Medicaid Financing of State and County Psychiatric Hospitals

Executive Summary

A common perception is that public psychiatric hospitals receive little or no Medicaid funds because of the Institutions for Mental Diseases (IMD) exclusion. This policy prohibits Medicaid reimbursement for care provided to individuals older than 21 years or younger than 65 years if the care is delivered in psychiatric institutions. Nevertheless, while States continue to provide substantial support to public psychiatric hospitals, in recent years Medicaid has funded an increasing share of the operations of these facilities. This study was undertaken to address the lack of comprehensive information regarding the nature and scope of such Medicaid support. The study identifies potential sources of Medicaid funds paid on behalf of public psychiatric hospitals and provides an estimate of the amount of such funds in 2001. The Medicaid funding experiences of public psychiatric hospitals in five States—Arkansas, California, Iowa, Maryland, and New Jersey—were examined in depth for the study.

Major findings:

In 2001, an estimated $2.6 billion in Medicaid funds were paid on behalf of public psychiatric hospitals in the United States. This represents approximately one-third of total operating costs for these institutions.
Medicaid funding for State and county psychiatric hospitals can be derived from several sources:
- IMD Optional Services: States may choose to provide coverage for inpatient services in an IMD for Medicaid-eligible individuals age 65 and over or under age 21, as well as for nursing facility services in an IMD for persons age 65 and over.
- Medicaid Managed Care: States can obtain IMD expenditure authority through a 1115 Medicaid waiver; pay for IMD services with savings from Medicaid managed care programs; or indirectly pay for IMD services if IMDs participate in the provider networks of behavioral health organizations (BHOs) that contract with the State's Medicaid program.
- Disproportionate Share Hospital (DSH): The Medicaid program provides supplemental payments to hospitals, including IMDs, that render a large volume of care to indigent patients.
- Administrative payments: IMD residents' Medicaid eligibility allows payment for administrative services provided to them, such as administrative case management.
Of these sources, DSH payments currently represent the overwhelming majority of Medicaid funds paid to State and county psychiatric facilities.
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.

The role of public psychiatric hospitals is changing constantly. States have worked since the 1960s to move large numbers of patients out of these facilities into community-based treatment settings. The challenges faced by State and county psychiatric hospitals are substantial and are likely to affect future Medicaid financing strategies pursued by the hospitals themselves or on their behalf.

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