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OLYMPIA — The federal government has backed off a demand that Washington state change how it administers mental-health care, a reversal that removes the possibility of one of the largest privatizations of services in state history.

Federal officials broke the news in a letter to the state last week.

“We very much appreciate them listening to our arguments and changing their position,” said state Sen. Steve O’Ban, R-University Place, chairman of the Senate committee overseeing mental-health services.

The decision ended months of drama triggered by a letter last July from the Centers for Medicare and Medicaid Services that threatened Washington with the loss of half a billion dollars in federal funding.

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The federal officials wanted the state to give private companies a chance to compete to run local mental-health systems, called Regional Support Networks (RSNs).

For the past 20 years, counties have had the option to run the systems, and all but Pierce County have done so. A private health-care company, Optum, runs the system there.

Federal officials had said the county options violated procurement laws, but the state Attorney General’s Office argued, and won.

Under the federal demand, private companies could have taken over hundreds of millions of dollars of services within the $1.5 billion spent on public mental-health services.

The latest letter, dated Feb. 3, said the federal government will release its funding as long as the state proves it uses the same process for buying services with federal money as it does with state money.

That shouldn’t be a problem, said Andi Smith, a senior policy adviser for Gov. Jay Inslee.

“We’re in the process of doing that and we have no problem with it,” Smith said.

Inslee, a Democrat, had recommended the privatization but encountered heavy resistance from lawmakers from both parties.

A second Inslee proposal, to integrate the delivery of mental-health and drug-dependency services, has gotten more support.

The idea, supporters say, would cut down on the number of providers that patients have to manage, better coordinate care and save money all at the same time.

The state Senate and House budget committees have passed similar versions of a bill to establish a task force to move the state toward integration.

They are Senate Bill 6312 and House Bill 2639.

“It’s hugely important,” said state Rep. Dawn Morrell, a Puyallup Democrat and chairwoman of the House Appropriations Subcommittee on Health & Human Services.

Morrell said the state’s ultimate goal will be to integrate physical-health services along with those of mental health and drug dependency.

“A lot of people have all three issues at the same time,” she said. “They’re not three different people. They’re one human.”

Brian M. Rosenthal: 206-464-3195 or On Twitter @brianmrosenthal

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