Medicaid Financing of State and County Psychiatric Hospitals

Introduction

While States enjoy significant flexibility in the design and operation of their Medicaid programs, they nonetheless rely heavily on financial support from the Federal Government. The Medicaid financing process is highly complex, and more so in many ways for State and county psychiatric hospitals than for other facilities and services. Much of the complexity is rooted in the Federal Government's longstanding policy that long-term psychiatric care—primarily for adults—is the responsibility of the States. Consequently, Federal law does not generally allow Medicaid reimbursement for care provided to individuals older than 21 years or younger than 65 years if the care is delivered in institutions for mental diseases (IMDs) (Geller 2000; National Association of State Mental Health Program Directors 2001a).¹ Dramatic shifts in mental health care delivery also have added to the complexity surrounding Medicaid financing of State and county psychiatric hospital services. In a trend commonly referred to as deinstitutionalization, sites of care have moved rapidly from inpatient to outpatient facilities and from institutions to community-based treatment programs (Geller 2000).

Even though the IMD exclusion and changes in mental health care delivery generally have limited Medicaid reimbursement for services in State and county psychiatric hospitals, these hospitals potentially may avail themselves of other sources of Medicaid funds. For example, Federal assistance in the form of disproportionate share hospital (DSH) payments is available to State and county psychiatric facilities serving a disproportionate number of low-income patients. However, Federal laws enacted during the 1990s set limits on payment amounts.² Congress also imposed significant restrictions, to be phased in over time, on the use of DSH monies to finance IMD services (National Association of Public Hospitals and Health Systems 2001a; National Association of State Mental Health Program Directors 2001b, 2001c; U.S. General Accounting Office (USGAO) 2000). Although many public psychiatric hospitals have benefited from the availability of Medicaid supplemental funds such as DSH, the continued availability of the funds, at least at recent levels, may be less certain in the future.

Thus, the overarching question is, "What share of State and county psychiatric hospital operations does Medicaid finance?" While existing evidence is limited and dated, it does suggest that Medicaid has been financing an increasing share of public psychiatric hospital operations. One estimate suggested that Medicaid represented approximately 10 percent of State and county psychiatric hospital revenues in 1990; a more recent estimate suggested that it accounted for 18 percent in 1994 (Manderscheid et al. 2001). However, given the extensive variation in State Medicaid programs as well as in States' approaches to the use of Medicaid financing, the experiences of individual States may differ dramatically from these national estimates. Further, much has happened since the mid-1990s that could affect trends both nationally and in individual States, including the proliferation of the DSH program and of Medicaid managed care programs.

A. Historical Context of Public Psychiatric Hospitals

Medicaid's role in funding services for patients in public psychiatric hospitals has been influenced greatly by the IMD exclusion and deinstitutionalization.

1. IMD Exclusion

Although the roots of the IMD exclusion predate the Medicaid program, the rule continues to confound today's financing relationship between Medicaid and State and county psychiatric hospitals. The 1950 amendments to the Social Security Act established the prohibition of Federal assistance for IMD residents as well as for patients diagnosed with a psychosis found in other medical institutions (USDHHS 1992). When the Medicaid program was established in 1965, it created the State option that, for the first time, allowed Medicaid funding for inpatient psychiatric care rendered in general hospitals as well as funding for specific services provided to IMD residents age 65 years and older. Further amendments in 1972 allowed for optional coverage, under certain circumstances, for IMD residents under age 21 or, in some cases, under age 22. Thus, the IMD exclusion generally prohibits Medicaid reimbursement for services obtained in IMDs by Medicaid-eligible adults age 22 to 64 years of age (Office of the Inspector General (OIG) 2001a, 2001b, 2001c).³ However, the IMD exclusion does not bar Medicaid reimbursement for inpatient psychiatric services per se, only services provided in specific types of facilities.⁴ Medicaid funds may be available for the same services rendered in a non-IMD environment.

An IMD is defined as "a hospital, nursing facility, or other institution of more than 16 beds that is primarily engaged in providing diagnosis, treatment or care of persons with mental diseases, including medical attention, nursing care, and related services" (USDHHS 1992, 1994). Further, "[a]n institution is an IMD if its overall character is that of a facility established and maintained primarily for the care and treatment of individuals with mental diseases" (DHHS 1994).⁵ Both Federal and State governments generally concur that State and county psychiatric hospitals qualify as IMDs. In fact, the literature often uses the terms "IMD" and "public psychiatric hospital" interchangeably. While the Centers for Medicare and Medicaid Services (CMS) has Federal regulatory authority over IMDs, it does not maintain a comprehensive list of existing IMDs but instead expects States to be self-policing in this area (personal communication, 12/11/01, M. Mullen at Center for Medicaid and State Operations (CMSO)). Consequently, the nationwide number of IMDs beyond those that are public psychiatric hospitals remains unknown.

2. Deinstitutionalization and Public Psychiatric Hospitals

Since the late 1960s, the Nation has seen a dramatic shift in the settings of care for persons with mental illness. Much of the shift resulted from a change in Federal policy during the mid-1960s, when policymakers were intent on moving people out of State psychiatric hospitals and into community-based programs. Important factors contributing to deinstitutionalization included the promotion of community care settings that developed with the passage of the Community Mental Health Centers Act of 1963; the creation of the Medicaid and Medicare programs in 1965, which provided funding for community-based mental health services; the introduction of psychotropic medications during the 1960s; and the growing patient-rights movement, including the development of patient-focused mental health law (Grob 2001; Gronfein 1985; Mechanic 1969). More recently, managed care has continued the move toward community-based treatment settings for persons with mental illness, as have legal rulings such as the Supreme Court decision Olmstead v. L.C (Hogan 1999; Perlin 2000; Ray and Oss 1993; White House 2002).⁶

The impact of these forces on public psychiatric hospitals over the years is striking. The number of public psychiatric hospitals declined by 26 percent between 1970 and 1998 (see Figure I.1). Despite substantial growth in the number of private psychiatric hospitals early in the same period, by 1992 these hospitals' numbers likewise began to decline. Between 1992 and 1998, the number of private facilities decreased by 27 percent. At least through 1998, however, the number of psychiatric units in general hospitals continued to grow, although at a much more moderate pace in recent years.

While the trends in the number of psychiatric hospitals by ownership type generally reflect the impact of shifts in mental health care settings, the effects are more dramatic in terms of changes in bed capacity (see Figure I.2). In 1970, the Nation counted more than 400,000 public psychiatric hospital beds, but by 1998, the number had decreased to just over 63,000, an 85 percent decline. During the same period, the number of private psychiatric hospital beds increased more than twofold, from just over 14,000 to more than 33,000. In addition, the number of psychiatric beds in general hospitals more than doubled, increasing from approximately 22,000 in 1970 to just over 54,000 by 1998.

In sum, public psychiatric hospitals represented the overwhelming majority of psychiatric hospital beds in 1970, but the picture changed dramatically by 1998. The loss of nearly 350,000 public psychiatric hospital beds during this period was only partially offset by the combined increase in the number of private and general hospital psychiatric beds (approximately 50,000).

According to the National Association of State Mental Health Program Directors Research Institute (2000), the shrinkage in State psychiatric hospital capacity led to an escalation in the number of closures and consolidations of State psychiatric hospitals over the past decade.

B. Focus of This Report

As the role of State and county psychiatric hospitals in public mental health systems has evolved, many people believe, incorrectly, that these institutions receive few, if any, Medicaid funds. This misperception may be bolstered by a general lack of information and data bearing on the issue. Although some research, for example, has looked at DSH payments to public psychiatric hospitals, the information on the overall share of facility funding represented by Medicaid is limited at best. Further, the available information is dated and does not reflect changes in Medicaid financing policies over the past 10 years.

The purpose of this report is to identify the sources of Medicaid funds that State and county psychiatric hospitals receive, changes in these sources over time, and the pressures and local circumstances that influence the Medicaid financing strategies that States pursue on behalf of these public institutions. In addition, the report updates previous estimates of the share of public psychiatric hospital operations financed by Medicaid. This information will help to gauge more accurately the effect of changes in Medicaid financing policies on these public institutions and the persons they serve.

C. Study Methods

This report draws from a multifaceted study of State and county psychiatric hospitals. Specifically, information was collected from four sources:

Review of the literature. The review focused on articles and other information discussing sources of and changes in Medicaid funds available to public psychiatric hospitals and the factors that have shaped the role of Medicaid involvement with these institutions.
Expert advisory panel. The panel providing guidance to the project included representatives from State mental health authorities, State Medicaid agencies, mental health researchers, relevant national trade organizations, public consulting, and CMS.⁷
Case studies of five States. The study team conducted site visits to five States: Arkansas, California, Iowa, Maryland, and New Jersey, selected for their broad range of demographic characteristics and Medicaid funding experiences.⁸
Interviews with CMS regional office staff.⁹ Conducted by telephone, the interviews solicited the insights and perspectives of CMS regional office staff on the process of adding, terminating, or altering Medicaid financing strategy for a State's public psychiatric hospitals.

D. Organization of the Report

The balance of this report examines the above issues more fully. Chapter II identifies and describes the sources of Medicaid funds that may be available to State and county psychiatric hospitals. Chapter III examines the specific Medicaid funding experiences of these institutions in the five case study States and the local circumstances that may affect Medicaid financing strategies pursued by each State. Chapter IV reconciles earlier estimates of Medicaid's contribution to the overall funding of public psychiatric hospitals with today's situation. Finally, Chapter V draws overall conclusions and discusses pressures—such as States' budget crises—that may affect future Medicaid financing of public psychiatric hospitals.

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