States Find Creative Ways To Fund Public-Sector Care

Advocates often cite the Institutions for Mental Illness (IMD) exclusion as an example of legislation that works to hamper efforts to serve people with mental illness.

The IMD exclusion prohibits Medicaid reimbursement for inpatient care provided to individuals between the ages of 22 and 64 if the care is delivered in a psychiatric institution that contains 16 or more patient beds. It was intended to support the policy that states, rather than the federal government, have responsibility for funding long-term psychiatric care, particularly for adults.

Representatives of major mental health organizations, such as the National Alliance for the Mentally Ill, told members of President Bush’s New Freedom Commission on Mental Health last year that the IMD exclusion has outlived any usefulness and serves to fragment the delivery of mental health care.

A 2003 report from the Substance Abuse and Mental Health Services Administration titled “Medicaid Financing of State and County Psychiatric Hospitals” suggests, however, that state officials and hospital administrators have found various other sources of Medicaid revenue that soften—at least, temporarily—the potentially harsh consequences of the exclusion.

In fact, researchers from Mathematica Policy Research Inc. estimate that in 2001 $2.6 billion in Medicaid funds were paid on behalf of public psychiatric hospitals in the United States. The figure represents approximately one-third of total operating costs for those institutions.

Approximately $2.2 billion of those funds came from Medicaid’s Disproportionate Share Hospital (DSH) program. The program provides payments to hospitals that care for a large volume of poor patients. States have discretion in determining hospitals’ eligibility for DSH payments. Hospitals must receive DSH payments if their low-income utilization exceeds 25 percent and may receive designation if the Medicaid utilization rate is at least 1 percent of total bed days.

Like other programs funded through Medicaid, federal DSH payments must be matched with state funds according to a formula that reflects the wealth of the state.

Report authors included more detailed analysis of the role and sources of funding for public psychiatric hospitals in Arkansas, California, Iowa, Maryland, and New Jersey.

There is considerable variation among the states in terms of their aggressiveness in claiming DSH funds and their methods of distributing them. In Maryland and New Jersey, for example, state psychiatric hospitals are totally funded by state appropriations. In Maryland, DSH funds go to the state general fund rather than to the hospitals. In New Jersey, DSH funds are earmarked for charity care and hospital-relief funds.

Not surprisingly, given the otherwise limited resources available for public psychiatric hospitals, the size of the DSH program has increased dramatically. Expenses rose from a total of $1.4 billion in payments with six participating states in 1990 to $15.9 billion in 2001 with 47 states and the District of Columbia as participants.

The program cannot be viewed, however, as a long-term funding solution for long-term psychiatric care. Congress has acted to curb the growth in the DSH program. Members limited expenditures to 1992 levels for “high DSH” states and in 1997 capped spending on IMDs at Fiscal 1995 levels and also set standards that would result in a declining percentage of DSH funds going to IMDs.

Medicaid funds also can become available for IMDs through savings that states generate from Medicaid managed care programs and through the use of Medicaid waivers that allow the states to add optional services or populations if they offset the additional costs by Medicaid savings. Those sources of funds are threatened by the state-budget crises that have led to cuts in Medicaid enrollees and benefits.

“The role of public psychiatric hospitals is changing constantly,” concluded the report’s executive summary. “States have worked since the 1950s 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.”

“Medicaid Financing of State and County Psychiatric Hospitals” is posted on the Web at www.mentalhealth.org/publications/allpubs/SMA03-3830/default.asp. ▪