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Trends in Mental Health Services

Until 30 years ago, most seriously mentally ill persons lived in state mental hospitals, which had 550,000 residents in 1955. With the introduction of antipsychotic drugs, it became feasible to discharge many of these patients and admit fewer new ones. By 1985 the total population had decreased 80 percent, to 110,000.10

Bar Chart, State Psychiatric Hospitals Closed by Decade, 1990 to 1996

More state psychiatric hospitals have been closed in the 1990s than in the 1970s and 1980s combined.11 The trend in mental health is more towards downsizing and consolidation rather than actual closure, however. The number of state hospitals affected by reorganizing, downsizing and closure total 116 across the country.12


States are engaged in an ongoing effort to shift resources from state hospitals to community programs.


Deinstitutionalization has resulted in the discharge of hundreds of thousands of mentally ill individuals to what was intended to be community care. States are engaged in an ongoing effort to shift resources from state hospitals to community programs. For example, in 1997, the Louisiana Legislature passed a bill to enhance community-based care. HB 1044 makes it a function of the Louisiana Department of Health and Hospitals to promote the establishment and administration of a community-based system of care for emotionally and behaviorally disturbed children and adults to include, but not be limited to, group homes and supportive housing services, programs and facilities.


Some states are giving community mental health programs some form of control over the budgets of state psychiatric hospitals.13 There may be financial incentives or rewards to reduce state psychiatric hospital utilization. In many states, community-based programs are designed to be the gatekeepers of entry into state psychiatric hospitals.

The “Old” Economic Incentives for Mental Health Services

From the very beginning, Congress was reluctant to use the Medicaid program to pay for services delivered in state psychiatric hospitals. Funding services for people with severe mental illness was considered a responsibility of state and local governments. States have been barred from drawing down federal Medicaid funds to serve adult patients in “institutes for mental disease” (IMDs), which are defined as facilities that devote more than 50 percent of their beds to psychiatric patients. Medicaid funds can, however, be used to pay for services for people under the age of 21 and over age 65 who receive treatment in IMDs. In addition, if Medicaid-eligible patients receive inpatient psychiatric services in general community hospitals, those facilities can be reimbursed through the Medicaid program. As a result, many states have devoted more resources to “purchasing” beds for people with mental illness from private acute care hospitals while continuously downsizing their own psychiatric hospitals.

The “New” Economic Incentives for Mental Health Services


Federal Medicaid rules favor the provision of mental health services in outpatient settings over inpatient settings, especially for adults. In the last decade, states have been able to receive federal Medicaid matching dollars for funding several optional services targeted primarily to the mentally ill, such as the Medicaid rehabilitation option (MRO), case management, clinic services, partial hospitalization, etc. For children, the Medicaid early intervention service has allowed for intensive outpatient treatment. By combining these services with services offered in community mental health centers and funded by federal mental health and substance abuse block grants, states have tried to create a service system that minimizes inpatient hospitalization. In addition, breakthroughs in chemical treatment of mental illness have allowed greater reliance on prescription drug therapy, which is also a Medicaid covered benefit.

It is important to note that many fewer adults suffering from severe mental illness are eligible for Medicaid in comparison to persons with developmental disabilities. Many people exhaust their private insurance coverage for mental illness, or have no private insurance coverage at all, and must rely on the state and local public “safety net” for mental health services. This discriminatory treatment of mental illness in comparison to other physical illnesses has led to the “mental health parity” movement. At the state and federal level, advocates for the mentally ill are lobbying for laws that require that mental health insurance coverage be provided with parity to coverage for other physical ailments. The new federal law, The Health Insurance Portability and Accountability Act of 1996, mandates that annual and lifetime caps for mental health coverage must be equivalent with other physical health coverage (but it does not mandate that insurers sell, or employers provide, mental health coverage).

Incentives to Privatization of Mental Health Services


Privatization of services delivered to the mentally ill has taken a slightly different twist than that for MR/DD. Most Community Mental Health Centers (CMHCs) have been created as private non-profits. Many researchers have concluded that CMHCs have not stepped in to serve a population of chronic, long-term patients discharged from state hospitals.14 There is insufficient funding at all levels of government for housing for people with mental illness. As a result, homelessness among the mentally ill has reached epidemic proportions in many areas. The private agencies that states and counties have contracted with to perform crisis and outreach services often fail to perform the kind of intensive, coordinated, 24-hour available activities necessary to form a true safety net system. One costly consequence has been the rising number of mentally ill inmates in local jails and state prisons.

The latest privatization approach is known as “managed behavioral health,” in which states and counties are contracting with for-profit companies to deliver care to Medicaid recipients and indigent clients with mental illness and substance abuse problems. For a fixed fee per client per month, known as capitation, these companies promise to provide sufficient treatment and support services. In reality, according to the National Alliance for the Mentally Ill, there has been a “litany of broken promises.”15 NAMI cites problems ranging from failure to cover anti-psychotic medications, limiting hospital care, insufficient intensive case management, failure to define a suicide attempt as a medical emergency, and failure to provide rehabilitative services. NAMI gives the industry a failing grade.


"When [patients] leave the institutions, all of their services have to be pieced together," said Dr. Robert P. Leberman, who headed the world-reknown UCLA research unit at Camarillo State Hospital (Calif.) until it was closed. "At Camarillo, we had rather experienced doctors, we had dentists, we had psychiatrists all under one roof. Now they are sending these people into catch-as-catch-can community placements that frequently do not have the coordinated, comprehensive, and continuous services that are necessary for people with mental disabilities." 16

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