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A changed payment system causes disruption

May 1, 2010
by David H. Kerr
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For decades, federal block grants have funded drug treatment at a variety of levels of care. Historically, most of this funding has come down by way of state contracts and grants for a dedicated number of treatment beds or slots. Programs such as Integrity House in New Jersey have received guaranteed advance funding, whether or not our beds or slots were full. We have always been close to 100 percent of our capacity-with a waiting list that numbers in the hundreds.

Yet with federal and state cuts recently extending to direct services, the funding mechanism has changed from guaranteed advance pay to payment only for slots occupied, and only after the pay period or the following month. This is smart management and makes sense in a climate of diminishing state revenue. But at the same time, it creates a challenge for treatment programs to keep all beds full and to bill for these beds in a timely manner. This is complicated by the fact that we have little control over filling our beds, and the bureacracy of referring agents often causes a delay.

The traditional funding system of advance pay has helped to overcome the chronically low per diem reimbursement rate offered by our state.

The initial impact of the pay switch on Integrity House and all programs in New Jersey produced a major cash flow problem last year. And while most of us survived, virtually all of us had to increase our line of credit, or try to find money from other sources.

A fee-for-service funding mechanism for addiction treatment brings our “industry” in line with other service providers. The problem is that our infrastructure has been established over decades on the basis of full funding for all of our beds, and Integrity House will take a loss despite the fact that we are at 98 percent utilization.

Benefits of advance pay

The traditional funding system of advance pay has helped to overcome the chronically low per diem reimbursement rate offered by our state. Also, through no fault of our own, there are often delays in referrals from our funding sources and a bed will stay open one more day while unfinished paperwork, warrants or other issues are resolved. If three or four prospective clients waiting to be admitted experience even one day of delay, it becomes very costly for us, since under fee for service we do not receive funds until the bed is full. In Integrity House's case this can cause a reduction of funds of as much as a quarter of a million dollars if we dip to 90 percent utilization for a length of time.

Recently the state reviewed our utilization report and erroneously came up with a 90 percent rate. In all fairness, we submitted our utilization report in the incorrect format. However, we corrected the report and advised the state, with our data, that we in fact were at 98 percent utilization. The state's response was, “Too late,” as the budget already had been submitted to Trenton.

As a result, we are now facing a $230,000 funding cut. We are still hopeful that our appeal will be reviewed favorably based on our correct utilization rate. The 208 people on our waiting list can ill afford a reduction in our services. It is a life-threatening issue for many of them.

Policy options

With this in mind, I am recommending that New Jersey officials consider two possible alternatives:

  • Phasing fee for service in over a two-year period, which will guarantee funding as long as programs maintain 95 percent utilization.

  • A per diem funding increase based on our actual costs and/or comparable rates with other states and/or insurance industry rates.

These two simple steps would help to mitigate the potentially drastic funding crisis that we and agencies like us face, while enabling us to maintain continuity of care to achieve the best possible outcomes for our student members (clients) and for the state as a whole.

David h. kerr David H. Kerr is Founder and President of Integrity House, a substance abuse rehabilitation center with locations in Newark and Secaucus, New Jersey that treats more than 1,400 individuals per year. He wrote in the January/February 2009 issue on Integrity House's program to treat gang-affiliated individuals. His e-mail address is

dkerr@integrityhouse.org. Addiction Professional 2010 May-June;8(3):38