Managed Care: Public-Sector Managed Behavioral Health Care: V. Redefining "Medical Necessity"—The Iowa Experience

Iowa is a rural state. As of 1990 a total of 79 of its 99 counties had populations under 30,000. A 1996 survey showed that almost half of the 211 psychiatrists in the state practiced in one of three counties (5). There are four state mental health institutions, one in each of the four geographic quadrants of the state. Before the advent of managed care, the mental health system was highly decentralized with substantial county control (5).

Iowa began to use managed care for its Medicaid medical-surgical program in 1986. That experience was largely positive, and in 1993 the governor asked the Iowa Department of Human Services to create a statewide managed mental health program. After receiving a Medicaid waiver, the department issued a request for proposals for what was first called the Mental Health Access Plan in March 1994 (5).

Eight companies, including Blue Cross-Blue Shield of Iowa, CMG, Green Spring, Medco (subsequently Merit Behavioral Care), Options, and Value Behavioral Health, submitted proposals. When the contract was awarded to Value Behavioral Health, Medco, which ranked second, sued on the grounds that the Iowa Department of Human Service's consultant (Lewin-VHI) and Value Behavioral Health were owned by the same parent company. The court agreed that despite the state's efforts to insulate the procurement process from the consultation, "as a sister subsidiary of Value, Lewin-VHI had motive and opportunity to share inside information with Value that was not available to other bidders." In July 1994 the Iowa Supreme Court upheld the original ruling, stating that the case "involved an organizational conflict of interest that was incapable of mitigation" (5).

In November 1994 the state, which had elected not to appeal, awarded the contract to Medco, now Merit Behavioral Care of Iowa. Merit began covering patients under the Mental Health Access Plan on March 1, 1995. The initial contract ran through September 1997, but in March 1997 the state extended the initial contract with Merit through December 31, 1998. As of January 1999 the state joined the previously separate mental health and substance abuse components into a unified program, now called the Iowa Plan for Behavioral Health. Only two companies were bidders—Merit (now part of Magellan) and ValueOptions. The contract, which runs through June 30, 2001, with three optional one-year extension periods, was again awarded to Merit.

In interviews with Merit staff and Iowa Department of Human Services leaders, all interviewees agreed that the initial implementation in 1995 was "very rocky" and that in the first six months the state "came close to pulling the plug." Part of the problem was operational, especially slow claims payment. But the central source of turmoil was the clash between private-sector medical necessity criteria and public-sector safety-net functions. Three lessons are potentially valuable for managed behavioral care in other states.

First, Merit initially balked at covering court-ordered inpatient evaluations when the clinical situation did not meet their necessity criteria for hospital care. Court-ordered evaluations, however, are often last-resort safety-net functions for high-visibility, high-concern situations. Merit changed the policy and now covers up to five days for a court-ordered inpatient evaluation or one day for a substance abuse evaluation regardless of Merit's assessment of the enrollee's clinical condition.

Second, Iowa, like many other states, has had difficulty creating enough residential settings for children and adolescents. In the initial implementation phase, children and adolescents who no longer met medical necessity criteria for inpatient care were sometimes discharged before a satisfactory alternative became available. In this case, too, Merit changed its policy. Under a "Keep Kids Safe" policy, children and adolescents are not discharged from inpatient care until a safe living arrangement is available and a plan for the necessary follow-up for mental health treatment has been arranged. In the first year after this change, 194 children were kept at a higher level of care for an average of 17.6 days each.

Finally, Merit and the state shifted from the private-sector concept of medical necessity to a new combination of medical and psychosocial necessity. Merit defines psychosocial necessity as "an expansion of medical necessity" that examines "environmental factors that inhibit or hamper the effectiveness of [treatment] unless they are addressed" (6). Psychosocial necessity includes rehabilitative and supportive services as well as traditional clinical services, and the care managers are told to consider "the potential for services/supports to allow the enrollee to maintain functioning improvement attained through previous treatment" (7).

For the U.S. health system strategy of competitively based managed care to succeed, purchasers, managed care organizations, consumers, providers, and other stakeholders must negotiate over value, defined as quality divided by cost. Deciding what services should be regarded as medically necessary is a central component of that negotiation.

David Mechanic (8), long a wise scholar of health policy, specifies the preconditions of meaningful negotiation with characteristic clarity: "Purchasers need to understand that going with the lowest bidder will mean that clients are much less likely to benefit from new technologies. Advocates must understand that while in an ideal world they would like unlimited access, they too must establish priorities and not demand a pattern of service that is unsustainable. Providers must accustom themselves to a more scientifically based pattern of practice."

The quality improvement movement teaches that defects should be seen as treasures because of the learning opportunity they provide. In that spirit, the turbulent start-up phase of managed behavioral health care in Iowa is a treasure. It allows us to identify and plan for crucial areas of conflict between private-sector definitions of medical necessity and the needs of public-sector consumers and purchasers, such as court-ordered evaluations and residential and other intensive settings for children and adolescents. Managed care organizations must recognize the distinctive psychosocial impediments to health experienced by low-income clients (9,10).

Learning from conflict requires a safe environment. The stakeholders in Iowa would probably not have been able to pursue a quality improvement approach to the volatile implementation of the behavioral health carve-out without protection from Governor Terry E. Branstad, who may have been especially resistant to heat because he was not running for reelection. "If you look at the complaints," the governor commented, "they're almost entirely from psychiatrists or hospitals who are concerned about their own financial situations. When you have a change of this magnitude, and there's that much money that some of the more expensive providers aren't getting, obviously you're going to hear some squeaks from those people" (5).

Ideally, we would evaluate the Iowa program on the basis of the outcomes it achieves (11). Unfortunately, outcome data robust enough to allow rigorous program evaluation are rarely available, and Iowa is no exception (12). We base our assessment of Iowa as a positive example for other states on interviews with multiple stakeholders who consistently described a climate of collaboration and creativity in addressing the challenge of serious mental illness.

Creating a definition of medical necessity broad enough to encompass the needs of consumers who experience serious and persistent mental illness as well as the health impacts of poverty is a necessary but not sufficient condition for good public-sector managed behavioral health care. Adequate funding and a strong clinical infrastructure are also a sine qua non. The next column will address Iowa's experience with funding and community reinvestment.

The authors thank Gerard Clancy, Ann Detrick, Joan Discher, and Jane Gaskill for the help they gave in learning about the Iowa experience, and they thank the Greenwall Foundation and the Robert Wood Johnson Foundation Medicaid managed care program for their support.

Dr. Sabin, editor of this column, is associate clinical professor of psychiatry at Harvard Medical School and codirector of the Center for Ethics in Managed Care at Harvard Pilgrim Health Care and Harvard Medical School. 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, [email protected]).