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Originally published Friday, July 19, 2013 at 7:52 PM

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Feds put state’s mental-health system in jeopardy

Under a new federal directive, the state’s longstanding mental-health system could effectively be dismantled and rebuilt. The surprise notice from the feds could put Washington’s mental-health system in the hands of private insurers.

Seattle Times staff reporter

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A surprise notice from the federal government could put Washington’s mental-health system in the hands of private insurers, reversing 20 years of history.

The notice, which arrived earlier this month, said the state’s payment system for mental-health services violates federal procurement laws. Considering it’s a $500 million question — and the state has 90 days to develop a corrective plan of action — state officials are scrambling.

“To put it bluntly, this is not something we were anticipating,” said Nathan Johnson, policy director at the Washington Health Care Authority. “It came out of the blue.”

The counties, which administer most of the state’s services for people with serious mental illness, got word of the problem last week in a conference call with state officials. After the state broke the news, “there was dead silence” among the regional officials, said Sen. Linda Evans Parlette, R-Wenatchee, majority coalition caucus chair.

Under this new federal directive, the state’s longstanding mental-health system could effectively be dismantled and rebuilt. That means the counties could find themselves out of a job — an admittedly thankless one, but one that has broad implications.

“The uncertainty is rather nerve-wracking,” Parlette said.

Since 1993, most services for people with serious mental illness have been managed by what are known as Regional Support Networks (RSNs). Counties have a right of first refusal to serve as the local RSN, and all but one (Pierce) have signed on for the job.

Medicaid dollars are funneled to the RSNs, which in turn can contract out for services ranging from counseling to housing support and everything in between. The RSNs receive funds based on the number of patients, making it a capitated system (payment per person, rather than a payment per service provided).

Some other states have similar systems, and the feds have approved this arrangement for years. But a federal audit of another state found a problem with it. In a July 5 letter, the federal government said the system violates federal procurement laws.

In essence, it’s an accounting problem, rather than a problem with the services themselves. There are two ways to remedy it: either open the RSNs to competitive bidding or switch to a fee-for-service model.

The state is considering challenging the federal directive. At the same time, officials are examining the options. A fee-for-service model, Parlette said, would be “like going backward.” The more likely scenario involves opening it up to competitive bidding from the public and private sectors — which has its own hurdles.

”It would be concerning if money is being taken out of King County to go to profit and not being used for services,” said Amnon Shoenfeld, the county’s director of mental-health services.

So far, no one can say how this might affect people receiving services. But they do agree on one thing: If the state does not succeed in challenging the directive, it’s going to be a big deal.

Either option suggested by the feds would require a change in state law. And going through the competitive bidding process, Shoenfeld said, would be “a lot of work and a lot of money. And we’ve got other things to do.”

Maureen O'Hagan: 206-464-2562 or mohagan@seattletimes.com

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