Implementing publicly funded risk contracts with community mental health organizations

The study analyzed the experience of the Los Angeles County Department of Mental Health with implementation of new contractual arrangements for services for patients with severe mental illness. The arrangements shifted the financial risk for treatment to community organizations and paid a fixed annual rate per enrolled patient without further adjustment for severity of illness. Patients were assigned to the program based on high prior treatment costs. The new contractual approach enhanced programs' flexibility and accountability and increased their emphasis on principles of psychosocial rehabilitation. Challenges in implementation included disenrollment of the majority of assigned patients by the community organizations at risk for high treatment costs. Prior treatment costs for continuing cases, while high, were lower than those for disenrolled cases. Existing information systems provided limited clinical and cost data, making it difficult to monitor providers' performance. Risk contracting required substantial clinical, fiscal, and management changes at community organizations and the mental health authority. The analysis suggests that mental health authorities that are planning to institute risk contracts need to balance fiscal incentives with performance guarantees and to pay particular attention to information systems requirements and to the severity of patients' illness. Although risk contracts present challenges, they can lead to improvements in service delivery that persist beyond the implementation phase.