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Issues in Medicaid Financing of State and County Psychiatric Hospitals

Despite the perception that few people are served by public psychiatric hospitals, they play a critical role in the continuum of care for people with mental illness. Although the capacity of these hospitals has diminished as a result of deinstitutionalization, they continue to serve people with severe and chronic mental illness who do not have the resources to seek care elsewhere, as well as those with mental illness incarcerated in correctional facilities. Furthermore, Medicaid is funding an increasing share of their operations, with states accessing a variety of Medicaid funding sources, including Disproportionate Share Hospital (DSH) payments, Institutions for Mental Diseases optional services, and Medicaid managed care.

This project identified and examined the sources of Medicaid funds that state and county psychiatric hospitals received, changes in these sources over time, and the pressures and local circumstances that influenced the Medicaid financing strategies that states pursued on behalf of these public institutions. The project also updated previous estimates of the share of public psychiatric hospital operations financed by Medicaid. Medicaid funding sources of particular interest included Medicaid optional services, Medicaid managed care, DSH, enhanced payments/upper payment limits, and administrative payments.

The project was a multifaceted study of state and county psychiatric hospitals. Specifically, information was collected from the following four sources: literature review; expert advisory panel, including representatives from state mental health authorities, state Medicaid agencies, mental health researchers, relevant national trade organizations, public consulting firms, and the Centers for Medicare & Medicaid Services (CMS); case studies of five states (Arkansas, California, Iowa, Maryland, and New Jersey); and interviews with CMS regional office staff who worked directly with the five states.

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