Quick Fix

After years of financial neglect, the state is hoping a shot of privatization will cure Dallas County's addicted and mentally ill population

This old system required the state to manage some 270 contracts representing a total of $93 million in the Northstar region alone. From the state's end, the new system is light years ahead of the old in terms of billing and oversight.

Instead of writing hundreds of checks to agencies scattered over the seven-county area, now it has to write only two -- one to Magellan, the other to Value Options. What's more, the state no longer has to hold all of those agencies accountable for the money they spend -- a task that usually fell to the state auditor when major problems arose.

Under Northstar, Value Options and Magellan will keep a leash on agency spending by either authorizing or denying treatment their doctors request for patients, while the state will enforce its new contracts with each company to ensure they don't attempt to gouge the poor by denying treatment and pocketing the money.

Michael Hogue

The New Place's Carolyn Tartaro conducts the last group session inside the New Place. The first drug treatment center of its kind in Dallas, the New Place became the first casualty in a new experiment in managed health care for Dallas County's low-income addicts and mentally ill residents when it closed its doors on October 15, 1999.
Mark Graham
The New Place's Carolyn Tartaro conducts the last group session inside the New Place. The first drug treatment center of its kind in Dallas, the New Place became the first casualty in a new experiment in managed health care for Dallas County's low-income addicts and mentally ill residents when it closed its doors on October 15, 1999.

As part of their contracts with the state, Magellan and Value Options agreed to adhere to minimum-treatment guidelines, which include existing federal Medicaid treatment requirements and new ones written by doctors employed by the state. If the companies don't live up to those guidelines, they can be fined or their contracts may be terminated.

"If people do things the way they're supposed to," Wanser says, "the clients are supposed to get better."

Like all big promises, however, there's a catch.


With Northstar, the state is investing in the theory that private companies will make a better middle man when it comes to buying health care for poor Texans. Whether they're right involves a simple and, as of yet, unanswered question: Is the $93 million the state is now divvying up between Value Options and Magellan enough to ensure that the companies can make a profit and improve an indigent health-care system that has been historically underfunded?

Not surprisingly, the representatives of Value Options and Magellan say they can. Or at least they think they can.

"It's a very risky business," says Carole Matyas, the executive director of Value Options in Dallas. "There's no guarantee we get a profit. We believe we can do it, but it's too early to tell how the financial piece of this is working out."

With their millions of dollars in revenues and modern computer billing systems, the companies believe they can effectively trim the administrative fat that washed out the old system and then use the savings to improve services. They hope to accomplish this by applying two new principles to the old system, in which the state sent its money down to a familiar network of county agencies like MHMR in big chunks.

Under Northstar, the state's money will now follow the patient instead of the program, while the traditional providers will no longer be able to spend it as they please. Instead, they will have to compete with one another to get the companies' business and, when they do, they'll have to justify the care they give patients by getting permission from their authorization departments. In other words, they'll have to behave like capitalists if they hope to survive.

The state will not interfere with the day-to-day treatment Magellan and Value Options either authorize or deny for patients, but it will monitor the total amount of money the companies spend on services to ensure they are living up to their promises.

Specifically, Value Options has agreed to spend 86 percent of the state money it gets on services, while using the remaining 14 percent to pay for its in-house administrative costs. Magellan has agreed to spend 90 percent of its money on services and 10 percent on overhead.

The way this works is simple. For every dollar the state gives Magellan, 90 cents must be spent on patients. If it costs Magellan only five cents to deliver that care, it gets to pocket the remaining nickel as a profit. If it costs 10 cents to deliver the care, then Magellan breaks even. But every penny over the 10 cents that the care costs is money that comes out of Magellan's revenues.

If it turns out that the companies underestimated their administrative costs, they will lose money.

Like Matyas, Magellan Executive Director Robert Waters says he believes he can do business under Northstar eventually, but so far the numbers don't look good. "We have not had a good first three months," says Waters, who adds that "we'll be happy to get back to even by January."

Waters declined to specify the company's early losses, but he blames most of the shortfall on the three-month delay that kept Medicaid patients from enrolling in Northstar. Because the patients weren't getting care, the company wasn't getting paid -- right at a time when it was investing its own money to pay rent, buy office equipment, and hire staff for its new Dallas office.

The delay dealt a blow to Magellan's initial projections, but Waters says the real challenge is not to let unanticipated problems knock the company off the narrow tightrope that the state's limited resources force it to walk. During the next few months, he says, the company will continually tweak its policies while it searches for a way to adhere to its contracts without sinking further into debt.

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