Sharfstein Gives Survival Tips For Troubled Hospitals

“Does the psychiatric hospital have a future?,” asked Steven Sharfstein, M.D., president and chief executive officer of the Sheppard Pratt Health System in Maryland.

He gave an affirmative, but guarded, response during his delivery of the Administrative Psychiatry Award Lecture at APA’s 2002 annual meeting in Philadelphia.

Sharfstein, who is also an APA vice president, traced the history of an institution that upon his arrival in 1986 was wedded to the value of long-term hospitalization for patients with serious mental illness. The average length of stay at Sheppard Pratt then was 73.5 days.

Ninety percent of the hospital’s revenue came from inpatient care, and 92 percent of the budget came from private sources. Coverage from insurance had expanded during the 1960s and 1970s and typically covered all inpatient charges. For 98 out of the institution’s 100 years, it had been profitable.

“No one envisioned the hurricane that would result from managed care,” Sharfstein emphasized.

In 1989 Green Spring Health Services, a behavioral managed care company, or carveout, that was later bought by Magellan Behavioral Health, received a contract to administer mental health benefits for Blue Cross and Blue Shield of Maryland. One-third of Sheppard Pratt’s inpatient days were covered by that insurance company.

By 1992, when Sharfstein became medical director, the hospital was awash in a “sea of red ink.” Sheppard Pratt was losing $5 million annually on a budget of $50 million.

“We were closing units and beds on a regular basis,” said Sharfstein. The average length of stay decreased from 73.5 days to 33 by 1992. The figure continued declining until it stabilized at the current figure of nine days.

Some members of the hospital’s board of trustees wanted to close the hospital and develop a small residential institution. Sharfstein disagreed and turned to a management approach he had learned during a four-month stint at the Advanced Management Program at the Harvard Business School.

“[That program] gave me an appreciation of the creativity of the marketplace and capitalistic approaches to coping and survival,” he noted.

Sharfstein decided his institution had to “grow its way out of the dilemma,” and he focused his energies on identifying new “customers” and eliminating costs.

Today, he calls Sheppard Pratt a “hospital without walls,” or, more formally, a “comprehensive behavioral health care system.”

Only 40 percent of the revenues for the Sheppard Pratt Health System come from payment for inpatient treatment. Seventy percent of its revenues come from public sources. Medicare and Medicaid are the primary funding sources.

“Today, we treat 40,000 individuals in 20 locations,” said Sharfstein. Through five wholly owned affiliates, Sheppard Pratt provides rehabilitation, outpatient care, and housing for nearly 1,000 individuals with severe and persistent mental illness. The institution has more than 100 children and adolescents in residential treatment and 300 in special schools.

In 1986 the hospital treated about 4,000 patients, of whom 1,200 were in the hospital.

In a sign of optimism about the future, the institution’s board of trustees recently voted to invest up to $90 million to build a new hospital.

Sharfstein recognizes, however, that the survival of any psychiatric hospital is not assured, although there will always be a need for institutions that offer a safe environment in which a person with mental illness can be stabilized and re-evaluated.

He also recognizes that the fate and role of psychiatric hospitals will continue to be impacted by larger social forces.

“As states continue to downsize public facilities, and as most patients begin to lose private insurance after one or two acute episodes involving inpatient care, the importance of funding in the public sector can not be overemphasized,” he said.

More specifically, Sharfstein believes that treatment for persons with serious and persistent mental illness will continue to be a “major public health burden.”

Up to 20 percent of patients cannot be treated effectively in the few days or even weeks of hospitalization that are permitted by public and private programs. Many of these patients end up in the criminal justice system.

Public and private payment for inpatient treatment have been cut dramatically, but resources for outpatient treatment did not expand sufficiently to compensate, he argued. “More and more community clinics are on the verge of extinction because of nonreimburseable items like missed visits and time spent on coordination of care,” said Sharfstein.

The cost constraints are exacerbated by rising pharmaceutical costs. “The pharmaceutical industry is bankrupting limited budgets with medications of marginally improved benefit. . . . This short cut of medication strategies is a great overpromise,” he said.

Sharfstein described strategies that offer promise in addressing some of the most serious problems with the mental health system. Because Sheppard Pratt had become the largest provider of acute services funded by Medicaid in Maryland, Sharfstein was able to negotiate with state officials for higher reimbursement rates.

“Develop a coalition,” he advised. “Some of our best allies in the struggle over Medicaid were the Alliance for the Mentally Ill, On Our Own [a consumer group], and the Maryland Psychiatric Society.”

He believes that the daily utilization reviews that are associated with managed care will give way to more evidence-based, disease-management approaches. This trend, however, will require psychiatric hospitals to learn to control costs and improve care through more aggressive management of inpatient stays.

Sharfstein concluded by answering another question.

“Ask me what I do,” he said. “I run a large, nonprofit public/private partnership, community mental health center in Baltimore called Sheppard Pratt.” ▪