Medicaid Financing of State and County Psychiatric Hospitals

National Estimate of Medicaid Funding

Although it is clear that public psychiatric hospitals receive Medicaid funds, the share of total funding represented by such funds remains less clear. This chapter attempts to clarify the issue by creating a national estimate of the amount of funding that public psychiatric hospitals receive from Medicaid. This estimate is derived from available DSH data as well as from the Medicaid funding experiences of the five case study States.

A. Previous Estimates of Medicaid Funding

The most recent estimate of Medicaid funding, based on 1994 data, suggests that Medicaid funds account for approximately 18 percent of State and county psychiatric hospital revenues (Manderscheid et al. 2001).²⁷ Since 1994, however, several notable developments have affected Medicaid funding for public psychiatric hospitals.

States increasingly have included their public psychiatric hospitals in DSH programs, although not all of the DSH monies actually stay with these facilities but often are retained by or returned to the State for use at the State's discretion (Coughlin and Liska 1997; Coughlin et al. 1994).
The role of public psychiatric hospitals continues to evolve as the facilities assume dual responsibility as the (1) provider of last resort for persons, primarily adults, with severe and chronic mental illness who do not have the resources to seek care elsewhere and (2) protector of the public safety in providing care for a forensic population with mental illness (National Association of State Mental Health Program Directors Research Institute 2002).
Since the mid-1990s, States have expanded their use of Medicaid managed care—an arrangement that often makes special provisions for mental health services (HCFA 1997; Physician Payment Review Commission 1995, 1996; Rotwein et al. 1995).

With these developments in mind, the following section discusses a more current estimate of the Medicaid-funded share of public psychiatric hospital operations.

B. National Estimate of Medicaid Funding of Public Psychiatric Hospitals

To develop an overall national estimate of the amount of Medicaid funds supporting public psychiatric hospitals, estimates of two components are required: (1) DSH funding and (2) non-DSH funding. An estimate of total operating costs for public psychiatric hospitals is also required. The most recent figure available is for fiscal year 2001, when State mental health authorities reported spending $7.4 billion on inpatient services in State psychiatric hospitals (personal communication, 3/19/2003, T. Lutterman at the National Association of State Mental Health Program Directors Research Institute).²⁸

1. DSH Medicaid Funding Estimate

As previously noted, DSH funding represents the largest share of Medicaid funding for State and county psychiatric hospitals. The only year for which data are available on IMD DSH spending, which separate it by public and private hospitals, is 1998 (Table II.3). That evidence is limited, however, as only 37 States and the District of Columbia reported the information in this fashion. For those States reporting, DSH allocations for public psychiatric hospitals were $838 million of $6 billion in total DSH allocations, or 14 percent.²⁹

To estimate the amount of DSH allocations made on behalf of public psychiatric hospitals, the 14 percent figure from the preceding paragraph is used as the basis for the calculation. In 2001, total DSH spending for all States was $15.9 billion (CMS-64 Files 1991 – 2001). Applying the 14 percent to this $15.9 billion figure results in a DSH estimate for public psychiatric hospitals of $2.2 billion for 2001, or 29 percent of the $7.4 billion operating costs.

2. Non-DSH Medicaid Funding Estimate

The non-DSH Medicaid funding estimate is developed based on the experience of the five case study States. Given, however, that the information from the States reported only the Federal share of Medicaid, not their own share, the latter had to be calculated to determine the total amount of non-DSH Medicaid funding. To do so, the Federal medical assistance percentage (FMAP) was used. However, the calculation is more complex than it appears because the FMAP is based on the Federal fiscal year (October 1 to September 30), whereas the State data are based on either the State fiscal year (July 1 to June 30) or the calendar year (January 1 to December 31), as noted in Table IV.1. Consequently, the FMAP was converted to the period comparable to that covered by the State data (see Table IV.1).

Using the converted FMAP, the percentage of the overall operating costs for the State psychiatric hospitals in the five case study States represented by non-DSH Medicaid funds was calculated (see Table IV.2). This calculation resulted in an estimate of 6 percent. Applying the 6 percent to the $7.4 billion estimate of 2001 spending on inpatient public psychiatric hospital services results in a non-DSH Medicaid funding estimate for public psychiatric hospitals of $0.4 billion for 2001.

3. Overall National Estimate of Total Medicaid Funding

It is estimated that Medicaid provided $2.6 billion in funding on behalf of public psychiatric hospitals in 2001 (Table IV.3). This includes an estimated $2.2 billion in Medicaid DSH funding and nearly $0.4 billion in Medicaid non-DSH funding. This represents approximately one-third of public psychiatric hospitals' total operating costs in 2001. However, various caveats and limitations, detailed in the next section, may have a substantial impact on the accuracy of the estimate.

C. Assumptions and Limitations of the National Estimate

The estimate should be interpreted cautiously in light of the following assumptions and limitations associated with its development.

Significant State-to-State variability exists in terms of Medicaid funding. Therefore, it is difficult to determine the true "national representativeness" of the estimate, since it was based in part on five States' experiences.
The widest variation in Medicaid funding of public psychiatric hospitals among the States is in DSH funding. The estimate does not attest to the amount of these funds that actually remain with the hospitals versus the amount retained by or returned to the State for State-designated use.
The estimate is a "snapshot" in time. Consequently, it may not reflect future changes in local circumstances and Federal policies related to Medicaid.

D. Conclusion

In sum, the evidence suggests that the amount of Medicaid funds paid on behalf of public psychiatric hospitals is increasing. For 2001, Medicaid provided an estimated $2.6 billion in funding on behalf of these facilities, which represents approximately one-third of total operating costs. This compares to previous Medicaid funding estimates of 18 percent in 1994 and 10 percent in 1990. DSH monies comprised the largest share of the $2.6 billion—nearly 85 percent. However, various caveats and limitations may affect the accuracy of the estimate, including the extensive State-to-State variability and the fact that the estimate represents a snapshot in time and may not hold true for other years. In addition, the estimate makes no assumptions as to the amount of Medicaid funds that stay with these public facilities, as opposed to being retained by or returned to the State for use at the discretion of the State.

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