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The Problems with Managed Care


Many years ago, states began downsizing and closing their mental hospitals. The process, known as deinstitutionalization, was a response to pressures from consumer activist groups pushing for community-based treatment, advances in psychiatric medications, a changing philosophy of health care delivery, and a desire to cut costs. Deinstitutionalization is widely acknowledged today as a failure for many people with the most chronic and disabling mental illnesses. Hospital doors were closed without assurance of care elsewhere. Accountability for quality of care was nonexistent. To this day, unrelenting illness, unemployment, homelessness, incarceration, suicide, and violence are evidence of the failure of deinstitutionalization.

The introduction of managed care into the public mental health system represents another potential disaster. States and counties throughout the country are contracting out responsibility for the management and delivery of care to people with severe and disabling mental illnesses. This dramatic shift to managed care is unfolding in a climate that bears a strong resemblance to that surrounding deinstitutionalization. The competition for taxpayer dollars is so intense among behavioral health organizations that cut-throat bidding drives down the amount invested in managed care programs until quality suffers. Waiting lists for mental health services, patient dumping, utilization review, and growing homeless populations and numbers of prisoners with varying degrees of mental illness are all problems that began with deinstitutionalization, but may be exacerbated by managed care arrangements.

Economically Motivated Transfers — "Patient Dumping"

As states continue to downsize their institutions for the mentally ill and reduce their capacity for inpatient psychiatric treatment, private hospitals end up seeing the patients at their door. Many private hospitals, in turn, become increasingly inclined to dump their unprofitable patients onto the community mental health care system. These economically motivated transfers are often bad for the patients and can have substantial repercussions for community mental health centers.

A study entitled, The Determinants of Dumping: A National Study of Economically Motivated Transfers Involving Mental Health Care, by Mark Schlesinger et. al., concluded that, "Economically motivated transfers of patients with mental illness were widespread in 1988 and likely have increased since that time, affecting the viability of the community mental health care system." Specifically, the study targets the transfer of psychiatric patients from private facilities into publicly-run community mental health centers once their benefits have been exhausted. It goes on to report that two-thirds of psychiatric hospitals have "dumped" patients without insurance coverage into public hospitals and community mental health centers, potentially disrupting patients’ continuity of care and threatening the viability of community mental health systems. Also fueling the problem are the growth of for-profit facilities, the spread of utilization review (HMOs often require primary care physicians to obtain approval for some or all referrals) and a reduction in capacity of state-run psychiatric hospitals.

Patient dumping has the potential to "disrupt the continuity of care for patients" when they are most vulnerable. It also increases the financial burdens on providers of last resort (typically public hospitals or community health centers) because the initial provider often depletes a patient’s limited economic resources or insurance coverage before the transfer, so that the second provider must bear the full cost for subsequent treatment.

Federal legislation prohibiting dumping has offered little protection for public hospitals and other providers of last resort. The regulations did not clearly delineate the difference between appropriate and inappropriate transfers. Also, there was a lack of adequate management information systems in the hospitals receiving the transfers, and there were limited resources available to enforce the laws. Anti-dumping legislation generally focused only on those transfers involving medically unstable patients, which represented no more than 24 to 31 percent of all economically motivated transfers among hospital emergency departments.1 "In an era of privatization, the continued transfer of high-cost patients to public hospitals added to their average cost per patient, reinforcing stereotypes of these facilities as less efficient than their for-profit and private nonprofit counterparts."2

Jails Become Mental Institutions

Jails and prisons have become the nation’s new mental hospitals, according to a recent New York Times expose. On any given day, almost 200,000 people behind bars — more than 1 in 10 of the total — are known to suffer from schizophrenia, manic depression or major depression, the three most severe mental illnesses. The rate is four times that in the general population. And there is evidence, particularly with juveniles, that the number of mentally ill in jail are growing.3

Some of these people are violent, but many are merely homeless charged with petty crimes instigated by their illness. Others are just picked up by police for acting strange. This is what Dr. E. Fuller Torrey, an expert on treatment of mental illness, calls the "criminalization of the mentally ill" and it is growing as a national issue because the problems caused by having the mentally ill behind bars has not been addressed.4

The New York Times story reports that this trend began in the 1960s when states started closing the institutions. Antipsychotic drugs provided states with an opportunity to slash hospital budgets and made medicating patients in the community a viable alternative to long-term hospitalization. But the drugs work only when they are taken — and when they work, patients are tempted to stop, because of the often unpleasant side effects. As states lagged in opening a promised network of clinics and halfway houses to monitor patients, obtaining treatment became harder. Health insurers restricted coverage, for-profit hospitals turned away the psychotic, and new laws made it more difficult to commit disturbed people. Thousands began to fall through the cracks.

Utilization Review, Access Denied

A 1996 study5 examined the managed care approval process for Marylanders treated by mental health professionals. The data showed that treatment providers were generally able to effectively contact managed care companies to obtain decisions about treatment authorization or denial. However, it also showed that the managed care process was cumbersome and difficult for patients. In many cases, only a short series of treatment sessions was authorized at any given time, necessitating numerous written treatment plans and repeated contacts with the companies. All of this generates considerable uncertainty among patients about their ability to obtain continuing treatment. The results suggest that restrictive outpatient utilization review is wasteful of money and resources and detrimental to the treatment process.

Managed care companies often require primary care physicians to obtain approval for some or all referrals. In addition to preauthorization requirements, managed care companies often require approval of continuation of some services (such as additional days in a hospital). Mental health providers argue that referrals or continued authorization for services are at times inappropriately denied, that the individuals making referral and utilization decisions lack the appropriate training and expertise to make sound judgments, that referral decisions are often based on rigid criteria which are not responsive to the enrollee’s needs, that obtaining referrals is often very time consuming, and that difficulties in obtaining a referral decision result in delays in obtaining needed care for enrollees.6

In a report by the Public Advocate for the City of New York, managed care physicians interviewed about the referral process reported: Sometimes it takes physicians an inordinate amount of time and effort to obtain approvals; doctors told us of many instances of unanswered phones and recorded messages when they called the HMO approval line, especially after usual business hours. Another problem is that HMOs and physicians sometimes disagree about what is medically necessary and should be covered....7

Utilization review/referral systems by managed care companies can pose both access and quality of care problems. If referral decisions are not made in a timely fashion or are inappropriately denied, access is affected. And, if the standards by which referral decisions are made become too restrictive, quality is compromised.

AFSCME Public Policy Department
August 1998



1. Schlesinger et al.; The Determinants of Dumping: A National Study of Economically Motivated Transfers Involving Mental Health Care; 1997

2. Altman et al.; Competition and Compassion: Conflicting Roles for Public Hospitals; 1989

3. New York Times; 3/5/98

4. E. Fuller Torrey; Out of the Shadows: Confronting America's Mental Illness Crisis; 1997

5. Warres et al.; The Impact of Managed Care and Utilization Review: A Cross-Sectional Study in Maryland; 1996

6. Families USA Report; July, 1996; HMO Consumers at Risk: States to the Rescue

7. Green, M.; What Ails HMOs -- A Consumer Diagnosis and Rx, Public Advocate for NYC; 1996.