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Medicaid Financing of State and County Psychiatric Hospitals

Medicaid Funding of State and County Psychiatric Hospitals in Five States

While States may take advantage of several Medicaid funding strategies to help support their public psychiatric hospitals, they nonetheless face unique local circumstances that dictate variation in the Medicaid policies they follow. This review of five case study States—Arkansas, California, Iowa, Maryland, and New Jersey—reveals which Medicaid strategies are most common and significant and examines the role of public psychiatric hospitals in the five States and the funding strategies used to support such hospitals.¹⁹

A. The Role of Public Psychiatric Hospitals in States' Public Mental Health Systems

The public mental health system, including the availability of and State preference for treatment settings, differs among the five case study States. The role and place of public psychiatric hospitals in a State's continuum of mental health care influence the Medicaid financing strategies States pursue on behalf of these facilities. In some States, State psychiatric hospitals, operating largely outside the overall treatment continuum, serve limited niche populations: the hardest to serve, most chronically ill patients. In other States, these public hospitals are a major component of the overall public mental health care system, serving both short- and long-term patients.

1. Arkansas

In contrast to the other four States, Arkansas operates only one public psychiatric hospital. With several hospital closures in recent years, the number of beds in the private sector, including both freestanding psychiatric hospitals and psychiatric units within general hospitals, has decreased sharply. Consequently, demand for the State psychiatric hospital's services from both the forensic and civil populations has escalated. The lack of alternative treatment settings has created a 100-person waiting list for forensic beds and a 40-person waiting list for civil beds.

2. California

In California, the State's 58 counties are responsible for public mental health services, including services for Medicaid-eligibles. The counties are at risk for mental health services for their residents, and they control how mental health dollars are spent. When a county needs to place a resident in a State facility, it pays a predetermined per diem rate. Counties use the State psychiatric hospitals only as a last resort, mostly to treat the hardest to serve, most chronically ill civil patients. This is due to the high cost of State facilities, their long distance from many communities, and the fact that the State hospitals primarily serve forensic patients. California's State psychiatric hospitals receive a small share of their operating budgets from Medicaid, with those Medicaid dollars generally intended for civilly committed patients 65 years and older and 21 years and younger, both noticeably small groups.

California's system of psychiatric health facilities (PHFs) (both publicly and privately owned), along with psychiatric units in general hospitals and freestanding psychiatric hospitals, serve local needs for acute inpatient psychiatric treatment. The length of stay in PHFs is typically short—5 to 7 days. Most PHFs can collect Medicaid reimbursement for persons from 22 to 64 years of age because the hospitals are small enough—16 beds or fewer—to avoid the IMD exclusion. PHFs often receive more Medicaid dollars for services, as a percentage of total budgets, than do the State hospitals.

3. Iowa

Iowa's four State psychiatric hospitals, an integral part of the State's public mental health system, primarily serve short-term patients (shorter than 30-day stays). Among the five case study States, Iowa's State psychiatric hospitals are the only ones that admit voluntary patients; patients do not have to meet the more rigorous commitment requirements of posing an imminent danger to themselves or others.

Medicaid-eligible, voluntarily admitted adults and all Medicaid-eligible child patients receive services through the State's Medicaid managed behavioral health care plan, known as the Iowa Plan.²⁰ Given that the State hospitals accommodate voluntary patients for short stays, the State requires the behavioral health organization that holds its Medicaid contract to include these hospitals in its provider network, thereby allowing the hospitals to secure some Medicaid funding for patients between the ages of 22 and 64 years. For patients in that age range who are involuntarily committed, the State and counties share the costs of care in the State hospitals, with the State paying 80 percent of the per diem and the county of residence paying the remaining 20 percent plus any costs of care beyond that covered by the per diem rate. If county residency is not established, the State pays 100 percent of costs.²¹ In addition, once a Medicaid-eligible child's commitment is decertified by the State's managed behavioral health care plan, the State is responsible for 100 percent of costs.

4. Maryland

Maryland has a Section 1115 waiver that grants the State IMD expenditure authority; however, the State excludes State psychiatric hospitals from the IMD waiver provision. It prefers to have short-term patients (those with 30-day or shorter stays) served in private facilities so that the State psychiatric hospitals can remain the treatment setting of last resort. As a consequence, State psychiatric hospitals forgo some Medicaid funds that they might otherwise receive. Like many other States, Maryland has focused on reducing its State psychiatric hospital population and redirecting patients to community-based programs.

5. New Jersey

New Jersey also has a policy to reserve its State and county psychiatric hospitals for longer-term patients. However, instead of using a Section 1115 waiver as Maryland does, New Jersey set up a system of short-term-care facilities, which are psychiatric units within general hospitals, for stays of up to 2 weeks. The short-term-care facilities are not State or county owned but instead are private facilities which the State formally designates and to which it provides some financial support.

New Jersey has also set up a statewide structured admissions process under which all individuals admitted to a public psychiatric hospital or a short-term-care facility must undergo evaluation by a county screening center. The centers, funded through the State's Division of Mental Health Services (DMHS), try to place individuals meeting the involuntary admission criteria in the least restrictive setting, preferably the local short-term-care facility. The direction of patients into short-term-care facilities allows Medicaid reimbursement for psychiatric services because the facilities do not meet the criteria that make them subject to the IMD exclusion. Persons needing longer-term care are transferred to State or county psychiatric hospitals.

The county hospitals serve essentially the same clientele as the State hospitals in terms of length of stay and patient characteristics. However, county facilities serve mostly county residents, whereas the geographic service area of the State psychiatric hospitals is much broader. Another difference is that the State hospitals have a larger forensic population.²² The State psychiatric hospitals also operate some specialized programs that are not available at county facilities, including programs for children and the dually diagnosed (persons with developmental disabilities and mental illness). Both the short-term-care facilities and county hospitals alleviate some of the capacity pressure faced by the State psychiatric hospitals.

B. States as Primary Funders of State and County Psychiatric Hospitals

Public psychiatric hospitals in the five case study States rely on State or county general funds as their main source of funding. State hospitals in three of the States—Iowa, Maryland, and New Jersey—are 100 percent State-appropriated; that is, the hospitals' entire operating budget comes from a State appropriation. All revenue collected from patients or insurers (including Medicaid) is turned over to the State general fund. One respondent suggested that in States where hospitals are 100 percent State-appropriated, an individual hospital might be relatively insulated from budget swings resulting from changes in revenue sources.

In California, the State and the counties together fund the State psychiatric hospitals: a State appropriation covers forensic patients, while counties, using funds they receive from the State, pay a per diem rate for civilly committed patients.²³ Any revenues collected from private or public insurance for civilly committed patients are deposited into a fund that is used periodically to adjust (e.g., lower) the per diem rate that counties are charged. However, in California, State psychiatric hospitals receive little Medicaid funding because of the high proportion of forensic patients in the State system.

In Arkansas, the situation is different. A State appropriation covers about 90 percent of the single State hospital's operation, with the hospital at risk for funding the remainder of the budget. For example, the hospital's operating budget in the fiscal year beginning July 2001 is $23.5 million. The State appropriation totaled $21 million, meaning that the hospital is responsible for collecting the remaining $2.5 million. In accordance with a sliding-fee scale, the hospital bills all patients, regardless of ability to pay, to cover its costs beyond the State appropriation.²⁴ If the hospital fails to collect from Medicaid or other payers, the State does not reimburse it for the lost collections.

Appropriations for State psychiatric hospitals in all five case study States have held steady or declined slightly in recent years. However, all five States were facing budget deficits at the time of the case study site visits, and, as a result, their public psychiatric hospitals were likewise in the throes of fiscal challenges. In Arkansas, the State usually appropriates enough money to fund annual payroll increases, but there was no increase in fiscal year 2001. At the time of the case study site visit, the hospital was considering either closing its 16-bed adolescent unit or changing the intensity of the unit to a subacute level, a move that might open up new funding opportunities. Respondents in California did not believe that the State budget shortfalls would affect the State psychiatric hospitals; given that the hospitals treat primarily forensic patients, their capacity is a public safety priority. In Iowa, the budgets of the four State psychiatric hospitals had remained steady over the past 5 years but had seen some recent declines in response to the statewide budget shortfall. In Maryland, recent budget declines for the State psychiatric hospitals have led to delays in purchases, in hiring, and in the initiation of capital projects. Respondents in New Jersey were hopeful that, despite the State's budget deficit, the impact on its public psychiatric hospitals would not be significant.

California and New Jersey also operate county-owned psychiatric hospitals. Ten county-owned psychiatric units or hospital facilities in California provide 24-hour inpatient care.²⁵ PHFs, which have a special licensure and receive county appropriations, provide service intensity similar to acute psychiatric hospitals, but they lack an emergency room and other onsite ancillary services, such as laboratories. Because only two PHFs have more than 16 beds, most are not subject to the IMD exclusion. In New Jersey, the six county-operated psychiatric units or hospitals participate in a "90/10 program" for uninsured patients whereby the State pays 90 percent of the cost of care and the county pays 10 percent; if the patient is not a resident of any county, the State pays 100 percent. The "90/10 program" also applies to State psychiatric hospitals, in that counties support 10 percent of the costs in those hospitals for county residents.

C. Sources of Medicaid Funds

Reliance on Medicaid revenues to fund State psychiatric hospital operations varies across the five States (see Table III.1).

1. IMD Optional Services

Persons under the age of 21. Every case study State covers inpatient psychiatric services for persons under the age of 21, but not all public psychiatric hospitals accept patients in this age group. Most of the public psychiatric hospitals in the case study States no longer offer inpatient services to children under 12; however, they do have some capacity to serve adolescents. Public psychiatric hospitals in Maryland stopped admitting children 5 or 6 years ago, and only two of them currently serve adolescents. The State directs children in need of inpatient psychiatric services—a covered group under Medicaid—to private hospitals. California and New Jersey each have one State psychiatric hospital serving children. In Arkansas, the State psychiatric hospital does not treat children but has 16 beds for adolescents and an additional 16 beds for juvenile sex offenders. In Iowa, two of the four State psychiatric hospitals specialize in treating children, although service capacity for children has recently shrunk.

Overall, children and adolescents make up a small share of the State psychiatric hospitals' patient load (see Table III.2). Consequently, the amount of Medicaid funds collected for the population under age 21 is small.

Persons age 65 and older. Four of the five case study States cover inpatient psychiatric services provided to patients 65 years and older as a Medicaid optional service. The exception is Arkansas. Representatives from the mental health division in Arkansas have initiated discussions with the Medicaid division about amending its State plan by 2004 to include individuals age 65 and over, but, at the time of the site visit, no final decision had been reached. Unlike the case with children, most State psychiatric hospitals do not restrict services for those over age 64. In fact, many offer a specialty in geriatric care. However, evidence from the case study site visits suggests that beds specifically designated for the elderly, like those for children, represent a relatively small share of State psychiatric hospitals' overall capacity (Table III.2). Providing further evidence, California's Department of Mental Health reported that as of June 30, 2001, 146 of the total 4,377 clients in the State hospitals, or 3.3 percent, were over 64 years of age (California Department of Mental Health 2002). Of those 146, only 36 were reported as "county-billable," meaning even potentially Medicaid-eligible.

2. Medicaid Managed Care

Two States, Iowa and Maryland, use Federal waivers to obtain Medicaid funding for the nonelderly adult population that is typically disqualified from Medicaid reimbursement for certain services under the IMD exclusion. Iowa's Section 1915(b) waiver, known as the Iowa Plan, allows the State to take the savings generated from the use of managed care to provide services not otherwise covered under the State Medicaid plan, including inpatient services in State psychiatric hospitals. Medicaid largely funds the Iowa Plan for services provided to Medicaid-eligible persons. SAMHSA block grants and public health funds provide additional support for services provided to the indigent through the Iowa Plan.

Under the Iowa Plan, the State psychiatric hospitals become, by contract, part of the provider network of Medicaid's behavioral health care vendor, Magellan Behavioral Care of Iowa (formerly Merit). As long as Magellan approves admissions and lengths of stay, the State psychiatric hospitals may be reimbursed for services provided to the voluntary (noncommitted) Medicaid-eligible adult population over 21 years of age and under 65 years of age and to Medicaid-eligible children, whether voluntary or involuntary. According to a Magellan representative, in 2001, the State psychiatric hospitals received $4.3 million through this arrangement.

Maryland has a Section 1115 waiver that carves out mental health services for all Medicaid-eligible persons, including children with severe emotional disturbance (SED) and adults with serious and persistent mental illness (SPMI). Under this waiver, which grants the State IMD expenditure authority, private psychiatric hospitals receive payment for 30 days per episode, up to 60 days per year, and 120 days in a lifetime for adult patients (ages 22 to 64). However, because the State hospitals are excluded from the waiver, they receive no Medicaid funds via the waiver program. The State psychiatric hospitals will admit patients when their Medicaid funding ends. Due to CMS's decision to eliminate IMD expenditure authority waivers, Maryland's IMD waiver program will likely end when it comes up for renewal. This change could potentially shift significant capacity pressure from the private psychiatric hospitals back onto the State hospitals, which already maintain waiting lists.

3. Disproportionate Share Hospital Payments

Public psychiatric hospitals participate in DSH in three States—Arkansas, Maryland, and New Jersey. In Arkansas, the DSH funds are deposited into the hospital's account with the Department of Human Services for hospital-designated use. Because State psychiatric hospitals in Maryland and New Jersey are 100 percent State appropriated, DSH funds are deposited directly into the State general fund. In Maryland, the State psychiatric hospitals receive a notification letter stating that the hospital has been "credited" with DSH funding, but it is unclear whether those DSH funds returned to the Maryland State treasury are set aside for a particular purpose. When DSH funding is returned to the State of New Jersey, the money is earmarked for a charity care fund and a hospital relief fund, a small portion (reportedly 10 percent) of which is set aside for psychiatric hospitals and allocated through the Division of Mental Health Services. In Maryland and New Jersey, the State appropriation is considered the State match for DSH. In Arkansas, the State psychiatric hospital funds the match.

DSH payments to public psychiatric hospitals. The amount of DSH funding public psychiatric hospitals receive varies considerably with the different DSH systems in each State, reflecting States' localized health systems and funding priorities.²⁶ For example, as part of an overall DSH funding increase for the State, the Arkansas State Hospital received DSH funds for the first time in fiscal year 2002. The Balanced Budget Act (BBA) of 1997 replaced the statutory formula for DSH with specified DSH amounts by State; Arkansas's share was $2.7 million. In 2000, the Federal Benefits Improvement and Protection Act (BIPA) helped low-DSH States, such as Arkansas, by setting the minimum State DSH payment equal to 1 percent of total Medicaid expenditures (HCFA 2001; National Association of Public Hospitals and Health Systems 2001a). Arkansas's DSH funding rose to approximately $21 million in 2002, and the State psychiatric hospital benefited.

Maryland has a unique system in which all insurers (Medicare, Medicaid, and private) pay the same amount for the same treatment at general hospitals. A commission sets rates so that payment for uninsured patients (charity care) is included. The general hospitals are then ineligible to participate in the DSH program because their rates already cover the costs of caring for indigent persons. As a result, only the public and private psychiatric hospitals, two chronic hospitals, and three specialty hospitals are eligible to participate in the State's DSH program. With so few hospitals eligible, Maryland has not been able to collect its full DSH share since 1999; however, the State always collects the maximum amount of funding available under the IMD DSH caps. In 2001, Maryland collected $40 million in retroactive DSH payments. The State realized that it had been using an incorrect rate and was not collecting all of the funding for which it was eligible. Using the correct rates, the State will receive an additional $14 million annually in DSH.

New Jersey has a minimum requirement—essentially a 1 percent Medicaid utilization rate—for hospitals to qualify for DSH. All State and county psychiatric hospitals are eligible to participate in DSH, and the maximum funds allowed under the IMD DSH cap are received on their behalf. The State claims DSH for all DSH-eligible expenditures in the county psychiatric hospitals; that revenue is also deposited into the State general fund.

One of the results of California's creation of a county-based public mental health system is that State psychiatric hospitals are not eligible to participate in the State DSH program. Given that the counties are responsible for indigent care—medical and mental health—the State has essentially passed the DSH program on to the counties. Counties and individual hospitals decide whether to claim DSH payments, and hospitals are eligible as long as they meet the State's minimum requirements. County-owned PHFs are potentially eligible to receive DSH funding, and a few have received minimal payments in the past. As one respondent noted, however, counties are more likely to spend DSH funds on general medical care. According to the California Department of Health Services, one publicly owned PHF received DSH payments totaling $276,360 for fiscal year 1999–2000. Another county-owned PHF was eligible but did not receive any payments. In fiscal year 1998–1999, two county-owned PHFs received DSH payments totaling $141,414 (California Department of Health Services 2000).

Public psychiatric hospitals in Iowa do not participate in DSH. In Iowa, DSH payments are made to general hospitals only—not to IMDs. The largest share of DSH funding (more than 60 percent) goes to the University of Iowa, and IGTs are reportedly used to move these funds from the university back to the State.

IMD DSH caps. Recent reductions in the IMD DSH caps will affect both Maryland and New Jersey over the next year. One Maryland respondent fears that, if the reductions lead to lower State appropriations, the quality of care provided by the State psychiatric hospitals may be jeopardized. Other respondents were not sure how, if at all, the new DSH caps would affect the hospitals. One New Jersey respondent did not expect the lower DSH caps to affect the State psychiatric hospitals because the facilities receive a State appropriation to cover all operating costs. For 2002, the Arkansas State psychiatric hospital received approximately half the IMD DSH cap for the State. Given that private freestanding psychiatric hospitals in Arkansas participate in the DSH program, they are also funded within the IMD DSH cap constraints.

Relationship between DSH funds and State appropriations. In Arkansas and Maryland, respondents suggested that there does not appear to be a direct relationship between the State appropriation and DSH collections. As one Maryland respondent notes, DSH historically has not affected State hospital appropriations. Another respondent agreed, noting that, while the State appropriation has decreased in each of the past 2 years, the decline is attributable to a statewide budget shortfall rather than to lower DSH revenues.

In contrast, New Jersey respondents say that there is a connection between DSH funds and the State appropriation. When the Department of Human Services (Division of Mental Health Services) submits a budget to the legislature, the department makes sure that legislators understand that the State will receive some DSH funds to offset the full 100 percent State appropriation. Respondents believe that the New Jersey legislature understands that if it cuts funding to the State psychiatric hospitals or the hospitals become decertified, the State will no longer have access to Federal DSH funds, at least not at the same level. The respondent says that in the early 1990s some county psychiatric hospitals sued the State for the DSH money that the State claimed on their behalf. The court ruled that use of the money was at the discretion of the State legislature.

4. Administrative Payments

None of the five States collect Medicaid funds related to administrative services provided on behalf of public psychiatric hospital patients. Most were not aware that these payments could be claimed.

D. Conclusion

While States fund a substantial portion of public psychiatric hospital operations, Medicaid also plays an important role. States tend to favor funding strategies related to DSH programs, IMD optional services, and Medicaid managed care rather than strategies involving reimbursement for administrative services.

Some of the case study States have pursued similar Medicaid funding strategies, but the effects of those strategies vary with the specifics of each State's public mental health care system. For example, all five States cover optional services for children under the age of 21, but most States divert children to private hospitals or primarily serve children from the juvenile justice system; in the latter case, sources other than Medicaid fund services.

The specific Medicaid funding streams pursued by a State depend on several factors. Not all States may be eligible for, nor may all States want to pursue, every funding opportunity. The sources of funding a State pursues for its public psychiatric hospitals are closely linked to the mental health and Medicaid systems' views of the hospitals, the populations served by the hospitals (forensic versus civil commitments), and length of stay (long, intermediate, or short term). Furthermore, the role of public psychiatric hospitals in the States is constantly changing; States have worked since the 1960s to move large numbers of patients out of these facilities into community-based treatment settings. Many hospitals are trying to supplement their decreasing budgets by pursuing alternative sources of funding, such as leasing or selling land and building space or serving the expanding forensic population. As Medicaid funding sources become subject to more restrictions, such as DSH payment limits, and as the IMD expenditure authority under managed care waivers is phased out, the level of Medicaid funding likely will decline.

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