Banking & Finance, Government, and Health Care

State plans to end LRE contract

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

July 5, 2019
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An action by the state will change the existing public mental health care system in West Michigan.

The Michigan Department of Health and Human Services said it plans to end its relationship with the organization that handles Medicaid funding for five community mental health centers in West Michigan.

Once the contract between the state and Lakeshore Regional Entity ends Sept. 30, MDHHS plans to establish a new organization to handle the region’s mental health Medicaid funding.

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

MDHHS sent LRE a letter April 25 warning LRE to correct “governance and severe financial instability” within 30 days or have the contract canceled. After reviewing a response from LRE, MDHHS said it decided to cancel the contract based on many factors, most notably five years of financial deficits and “lack of a plan” to cover this year’s projected $16 million deficit. 

LRE has had budget deficits each year since 2015, and the state has covered the shortfalls for the last two years. This year’s projected shortfall would require additional assistance from the state for a third year. 

LRE had a deficit of $1.5 million in 2015 and $2.5 million in 2016. LRE is projecting an upcoming $14 million deficit.

“Michigan residents deserve access to behavioral health services that are accessible, affordable and effective, and Michigan taxpayers deserve a system that manages our tax dollars efficiently,” MDHHS Director Robert Gordon said. “Following many years of poor performance and financial mismanagement that stands out among PIHPs, we believe it is clear that LRE is not the right entity to deliver services for West Michigan residents in need.”

MDHHS sent LRE a similar warning letter on March 30, 2018. LRE since has downsized its own staff and contracted with Boston-based Beacon Health Options to provide managed care support to the CMHs and develop a plan for better efficiency, according to Stan Stek, LRE board chair and Kent County board vice chair. 

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 took 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 not enough to break even. 

“Lakeshore is only trying to comply with what it thinks the state is requiring,” said Robert Sheehan, CEO of Community Mental Health Association of Michigan, which oversees the state’s PIHP and CMH operations.

“We remain quite frustrated with the state's most recent position,” Stek said. “We felt that we had continued to offer opportunities to be open and cooperative and trying to find a good solution.”

Stek said this “is a crisis of the state’s making” due to systematic underfunding, affecting not just LRE but every PIHP in the state.

Sheehan said the state funding system was designed for low demand and has not accommodated the recent higher demand for the newer autism services and Healthy Michigan Plan. CMHs are legally required to serve any eligible resident.

Sheehan 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.

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, Sheehan said. Now, four PIHPs have no reserve funds to cover anticipated shortfalls.

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.

Stek said the state also should have been contributing about $45 million for PIHPs reserves annually for the past 20 years but only started doing so in 2019.

HealthWest, the CMH provider for Muskegon, issued a statement of disapproval in response to the state’s decision. 

Though HealthWest has reduced per-patient costs by more than 20% since 2015, its number of patients has increased by 41%, and Medicaid payments have increased by only 12%.

The shortfalls have forced Muskegon County to loan more than $9 million from the county to cover payments owed to HealthWest, some of which date back as far as 2017. 

“It is unfair that Muskegon County taxpayers are asked to foot the bill for services the state of Michigan is legally required to pay for,” said Julia Rupp, HealthWest executive director. 

About 84% of HealthWest’s $69 million annual budget comes from Medicaid payments. Muskegon County’s general fund is responsible for roughly 1% of HealthWest’s annual budget. The remaining budget is funded through grants, reimbursements and other sources.

Rupp said leaders and legislators are working to solve the issue.

“Recognizing projected shortfalls in a number of PIHP regions, MDHHS has requested supplemental funding from the legislature for all PIHPs for 2019, consistent with actuarial soundness,” MDHHS stated. “However, that funding will not fully address LRE’s funding shortfall nor its management challenges.”

MDHHS said it intends to keep the region intact and will initiate temporary state management while it seeks to establish the new PIHP. Patients will continue receiving services and retain access to their existing providers, MDHHS said.

The temporary contract would “include all public policy requirements currently in place for PIHPs, including consumer protections, and preserve public oversight.”

MDHHS will take over the Beacon contract to build on the recent work and establish a public oversight board, which will include representation from the CMHs, the counties, advocates and individuals receiving services.

Community mental health leaders say nonlocal governance is a key reason they want to maintain the contract.

“Local public governance has been the foundation of Michigan’s mental health system for the past 50 years,” Rupp said. “The health and well-being of Michigan residents have too often suffered when the state has removed local control.”

In a discussion with CMHAM, MDHHS said its goals for canceling the contract include having greater involvement in managing Medicaid involvement on the Lakeshore region, changing the makeup of the region’s board of directors and reexamining the role of the region’s staff with Beacon and Medicaid, according to a document from Sheehan.

Canceling the contract to achieve those goals is “completely unnecessary,” Stek said. “What is proposed disrupts the entire system, threatens any genuine public oversight and puts at risk the continuity of service.”

The CMHAM said a “wiser path” — which would include MDHHS joining the LRE-Beacon contract and requiring changes in board makeup and staff roles — would achieve these goals and prevent “unnecessary chaos.”

Stek said the state’s proposed action is “doomed for failure, and we will pursue available recourse to correct that direction” — likely legal action, if it comes to that.

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