The report places special emphasis on innovative approaches that either have been or could be used by States to improve Medicaid coverage of needed services. It notes that nearly 11 million youths under age 21 were enrolled in Medicaid in 1988. Children with drug abuse or mental health problems or at risk for these problems need a range of parallel services, from assessment and short-term counseling to residential treatment. Overall, States have not made optimal use of Medicaid as a funding source for mental health services and drug treatment for children. Many States still emphasize traditional inpatient and clinic-based services in their coverage policies. Therefore, State program administrators should examine policies regarding mandatory and optional benefits carefully to understand how they can be used in combination to provide coverage for a full continuum of services in a variety of settings. Collaboration among providers and government officials is needed to accomplish this task. Tables, notes, and appended glossaries and State-by-State charts