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Psychiatr Serv. 1997 Sep;48(9):1147-52.

Savings from a Medicaid carve-out for mental health and substance abuse services in Massachusetts.

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Department of Health Care Policy, Harvard Medical School, Boston, MA, USA.



The study examined the financial performance of a managed behavioral health care organization responsible for mental health and substance abuse services under the Massachusetts Medicaid program. Financial performance is considered in light of incentives in the contract between the managed care firm and Medicaid.


Data on the financial performance of the managed care organization were obtained from documents related to a recent rebidding of the contract and other publicly available documents. Financial incentives associated with claims costs and administrative services are also reported.


Spending by the managed care organization was about 25 percent lower than projected expenditures adjusted for inflation. Explicit financial incentives associated with cost reduction did not give the managed care organization strong inducements to attain these savings. The profit and loss features based on cost targets were quite limited. The organization had a much greater incentive and opportunity to make profits by conserving its administrative costs rather than by controlling Medicaid claims costs.


In light of the contract's weak cost-saving incentives, it may be surprising that so much was saved. One explanation is that it was easy to achieve such savings in a state with high expenditures. However, in examining the particular amounts saved, it is clear that the organization came close to contract targets even when incentives to achieve them were weak. The authors label this behavior "managing to the contract" and discuss some reasons why a managed care organization might behave in this way and the implications this behavior has for contract design.

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