The District has agreed to pay the city’s largest Medicaid contractor $10.2 million to settle a long-running contract dispute. The payout has contributed to the need for a $32 million increase in Medicaid funding recently approved by the D.C. Council.

In September, D.C. Chartered Health Plan asked the Contract Appeals Board for $14.9 million in compensation for the city’s “failing to set actuarially sound rates” for dental care. The dispute has its roots in a court settlement in which the District pledged to improve children’s access to dental care.

The city, according to Chartered’s appeal, ordered the provider to dramatically hike its reimbursement rates for dentists so more would locate in the city and serve needy kids. More Medicaid recipients than anticipated started going to the dentist, the appeal said, which “exacerbated existing pressures on Chartered’s ability to control costs.”

In October, the city moved to dismiss the appeal on procedural grounds without addressing the merits of Chartered’s argument. However, managed care providers are generally expected to assume the risk that the rates they agree to might not cover their costs.

Health Care Finance Director Wayne Turnage said Tuesday that the District was compelled to settle the complaint ahead of the city’s annual negotiation with its two Medicaid managed care providers, of which Chartered is the largest.

As part of the settlement, the District has agreed to pay Chartered a lump sum of $3.7 million. It has also agreed to pay Chartered a premium over the monthly per-enrollee rates it is offering its other contractor, UnitedHealth, totaling an additional $6.5 million. Because 70 percent of Medicaid costs are borne by the federal government, local taxpayers will pay just over $3 million.

Earlier this month, Mayor Vincent C. Gray lobbied the Council before its final budget vote to prioritize a $32 million addition to the local Medicaid budget. Turnage argued that the increase was necessary to establish the “actuarially sound” rates required to be paid to the Medicaid contractors under federal regulations. But some D.C. Council members have questioned the need for the extra money.

Council members are set to further discuss the managed care contracts at a meeting Wednesday afternoon.

Chartered has contracted with the city for more than two decades, and its chairman, Jeffrey E. Thompson, enjoys close political ties to city officials. The city sued the company over improper billing in 2008, resulting in a $12 million settlement.

A spokeswoman for Chartered did not immediately return a call for comment.

Staff writer Nikita Stewart contributed to this report.