Medicaid Financing of State and County Psychiatric Hospitals

Conclusions

Despite the perception that few people are served by public psychiatric hospitals, these facilities continue to hold a critical place in the continuum of care for persons with mental illness. It is true that the capacity of these institutions has diminished significantly as a result of deinstitutionalization—a trend in which the traditional site of care has moved from inpatient to outpatient facilities and from institutions to community-based treatment programs. However, many public psychiatric hospitals continue to play an essential role, serving persons, primarily adults, with severe and chronic mental illness who do not have the resources to seek care elsewhere, and a forensic population with mental illness.

Another common, but inaccurate, perception is that public psychiatric hospitals receive few or no Medicaid funds because of the Federal Government's long-standing policy, known as the IMD exclusion, that long-term psychiatric care is the responsibility of the States. Evidence does suggest, however, that Medicaid is funding an increasing share of public psychiatric hospital operations. This chapter provides a number of overall conclusions about this evidence, as well as a brief discussion of pressures that may affect future Medicaid funding of public psychiatric hospitals.

A. Medicaid Funding and Public Psychiatric Hospitals

Although States avail themselves of various sources of Medicaid funds for their public psychiatric hospitals, there is substantial State-to-State variability as to the specific sources and amounts pursued. The most significant sources of Medicaid funds paid on behalf of public psychiatric hospitals are those from IMD optional services, Medicaid managed care, and DSH payments. Of these sources, DSH payments represent the overwhelming majority of Medicaid funds pertaining to these facilities.

It is estimated that in 2001, $2.6 billion in Medicaid funds were paid on behalf of public psychiatric hospitals, including $2.2 billion in DSH funds and $0.4 billion in non-DSH funds. Medicaid represented approximately 35 percent of these public facilities' operating costs during that year. This estimate is higher than previous estimates of 18 percent from 1994 and 10 percent from 1990 (Manderscheid et al. 2001). It was derived using available Medicaid data, as well as from the experiences of the five States included in this study: Arkansas, California, Iowa, Maryland, and New Jersey. It is important to note, however, that the extensive State-to-State variation that exists with regard to Medicaid funding may limit the accuracy of the estimate when extrapolating to a national basis. Also, because the estimate is based on data from a limited time period, it may not be applicable to other time periods. In addition, the estimate makes no assumptions as to the amount of Medicaid funds that actually remains with these public facilities versus being returned to States' treasuries.

B. Pressures Affecting Future Medicaid Funding

The challenges faced by State and county psychiatric hospitals are both substantial and likely to affect the Medicaid financing strategies pursued by the hospitals themselves or on their behalf. Beyond the specific challenges brought about by changes in Medicaid funding—such as the recent establishment of DSH caps or the future disallowance of IMD expenditure authority under Section 1115 waivers—the following broader environmental pressures may also influence funding strategies:

Fiscal crises in the States. Nearly all States are facing budget shortfalls for which higher spending in Medicaid programs is at least partially responsible (National Governors Association 2002; Smith et al. 2002).
Continuing deinstitutionalization. Federal policy that continues to emphasize community-based rather than institutional care has been reinforced by the U.S. Supreme Court's decision in Olmstead vs. L.C. (White House 2002).
Reconfiguring and redefining roles. As public safety at the community level becomes more and more important, the demand on public psychiatric hospitals for forensic services is likely to grow, perhaps affecting hospitals' capacity to serve other populations (Daigneau 2002; National Association of State Mental Health Program Directors Research Institute 2000). Forensic patients typically are not funded by Medicaid, but instead are funded through States' correctional budgets.
Mental health parity. An absence of parity in insurance coverage for mental health and substance abuse raises the pressure on the public mental health system, including State and county psychiatric hospitals. These facilities act as the safety net not only for indigent and low-income individuals but also for persons who have exhausted their insurance benefits (National Mental Health Association 2002). Efforts that establish parity could significantly change this situation.

In terms of Medicaid financing strategies for State and county psychiatric hospitals, the States themselves and others assisting them will need to consider a wealth of factors. In addition to the environmental pressures mentioned here, there is extensive State-to-State variation in the level of Medicaid support as well as continuing change in local circumstances and, at the Federal level, changes in Medicaid financing policies. Consequently, what holds true today may not hold true in the future. Therefore, it is necessary to monitor continuously the shifts in these factors and the various approaches to Medicaid financing of public psychiatric hospitals.

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