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Opportunities and Challenges under Medicaid Substance-Use Disorder Treatment System Reform


Email Alert

November 17, 2016

By Kevin Malone and Purvi Maniar*

An important new effort to effectively serve Medicaid beneficiaries with substance use disorders (SUD) is set to expand significantly in the coming months to Massachusetts, Maryland, Michigan, Virginia, and potentially other states. Last year, the Centers for Medicare & Medicaid Services (CMS) opened up a new opportunity for states to submit demonstration projects under section 1115 of the Social Security Act to test new SUD treatment services and delivery systems. Through the State Medicaid Director’s Letter SMD # 15-003 entitled “New Service Delivery Opportunities for Individuals with a Substance Use Disorder,” (SMD letter) CMS called for states to propose delivery system transformation demonstration programs improving access and quality of care for individuals with SUD. So far, only California is operational but applications from Massachusetts, Maryland, Michigan, and Virginia are under final review at CMS with approval imminent. Additional states are likely discussing informal submissions with CMS.

These new efforts will cause dramatic changes in participating states, presenting many opportunities and challenges for health plans and providers of SUD. In particular, these efforts will require SUD providers to substantially change their clinical and business practices to deliver evidence-based care, adopt improved record-keeping and business practices, and participate in integrated care. For many providers historically reliant primarily on cash or grant-based financing in isolation from other parts of the health care system, this program represents a major change and opportunity to access meaningful federal governmental reimbursement.


The SMD letter provides an opportunity for states to transform their Medicaid SUD treatment system by expanding benefits, reforming practice, and including, for the first time, coverage of short term stays in residential addiction treatment facilities. Historically, CMS has considered such facilities “institutions for mental disease” (IMDs) meaning that federal Medicaid financial support was not available. However, the SMD makes it clear that simply adding a new residential treatment benefit will not, by itself, be enough. The program requires states to develop a comprehensive continuum of care with focus on evidence-based services, enhanced care-coordination, primary and behavioral health integration, a value-based payment plan, and program integrity efforts (SUD has historically been a high-risk area for fraud and abuse). Potentially most challenging for states, plans, and providers, the program also requires the adoption of nationally accepted standards of care (the ASAM Criteria in particular) across the SUD treatment continuum from early intervention to medically managed inpatient care.

These requirements will require some SUD providers to make major changes in clinical and business operations to meet the new standards and other program requirements. However, these investments will create significant new opportunities including the potential for higher reimbursement, access to care coordination support, and a larger market. In addition, these improvements may allow access to commercial payer markets, now required to cover SUD services more fairly under the Mental Health Parity and Addiction Equity Act.

California’s Demonstration

California was the first state to submit an 1115 demonstration project application focused on SUD system reform (predating the SMD letter) and their proposal, “Drug Medi-Cal Organized Delivery System” (DMC-ODS), was approved on August 13, 2015. The new SUD benefit package for eligible beneficiaries includes: early intervention, outpatient drug-free treatment, narcotic replacement therapy (methadone), intensive outpatient counseling, naltrexone, partial hospitalization, residential treatment, and elective inpatient detoxification, according to the ASAM Criteria where applicable. The demonstration project also includes case management, and care coordination with physical and mental health systems, and also with the criminal justice system (such as officials in charge of community supervision or drug courts).  

DMC-ODS relies upon a state-county partnership model of implementation. With counties that opt-in to the program, the state enters into an intergovernmental Prepaid Inpatient Hospital Plan (PIHP) contract pursuant to 42 CFR 438.2. So far, eight counties have approved implementation plans and six more are pending (representing 21.6 million people / 55.7% of the California population). County-run PIHPs are also required to execute agreements with Medi-Cal managed care plans to facilitate the coordination of services for shared beneficiaries. These agreements must provide for how demonstration PIHPs will secure the necessary participant consents to comply with 42 CFR Part 2. Delivering coordinated care to participants in managed care plans with carved out SUD benefits has historically presented a major challenge under 42 CFR Part 2’s individual consent requirements and these agreements between the California County PIHPs and the Medi-Cal managed care plans facilitating the collection of participant consent represent an innovative way to mitigate the challenge. (The impending 42 CFR Part 2 Final Rule is the subject of an upcoming AHLA Alert).            

Early Results and Implications

Based on a preliminary study of DMC-ODS by the California Senate Office of Research, some of the counties hoping to participate are struggling to fill gaps in the continuum of care, in part because many SUD providers don’t participate in Medicaid due to low historical reimbursement rates. Many counties also have residential treatment capacity shortages and maintain long waiting lists already. As a result, some are seeking contracts with treatment facilities in adjacent counties and others are engaged in negotiations with providers about making adjustments to meet the ASAM Criteria necessary for contracting to proceed.

In California and the other states pursuing SUD system reform, this new program will require solutions to challenging network adequacy and provider capacity issues. Further, many of the SUD providers in these states will have to undertake significant clinical and operational changes in order to participate in the new programs. However, the program nonetheless presents a unique opportunity to leap forward into the more modern SUD treatment system our country desperately needs.

*We would like to thank Kevin J. Malone (Epstein Becker Green PC, Washington, DC) and Purvi B. Maniar (Epstein Becker Green PC, New York, NY) for authoring this email alert.

The authors recognize that we may see significant changes among health care laws and governmental health care programs in the U.S. during the next Presidential term. While the authors believe that Medicaid and the above referenced program will proceed as described in the states mentioned above, any sweeping health reform legislation that impacts Medicaid, or administration decision to no longer approve these types of waivers, may impact this program, as well as others.

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