs.

The purchaser's development team may want to create an advisory group consisting of representatives of various stakeholder groups who have the ongoing opportunity to make suggestions, voice concerns, and/or participate in the process of decisionmaking. Some modest financial support may be necessary to involve certain low-income stakeholders. It may also be advisable to meet with some stakeholders separately to discuss issues of concern to them, such as design elements related to children in foster care. When assembling an advisory group, conflicts of interest are natural and inevitable and are best discussed openly and directly.

Consumers and family members or guardians can offer an especially valuable perspective during the early design and planning phase of the managed care initiative. Many consumers and their families have become very resourceful in obtaining information and services on their own because they have all too often encountered a lack of resources, fragmented systems, and providers who are ill informed about their needs. As a result, some consumers and family members may be more knowledgeable about treatments, services, and system problems than are purchasers, providers, MCOs, or other stakeholders. (A more detailed examination of the optimal roles of consumers is presented in Chapter VIII.)

In some cases, achieving consensus from a wide variety of stakeholders about the underlying principles and operations that will guide the managed care initiative is very difficult or impossible. Conducting public meetings or hearings and providing the larger community with an opportunity to comment on drafts of documents is one way to help build consensus. A balance must be struck, however, between ensuring the opportunity for sufficient input and creating unnecessary burdens for the development team. Soliciting input from potential competitors and their subcontractors is particularly challenging since the manner in which this occurs can affect the legality of the entire procurement. Regardless of the methods used to build consensus, purchasers should be cautioned that the failure to solicit early input from key stakeholders in a meaningful way can create very serious problems throughout the design, procurement, and implementation phases. In some cases, lack of consensus has derailed otherwise well-designed programs.

Special Issues Encountered in the Design Stage

The primary tasks of the design stage have been outlined above. In the discussion that follows, issues pertaining to decisions about major aspects of the managed care system design phase are highlighted:

• Decisions about eligibility criteria;
• Decisions about enrollment strategies;
• Decisions about disenrollment protections;
• Decisions about what services to cover in the benefits package; and
• Decisions about joint purchasing of services (i.e., whether to purchase substance abuse services and mental health services separately or jointly) and decisions about the degree to which managed behavioral health care is to be integrated with general health care (i.e., whether it is to be "carved in" with general health care or "carved out").

Given the current trend toward more integrated systems, it may be advantageous to develop models of managed care systems that will facilitate greater coordination of Medicaid and other funding streams (see discussion of funding streams in Chapter VII). One challenge would be to determine the range of services and level of access that the purchaser would like to provide and then to identify the funding streams that can be accessed when creating that package.

Combining funding streams for managed care initiatives is a very challenging task. The Medicaid program, for example, is subject to numerous statutory requirements that do not disappear simply because a State Medicaid agency decides to use a private contractor to perform some of its functions. In trying to pool funds from two or more sources, consideration should be given to the fact that eligibility rules, enrollment practices, and services covered vary tremendously across different government-funded programs. Also, the statutory and regulatory provisions vary across government programs and are very different from each other and from the provisions governing Community Mental Health Services (CMHS) and Substance Abuse Prevention and Treatment (SAPT) Block Grants (for further discussion, see Chapter III).

a. Decisions About Eligibility Criteria

The criteria that will be used to determine who is eligible for managed care services may be based on a host of clinical, financial, and political considerations that vary in different States, counties, and localities. The development of a managed care system can be an opportunity to establish more uniform policies on eligibility for services to special populations that require access to multiple government-funded programs. The attempt to streamline processes and coordinate care within Medicaid could include a consolidation of access requirements under the direction of a case manager. Targeted case management is a mandatory Medicaid benefit for Medicaid-eligible children and an optional benefit for adults. At the very least, designers will want to ensure the development of policies that promote efficient referral between the managed behavioral health program and other government-funded service delivery systems. Some factors upon which eligibility can be based include the following:

Insurance status;

Diagnosis (i.e., level of functional impairment);

Severity of illness;

Risk factors;

Income and/or asset level;

Age;

Geographic variables;

Specific clinical subtypes;

Disability status; and

Involvement in specified systems or groups (e.g., criminal justice system, child welfare system).

Once the eligibility criteria have been established, it will be possible to develop a thoroughly researched estimate of the number of likely subgroups, the number of eligible individuals in each, and their probable geographic distribution. If the estimated number of eligible persons or their distribution is unacceptable because of cost or other considerations, the purchaser may decide to adjust the eligibility criteria.

The final eligibility criteria and estimate of the size of the eligible population will enable potential bidders to submit informed proposals. Great care should be taken to ensure that eligibility data are as accurate and complete as possible. In some situations, certain eligibility groups may have access to services not available to other groups, for example, when another entity is sharing the cost of designated services (e.g., educational training, social skills training). That may be the case particularly when the same contract is used to enroll Medicaid beneficiaries and persons whose enrollment is sponsored by other programs (e.g., the CMHS Block Grant), because Medicaid beneficiaries may be entitled to a far broader array of services.

b. Decisions About Enrollment Strategies

The development team must decide whether enrollment in managed care can be required, allowed, or prohibited for particular subgroups. Because of the clear financial consequences of providing services to someone no longer eligible for services, it also is important to specify how promptly the MCO can disenroll members.

Eligible individuals can join a managed care plan in person, over the telephone, by mail, or by the recommendation of a designated enrollment counselor. Typically, they enroll in a managed care plan in one of two ways. The first is to enroll in a specific plan and complete the enrollment process within the timeframe established by the State (e.g., 45 days from a designated date). The second, for individuals who enroll late or do not make an enrollment selection, is to be randomly assigned to a plan (autoenrolled) with no personal input into the enrollment decision.

People suffering from severe mental and/or addictive disorders may have substantially greater difficulties than healthier people in meeting a short deadline and therefore are likely to be overrepresented in autoenrolled groups. If these individuals are helped by guardians or caseworkers, they may not have as much difficulty in meeting the deadline.

Dissemination of information about enrollment is critical, and active outreach efforts to enroll eligible individuals should be planned. Outreach may be most needed with populations that are legally vulnerable, such as illicit drug users and drug-addicted women with children.

Default enrollment may increase the chances that individuals actively receiving services for mental or addictive disorders will be forced to terminate treatment because their usual provider(s) is not a member of the assigned plan. Such disruptions in the treatment process can lead to significant therapeutic losses and confusion, increased difficulties in treatment compliance, and uncertain transitions to new and unfamiliar providers.

Purchasers can avoid this problem by adding contract provisions for out-of-plan referral benefits or for highly specific, time-limited transfer activities. In such instances, purchasers may want to develop detailed transition policies for those in treatment, during enrollment or disenrollment, transfers, or at re-enrollment. For example, the MCO could be required to authorize out-of-network payments for a designated period of time for individuals who must continue care while making the transition to new service providers. Purchasers can ameliorate the impact of involuntary default assignments by assigning certain providers or outreach workers to search for individuals who have not made selections, ensuring that every reasonable effort is made to contact them and help them select an appropriate provider.

The child welfare system operates on a no-reject, no-eject policy. Purchasers of child welfare managed care services must be sensitive to the potential impact of the autoenrollment requirement inherent in the statutory mandate to serve and protect all children deemed abused and/or neglected. However, once a child is enrolled in a plan, it is permissible to offer the child different benefits or services intended to protect and facilitate permanency for the child and family in a timely manner.

Another enrollment issue arises when purchasers contract for behavioral health services with more than one plan, providing enrollees with several options for substance abuse and mental health services. When many MCOs compete for enrollees, there may be incentives for adverse selection, meaning that plans may compete for the healthiest people and try to avoid enrolling people with the most expensive treatment needs. This practice is referred to as "cherry picking." It is relatively easy for an MCO to cherry pick among persons with mental and addictive disorders--for example, the MCO could adapt policies to decrease the number of individuals with high rates of mental health care utilization based on the knowledge that the use of mental health services in a year is highly predictive of high levels of physical health service use in that year and of high mental health service use in the next year. Thus, purchasers who develop contracts with several MCOs that will compete for a finite pool of enrollees should create strong protections against cherry picking.

Purchasers must also take into account changes in public policy that affect eligibility and enrollment procedures, such as the new Supplemental Security Income (SSI) eligibility criteria for children, as contained in the Personal Responsibility and Work Opportunity Act of 1996.

Depending on the circumstances, purchasers may want to consider using health benefits managers or enrollment brokers who implement and manage the enrollment function. Examples of the use of health benefits managers are found in Pennsylvania, Massachusetts, Maryland, and Nebraska. If a health benefits manager is used, the prime contract between the purchaser and the MCO should clarify who pays for this service, how disagreements between the MCO and health benefits manager are resolved, health benefits manager responsibilities and restrictions, the MCO's responsibilities for providing the health benefits manager with information, and the processes by which the MCO and the health benefits manager are to communicate (Horvath and Kaye, 1995). A health benefits manager can reduce cherry picking or other hazards of aggressive MCO marketing and reduce the use of default assignment by actively seeking out eligible individuals and assisting them in making the best choice based on their circumstances.

Enrollment practices should be closely monitored. If significant enrollment problems occur, such as those described above, enrollment may need to be suspended. A suspension option should therefore be incorporated into the contract. Since such a suspension has serious financial consequences for the MCO and service consequences for individuals, this option should be used only if there appears to be no other recourse.

In sum, several issues are inherent in any voluntary enrollment situation. To prevent an MCO from cherry picking, some type of independent entity is often needed to ensure a degree of control over who is, or is not, determined eligible. Care must also be taken when transitioning individuals already in treatment into the MCO provider network. This may require authorization of services with the enrollee's current provider and/or establishment of timelines for transition planning. These strategies can be very important for vulnerable populations to ensure that an individual's condition does not deteriorate because medications or other key services are not accessible during the transition to a new system.

c. Decisions About Disenrollment Protections

Individuals with substance use and mental health disorders need contractual protections from disenrollment because they often receive services through managed care systems that are permitted to disenroll them for noncompliance. Some MCOs have used various operational definitions of noncompliance to contain costs, such as failing to follow instructions, being generally uncooperative, or failing to regularly keep appointments.

The nature of substance use and mental health disorders makes it likely that some individuals who have these disorders will not comply with either general health or behavioral health service requirements. Many consumers with behavioral health problems are noncompliant with treatment due to symptoms of their illnesses or side effects of their medications. Court-ordered clients and other involuntary recipients of care may also be vulnerable to charges of noncompliance.

The incentive to disenroll people with substance use and mental health disorders for cause is great, because these individuals tend to have very high health care utilization rates. Individuals with alcoholism use health care services at two to four times the rate of the general population, and family members of individuals with alcoholism use health care services at a rate two to three times that of the general population.

The purchaser of a managed care system can discourage the clinically unsound practices of disenrolling people with mental and substance use disorders for noncompliance. One way is to require that the MCO obtain the purchaser's approval before disenrollment for cause can occur (this approach was used in Oregon for substance use treatment enrollees). Another way is to offer specialized enrollment procedures for different categories of individuals (such as those currently hospitalized or non-English-speaking individuals), provide opportunities for families to enroll in a plan as a family unit and be eligible for a package of benefits and coordinated case management services, or develop effective stop loss policies or risk corridors (see chapter VII) that place limits on the amount of losses that can occur. The purchasers may wish to contractually prohibit some or all "cause-based" disenrollments initiated by the MCO.

The capacity to offer portability of coverage to enrollees is a critical decision for public purchasers if they wish to minimize disruption in services when enrollees move. Decisions about portability may influence design considerations that affect location of services, such as the choice between statewide and regional networks. (Chapter VIII provides a more detailed examination of disenrollment and contract development options.)

d. Decisions About Covered Services

In addition to determining who is eligible for the program, the development team must articulate clinical and other services to be included in the benefits package. Before this can be done, the purchaser must assess the adequacy of available funding. Furthermore, because managed care adds an extra layer of administrative costs compared with an unmanaged system, there is less funding available for clinical services. Thus the purchaser must analyze the eligible population, expected use patterns, and the costs of supporting those patterns and begin to make fundamental decisions about what types of services to offer and how access to those services will be managed.

This step requires the development of precise service definitions, which may never have been done before, and the inclusion of these definitions in the RFP and the contract. The package generally describes the following aspects of coverage (Rosenbaum et al., 1997):

The categories and types of covered and excluded services, providers, and populations, including a description of coordination issues between covered and excluded services;

Permissible limits on the amount, duration, and scope of services;

Benefit and service definitions; and

Definitions and standards for determining medical, clinical, and psychosocial necessity and other means of determining eligibility for a unit of service.

The benefit package is the heart of the system. In the case of Medicaid, States remain financially liable for services that are included in the State plan but are not covered in the contract. If services are not described well, MCOs can make excessive profits because they are contractually liable for fewer services than the premium assumes. Poorly described services can also result in unanticipated costs for the State (see discussion in Chapter III). The types and extent of covered services may vary considerably between plans due to differences in existing service structures, regulatory guidelines for units of service (e.g., Title IV-E dollars in the children's system may be used to pay for board and maintenance only), budget considerations, and available funding streams in a given State or county. Requirements attached to funding streams can have a profound impact on the services that can be purchased. See Chapter III for a more detailed explanation of issues pertaining to covered services.

e. Separate vs. Joint Purchasing of Services and "Carve-In" ⁽²⁾ vs. "Carve-Out" Models

Embedded in decisions about which services to include and the criteria for determining eligibility are four options that may have some of the greatest long-term ramifications for the evolving system:

Whether the purchaser opts to buy mental health services only, substance abuse services only (treatment and/or prevention), or both;

Whether to blend behavioral health services with physical health services in a carve-in (integrated health care) purchase, separate these services from general health care and build a "carve-out" system, or build a carve-out system with planned and effective coordination between medical and behavioral health;

Whether to blend behavioral health services with services from other systems of care in a comprehensive delivery package (e.g., for children and their families); and

Whether or not to carve in, carve out, and/or phase in coverage for specified subgroups (e.g., children and/or families, adults with severe mental illness, all SSI recipients).

Empirical data may drive decisions about those options to some extent, but the four decisions are often largely based on the fundamental beliefs and system philosophies of the development team and other decisionmakers about how health care systems are optimally organized. While an in-depth discussion of these design decisions is beyond the scope of this document, some of the key points for consideration are identified below.

• Joint or Separate Purchase of Substance Abuse and Mental Health Services. A far-reaching design decision is whether to combine the purchase of substance abuse and mental health services in the RFP under the umbrella of behavioral health or whether these two specialty services will be purchased separately. Jointly purchased substance abuse and mental health services can be managed very closely as one program or alternatively, managed as distinct and separate programs. Many factors can drive the decision to separate, combine, or coordinate the service packages of these disciplines, including the existing organizational structure of government, the relative cost of each benefit, political and personal relationships between officials and departments, conceptual viewpoints of leading decisionmakers, the readiness of either system to be effectively managed, and the perspective and strength of advocacy groups (Moss, 1995).

The relationship between the substance abuse and mental health fields is complex. Professionals in both fields often have deeply held sentiments and philosophies about the most appropriate way to structure the functional relationship between the systems. Views can differ substantially with respect to the most appropriate governmental organization structures, treatment philosophies, and optimal business relationships with each other in a managed care marketplace. These views can play a large role in all levels of decisionmaking. There are also substantial differences between the two fields in the areas of health care conditions addressed, the emphasis on treatment and prevention services, and the provider systems used.

A significant factor encouraging greater coordination of services is the large number of persons with co-occurring mental and substance use disorders found in both treatment systems, but especially the mental health system. Results of such studies as the Epidemiologic Catchment Area study of the National Institute of Mental Health and the National Comorbidity Survey suggest that there are approximately 10 million Americans with co-occurring substance use and mental disorders (Regier et al., 1990).

Possible advantages and disadvantages of purchasing substance abuse and mental health services together are listed in Exhibit II-2.

• Carve-In and Carve-Out Models. Purchasers must make decisions regarding the degree to which managed substance abuse and mental health services are to be integrated with general health care. Most often, managed behavioral health care is carved out from general health care and managed care separately. This usually occurs in one of two ways: (1) a purchaser contracts directly with a managed behavioral health organization (MBHO) to manage the substance abuse and mental health services; or (2) full service MCOs subcontract these services to MBHOs.

Officials in New Mexico, for example, wished to foster integration between behavioral and general health care services but feared that behavioral health dollars might be siphoned away to fund general health care. Consequently, they developed a modified carve-in model that requires HMOs to contract with an independent MBHO for the management of behavioral health services but establishes mechanisms to create an impenetrable barrier between general health and behavioral health dollars.

The decision about whether to develop a carve-out model or a more integrated carve-in model is affected by several factors that vary substantially from purchaser to purchaser. These include the general makeup of the existing health care system, the market penetration of managed care, the availability of HMOs or full-service MCOs in the local health care environment, the ability of these organizations to meet appropriately the behavioral health needs of the eligible population, cost considerations, and the opinions and perspectives of key decisionmakers.

It should be noted, however, that a recent survey of 11 large full-service HMOs showed that all but two provided substance abuse and mental health services by purchasing services from wholly-owned behavioral health subsidiaries or independent vendors (Rudd, 1997). Even the two HMOs that provided some services inhouse used outside contracted vendors for Medicaid enrollees. Designers should carefully consider the type and degree of integration desired if carve-in models are being considered, since often the HMO will carve out behavioral health services.

Ensuring that behavioral health services are effectively linked with primary health care remains a substantial challenge in designing managed care systems. Regardless of whether they choose a carve-in or carve-out model, purchasers must develop parameters in the contract that specify any primary care linkages, including performance standards that monitor the degree to which expectations are met. Purchasers opting to buy substance abuse and mental health services using an integrated carve-in model should closely monitor both substance abuse and mental health benefits to ensure that the utilization of these services is comparable to the utilization of physical health benefits provided in the package. Purchasers of substance abuse and mental health carve-outs should devote substantial resources to ensuring that there is an adequate link to primary health care services.

The potential advantages and disadvantages of the carve-in model for substance abuse and mental health benefits are shown in Exhibit II-3; the potential advantages and disadvantages of the carve-out model are shown in Exhibit II-4.

Stage 2: Procuring Managed Care Services

It is also important that the procurement process conform to applicable laws and regulations. All States must comply with relevant Federal laws, but each State has specific requirements--such as general purchasing rules and required contract language--that will affect the development of the RFP and contract provisions and, in many cases, the entire procurement process. State insurance and HMO regulations, which vary widely, may also dictate the structure and content of the RFP and contract. These laws and regulations often address fiscal solvency, network requirements, reporting requirements, certificates of authority to operate within the State, and so forth. Other laws address consumer protections, such as specific grievance procedures, marketing rules, definitions of emergency care, and quality of care issues.

It is essential that planners ascertain relevant State requirements early in the process of planning a managed care initiative and that any necessary amendments to State law be accomplished so that they can be reflected in the RFP and finalized before contract startup (Horvath and Kaye, 1995; Rosenbaum et al., 1997). Planners should also assess the need for changes in legislation and/or regulations that will make desired reforms possible. New legislation is often necessary for Medicaid waivers, changes in procurement, licensure, or government personnel approvals before it is possible to implement the changes planned.

Step #6: Write the RFP

The requirements spelled out in the RFP form the philosophical and operational basis for the contract, while simultaneously protecting the clinical, legal, and financial interests of the purchaser. A study by the National Alliance for the Mentally Ill clearly showed that there is a great need for carefully constructed RFPs (Huskamp, 1996). Bidders tailor proposals specifically to the RFP requirements, and RFP responses may well become attachments to the managed care contract. (Sample specifications, characteristics, and components contained in a standard RFP are presented in Appendix A.)

A clear definition of the reform goals planned for under the contract and the problems to be addressed should be clearly stated in the RFP. Because the primary purpose of an RFP is to generate sufficient information to facilitate selection of the best bidder(s) to manage enrollee care, a primary objective of any RFP is to define a system that is reasonable enough to attract a sufficient number of responsible, qualified bidders. The RFP should outline financially reasonable terms that address the legitimate interests of all parties. Neither the purchaser, the MCO, nor consumers win if competent companies don't bid because the program requirements and/or RFP terms are seen as unreasonable, or if the contracted MCO becomes financially unable to meet enrollees' needs because of inaccurate data in the RFP. Although the contract must protect the legal rights of the purchaser, the goal is not necessarily to gain complete legal advantage over a vendor or over other types of outside or internal partners. One-sided RFPs and contracts may not attract desirable bidders.

a. State Bidding Procedures

Prior to final design of the managed care program, a purchaser should review State bidding procedures to ensure compliance. For example, State law may address required preferences for minority and small businesses. State law may also address preferences for "home State" businesses. Purchasers must review all aspects of the bidding procedure to ensure that any required preferences or scoring techniques are followed. This includes a review of any legislation that may relate to the selection process. A purchaser should be mindful of legislative directives, as dissatisfied bidders may use legislative language to try to prove that a procurement did not proceed according to State directives.

b. State Administrative Procedures Act

Bidding procedures that are affected by State law may be subject to a State's administrative procedures act, which ensures that State functions are carried out in accordance with concepts of due process. Generally, a State's administrative procedures act may permit judicial review of discretionary acts (i.e., procurement) performed by a State agency. If the procurement conducted by the purchaser falls within the confines of discretionary acts, it may be subject to judicial review.

A legal challenge of a procurement based on a State's administrative procedures act may lead the court to examine whether the procurement conducted by the State agency was conducted arbitrarily or capriciously. In the context of this guide, the term "arbitrary and capricious" refers to procurements in which the standards to be applied were either unclear or unfairly applied or the process was tainted by conflicts, or both. The result is considered arbitrary and capricious because the standards were meaningless and/or because the process was unfair. The court may also examine whether the purchaser can produce adequate evidence to substantiate the selection of a particular vendor. Thus, the purchaser must fully document procurement procedures and selection criteria to ensure sufficient evidence to support its final decision.

c. Federal Procurement Law

If a purchaser is using Federal money to operate the managed care plan, not only State procurement laws but Federal procurement laws may apply. Special Federal acquisition regulations from the Code of Federal Regulations should be referenced by the purchaser.

d. Precision and Specificity of the RFP and Contract

Determining the optimal level of detail in the RFP and contract is a fundamental decision for the purchaser. At one end of the spectrum, purchasers may wish to be very prescriptive in order to clearly convey in objective, measurable ways their expectations of the MCO. Some argue that, in the attempt to prevent the MCO from inept or avaricious behavior, this level of prescriptive detail will eliminate creativity or input from the MCO. If the RFP is too detailed and prescriptive, the responder need only "parrot" the questions in their response. Those advocating for more broadly worded contracts believe that the customer would be better served by engaging the services of a legitimate and ethical MCO and then working out the details of the program collaboratively.

Some purchasers may want one RFP process that leads to two contracts with the selected MCO in order to prevent the RFP from being overly detailed and prescriptive. One contract period would be for planning and development and the other for operations. To be most helpful, the RFP should describe particular programmatic and policy issues that the purchaser has identified. Formats that request the responder to delineate a plan to deal with the programmatic and policy issues provide the opportunity for vendors to differentiate themselves for the customer.

The purchaser's critical task is clearly to articulate specifications of overriding importance and to include with each of these specifications a mechanism for measuring the MCO's performance. When the State/purchaser does not have sufficient information to give precise direction to its contractor, it is perfectly acceptable to permit the contractor to develop its own approach, as long as the purchaser understands that in such a situation it is effectively defaulting to the industry or contractor standard. For example, a purchaser may want extreme clarity about which services are covered and which are not. On the other hand, the purchaser may elect to give the seller broad latitude to select the provider network.