Budgeted Systems of Care

It is difficult to introduce change into budgeted systems of care from the top down. The basic economics of the public system are at odds with shifts from well-established practices. The grant-based financing system and the franchise nature of most local public delivery systems for M/SU health care tend to inhibit change. Given existing budget levels, introducing competition appears to be impractical. A more practical candidate for policy attention is the content of the grant-based financing system. Pay-for-performance principles could be introduced into such an environment without creating undue disruption. For example, to ensure some financial stability, the majority of funding could continue to be guaranteed via contracts or grants; however, performance criteria would be used to allocate the remainder (e.g., 25–30 percent) of historical funding levels, along with future increases (distribution of inflation or other budgetary increases).

There are, however, numerous challenges to implementing pay for performance in public M/SU treatment systems. First is the primitive state of performance measurement with respect to both the development of measures and the ability of states to implement such measures (Lutterman et al., 2004). In addition, there is concern that pay for performance would distort quality improvement efforts to focus only on those areas in which measures have been developed and payments are made (teaching to the test). There is also little understanding of how such payment might be structured to maximize quality improvement across, say, a state substance-use treatment system. Finally, it was found that in the substance-use sector, use of treatment outcome as a performance indicator created an incentive to treat the least problematic clients presenting for care (Lu, 1999).


The incentives created by competitive insurance arrangements, whereby health plans compete to enroll individuals, can be especially deleterious to insurance coverage for and quality of M/SU health care. Because people with M/SU illnesses are more costly to care for than other types of enrollees and because the costs of treating these illnesses persist over time, health plans have economic incentives to avoid enrolling these individuals—a phenomenon known as adverse selection. These selection incentives result in distorted terms of insurance coverage for M/SU services, as well as distortions in the quality of care. The end result is that competitive insurance markets (private or public) tend to generate quality levels for M/SU care that are too low.

The committee recognizes that none of the measures recommended below will fully address the powerful incentives to avoid enrolling people

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