South Carolina's Medicaid agency is proposing what ultimately could be a major change in how the state treats children with mental illness.

The Department of Health and Human Services said Friday it plans to ask federal officials for permission to test a plan that would shift care toward earlier, and cheaper, community-based outpatient treatment for children with emotional problems. The plan would use public and private mental health providers to provide treatment.

Proponents say they think the proposal would improve care by reducing the need for intense inpatient treatment while allowing children to stay at home at a lower cost.

"I think it's ambitious," said David Murday, interim director of the Center for Health Services and Policy Research at the University of South Carolina, who helped the state develop the proposal. "I think if we are able to pull it off, we will greatly improve behavioral health services for children."

Gov. Mark Sanford's administration has submitted a concept of its plan to the federal government, the first step to approval. If the plan is given the go-ahead, it would begin as a pilot project in a geographic area to be determined.

The federal government pays nearly 70 percent of the cost of Medicaid in the state and must approve major changes to the program that would go against its established guidelines.

The state previously proposed a massive overhaul of most of the Medicaid program that would, among other things, direct most recipients into private health plans. The state is going ahead with that plan thanks to recent Congressional approval loosening some of its regulations.

This proposal deals with a small yet costly population Medicaid treats every year, about 4,000 children with emotional or behavioral problems.

Most of those children can't get treatment until their problems progress to the point at which they need inpatient help, frequently at facilities run by a handful of state agencies, including the state Department of Mental Health. Treatment for them costs $58 million a year.

In a letter to the federal Center for Medicare and Medicaid Services, state Health and Human Services Director Robert Kerr said the care is fragmented and inefficient. He said the system "makes it impossible to know if we are providing children with what they need to successfully live and participate in the community."

The state is modeling its plan after similar programs designed to keep the elderly out of nursing homes.

The program would screen children to determine their treatment needs, and parents would get to choose from various care providers.

The treatment would be reassessed regularly to determine its effectiveness.

Ultimately, the goal is to move most of the treatment from inpatient to outpatient settings so children can stay home and in school.

John Hutto, a spokesman for the mental health department, would not comment beyond a written statement:

"The Department of Mental Health has always been a proponent of serving children in the least restrictive environment as demonstrated by our services for children, adolescents and families. We look forward to having an active role in developing the final proposal for serving children in this state."

Reach Jonathan Maze at jmaze@postandcourier.com or 937-5719.