MONTPELIER -- A provision in the state budget relating to a 2 percent Medicaid reimbursement rate increase could hurt the bottom line of some agencies that care for Vermonters with disabilities and mental illness.

The provision says designated agencies, also referred to as specialized service agencies, must provide "an increase in compensation for direct care workers that is in proportion to the Medicaid rate increase."

That's problematic for the 16 nonprofit designated agencies that contract with Agency of Human Services to provide services for low-income people with disabilities or mental illnesses, said Julie Tessler of the Vermont Council of Developmental and Mental Health Services, a trade association representing the agencies.

Designated agencies on average receive 85 percent of their compensation from Medicaid, with the rest coming from private insurance claims, grants and donations. Requiring the agencies to give all their direct care workers a raise that is proportional to the 2 percent Medicaid rate increase becomes an unfunded mandate because their non-Medicaid compensation is not expected to increase, Tessler said.

"There's a mix of revenue sources, so we're not necessarily able to give that increase across the board," Tessler said.

The requirement to increase direct care workers pay proportionally also ties the agencies' hands and doesn't allow them to use the rate increase strategically, she said. The state and other health care providers pay their masters-level clinicians $15,000 more than the designated agencies in some cases, leading to high turnover in important positions, Tessler said.

The Vermont Council of Developmental and Mental Health Services would like the option to allocate the rate increase strategically, Tessler said.

"All of our employees deserve pay equity," Tessler said, however, "It's in the best interest of the people we serve that we be able to make decisions like that."

Sen. Alice Nitka, D-Windsor, vice chair of the Senate Appropriations Committee, said she had the language inserted last session because the designated agencies had not passed on previous rate increases to their direct care workers.

The budget is currently in a committee of conference to iron out differences between the House and Senate versions, and its language and provisions will be fluid until that work is done.

"We know that (provision) was problematic for some agencies, and we may have to go back and refine that language," said Jane Kitchel, D-Caledonia, chair of the Senate Appropriations Committee and a member of the budget conference. "Our intent is not to prescribe the exact amount of the raise, just to make it clear that the benefit of the increase is to flow to our line workers."

Tessler made it clear she would prefer if the provision were struck, but said she is working to help the conference committee draft alternative language.

Last year, when the Medicaid rate was increased by 3 percent, the budget contained language directing the designated agencies to give their direct care workers a "commensurate" pay increase. That language was changed in this year's budget adjustment to "proportional" at the request of Tessler's organization, Kitchel said.

The 3 percent rate increase from a year ago is now the subject of a lawsuit. The union that represents a growing number of its workers is suing HowardCenter, which serves as a designated agency in Burlington. The American Federation of State, County and Municipal Employees argues that a smaller raise given to Howard Center workers before the 3 percent Medicaid bump went into effect should be considered separate, and the center owes its employees the full Medicaid increase on top of that.

HowardCenter gave the initial raise on the assumption that it would be able to pay for it using the Medicaid rate increase, Tessler said.

"We worked very hard with Legislative Council to make sure that last year's increase was used properly," Tessler said.

In a letter from Kitchel and Rep. Martha Heath, D-Westford, chair of the House Appropriations Committee, to the commissioners of the Agency of Human Services departments that contract with designated agencies, the lawmakers said the legislative intent of last year's provision was, "to ensure that an appropriate share of any increase be used to benefit direct care workers," and that the language was intended "to be neutral in terms of labor contracts."