Medicaid Financing of State and County Psychiatric Hospitals

Sources of Medicaid Funds for State and County Psychiatric Hospitals

Identifying and understanding Medicaid funding sources for public psychiatric hospitals is difficult because information about them is limited and because funds are used in complex ways. Although some sources of Medicaid funds have been available to State and county psychiatric hospitals under the State option for some time, the past decade has seen these facilities tap into new Medicaid funding streams, such as DSH payments. This chapter examines the different Medicaid funding streams available to State and county psychiatric hospitals.

A. IMD Optional Services

Federal law requires that States provide certain basic services that are deemed medically necessary to Medicaid recipients. In addition, States may choose to provide certain optional services under their Medicaid plan as allowed by Federal regulations. Optional services must be offered consistently within a State without discrimination based on disease category or geographic location (Johns Hopkins AIDS Service 2003).

For IMDs such as State and county psychiatric hospitals to receive Medicaid reimbursement for inpatient services provided to persons under 21 years of age and/or to persons age 65 years and older, the State must choose specifically to cover these optional services under the State Medicaid plan. States, however, are not required to choose any of the IMD optional services, although most have opted for them (see Table II.1).¹⁰ Specifically, States may choose to provide the following:

Coverage of inpatient hospital services under the direction of a physician for Medicaid-eligible individuals aged 65 and over in an IMD. Forty States and the District of Columbia cover this optional service.
Nursing facility services for Medicaid-eligible individuals aged 65 and over in an IMD. This option includes nursing services provided in nursing homes that meet IMD requirements. Nursing services must be needed on a daily basis and be provided on an inpatient basis. Thirty-three States and the District of Columbia cover this optional service.
Coverage of inpatient psychiatric care only for Medicaid-eligible IMD residents under age 21. In order to qualify for Medicaid reimbursement, the inpatient psychiatric services must be provided under the direction of a physician and also must be provided in a psychiatric hospital, inpatient psychiatric program in a hospital, or other psychiatric facility accredited by the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) or another accrediting organization. Thirty-nine States and the District of Columbia cover this optional service (CMS 2002b).

B. Medicaid Managed Care

The advent of Medicaid managed care has led to the creation of new funding opportunities for IMD services. States may request a waiver from the Federal Government in order to operate a specific kind of program (CMS 2002a). Medicaid waivers often are used to authorize managed care or alternative delivery or reimbursement systems. States may obtain two distinct types of Medicaid waivers to implement managed care in their Medicaid programs. Both types—Section 1915(b) and Section 1115—fall under the purview of Title XIX of the Social Security Act.

More recently, the Balanced Budget Act of 1997 gave States the option of amending their State plans to require Medicaid beneficiaries' enrollment in managed care. This option allows States to forgo the waiver as long as certain exempted populations, such as supplemental security income (SSI) populations and children with special health care needs, are not required to enroll. If there is mandatory enrollment for exempted populations, a waiver is still required (Federal Register 2001c).

There are three ways in which States can use managed care programs to pay for IMD services. First, States can pay for IMD services with savings generated from Medicaid managed care programs. Second, States can indirectly pay for IMD services in State and county psychiatric hospitals if those hospitals participate in the provider networks of BHOs that contract with the State's Medicaid program. Third, States can obtain IMD expenditure authority through an 1115 Medicaid waiver.

1. Paying for IMD Services Through Savings

Section 1915(b) waivers, known also as freedom-of-choice waivers, permit States to bypass certain provisions of the Medicaid law and require beneficiaries to enroll in managed care. CMS requires that 1915(b) waiver programs cannot negatively affect beneficiary access or quality of care of services, and cannot cost more than what the Medicaid program would have cost without the waiver. The waiver programs are approved for 2 years and may be renewed if the State applies (CMS 2002a). The 1915(b) waiver permits States to use cost savings to provide additional services to existing Medicaid-eligible beneficiaries. This waiver does not grant "IMD expenditure authority." That is, it does not give States the authority to reimburse IMDs directly for inpatient services provided to adults (CMS 2002a; personal communication, 11/14/01, R. Rhodes at CMSO). However, given that States are allowed to use any savings generated from managed care to provide additional services to Medicaid beneficiaries, States technically can use the savings to pay for inpatient services provided to adults in IMDs.

2. Inclusion of Public Psychiatric Hospitals in BHO Provider Networks

Medicaid dollars may filter through to IMDs indirectly if the facilities participate in the provider networks of behavioral health organizations (BHOs) that contract with a State's Medicaid program. The inclusion of State and county psychiatric hospitals in such a network may be a State requirement, as in Hawaii and Iowa (see Table II.2); however, these hospitals may also be included at the discretion of the BHOs themselves.¹¹

3. Section 1115 Waiver IMD Expenditure Authority

Section 1115 waivers, also referred to as research and demonstration waivers, allow States to carry out experiments to test new approaches to benefit design, service organization, delivery, and financing as well as eligibility. In fact, States often use the waivers to expand coverage to the uninsured (Health Care Financing Administration (HCFA) 1997; Physician Payment Review Commission 1995, 1996; Rotwein et al. 1995). Section 1115 waiver projects are typically approved to operate for a 5-year period and must be budget neutral over the life of the project (CMS 2003). The flexibility of the waivers has encouraged some States to incorporate IMD services into their Medicaid managed care programs by obtaining IMD expenditure authority (see Table II.2). Eight States currently have 1115 waivers with IMD expenditure authority.

Depending on the State, the IMD expenditure authority may not extend to all IMDs in the State but rather to a designated group, such as private freestanding psychiatric hospitals. In other words, just because a State has IMD expenditure authority does not necessarily mean that such authority applies to State and county psychiatric hospitals. Furthermore, all IMD expenditure authority States except Rhode Island impose a 30-day limit per episode and a 60-day annual limit for inpatient mental health services; the coverage is intended to treat IMDs as acute care facilities for new admissions rather than as long-term care facilities (Center for Health Services Research and Policy 2001; personal communications, 11/19/01, various State project officers at CMSO).

States have not actively pursued Section 1115 waivers as a vehicle for receiving IMD expenditure authority. In fact, most of the existing waivers were approved during the mid-1990s, and States have demonstrated little activity recently in the pursuit of these waivers (personal communication, 11/19/02, M. Fiori at CMSO). CMS reports that as the Section 1115 waivers with IMD expenditure authority expire, this authority will not be renewed (Peltz 2002).

C. Disproportionate Share Hospital Payments

For many State and county psychiatric hospitals, Medicaid's DSH program is a major funding source. The intent of the DSH program is to provide supplemental payments to hospitals that render care to a large volume of indigent patients; these facilities are often unable to generate revenues sufficient to cover their uncompensated care costs because they do not serve enough privately insured patients and because Medicaid reimbursement is low (Coughlin and Liska 1997). Subject to some minimal Federal requirements, the States have substantial discretion in setting the criteria for hospitals' eligibility for DSH payments, and the criteria almost always encompass both public and private psychiatric hospitals.¹² Over a short period, the size of the DSH program increased dramatically, rising from a total of $1.4 billion in payments with 6 participating States in 1990 to $17.5 billion with 39 participating States by 1992 (Coughlin and Liska 1997). In 2001, the size of the DSH program was reportedly $15.9 billion, with 47 States and the District of Columbia participating (CMS-64 Files 1991 – 2001).

Most State and county psychiatric hospitals far exceed minimum requirements for DSH payments to hospitals. In the early 1990s, amid State budget shortfalls and expansions in Medicaid eligibility, States began using DSH for their IMDs (Coughlin and Liska 1997; Coughlin et al. 1994).¹³ The DSH program gave States the opportunity to obtain additional Federal dollars, subject to the Federal match.¹⁴ Yet, owing to Federal restrictions on the use of DSH monies, many States turned to intergovernmental transfers (IGTs)—monetary transfers within or across different levels of government—to revert DSH funds back to State general treasuries or to fund other, sometimes non-Medicaid, services (Coughlin and Liska 1997; OIG 2001d; USGAO 1994, 1998, 2000, 2001). An expanded discussion of how IGTs are used within a DSH program can be found in Appendix B.

Typically, data do not break down Medicaid funding source by type of provider. The one exception, is DSH receipts, which offer data on the extent of DSH funds paid on behalf of public psychiatric hospitals in 1998 (see Table II.3). Nonetheless, the data do not indicate which States are using IGTs or, for those that do use IGTs, the uses to which the States allocate the funds.¹⁵

Federal concerns about the dramatic rise in DSH spending prompted Congress to pass a statute designed to curb DSH expenditure growth. Legislation enacted during the early 1990s created State-specific Medicaid DSH allocations that limited expenditures to 1992 levels for "high-DSH" States and allowed growth in proportion to State Medicaid spending based on 1992 levels for "low-DSH" States.¹⁶ The Omnibus Budget Reconciliation Act of 1993 (OBRA) introduced further restrictions that created facility-specific caps, under which total DSH payments to a provider could be no more than the total nonreimbursed costs of providing inpatient care to Medicaid and uninsured patients (Coughlin and Liska 1997; National Association of Public Hospitals and Health Systems 2001a).

More recent legislation has curtailed overall State DSH spending still further by specifically focusing on IMD DSH in light of the rapid escalation in payments during the early to mid-1990s (see Figure II.1). The Balanced Budget Act of 1997 (BBA) specified State-by-State allocations for fiscal years 1998 through 2002 in which the amounts were to remain fixed or to decrease over the period. For IMDs, each State could spend no more on DSH for these facilities than it did in fiscal year 1995, either in absolute dollars or as a percentage of total State DSH spending.

The BBA placed specific restrictions on those States that spent more than half of their DSH allocation on IMDs, limiting future IMD DSH expenditures as a percentage of total DSH to 50 percent in fiscal year 2001, 40 percent in fiscal year 2002, and 33 percent thereafter (HCFA 1997; National Association of Public Hospitals and Health Systems 2001a; National Association of State Mental Health Program Directors 2001b, 2001c). Temporary relief came from the Beneficiary Improvement and Protection Act of 2000 (BIPA), which allowed State DSH allocations to increase by the Consumer Price Index for fiscal years 2001 and 2002. Consequently, IMD DSH payments were not subject to the 50 percent limit imposed by the BBA for 2001 and continued to represent a substantial portion of the total DSH payments in many States in that year (see Table II.4). In fiscal year 2003, however, the allocations reverted to the level specified in the BBA (HCFA 2001; NAPH 2001a). Using 2001 data on DSH, it appears the BBA's 33 percent IMD cap affects 15 States in 2003.¹⁷

Florida is one of the States affected by the BBA IMD caps. A 2000 audit report by the Florida Office of Program Policy Analysis and Government Accountability anticipated that the State would lose $29.6 million, or almost 11 percent of the State's budget for mental health institutions, as a result of IMD caps in the DSH program. To offset the loss, the State chose to close down a State mental hospital by moving patients to other hospitals or into community treatment settings. All patient transfers were completed for this hospital on February 8, 2002 (Florida Department of Children and Families 2003).

While the BBA has placed limits on the amount of DSH paid on behalf of IMDs, this source of funds is likely to continue to contribute a significant portion of the overall Medicaid funding that States receive. It is expected that States pursuing this funding strategy will continue to seek DSH funds on behalf of their public psychiatric hospitals to the extent possible under the law.

D. Administrative Payments

While Federal regulations allow States to be reimbursed for the costs necessary to administer their Medicaid programs, the intent of the regulations becomes less clear when administrative costs are associated with IMD residents. The reason stems largely from the IMD exclusion that prohibits Medicaid reimbursement for most IMD services. Given, however, that the IMD exclusion applies only to services, it does not preclude the use of Medicaid funds for administrative costs related to Medicaid-eligible IMD residents (USDHHS 1992). A 1992 USDHHS Report to Congress clarified that IMD residents' Medicaid eligibility allows them to receive applicable administrative services, even though no Federal financial participation is available for treatment services.

Several different types of Medicaid administrative services are eligible for Federal financial participation (FFP). FFP is available for direct program management; costs incurred in the design, maintenance, and operation of automated systems; and the processing of Medicaid applications, appeals, and general information to the public about the program. In addition to services eligible for FFP, Federal policy defines other IMD services that can be claimed as necessary to manage a State's Medicaid program. Those services include monitoring of certain medications and administrative case management (including assessment, care planning, and referrals and linkages to other programs and providers).

Currently, only a few States receive administrative payments on behalf of IMD residents. In one State, for example, the State Medicaid Authority, as the lead agency responsible for the largest percentage of IMD facilities, claims activities and costs associated with the administration of the Medicaid hospital and nursing home system. This State does not segregate the IMD facilities from its total claim. In two other States, the State Mental Health Authority claims the Federal match for the costs of administrative services related to maintaining Medicaid eligibility, conducting disability assessments, and preparing predischarge benefits applications for IMD residents. Although the staff doing the reimbursable work is located in the State's public hospitals, it is actually assigned to a central administrative unit within the Mental Health Authority. Also, since the staff conducting the work performs these administrative tasks exclusively, cost identification and claiming are rather straightforward. These indirect costs are separated out from the facilities' cost reports.

E. Conclusion

Several sources of Medicaid funds—including those from DSH payments, IMD optional services, Medicaid managed care, and administrative payments—are available to State and county psychiatric hospitals.¹⁸ However, the pursuit of each of these funding sources varies considerably from State to State as dictated by local circumstances. Even among States that avail themselves of the same sources of Medicaid funds, methods and amounts differ significantly. A good example is the disparate approaches to the use of DSH payments for IMDs.

The existing information is suggestive but insufficient to provide an understanding of the overall financial impact of Medicaid funding on State and county psychiatric hospitals, both in individual States and nationally. In addition, it offers little insight into why States vary in their pursuit of funding sources for their public psychiatric hospitals or into the factors that influence their decisions. Through case studies, the next chapter examines the Medicaid funding experiences of public psychiatric hospitals in five States—Arkansas, California, Iowa, Maryland, and New Jersey—and begins to piece together some of the missing information.

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