This story is published here through a content-sharing partnership with North Carolina Health News.

By Rose Hoban

State legislators grilled leaders of the state Department of Health and Human Services, as well as the interim head of Western Highlands Network, at a legislative oversight hearing at the capitol Tuesday.

The discussion was held in response to Western Highlands’ recent revelation that the mental health agency had come up $3 million short in the six months since converting to a managed care organization in January. The agency provides mental-health, substance-abuse and developmental-disability services in Buncombe, Henderson, Madison, Mitchell, Polk, Rutherford, Transylvania and Yancey counties.

Legislators also learned that consultants had warned DHHS officials last fall of problems at Western Highlands as the organization prepared for making the transition, but state health leaders allowed the changes to go forward anyway. But some at the meeting defended the agency, which was only the second mental health agency to make the switch from being providers of care to managing what is essentially a small insurance company.

The only point of agreement is that there is plenty of blame to go around.

Already, in a board meeting on July 27, the Western Highlands board fired agency CEO Arthur Carder Jr. after learning that Carder had been aware of financial problems for several months before notifying board members.

Consultant warnings

In Raleigh, legislators heard from an outside consultant brought into Western Highlands to do an emergency audit in mid-July once state officials learned about the shortfall.

Michael Prinski, from the consulting firm Mercer, detailed multiple problems with the agency’s management processes, especially the ability to track how much care was being provided to individual patients.

“One of the key aspects in operating a managed care entity is having data and utilizing it to effectively manage care,” Prinski said. “The different clinical areas and financial areas didn’t have specific processes within those areas to identify issues.”

Prinski also detailed problems with tracking outstanding payments due to the agency and whether payments to care providers were being processed in a timely manner.

“This is critical… for the financial operations of an MCO, because if you don’t know how much claims are yet to come in, then it’s hard to predict what the proper loss is going to be and what your outstanding liability is to providers,” Prinski said.

But what appeared to disturb lawmakers most was realization that Prinski’s firm found similar issues at Western Highlands last fall before the agency made the switch to becoming a managed care organization, or MCO. In audits done 120 and 45 days before the Jan. 1 transition date, Mercer consultants found similar problems in the IT systems.

“What you’re telling us is that these things were identified as potential problems, but they were never corrected by Western Highlands,” asked committee co-chair Rep. Nelson Dollar (R-Cary).

“Yes,” replied Prinski.

“That speaks volumes,” responded Dollar.

When asked by lawmakers why state officials allowed Western Highlands to make the conversion in January, even though they knew about problems, then-chief deputy secretary of DHHS Mike Watson responded, “The decision came out of a review of Mercer’s insight reviews, a look at a plan of correction from Western Highlands and a discussion with them around what they felt was their ability to address the concerns and move forward.”

But when pressed, Watson admitted that he would not make the same decision today. He pointed out that another local management entity, or LME, due to convert has been delayed by several months because of similar administrative issues identified by the state.

“What we have asked LMEs to do is a huge transformation from service providers to insurance companies,” said DHHS Secretary Al Delia. ” We’ve asked these folks to make these changes quickly. So it’s not surprising that we’ve had these kinds of problems.”

Putting the losses in context

This year’s budget at Western Highlands is $138 million.

In defending some of what happened at the agency, Sen. Martin Nesbitt (D-Buncombe) pointed out that Western Highlands received $15 million fewer dollars from the state this year than last in order to provide services.

“The managed care assumptions were that there would be about an 11 percent reduction in costs,” confirmed Steve Owen, chief business operating officer for Medicaid.

“So it’s up to the LME to figure out how to save $15 million dollars right out of the chute,” asked Nesbitt, who co-chaired the legislative oversight committee on mental health reform for close to a decade.

“I think the issue for Western Highland is they have very strong clinical people. I think the problem is having the data about where money is being spent where services are being utilized, the ability to apply that data into their care management system in a way that generates both the savings and the clinical outcomes,” said Watson.

“If my my figures are correct here, Western Highlands in fact saved about $4 million over what it had been run for the year before,” Nesbitt said. “It just didn’t save $7 million in the first half of the year, in the first six months of operation.”

“When we originally came up with the idea of these waivers, it was never my intention that we were going to command a cut of 10 percent, or 11 percent the first year. We were going to turn it over to them, let them manage it, and hopefully they could find savings that we could reinvest into the mental health system,” Nesbitt said. “You’ve took one of the LMEs that probably has the best record of serving people in the state, and then destroyed it.”

Even as committee Republicans took Nesbitt to task for the failures of the 2001 mental health reform effort, Sen. Fletcher Hartsell (R-Cabarrus) pointed out that it took Piedmont Behavioral Health years of tinkering to come up with a system that works.

“There are going to be fits and starts in any kind of… I’m not trying to condemn or condone,” Hartsell said. “We’re not turning back, we don’t have a choice.

“We probably have some blame, Western Highlands has some blame, the department has some blame. We also deserve some credit… If we’re going to say that this model is what we’re going to use, then lets use the model.”

State officials and legislators agreed with Hartsell that the issues at Western Highlands could be a useful lesson for other local management entities in the process of making the conversion to managed care organizations.

Watson told the panel that, in the past few weeks, the department has been working closely with Western Highlands to revise its budgeting and it has been required to hire a consultant to make improvements. He also said Western Highlands has submitted a plan of correction to the state that includes meeting with state officials weekly and addressing the IT problems and internal audits at the agency.

Watson also pointed out that the $3 million represents only about 3 to 4 percent of Western Highlands’ annual budget. He said the agency still has enough cash on hand and reserves to make up the losses by year’s end.

How N.C. mental health agencies provide care

As a result of legislation passed in the summer of 2010, all mental health agencies in the state are being compelled to switch from providing case management and services to people with mental health disabilities to functioning as small insurance companies, similar to HMOs.

The model for delivering mental health care like this was Piedmont Behavioral Health, the local management entity, located in Salisbury, N.C., serving mental health patients in five counties near Charlotte. The agency has been experimenting with providing services under a managed care system since 2006.

Even before state legislators mandated for all of the state’s local management entities to follow Piedmont Behavioral Health’s lead, Western Highlands was asking to experiment with the managed care model as well, and was eventually given permission to be the next agency to make the switch.

Western Highlands was seen as one of the best managed mental health local management entities in the state by both advocates and providers of care.

“We appreciated them bringing in providers and other stakeholders into the planning process. It was different from what other folks had done,” said Jennifer Mahan, from the Autism Society of North Carolina.

But part of the model is changing the culture of how local management entities do business. Providers that once were used to receiving fee-for-service payments from Medicaid for services delivered are now having to make more decisions about care in order to exist within the limited dollars provided by the state.

“Everything you were doing before might not be able to fit into that model,” Mahan said.

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