The demise of Cardinal Innovations: How a state-mandated mental health organization failed in slow motion. - North Carolina Health News
By Seth Gulledge
Beset by “greed” and “avarice.” “Irresponsible” and “unconscionable” behavior. “Extravagant” and “excessive” spending that “eroded the public trust.”
These are just some of the ways that lawmakers and health care experts across the state have described the life – and ultimate demise – of Cardinal Innovations, the state’s first mental health local management entity-managed care organization (LME-MCO) since it launched in the early 2000s.
By its end, counties across the state had begun breaking their contracts with the organization, citing concerns about the organization’s ability to deliver care to some of the state’s most vulnerable, along with “internal chaos” and “frequent” turnover of staff.
Far from representing the isolated demise of a single organization, the rise and fall of Cardinal presents a far weightier consideration for providers and patients statewide: what’s to prevent it from happening again?
Beginning this month, millions of North Carolina residents have begun receiving their care through a managed care model – a long-awaited transformation of the state’s Medicaid delivery system which provides physical health care for more than 2.2 million people with disabilities, low income seniors, children and some of their parents.
Unlike the traditional fee-for-service system where the state reimbursed providers for each visit, test and treatment, under managed care, health care providers receive a flat “per member per month” amount to handle all of the care for patients while meeting quality benchmarks.
Managed care is far from new. The state has experimented with the delivery model for close to two decades for mental health patients, beginning with Cardinal – then known as Piedmont Behavioral Health – which served as the pilot program for the implementation of the LME-MCO model to provide services across the state.
Ostensibly, the purpose of the pilot was for the state to work out the kinks in the future system of health care delivery – an experiment that gave lawmakers and regulators both time and real-world experience to iron out exactly how the model could be tailored to later statewide use.
But if the point of a pilot program was to act as a pathfinder for the future organizations tasked with the health care services of the state’s Medicaid patients, the ultimate crash of that program just weeks before the statewide launch of the new model has many wondering how it bodes for the system as a whole.
“If it was a question of greed, then yes, I think we have solved that,” says Marvin Swartz, a Duke professor of psychiatry. “But if it’s a more systematic, operations problem, I don’t know if we have solved that. I don’t know if we have adequate oversight of network adequacy, or that the quality measures that were put in place are going to be adequate.”
From idea to reality
Piedmont Behavioral Health first began its pilot of the LME-MCO model in 2005, originally serving the citizens of Cabarrus, Davidson, Rowan, Stanly and Union counties.
The model was the brainchild of Dan Coughlin, who began working to adapt the model in 2000 following a blistering 430-page report from the state auditor’s office that recommended substantial alterations to the state’s publicly funded mental health care system. Under that system, individual counties paid directly for mental health care to their residents, but there were wide disparities across the state, along with deep structural issues.
Piedmont Behavioral Health launched the effort through a federal exemption in Medicaid rules, which allows states to request permission to experiment with ways to save money in the system.
After fighting for years to get the launch of the pilot program right, the experiment was met with almost immediate friction. In 2006, Piedmont Behavioral Health was sued by Rowan Homes, a group home for adults with developmental disabilities after PBH chose to not extend the company’s contract.
But the longer-term success of the organization’s model had many in the state – including legislators – convinced of its public good. In fiscal year 2010, for example, PBH reportedly spent one-third less on services to its customers than the statewide average, while still maintaining higher than average outcomes according to consumer evaluations.
That degree of success came parallel to statewide concern about Medicaid spending, after a 2008 report by the Raleigh News & Observer exposed more than $400 million in wasted “Community Support Services.”
With the influence of both convincing lawmakers of the experimental model, the legislature passed a law in 2011 requiring all local mental-health care organizations to convert to the model championed by PBH by January 2013.
Soon after, reports began to chip away at the successful public image of the LME-MCO model. In 2012, reports produced by a state-contracted auditor, Mercer, detailed issues at all of the LME-MCOs in the state, reporting insufficient care delivery, staffing and even their ability to pay providers.
Specific to Piedmont, Mercer reported a number of consumer care failures after reviewing patient files at random, including finding “little evidence of… addressing the collective developmental, mental health and biomedical needs” of one randomly selected individual. It also reported that where auditors found need for a doctor consultation, only a third of the cases had the consult requested and conducted.
That same year, another LME-MCO, Western Highlands Network, fired its CEO while scrambling to address a $3 million funding shortfall.
Piedmont began to specifically attract controversy by 2015 – by then it had rebranded as Cardinal Innovations – when it began clashing with state lawmakers over its reserves of cash appropriated to it by the state, as well as funding streams.
Though the legislation that created the LME-MCO model allows for organizations to hold onto extra capital for longer-term projects or to fill in care delivery gaps, some lawmakers became opposed to giving the organizations the same level of funding while they were sitting on hundreds of millions of cash. In 2015, the state began cutting “single-stream funding” – which provides revenue to treat the un- and underinsured – for organizations such as Cardinal, hacking off $110 million in the first year alone.
That cut immediately led to Cardinal limiting the services it was providing, provoking the ire of some lawmakers in the state.
“At $842 million, we ought to be able to ride this out and get the services that they need,” Sen. Tommy Tucker (R-Waxhaw) said at the time, referring to reports of $842 million held by the state’s LME-MCOs at the end of 2015. “Yet some of these executive directors of these LME/MCOs are telling their board members they’re going to have to cut services because of what the legislature did, while they sit there with $842 million in cash.”
To further complicate its image problem with lawmakers and stakeholders, Cardinal soon after became embroiled in a controversy regarding its CEO Richard Topping’s million dollar-plus reimbursement package. Though company executives continued to push back at accusations it was overpaying any of its leadership, the excess cash on hand along with high executive salaries did little to convince lawmakers to increase funding streams to their services.
Then, in 2017, a report by North Carolina State Auditor Beth Wood rebuked the organization for overstepping its bounds related to administrative spending, contracting and work, including no-bid contracts for consultants to explore “opportunities to expand its business portfolio.”
Further cuts to Cardinal’s funding stream were aimed at the issues addressed in Wood’s reports, but as funding was rolled back so too were services offered by Cardinal. The situation became so tense between state officials and the organization that, in late 2017, the North Carolina Department of Health and Human Services made a surprise takeover of the organization, ousting its executive leadership and board in an effort to improve the situation. The CEO who took over the reins, Trey Sutton, had once worked for DHHS and was essentially hand-picked by the state, and board members were chosen by members of the county commissions that paid the organization for services.
Despite that intervention, Cardinal would continue to be besieged by complaints regarding its services. LME-MCO organizations across the state once again fell in the crosshairs after a 2019 report by Auditor Beth Wood revealed an excess $439 million paid during a three-year period, money that wound up as cash reserves for the organizations.
Then, after more than 15 years of near constant tension rolling out its model, Cardinal began its final descent. In 2020, several of the counties that Cardinal was tasked with providing care for began severing ties, choosing to switch to other LME-MCOs they felt would be more beneficial to their residents.
Those losses were certainly the final straw that led to Cardinal announcing this year that it would be merging with Asheville-based Vaya Health, even as executives cited desires to improve patient care.
“It has become increasingly clear that in order to deliver on that mission, we need to consolidate with a strong organization that has a history of meeting member and community needs and can stabilize the disruption caused by Medicaid Transformation and county realignments,” the company’s Sutten, said in a statement announcing the merger.
Post mortems begin
With Cardinal’s more than two-decade journey in North Carolina health care coming to a close, many observers have felt its end a long-time coming. But regardless of the litany of controversies and complaints that centered on the organization, it is still largely responsible for some of the largest innovations of care-delivery in recent history.
“In their prime, Cardinal Innovations Healthcare, and its predecessor organization Piedmont Behavioral Health, were leaders among North Carolina’s LME/MCOs,” said Peggy Terhune, CEO of Monarch in a statement. “Cardinal was a pioneer in the managed care system that has now been adopted across North Carolina. It is difficult to see the demise of an organization that was once so mission driven and person centered.”
The company’s influence as a pioneer may not be over yet. With its demise comes the pressing question of what ultimately led the state’s once premier managed-care organization to fold – a question that could have significant ramifications for the future of North Carolina’s health care system.
Leadership erodes trust
Sen. Tommy Tucker, a frequent critic of Cardinal’s leadership over the years, lays its ultimate failure on a lack of focus and ineffective executives.
“I don’t think you’ll see Cardinal happen again,” he says. “Reason being, number one is how big they were, at one point in time they controlled 20 counties. And, of course, the former CEO felt like instead of running a public-private entity, he thought he was running a Fortune-500 company and was too big to fail.”
Tucker is not the only observer of the system to place much of the blame of Cardinal’s downfall on the leadership.
Dave Richard, the long-time head of the state’s Medicaid program at DHHS, also points at the Topping years of Cardinal as a precipitating factor for why counties began disengaging from their services.
“I think what we all believe is that the culture in Cardinal at the leadership level under Richard Topping had lost its way,” he said, adding that once new leadership was brought in the organization began making the positive changes that needed to occur. “But some things didn’t change rapidly, rapidly enough.”
Sen. Ralph Hise (R-Spruce Pine) also joins in that assessment, saying the middle years of Cardinal’s leadership led to an organization that fell out of sync with its core stakeholders.
“From a legislative point of view, I think they just began to focus too much on what they were going to be as a corporation,” he said, pointing to executive compensation and “lavish spending.”
“Quite frankly, they just lost vision of serving the individuals that needed to be served in the communities that needed service, and became focused on the corporate side. And that just became incompatible with continuing for the counties and ultimately for the state.”
Observers say that leadership culture ultimately degraded the trust not only between state officials and the organization, but also county officials who had the ultimate decision of whether or not to give the organization the responsibility for caring for their constituents.
In Forsyth County, for example, Donny Lambeth (R-Winston-Salem) says that “aggressive advocacy groups” of patients kept pressure on county legislators about the organization’s service failures even after the change-over in leadership, outlasting any “honeymoon period” where new leadership tried to rectify the situation.
“[Cardinal] put together an action plan, they tried – and I think they did try – but the service levels continued to go down,” he says. “Because they were hearing from these advocacy groups, these parents [saying] ‘we can’t tolerate this level of service and lack of service’ they made a tough decision to move.”
And with many of the other service counties also inundated with complaints about the organization’s services, they began falling like dominos.
“I think there was a period of time where the change in leadership had an opportunity to make some improvements – and I think they did some good things where they did make some changes,” Lambeth says, noting he received more complaints about Cardinal than any other LME-MCO in the state. “I think once the big counties made the decision to move away from Cardinal, that started raising questions with some of the smaller counties that had the same issues but didn’t know exactly what would happen if they disengaged . . . I’ll call it the snowball effect.”
‘The more important story’
Like any avalanche though, experts say other conditions had to be present to allow for the disaster to form.
“There was a lot of scorn heaped on them about their executory compensation and so the sort of the narrative in the media was about the greed of that organization,” Swartz, the Duke professor says. “While I understand that, I think to me the more important story there was the regulatory failure. . . and if we’re embarking on managed care, do we have the regulatory tools to prevent that from happening?”
In fact, Swartz says he doesn’t think the increased scrutiny related to executive compensation or spending is what led to Cardinal’s demise, he says it was the failures related to care.
At DHHS, Richard also says the care was at the heart of Cardinal’s problems.
“Obviously there were concerns in counties that made them want to disengage,” he says. “Most of it was around foster kids and how that process works, but there were other issues that people raised.”
He said both Cardinal and the state made “good faith efforts” to show that the situation could be improved but in the end, counties like Mecklenburg just were not able to be convinced and were not “comfortable staying with Cardinal,” leading to the proverbial “snowball.”
“I think one of the things that is so important for all of our LME-MCOs to know and remember is that this is a system based at the county level,” he says, noting that is a strength of the system’s design. “But it also makes it more difficult because it’s not as easy to say that ‘we’re a managed care organization and we have this region and we’ll respond to this county because they’re a constituent.’ In this system you have to really respond to counties.”
Swartz says the larger problem is that the failures “shouldn’t have been possible to happen” in the way managed care was intended to be set up and that there should have been parameters in Cardinal’s contract and additional oversight to prevent its issues.
He said he believes that is the fatal flaw in the system.
“I think the legislative intent was to write a check for Medicaid, and to have very tight control of the Medicaid budget,” he says. “But the corollary to that and what this legislature . . .[has] done is starve the beast and then whip it when it doesn’t perform. And many legislators have starved their bureaucracies and then turned around and said ‘why can’t you do what we asked you to?’”
More oversight needs more funding
The question of what regulators at DHHS and lawmakers can do is central in the mind of stakeholders throughout the system worried about patients.
Nicholle Karim, the senior director of policy development at the North Carolina Healthcare Association (NCHA), says she believes, as a whole, the LME-MCO system has suffered from a lack of necessary regulation and oversight.
“I think there were some design issues that have led to some of the outcomes that we have now,” she says. “We need to make sure in going into managed care that we’ve learned from those lessons, and that, we as a state, build the outcomes and what everyone is responsible for doing to get to those outcomes to be able to make sure that patients have a good care experience.”
Part of doing that, she says, is adding regulation and language to enforce consistency for organizations across the state.
“It wasn’t consistent among the state, when you ask someone about their experience with the LME-MCO system, one experience is one experience,” she says. “I think one of the lessons learned that I’m taking away from this is that there was a lack of consistency in terms of what each LME-MCO was doing, but [that’s] because the system was designed that way. So, there can be some benefits to that but then also some consequences and I think we’ve seen that.”
On the care-delivery side, she says the system needs to be more data-driven with behavioral health patients, saying she doesn’t know how well the state has been able to do that in the past, noting there is definitely “room for improvement.” She said that data is integral to creating “clear expectations” about what outcomes are being sought for each patient.
However, she said she believes consistency and clear expectations are not only important on the patient side, but for state officials overlooking the system. For example, she says the lack of clear, nuanced expectations about what LME-MCOs could do with their funds led to distrust about transparency and chaos.
“[The lack of] that nuance led back to some inconsistency and how those funds were spent,” she says. “It created confusion when we could have made it more clear with legislation about what the responsibilities were.”
That confusion can have widespread effects across the entire system, experts say, even prompting lawmakers to reduce funding for uninsured patients.
“The Legislature . . . has cut funding because they see places like Cardinal with reserves – which they were intended to have,” says Swartz. “They’ve said ‘oh, these guys are fat cats and they’re sitting on these reserves so we’re going to cut our funding for uninsured care.’”
The issue of single-stream funding, Swartz notes, is particularly salient in North Carolina, which has not voted to expand Medicaid, leaving a large portion of state residents with behavioral health issues uninsured.
While lawmakers like Lamberth say cuts to single-stream funding probably played “some but not much” in Cardinal’s care issues, many believe part of fixing the MCO system is tied to it.
“As we face the problems we’re facing with mental health and opioids and addiction, the single -stream funding needs to be replaced by the legislature in a full funding, recurring apparatus,” Tucker says, noting it would be more beneficial to the current method of funding determination.
However, Tucker does not believe single-stream funding cuts led to Cardinal’s demise, saying “you can blame a lot of things but you need to get your own house in order before you start taking shots.”
An adequate budget?
In addition to increasing single-stream funding, the need for additional resources for DHHS oversight is a concern others share as the state wades deeper in the managed care system.
“I think it’s untested,” Swartz says. “To me, that’s the big question: does DHHS have an adequate budget to oversee Medicaid managed care.”
He says the issue is that many states such as North Carolina cut their bureaucracies since the recession and failed to adequately restaff those departments. He says that issue becomes even more troubling at a time when DHHS is being asked to do “very complex oversight and quality assurance.”
Tucker also says he thinks with the overall system transformation comes increased need for oversight and management from the state.
“I believe there needs to be more management from DHHS in that it’s a public-private entity,” he says. “While they are not to manage it… DHHS has a responsibility with the amount of dollars and the populations they are trying to treat… they have a responsibility to have significant oversight on what’s going on.”
Tucker believes part of the issue is not just funding, but more firmly establishing the expectation on state lawmakers.
“This situation with Cardinal didn’t just pop up . . . there is sometimes a reluctance on the part of DHHS to get involved on those issues,” he says. “I’m sure there could be added language to the statutes, but I think bureaucrats in government are afraid to make decisive decisions because it’s just not their nature to do that.“
With Cardinal now merging with Vaya Health, the organization’s lasting legacy across the state will be what lessons lawmakers, regulators and providers take away from its elongated trial of the managed care model.
Some believe that even after Cardinal, the state is not prepared for the larger dive into managed care.
“I don’t think there were enough lessons in the Cardinal thing to inform this entire transition,” Swartz says. “The sheer complexity of the plan is really problematic. There’s so many moving parts – the theory of managed care is that you have well informed consumers and this is a very complicated plan I think even providers are having trouble understanding.”
Others believe Cardinal was distracting many from the benefits of managed care writ at large, and its demise will ultimately be a benefit for the entire system of managed-care organizations.
“They’ve been overshadowed by the misdeeds of Cardinal.” Tucker says. “Most of them are doing a fairly good job in other parts of the state. . . they’re not without mistakes, but I can tell you once the LME-MCOs were set up, as a politician, I received less calls on mental health issues and people with their inability to get assistance from the state was greatly diminished over time.”
For Richard, the state’s biggest concern with Cardinal’s demise was stabilizing what he calls a “fragile system,” but he hopes that lawmakers will see that patience and time are necessary components in finding the best solutions. That can be challenging when lawmakers face constituents who want results in elections every two years.
“[DHHS is also] guilty, sometimes of the same thing . . . we’ll say, this is what we should do, and then we shift and say, well we ought to do something different here,” he says. “The General Assembly has to be patient . . .you have to be patient and let the system play out to go forward.”
But like others, he says he believes the state as a whole needs to do a better job of defining what exactly stakeholders are waiting to see, or when they can determine something is not working. He noted the department has a tight oversight plan regarding tailored-plans for people with more severe mental health needs that he believes will be more effective.
“The General Assembly, the public, should expect that of us, that we’re going to hold them accountable for these outcomes,” he says. “If not, then the system will change again.
”We need to make sure that we let something prove itself or not prove itself. Let’s not jump into the middle of it.”
NCHN editor Rose Hoban contributed reporting to this story.
