Banking & Finance, Government, and Health Care

LRE at risk again of losing state contract

Organization oversees funding for five community mental health centers in West Michigan.

May 3, 2019
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For a second time, the organization that handles Medicaid funding for five community mental health centers in West Michigan is at risk of having its state contract canceled.

Lakeshore Regional Entity has 30 days from April 25 to correct “governance and severe financial instability,” or its contract with the state will be canceled Sept. 30, according to a letter from the Michigan Department of Health and Human Services.

LRE is one of Michigan’s 10 prepaid inpatient health plan (PIHP) organizations responsible for distributing and overseeing Medicaid funding for CMH providers that serve about 30,000 people annually in Allegan, Kent, Lake, Mason, Muskegon, Oceana and Ottawa counties.

If the contract is canceled, the CMH providers would receive funding from other PIHPs.

According to an earlier Business Journal report, the last 30-day notice to LRE from MDHHS was dated March 30, 2018, and was driven primarily because of the same funding issues.

“Facing a fifth consecutive year of losses and a third consecutive year of large losses requiring state support, LRE has lost MDHHS’s confidence in its financial management,” MDHHS Public Information Officer Lynn Sutfin said in an email statement. “MDHHS is moving to terminate LRE’s contract to protect taxpayers and to ensure that citizens in LRE’s region are in the hands of an effective management entity.”

Stan Stek, LRE board chair and Kent County board vice chair, said he believes the blame for the funding issues lies with the state, as does Robert Sheehan, CEO of Community Mental Health Association of Michigan, which oversees the state’s PIHP and CMH operations.

Sheehan said the state funding system was designed for low demand and has not accommodated the recent much higher demand for the newer autism services and Healthy Michigan Plan.

He said the Healthy Michigan program was overfunded in its first two years, beginning in 2014, because that’s about how long it took the clients to utilize the services, as he said providers predicted. Rather than maintaining funding, he said it was cut “dramatically” in the third year when demand spiked and has not been increased adequately since.

Sheehan said this is what is causing deficits, not just for LRE, but last year for nine of the 10 PIHPs in the state. He said LRE was hit first because it did not have adequate reserves to cover deficits after 2017 when the last $15.5 million went toward covering that year’s $24.3-million deficit.

With nearly $274 million in revenues and nearly $290 million in expenses, LRE had a deficit of nearly $16 million in 2018, according to documents from Sheehan. LRE is projecting a $14-million deficit this year. In 2015 and 2016, its deficits were $1.5 million and $2.5 million, respectively, according to the MDHHS letter.

“Lakeshore was the tip of the spear,” Sheehan said, adding LRE had the lowest reserves when formed four years ago, as well as higher demand than other PIHPs and decreased funding in the past couple years.

Sheehan said he believes it’s a matter of time before all the PIHPs are in deficit and out of reserves, and he expects some of the other organizations to receive 30-day notices from the state in the next couple of months.

Four of the organizations are completely out of reserves, and two have less than a year’s worth, Stek said.

The Wayne County PIHP’s total revenues in 2018 were $672 million and total expenses were $704.6 million, creating a $32.6-million deficit. The PIHP in Portage had revenues of $237 million and expenses of $252 million, creating a $15-million deficit.

The overall deficit for all PIHPs in 2017 was $133 million. Sheehan said the state should have adjusted funding to prevent such a deficit but did not. Preliminary figures for 2018 are about $95 million, and they don’t look good this year, either, Sheehan said.

If the state chooses to close LRE, Sheehan said legal action would be considered. While the MDHHS says LRE is not fulfilling its side of the contract, Sheehan would say the same about the state. Because CMHs are legally required to offer services, he said being underfunded leaves them “holding the bag.”

“The state, in our view, has reneged on that contract. They haven't adequately funded it and then they blame Lakeshore for not fulfilling their obligations,” Sheehan said.

“It isn't true, but if you want to believe that, it allows you to ignore the rest of the problem. It's like when a number of people come out of a restaurant, sick from eating the food, you don't blame their eating habits. That's a systemic problem. There's something going on in the restaurant.”

Stek said the Washtenaw County PIHP organization, Community Mental Health Partnership of Southeast Michigan, has filed administrative proceedings against the state, claiming the state is inadequately funding services and not contributing to reserve funds, the same issues Stek said LRE is facing.

“If that's the case, then we're not in material breach. The state would be,” he said.

Stek said the state has recommended a 2.5% increase for pre-Medicaid, but this will not suffice. He said the state should have been contributing 1.5% of the $3-billion behavioral health fund — about $45 million — to the PIHPs’ reserves annually but only started doing so in 2019.

Even if the state does not significantly increase funding next year, he said it eventually will be necessary to continue offering the services it does.

The MDHHS said in its email statement:

“MDHHS has contractual actuaries who develop the assumptions used in rate setting based on the service encounter and financial data reported by PIHPs for previous fiscal years. The actuaries certify the rates as actuarially sound and the rates are also submitted to the Center for Medicare and Medicaid Services for their approval.

“The ongoing significant expenditure beyond revenue and risk structure issue in Lakeshore Regional Entity and its member CMHs is an outlier compared to the rest of the state.”

To help cover the $16-million deficit from 2018, LRE received $3.5 million from the state auxiliary; $2.5 million from community stakeholders, including $1.5 million from Kent County; and about $5.2 million of unused funding from its CMHs. Since the state “declined to commit” to reaching an agreement on how to cover the remaining deficit that year, Stek said LRE decided to hold the funds donated by stakeholders and CMHs.

“They simply didn't think it was responsible to spend that money if, at the end of the day, they were going to pull the contract anyway,” Stek said.

In response to the 30-day notice sent in 2018, LRE contracted Boston-based Beacon Health Options to identify ways to save funds through improved efficiency. Since the beginning of the year, the company has spent millions of dollars, Stek said, to lease space and employ about 40 workers in Grand Rapids to carry out the contract.

Stek said Beacon’s system has been in the works since Feb. 1, and it’s taken about two months since then just to get established. He said Beacon recently made its preliminary reports on system change recommendations for LRE, which could save “significant millions of dollars,” probably starting in fiscal year 2020.

“But probably not enough to break even. They still conclude that the revenue from the state is probably not adequate for the services mandated,” Stek said.

Stek said he was a bit surprised at the latest letter because LRE has been in close contact with the state about its plans and actions.

“We are the only entity that is actually attempting to implement a cure, and we think that cure is solid. That cure has not been given a fair opportunity to demonstrate its capability of turning this around,” Stek said.

“It's frustrating because we want to sit down and work out the solution, not just start throwing letters back and forth.”

To close LRE and reassign its CMHs would just be moving the problem from one PIHP to another, Stek said, and the state has not disclosed an alternative plan for dealing with the issues.

“Whereas the gang right now — the five CMHs, the PIHP and Beacon — have a heck of a plan,” Sheehan said. “It's working already. Let’s let it continue.”

Even if the state has a plan, Stek said it would take a “Herculean effort” for the state to implement it before LRE’s plan starts to create an effect.

Between now and the MDHHS’s deadline, Stek said leadership is meeting with legislators and other PIHP and CMH leaders around the state to help find a solution.

“We'll use that time to evaluate the response, but we can't manufacture the millions of dollars it's going to take to cover that between now and then,” Stek said.

“All we can do is demonstrate that we are well aware of that. We’re aggressively redesigning our system, and it has promise of turning this around into a stronger service delivery mechanism. And it certainly promises to be stronger than what the current system is proving to be across the state.”

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