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WASHINGTON — A chance review triggered by a billing question last year has led federal Medicaid officials to effectively disallow a decades-old funding arrangement under which Seattle’s Childhaven and another state contractor provided taxpayer-subsidized child care and therapy for abused and neglected children.

The decision has forced state health-care officials to turn to the Legislature to make up the federal shortfall — some $2 million a year for Childhaven alone — as well as $2 million in state Medicaid match that was also lost.

The fallout has blindsided Childhaven executives, who are grappling with the biggest financial threat to the nonprofit’s child-care center in its 104-year history.

Childhaven, a private organization, operated for nearly 70 years as a traditional day-care center. In 1977, it switched its mission to open the nation’s first therapeutic child-care program, healing kids who were abused, neglected, exposed to drugs in utero and otherwise maltreated.

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The majority of the children, from infants to age 5, are deemed medically needy and eligible for Medicaid because they have been diagnosed with conditions recognized in mental-disorder manuals. Taxpayers for years have paid for part of their care through fixed daily reimbursements that total more than $19,000 a year per child.

But that long-standing setup came under scrutiny in May 2012. The impetus was a routine call from the state to the federal Centers for Medicare & Medicaid Services (CMS) regarding reimbursement for transportation services under a state-administered program called Medicaid Treatment Child Care.

The CMS employee, unfamiliar with the program, began looking into its structure and purpose, said Kelli Bohanon, an assistant director with the Washington State Department of Early Learning, the lead agency over the Medicaid arrangement.

That led CMS to raise eligibility issues, including concerns over the therapy provided by teachers who are not licensed clinicians and the lack of statewide coverage as required under federal Medicaid rules.

The Washington State Health Care Authority tried to amend the program to conform to rules. But Bohanon said CMS “strongly suggested” it would be futile, and the state withdrew its revised plan in August.

Washington state had stopped billing the federal government in February for services provided by Childhaven and the Catholic Family & Child Services in Yakima, the two Medicaid Treatment Child Care contractors.

Childhaven would lose $4 million a year, the combined total of the 50-50 match between state and federal Medicaid dollars — nearly half its revenue. But the impact has been limited so far because the state has tapped its general fund to continue paying its share, as well as to cover $1.38 million of the disappeared federal reimbursement.

State officials are searching for permanent solutions for next fiscal year and beyond, including asking CMS for a waiver to restore the federal dollars or, failing that, securing the money as a line item in the state’s budget.

Unless much of the money is restored, “we’d have to basically shut down our services,” said Maria Chavez Wilcox, Childhaven’s president.

Wilcox said she did not know what prompted CMS to challenge Childhaven’s status as a Medicaid provider after so many years.

“There is so much more oversight. They’re looking at the whole health-care arena,” she said.

CMS’ review flagged numerous eligibility concerns. For one thing, Medicaid providers must serve the whole state. But Childhaven’s three locations are in King County: in Seattle’s Yesler Terrace neighborhood, Auburn and Burien. CMS also questioned paying for services not provided by licensed clinicians.

The children are picked up from their homes and spend five hours a day at Childhaven during the week. Class time and transportation time is counted as therapy time.

Childhaven teachers have bachelor’s degrees in early-childhood education or related fields. The children receive individualized treatments, such as development therapy, behavior-modification counseling and play and art therapy.

All but 19 of the 179 current students at Childhaven have been diagnosed with various mental-health conditions, including attachment or adjustment disorder, post-traumatic stress disorder and deprivation and maltreatment.

Childhaven case managers, who are licensed social workers or mental-health counselors, make the diagnoses. The center’s lead clinician reviews them and forwards the diagnoses to a consulting physician with the Department of Early Learning for final authorization.

Childhaven’s contract with the state includes the cost of picking up and dropping off the infants and preschoolers. But under Medicaid, the state is required to use transportation brokers for nonemergency medical rides.

The federal and state governments pay Childhaven $68.77 a day for children younger than 2 and $59.80 for kids up to age 5.

Andrea Solomon, Childhaven’s vice president of resource development, said the actual daily cost per child is $156.

Wilcox, Childhaven’s president, said shutting down the Auburn and Burien centers or otherwise curtailing operations would deprive vulnerable children of one of their few safe havens. Some 20 percent of the children live with relatives other than their parents. An additional 15 percent are in foster care, and 5 percent are in the process of being adopted.

Wilcox said fundraising, which accounts for about half of Childhaven’s revenue, won’t be enough to sustain it. For fiscal 2013, Childhaven spent $836,000 to raise $4.96 million. It is one of 12 local agencies supported by The Seattle Times Fund For The Needy annual campaign.

Kyung Song: 202-383-6108 or Twitter: @KyungMSong

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