This issue paper is designed to help families, advocates and policymakers ensure that "medically necessary" standards in public-sector contracts for managed mental health care protect children's rights, particularly the rights of children who have serious emotional disturbance. Fundamental principles for developing sound contracts for public mental health services for children are provided and include: (1) families should be treated as partners in treatment planning; (2) even where the mental health system has been privatized, the ultimate responsibility for its operation should lie with the public agency; (3) family members and child advocates must have a voice in how the system is designed and run; (4) the managed care plan must address fragmentation in services for children with serious emotional disturbance; and (5) preserving families must be a central goal of child mental health services. Problems with the current definition of "medically necessary" in managed care and in Medicaid law are explained, and court decisions are discussed. A different approach to defining medically necessary services is proposed that addresses the goals of services, purposes of services, standards of service delivery, arbitrary limits, process to determine when services are medically necessary, and links to an appeal system. (Contains 36 references.) (CR)