The public's nightmare image of for-profit public-sector managed care is one of an opportunistic, financially driven company siphoning public money away from needy citizens to line the pockets of greedy investors and lavishly paid executives. A recent nationwide survey asked a random sample of adults if they were "worried that your health plan would be more concerned about saving money than about [providing] the best treatment for you if you are sick" (1). Sixty-one percent of respondents who were enrolled in "heavy managed care" said they were somewhat or very worried, compared with only 34 percent of those in "traditional" plans. Backlash against managed care is substantial enough to be the subject of an entire 400-page issue of the Journal of Health Politics, Policy, and Law (2).
Since 1995 Iowa has addressed these fears head-on through the evolving design of its Medicaid behavioral health program. This column, which is the sixth in a series on public-sector managed behavioral health care and the second focusing on Iowa (3), addresses the lessons other states can learn from Iowa's strategy of capping profits and mandating community reinvestment.
Starting in March 1995, Iowa entered into a carve-out contract with Merit Behavioral Care of Iowa for Medicaid mental health services. In the initial contract, which ran through September 1997 and subsequently was extended to December of the following year, 81 percent of the capitation was for paying claims, and 19 percent was for administrative costs. The contract specified that any savings from the claims fund would be divided between the state and the carve-out vendor, with 80 percent going to the state and 20 percent to Merit Behavioral Care of Iowa. However, when it became apparent that there would be unspent monies in the claims fund, something interesting and unexpected happened. The state and its carve-out vendor found themselves "embarrassed" at the prospect of earning profit (for the company) or surplus (for the state) from public resources that had been earmarked for care and could otherwise be used to benefit Iowa citizens (Surles RC, personal communication, Sept 17, 1997).
Skillful clinicians monitor and use their own subjective experience as data for guiding the treatment process. Skillful administrators use subjective experience in much the same way for the management process. Administrators working for the state and for its vendor interpreted the "embarrassment" they felt about the use of unspent treatment funds as an indicator that the original contract was faulty and should be modified. They concluded that even if the funds were not needed for acute care within the network as it existed, the network itself could be improved. In order to support and treat persons with serious mental illness in the community, community services had to be expanded, and individual providers could not be expected to make the necessary investments without financial backing. For 1996 and 1997, the state and Merit Behavioral Care of Iowa agreed to reinvest approximately $1 million a year of what would otherwise have been surplus or profit into strengthening the service system. The program was well received, and the contract that took effect on January 1, 1999, incorporated several innovations based on the experience of the initial contract.
For the rebidding, the state capped administrative services at 15 percent, a figure that apparently was not controversial for stakeholders. In Merit Behavioral Care of Iowa's winning bid, 83.5 percent of the $58 million Medicaid contract goes into claims, 2.5 percent into community reinvestment, and 14 percent to the company for administration. Eight performance indicators have incentive payments of $125,000 attached to them, creating the potential of an additional $1 million in profit for meeting the performance targets. Ten performance indicators carry penalties, to be paid into the community reinvestment fund if the standards are not met. Any monies left in the claims fund at the end of the year also go toward community reinvestment.
On the national scene, some managed behavioral health programs have been criticized for determining that an intensive level of service is not "medically necessary" under their utilization management criteria in circumstances in which no alternative level of service is available. The community reinvestment program is designed to prevent such catch-22 situations. It provides one-year grants that allow providers to invest in community-based programs that, if successful, can be funded on a fee-for-service basis thereafter.
The Gannon Center in Dubuque received such a grant, allowing it to hire staff for a drop-in and crisis intervention program. Under the grant the program ran for 40 hours a week; when the grant ended, the hours were reduced to 20 a week. By consumer preference the program operates primarily on weekends, when there is little opportunity for social interaction in the downtown area where many of the consumers live.
If outpatient services must be precertified for payment, a flexible drop-in program is stymied by not being able to specify in advance when its clients will actually drop in. Merit Behavioral Care of Iowa and the Gannon Center worked out a system whereby the managed care program precertifies a specified number of visits for a three-month period for each client. If fewer visits are used, the full number is not billed for. If more are used, they are generally covered. The company allows the center to "backdate" a certification form for visits that have not been anticipated.
Several community reinvestment grants went to peer support programs. Not all of them succeeded, but the pilot experience allowed the managed care program to create a set of specifications under which it would pay fee-for-service for peer support. Thus when Hope Haven in Rock Valley, a sparsely populated rural area of northwestern Iowa, developed a plan for peer support services, it was able to establish them as billable. Hope Haven hires, trains, and supervises consumer peer support specialists, who provide outreach services that are authorized and paid for through the standard process. The executive director reports, "We can sit down with the people who are funding the service to solve problems—the care managers act like partners."
Not all of the pilot projects have been able to sustain themselves after the community reinvestment grant ends. The key ingredients for success identified so far are active consumer participation from the brainstorming phase on, careful planning for postgrant funding, and the involvement of flexible and entrepreneurial providers.
It is hard to picture a private-sector purchaser and managed care program voluntarily reducing their contractually allowed potential for profit or surplus as occurred in Iowa. There is no reason to believe that public-sector employees are inherently more charitable than those in the private sector. However, public-sector programs are subjected to scrutiny by concerned stakeholders in ways that private programs are not. Because they are embedded in an open political process, they have wider accountabilities than private-sector programs do. The managers responsible for the Iowa program were wise enough to recognize that allowing the state and the vendor to earn surplus or profit by not spending funds that had been budgeted for clinical care could alienate consumers, families, providers, and the public—stakeholders whose support the program needed (4).
In a recent study of public-sector mental health care sponsored by the Bazelon Center for Mental Health Law and the Milbank Memorial Fund, a distinguished group of state-based managers concluded that managed care techniques could be a useful "cutting-edge technology" for Medicaid programs, but that for managed care to work, the public purchasers had to be activist managers of the contract (5). The Iowa experience confirms this conclusion. In the first six months of the contract, when the state and the vendor found that applying a private-sector definition of "medical necessity" simply did not work for the public sector, they shifted to a broader concept of "psychosocial necessity" (3). Similarly, when administrators found that the initial contractual provision for returning unspent treatment funds as surplus and profit felt "embarrassing," they developed the concept of community reinvestment and modified the next contract.
Iowa and Merit Behavioral Care of Iowa have created a contract that currently works well for both parties. The state was confident enough in its model that it extended the contract to include substance abuse (6).
Although it remains to be seen whether the Iowa model can be replicated elsewhere, the contract teaches three key lessons. First, the carve-out company cannot be allowed to make its profits by not spending treatment funds. This change goes a long way toward addressing the public concern that managed care companies earn more by providing less care.
Second, by devoting a specified component of the capitation and any unspent treatment funds to community reinvestment, the contract supports ongoing development of the treatment system. It repositions the managed care program from being seen—by providers and consumers—as an adversary that tells them what is not necessary into an ally that helps them build alternatives. Instead of being seen as—and perhaps actually being—an entity that trims muscle as well as fat, with community reinvestment the managed care program can build new muscle. Finally, the contract protects the state by putting the carve-out company at risk for budget overruns but offsets the risk by building in profit potential that is attached to meeting performance targets.
If the U.S. experiment with managed care is to survive, it will have to develop partnerships in both public- and private-sector programs that emulate the lessons that Iowa teaches us (7).
The authors thank Gerard Clancy, Anne Detrick, Joan Discher, Jane Gaskill, and Kathy Stone for helping them learn about the Iowa experience, and the Greenwall Foundation and the Robert Wood Johnson Foundation Medicaid Managed Care Program for their support.
Dr. Sabin, editor of this column, is clinical professor of psychiatry at Harvard Medical School and director of the ethics program at Harvard Pilgrim Health Care. Dr. Daniels is Goldthwaite professor in the department of philosophy at Tufts University and professor of medical ethics in the department of social medicine at Tufts Medical School. Send correspondence to Dr. Sabin at Teaching Programs, HPHC, 126 Brookline Avenue, Suite 200, Boston Massachusetts 02215 (e-mail, firstname.lastname@example.org).