National Estimates of Expenditures 

for Substance Abuse Treatment, 1997 

Rosanna M. Coffey, Ph.D. 

Tami Mark, Ph.D. M.B.A. 

Edward King 

Henrick Harwood 

David McKusick, Ph.D. 

Jim Genuardi 

Joan Dilonardo, Ph.D. 

Mady Chalk, Ph.D. 

February 2001 

U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES 

Substance Abuse and Mental Health Services Administration 

Center for Substance Abuse Treatment 

5600 Fishers Lane 

Rockville, MD 20857
Acknowledgements 

Numerous people contributed to this report, which was based on a larger study. Rick 

Harwood of the The Lewin Group produced the specialty facility estimates. Edward 

King, Jim Genuardi, and David McKusick of Actuarial Research Corporation produced 

the estimates for other providers, as well as the final total estimates. Rosanna Coffey and 

Tami Mark of The MEDSTAT Group coordinated the project and monitored the results. 

Rosanna Coffey drafted the report which team members reviewed. Deborah Ringel and 

Katherine Sullivan of The Lewin Group provided research assistance and computer 

programming, and Carl Parker of The MEDSTAT Group prepared the manuscript. 

Joan Dilonardo, Jeffrey Buck and Mady Chalk guided the work and provided many 

helpful comments and suggestions throughout this project. The Advisory Panel (named 

in Appendix A) provided many insights on policy relevance of the results. Three 

technical experts – Richard Frank, Ph.D., Thomas McGuire, Ph.D., and Donald Shepard, 

Ph.D. – provided methodological guidance. 

Disclaimer 

This report was prepared by The MEDSTAT Group for the Substance Abuse and Mental 

Health Services Administration (SAMHSA) of the U.S. Department of Health and 

Human Services (HHS) under Contract No. 270-96-0007, Joan Dilonardo, Ph.D., 

Government Project Officer. The content of this publication does not necessarily reflect 

the views or policies of SAMHSA or HHS, nor does it necessarily reflect the views of 

any of the Advisory Panel members. The authors are solely responsible for the content of 

this publication. 

Public Domain Notice 

All material appearing in this report is in the public domain and may be reproduced or 

copied without permission from the Substance Abuse and Mental Health Services 

Administration. Citation of the source is appreciated. 

Recommended Citation 

Coffey RM, Mark T, King E, Harwood H, McKusick D, Genuardi J, Dilonardo J, Chalk, 

M. National Estimates of Expenditures for Substance Abuse Treatment, 1997. 

SAMHSA Publication No. SMA-01-3511. Rockville, MD: Center for Substance Abuse 

Treatment and Center for Mental Health Services, Substance Abuse and Mental Health 

Services Administration, February 2001. 

Electronic Access and Copies of Publication 

This publication can be accessed electronically through the following Internet World 

Wide Web connections: http://www.samhsa.gov and http://www.ncadi.org. For 

additional paper copies of this document or associated background reports, please call the 

National Clearinghouse for Alcohol and Drug Information, 1-800-729-6686. 

Originating Office 

Office of Managed Care, Center for Substance Abuse Treatment, 5600 Fishers Lane, 

Rockwall II Building, Suite 740, Rockville, MD 20857.
i

Executive Summary 

Background 

About 11 percent of the adult population of the United States will suffer from a substance 

abuse (SA) problem, including alcohol and/or drug abuse, during the course of a year. Of 

the 10 leading causes of disability worldwide in 1990, alcohol use was fourth. The social 

cost of substance abuse in the United States in 1995 has been estimated at $276 billion. 

Given the magnitude of SA-related morbidity and mortality and this enormous cost, 

society should know how much is being invested in SA treatment. Moreover, major 

changes over the last 10 years in the organization and financing of health care make the 

tracking over time of our investment in substance abuse treatment paramount. 

This report is based on a larger study of mental health and substance abuse (MH/SA) 

treatment expenditures designed to provide periodic expenditure estimates. Because SA 

alone is an important social problem and a difficult health care challenge, this report 

examines questions specifically for substance abuse: 

• How much is spent in the United States to treat alcohol and/or drug abuse disorders? 

• How are the expenditures distributed by payer and provider type? 

• How has spending changed from 1987 to 1997? 

• How do SA expenditures compare to those for mental health and all U.S. health care? 

This report shows more detail on SA than the earlier study on MH/SA, although the 

dollar estimates are identical in both reports. SA is sometimes compared to MH in this 

report to view SA spending in the context of other behavioral health care. 

The project estimated expenditures using data and methods that the Health Care 

Financing Administration uses for estimates of national health expenditures from the 

National Health Accounts (NHA). Like the NHA, this work primarily used nationally 

representative databases with multiple years of data, which generally cover the study 

period of 1987 to 1997. 

Two sets of estimates are reported. First, “NHA-equivalent SA expenditures” are used to 

compare to all health care spending because they focus exclusively on health-servicesrelated SA treatment. Second, “total SA expenditures” include some social services 

(such as custodianship of group homes) that are excluded from the NHA estimates but 

delivered by SA providers. At a detailed level, the estimates include alcohol problems, 

drug abuse, combined substance abuse, mental health and all health care expenditures. 

Because the study focuses on expenditures for treatment and not on disease burden, 

estimates include expenditures only for the direct treatment of SA disorders. They 

exclude the substantial health costs that can result from SA (for example, trauma, HIV 

infection, and cirrhosis of the liver) and other non-health costs of caring for SA clients 

(for example, vocational training and housing subsidies). Other indirect costs, such as 

lost wages and productivity, and costs of criminal behavior, are also excluded from these 

SA expenditure estimates. 
ii

Key Findings 

♦ The total expenditure for treatment of SA in the United States was $11.9 billion in 

1997. That figure was small compared to the total social costs of $294 billion that 

can be attributed to substance abuse in that year. 

♦ SA treatment expenditures, when defined comparably to the National Health 

Accounts, grew at half the rate of all health care, 2.5 percent compared to 5.0 percent, 

annually between 1987 and 1997, after adjusting for general price inflation. 

♦ The slower growth of SA expenditures relative to all health care was due primarily to 

less spending on hospital care (primarily for alcohol treatment). SA spending for 

hospital services declined 0.6 percent per year on average between 1987 and 1997; 

such spending for all health conditions grew 3.6 percent annually, inflation adjusted. 

♦ The decline in hospital-based spending on SA was offset by faster spending on other 

services. Spending on outpatient and residential treatment for SA rose 5.8 percent 

annually over the 10 years, slightly faster than the 5.1 percent for mental health (MH) 

and 5.5 percent for all health care. 

♦ Spending on SA between 1987 and 1997 shifted from private to public support. 

Private expenditures for SA declined 0.2 percent each year on average, compared to 

an annual 3.6-percent increase for MH and a 4.1-percent increase for all health care. 

The public sector’s share of SA expenditures increased from 53 percent in 1987 to 64 

percent in 1997, greatly exceeding public spending on all health, which increased 

from 41 to 46 percent, and on MH, which went from 56 to 57 percent over the period. 

♦ Private insurance spending and “other private” (mostly philanthropic) spending on 

SA treatment each declined 0.6 percent annually over the 10 years, while out-ofpocket spending on SA increased by 1.1 percent each year. (Out-of-pocket spending 

for MH and all health care also increased comparably during the 10 years, but private 

insurance payments for those conditions increased rapidly.) 

♦ Examining “total expenditures” separately for alcohol and drug abuse treatment, a 

little more than half of total SA treatment expenditures was spent for treatment of 

alcohol problems ($6.4 billion in 1997), and $5.5 billion was for treatment of drug 

abuse. Total spending for drug abuse treatment rose at four times the rate for alcohol 

treatment, 4.3 percent versus 0.9 percent annually between 1987 and 1997. 

♦ Federal funding increased rapidly for drug abuse treatment, 9.6 percent per year on 

average from 1987-1997 (in NHA-equivalent dollars). This compared to 6.7 percent 

per year for alcohol treatment, 6.3 percent for MH, and 6.9 percent for all health. 

♦ Private out-of-pocket payments for drug abuse treatment over the 10-year period 

grew faster than for any other condition, at 4.9 percent per year for drug abuse, but 

only 2.6 percent for MH and 1.8 percent for all health. Out-of-pocket payments for 

alcohol treatment declined 1.9 percent. 
iii

Table of Contents 

EXECUTIVE SUMMARY ...........................................................................................................................I 

BACKGROUND.............................................................................................................................................. I

KEY FINDINGS ............................................................................................................................................. II

CHAPTER 1. BACKGROUND AND APPROACH ................................................................................ 1 

BACKGROUND ............................................................................................................................................ 1 

OBJECTIVE.................................................................................................................................................. 3 

SCOPE OF THE STUDY ................................................................................................................................. 3 

METHODS ................................................................................................................................................... 5 

Consultation and Improvements for the Second Set of Estimates ......................................................... 5 

Overview of Methods ............................................................................................................................ 5 

LIMITATIONS OF APPROACH ....................................................................................................................... 6 

BENEFITS OF APPROACH............................................................................................................................. 8 

ORGANIZATION OF THE REPORT ................................................................................................................. 8 

CHAPTER 2. EXPENDITURES FOR SUBSTANCE ABUSE (SA) TREATMENT AND ALL 

HEALTH CARE, 1997........................................................................................................ 9 

TWO ESTIMATES OF SA EXPENDITURES..................................................................................................... 9 

SA EXPENDITURES IN CONTEXT................................................................................................................. 9 

SA TREATMENT PROVIDERS..................................................................................................................... 10 

A Specialty Network of Providers ....................................................................................................... 10 

Some Specialized Professionals Do Not Treat SA............................................................................... 11

Most of SA Specialized Care Is Facility-Based................................................................................... 12 

Most of SA Treatment Is in Outpatient and Residential Settings ........................................................ 13 

SA FINANCING ......................................................................................................................................... 14 

SA Treatment Funding Predominantly Public .................................................................................... 14

Individuals Who Pay for SA Treatment Face High Out-of-Pocket Spending...................................... 15 

Federal Contribution Foremost for SA Treatment.............................................................................. 16 

State and Local Government Manages the Majority of All Spending on SA....................................... 18 

Medicaid Has an Important Role in SA Treatment ............................................................................. 18 

SUMMARY ................................................................................................................................................ 19 

CHAPTER 3. TRENDS IN SUBSTANCE ABUSE (SA), MENTAL HEALTH (MH), AND ALL 

HEALTH CARE, 1987-1997............................................................................................. 21 

INFLATION-ADJUSTED GROWTH AND NATIONAL-HEALTH-ACCOUNTS-EQUIVALENT EXPENDITURES..... 21 

SA SPENDING GREW MUCH MORE SLOWLY THAN MH AND ALL HEALTH CARE .................................... 21 

REASONS FOR SLOWER SA SPENDING...................................................................................................... 22 

Hospital-Based Services Declined ...................................................................................................... 23 

Outpatient/Residential Spending Rose................................................................................................ 24 

Independent Allied Professional Services Rose .................................................................................. 25 

Community SA Facility Services Rose ................................................................................................ 26 

Pharmacological Therapy for SA Increased -- An Uncertain Harbinger ........................................... 27 

Public Funding Slowdown and Private Funding Erosion................................................................... 29 

Federal Funding Grew Rapidly for SA ............................................................................................... 31 

Federal Block Grants Grew Dramatically.......................................................................................... 32 

Medicaid Growth – Reduced in Last Five Years................................................................................. 33

Medicare Spending Accelerated Over the Period............................................................................... 35 

FINDINGS IN CONTEXT.............................................................................................................................. 36 

CHAPTER 4. ALCOHOL AND DRUG ABUSE TREATMENT EXPENDITURES, 1997 ............... 37 

ALCOHOL AND DRUG ABUSE TREATMENT EXPENDITURES VERY SMALL RELATIVE TO TOTAL COST TO 

SOCIETY ................................................................................................................................................... 37 

OTHER SIMILARITIES BETWEEN ALCOHOL AND DRUG ABUSE TREATMENT EXPENDITURES .................... 38 
iv

DIFFERENCES BETWEEN ALCOHOL AND DRUG ABUSE TREATMENT EXPENDITURES................................ 38 

Specialty Sector Larger for Drug Abuse ............................................................................................. 38 

Hospital-Based Spending Higher for Alcohol Abuse .......................................................................... 39 

Drug Abuse Treatment More Likely at SSACs; Alcohol Treatment More Likely at MSMHOs........... 40 

Independent Practitioners More Relevant for Drug Abuse................................................................. 41 

The Importance of Funding Sources Differed Little by Type of Substance Abuse .............................. 42 

CHAPTER 5. TRENDS IN ALCOHOL AND DRUG ABUSE TREATMENT EXPENDITURES, 

1987-1997............................................................................................................................ 43 

INFLATION-ADJUSTED GROWTH AND “TOTAL” AND “NHA-EQUIVALENT” EXPENDITURES.................... 43 

DRUG ABUSE GREW MUCH MORE RAPIDLY THAN ALCOHOL TREATMENT AND ALMOST AS FAST AS ALL 

HEALTH CARE SPENDING ......................................................................................................................... 43 

REASONS FOR FASTER GROWTH IN DRUG ABUSE SPENDING.................................................................... 44 

More Treatment................................................................................................................................... 44 

Federal Expenditures Increased Significantly for Drug Abuse Treatment ......................................... 45 

Slow Increase in Private Funding of Drug Abuse Treatment; Decline for Alcohol............................ 46 

EVIDENCE OF MORE EFFICIENT TREATMENT............................................................................................ 46 

Alcohol and Drug Abuse Spending Shifted from Hospital-Based to Other Services........................... 47 

Spending on Specialty Hospital Services Declined Dramatically....................................................... 48 

Meaning of Trends in Alcohol and Drug Abuse Spending .................................................................. 49 

CHAPTER 6. CONCLUSIONS................................................................................................................ 50 

STUDY METHODS ..................................................................................................................................... 50 

NATIONAL TRENDS IN HEALTH CARE IN RELATION TO SA TREATMENT.................................................. 51 

Enrollment Trends in the Private Sector............................................................................................. 51 

Enrollment Trends in the Public Sector .............................................................................................. 51 

Effects of Managed Care..................................................................................................................... 51 

Changes in Treatment Philosophy ...................................................................................................... 52 

WHAT DOES SLOWER SA GROWTH MEAN? ............................................................................................. 53 

MEANING OF TRENDS IN ALCOHOL AND DRUG ABUSE SPENDING............................................................ 54 

What Does the Growth in Drug Abuse Treatment Spending Mean?................................................... 55 

What Does the Slow Growth in Alcohol Treatment Spending Mean?................................................. 55 

CONCLUSION ............................................................................................................................................ 56 

REFERENCES ........................................................................................................................................... 58 

GLOSSARY OF ACRONYMS AND TERMS..........................................................................................66 

APPENDIX A. ADVISORY PANEL 

APPENDIX B. METHODS 

APPENDIX C. EXPLANATION OF CHANGES IN SA EXPENDITURES BETWEEN THE 

1996 AND 1997 ESTIMATION PROCESS 

APPENDIX D. DETAILED TABLES OF MH/SA, MH, SA AND ALL HEALTH CARE 

EXPENDITURES 

APPENDIX E. DETAILED TABLES OF ALCOHOL ABUSE, DRUG ABUSE, MENTAL 

HEALTH, AND ALL HEALTH CARE EXPENDITURES 
v

Table of Figures 

Figure 2.1 SA Treatment Expenditures Were Very Small Relative to the Total Social 

Cost of Substance Abuse in 1997 .................................................................... 9 

Figure 2.2 Specialty Providers Received a Very Large Share of SA Expenditures in 

1997 ............................................................................................................... 10 

Figure 2.3 Retail Drug Spending for SA Treatment Was Very Small Compared to 

MH Services in 1997 ..................................................................................... 11 

Figure 2.4 Few SA Treatment Dollars Went to Independent Psychiatrists, 

Psychologists, Counselors, and Social Workers Compared to MH Dollars 

in 1997. .......................................................................................................... 12 

Figure 2.5 SA and MH Dollars Supported a Spectrum of Treatment Facilities in 

1997 ............................................................................................................... 13 

Figure 2.6 Outpatient and Residential Treatment Dominated SA Spending as with 

All Health Care in 1997................................................................................. 14 

Figure 2.7 Public Funding Was A Larger Share of SA Treatment than of MH in 

1997 ............................................................................................................... 15 

Figure 2.8 Out-of Pocket SA Treatment Spending High Relative to MH in 1997 ......... 16 

Figure 2.9 Federal Funding A Larger Share of SA than of MH in 1997 ........................ 17 

Figure 2.10 Federal Block Grants Provided Substantial SA Funding in 1997 ................. 17 

Figure 2.11 State and Local Governments Managed Nearly Half of SA Dollars in 

1997 ............................................................................................................... 18 

Figure 2.12 Medicaid Supported a Larger Share of SA (and MH) Expenditures than 

of All Health Spending in 1997..................................................................... 19 

Figure 3.1 SA Expenditures Grew Much More Slowly than MH and All Health 

between 1987 and 1997 ................................................................................. 22 

Figure 3.2 SA Spending Declined in Hospital Settings and Grew More Rapidly in 

Outpatient Settings than MH and All Health between 1987 and 1997.......... 23 

Figure 3.3 Non-Community Hospital Spending Declined Earlier for SA than for MH 

and All Health Care between 1987 and 1997. ............................................... 24 

Figure 3.4 SA Spending on “Other Professionals” Was Most Rapid between 1992 

and 1997......................................................................................................... 26 

Figure 3.5 Community SA Facility Spending Rose Rapidly between 1987 and 1992... 27 

Figure 3.6 Private Funding for SA Was Outpaced by Inflation and Was Much 

Slower than for MH and All Health between 1987 and 1997 ....................... 29 

Figure 3.7 Out-of-Pocket Spending a Much Higher Proportion of SA Spending on 

Non-Physician Professionals in 1997 Compared to 1987 ............................. 30 

Figure 3.8 Public Funding Grew Differentially for SA and MH Treatments between 

1987 and 1997................................................................................................ 32 

Figure 3.9 Federal Block Grants for SA Grew Rapidly between 1987 and 1992........... 33 

Figure 3.10 Medicaid Spending on SA Slowed in the Second Five Years, as for All 

Health............................................................................................................. 34 

Figure 3.11 Medicare Spending on SA Accelerated during the Second Five Years ........ 35 

Figure 4.1 Both Alcohol and Drug Abuse Treatment Expenditures Were Very Small 

Relative to their Total Social Cost in 1997.................................................... 38 
vi

Figure 4.2 Drug Abuse Treatment Expenditures Reflected a Larger Specialty Sector 

than Alcohol Expenditures in 1997 ............................................................... 39 

Figure 4.3 Hospital-Based Spending Higher for Alcohol than Drug Abuse in 1997 ..... 40 

Figure 4.4 Drug Abuse Spending Higher on SSACs1; Alcohol Abuse Spending 

Higher on MSMHOs1 in 1997 ...................................................................... 41 

Figure 4.5 Spending on “Professionals Other than Physicians” Was Greater for Drug 

Abuse Treatment than Alcohol Treatment in 1997 ....................................... 41 

Figure 4.6 Similar Funding Sources by Type of SA Disorder in 1997........................... 42 

Figure 5.1 Drug Abuse Spending Increased More Rapidly than Other MH/SA 

Spending between 1987 and 1997 ................................................................. 43 

Figure 5.2 Treatment Admissions for Alcohol Abuse Declined and for Drug Abuse 

Increased between 1992 and 1997................................................................. 44 

Figure 5.3 Federal Funding of Drug Abuse Treatment Increased Faster than Federal 

Funding of All Health Care between 1987 and 1997 .................................... 45 

Figure 5.4 Private Out-of-Pocket Payments for Drug Abuse Treatment Increased 

Faster than for All Other Health Problems between 1987 and 1997............. 46 

Figure 5.5 Outpatient/Residential Services Grew Notably Faster than HospitalBased Services for Alcohol and Drug Abuse Treatment between 1987 

and 1997......................................................................................................... 47 

Figure 5.6 Specialty Hospital Spending Declined for Alcohol and Drug Abuse 

Treatment between 1987 and 1997................................................................ 48 
1

Chapter 1. Background and Approach 

Background 

An estimated 11 percent of the adult U.S. population suffers from substance abuse or 

dependence during the course of a year (Kesseler et al., 1994). About 13.7 million adults 

each year (based on 1992 data) abuse or are dependent on alcohol (NIAAA, 1997), and about 

5.3 million (based on 1996 estimates) abuse or are dependent on illicit drugs (Epstein and 

Gfroerer, 1998). The 1999 National Household Survey on Drug Abuse reveals that of the 

population 12 years of age and older, 6.7 percent used illicit drugs (at least once during the 

30 days prior to the interview), 20.2 percent engaged in binge drinking (drinking five or more 

drinks on one occasion during the 30-day period), and 5.6 percent were heavy drinkers 

(drinking five or more drinks at a time during five or more occasions during the past 30 days) 

(OAS, 2000). Of the 10 leading causes of disability worldwide in 1990, the fourth was 

alcohol use and five (including alcohol) were psychiatric conditions (Murray and Lopez, 

1996). 

Furthermore, the total cost to society of substance abuse in 1995 was estimated to be a very 

large $276 billion (Harwood et al., 1998), a much larger figure than the spending on 

substance abuse treatment reported below. In addition, national estimates of the need for 

drug abuse treatment alone suggest that only two in five illicit drug abusers who need 

treatment for severe problems actually receive care. In 1996, about 5.3 million people with 

serious drug abuse problems needed treatment, while only about 2.0 million received it 

(Epstein and Gfroerer, 1998). 

Given the prevalence of substance-abuse-related morbidity and mortality and the broad social 

consequences, the Nation should know how much is being invested in treating these 

disorders, especially in relation to other health problems. Moreover, due to changes in 

treatment philosophy, and in the organization and financing of the health care system, 

consistent estimates of substance abuse spending over time are crucial for understanding the 

impact of major health policy changes. 

Over the past two decades, six studies have attempted to estimate the level of U.S. spending 

on substance abuse disorders, often in conjunction with estimates on mental disorders (Berry 

et al., 1977; Cruze et al., 1981; Harwood et al., 1984; Rice et al., 1990; Frank et al., 1994; 

Harwood et al., 1998). These studies made major contributions to our understanding of the 

total cost to society of substance abuse. However, they could not satisfy the need for a 

longitudinal perspective, where estimates from year to year can be readily compared to each 

other and to spending for all health care. 

Society’s approach to substance abuse has changed markedly over the decades. Substance 

abuse has shifted from being viewed as an individual problem for which society has no 

responsibility to a major social problem that must be addressed both by the medical care 

system and the criminal justice system (IOM, 1990a). 
2

A person in treatment for an alcohol or drug abuse disorder in the year 2000 has an 

experience vastly different from a person seeking care 50 years ago. Fifty years ago, a 

person seeking help for a serious drug or alcohol problem would have been treated for 

months in a psychiatric hospital. A person who experienced a trauma related to alcohol or 

drug intoxication and who visited an emergency room would be “patched up,” but might not 

be referred for substance abuse treatment. The characteristics that would identify that patient 

as having a drug or alcohol dependency varied across medical observers, and thus, the 

observer affected the likelihood of being referred for treatment of the substance problem. 

The patient’s diagnosis would be determined using the American Psychiatric Association’s 

Greybook (APA, 1942), in which alcohol and drug abuse problems were defined as character 

disorders along with stuttering and bed wetting. If the patient needed detoxification, he or 

she might be hospitalized for a month or more. Once “dried out,” the individual most likely 

would leave the medical care system to finish recovery alone, and relapse to use was a 

frequent occurrence. 

Today, people with a substance abuse disorder have a better chance of being identified and 

finding support, or of being required by the criminal justice system to undergo treatment. In 

an emergency room for trauma care, they usually are evaluated through psychiatric 

consultation. They are diagnosed with the standard, clinically explicit criteria of the 

Diagnostic and Statistical Manual of Mental Disorders, Fourth Edition (DSM-IV) (APA 

1994), in which alcohol and drug abuse are classified as distinct disorders. If they have the 

personal finances or health insurance that covers SA treatment, they can obtain care from a 

private outpatient or residential setting (such as the Betty Ford Clinic). If they cannot afford 

to pay for care, they can obtain it through a public facility that specializes in treating 

substance abuse. If they seek care, they are more likely to be treated in an outpatient than 

inpatient setting. Even if hospitalization is necessary, it occurs in a chemical dependency 

unit of a general hospital rather than in a State or county mental or other specialty hospital. 

Detoxification in a hospital occurs in a matter of days, not weeks, due to better detoxification 

agents and protocols, or occurs in a social setting or outpatient setting if the risk of serious 

complications are not high. A person dependent on alcohol likely receives counseling or 

psychotherapy and is linked to a support network. A person dependent on drugs may be 

enrolled in an intensive, residential therapeutic community or in an outpatient program under 

individual, group, or family therapy, and afterward is provided with a network to support 

their recovery. If they use opiates, they can be placed on methadone maintenance or LAAM 

(long-acting methadone) to reduce the craving for the drug and, thus, decrease their 

resistance to working through serious psychological problems. If the drug abuser is 

identified through the legal system, the court may order treatment as a condition of diversion 

or sentencing. If the addict is incarcerated, a drug abuse recovery program more likely is 

available within the prison or jail. 

None of this is to suggest that recovery from substance abuse is any easier today than 50 

years ago. There are no miracle drugs to cure substance abuse. Newer pharmaceuticals that 

exist to reduce craving of a substance (for example, naltrexone for alcohol) are rarely used in 

most treatment programs. Effective programs tend to require personal confrontation, 

acceptance, long-term commitment to treatment, and provide emotional and physical support. 

The difference today is that more support networks and different settings for care are 

available for those who seek treatment. 
3

Objective 

To understand the impact of these changes on substance abuse treatment, the Center for 

Substance Abuse Treatment and the Center for Mental Health Services (CSAT/CMHS) 

embarked on the development of a comprehensive set of expenditure estimates on substance 

abuse treatment – the CSAT/CMHS Spending Estimates Project. A prime objective of this 

project was to devise substance abuse estimates over a 10-year span that could be compared 

with spending on all health care services within the United States. 

Scope of the Study 

This study developed national spending estimates for substance abuse consistent with the 

methods and estimates of the National Health Accounts (NHA). The NHA is produced by 

the Health Care Financing Administration (HCFA) for all health care services. HCFA 

produces estimates by type of service and by payer, but not by diagnosis. This study 

produced a 10-year retrospective of spending on alcohol abuse, drug abuse, substance abuse, 

and mental illness, compared to all health care treatments, from 1997 back to 1987. 

The work is part of a larger study of national spending on mental health and substance abuse 

(MH/SA) services reported in Coffey et al. (2000) and Mark et al. (2000a, b). The results 

reported here are based on the second set of 10-year estimates from that work. The second 

set of estimates supercedes, and reflects improvements over, the first set of estimates. This 

report shows more detail on SA than the earlier study on MH/SA, although the dollar 

estimates are identical in both reports. SA is sometimes compared to MH in this report to 

view SA spending in the context of other behavioral health care. 

This study differs from many other studies of SA costs in that it focuses on the cost of 

treatment, not the burden of the illness. Burden of illness studies include costs not directly 

related to treatment, such as the impact of substance abuse on productivity, ability to hold a 

job and earn income, costs due to drug-related crimes, or housing and other accommodation 

subsidies to SA clients. 

To define SA disorders, we relied on relevant diagnoses classified in the International 

Classification of Diseases, 9th Revision, Clinical Modification (ICD-9-CM): alcoholic 

psychoses (291), drug psychoses (292), alcohol dependence syndrome (303), drug 

dependence (304), nondependent drug abuse (305, which includes alcohol), and drug 

dependence in pregnancy (648.3). “Tobacco abuse” was excluded for reasons noted below. 

(The ICD-9-CM system incorporates classifications of the DSM-IV system.) 

These diagnostic categories generally reflect what most payers identify as SA conditions that 

would be considered behavioral health benefits or excluded from coverage altogether. This 

definition of SA excludes expenditures on treatment that would be covered under medical 

benefits – for example, counseling and pharmacotherapy for nicotine addiction, or treatment 

for cirrhosis of the liver from alcoholism. 

Expenditure estimates were made for persons who had one of the included diagnoses as a 

primary diagnosis. Thus, additional expenditures for SA treatment provided during visits or 

encounters for other medical problems are not counted in the expenditures presented here. 
4

This is because data and methods for allocating payments for co-occurring diagnoses or cooccurring treatments are not available and development of such methods is beyond the scope 

of this study. 

The results of this study differ from other studies where substance abuse spending is based 

on all types of care provided in particular facilities. This study identifies relevant SA 

diagnoses on the basis of diagnostic information, not on the basis of where the care was 

given. For example, when we excluded diagnoses (such as tobacco addiction), we also 

excluded their expenditures from specialty mental health or substance abuse facilities. 

This study includes all providers delivering any services related to substance abuse. These 

include all hospital-based services (inpatient, residential, and outpatient services operated by 

any type of hospital); physician services (delivered by psychiatrists and other physicians); 

other professionals (psychologists, counselors, and social workers); freestanding nursing 

homes and home health agencies; and specialty SA facilities (multi-service mental health 

organizations, residential treatment centers for emotionally disturbed children, specialty 

substance abuse centers, and other facilities providing substance abuse services such as 

schools, jails, churches, and military field stations when enumerated by SAMHSA surveys). 

In counting substance abuse treatment services, this study includes encounters for 

detoxification. Many specialty SA professionals do not consider detoxification alone as a 

treatment for substance abuse. Even though isolated detoxification may be inadequate 

treatment, it does represent one type of spending that is part of the substance abuse treatment 

regimen. Furthermore, we have no way of separating detoxification alone from that 

associated with a more complete regimen of treatment, given the data available for this study. 

The study includes all types of payers. At the most detailed level, for public payers these 

include: Medicaid, Medicare, “other State/local” (State/local government sources other than 

Medicaid), and “other Federal” (Federal sources other than Medicaid and Medicare – for 

example, Veterans Affairs, Department of Defense, and Federal block grants). For one 

analysis, we split Medicaid funds into their tax dollar source – State/local or Federal – to 

develop total spending by these two government sources. For another analysis, we split 

public dollars into who manages the funds – State/local or Federal management. In this case, 

Medicaid funds and Federal block grants all are classified with “other State and local” funds, 

as State and local managed dollars. The private sources include private insurance, out-ofpocket expenditures, and other private sources. Out-of-pocket spending includes payments 

by both those with and without insurance. For the insured, out-of-pocket payments can 

include copayment and deductible amounts, services that are uninsured or are beyond 

insurance limits, as well as SA encounters paid totally by the client or family to avoid the 

stigma of SA treatment in insurance records. For the uninsured, their spending is included in 

out-of-pocket spending but cannot be distinguished. “Other private” includes philanthropic 

payments, either directly through private grants or indirectly through the proceeds of gift 

shops and cafeterias. 
5

Methods 

The methods used to devise the estimates are described briefly below and in more detail in 

Appendix B. Readers who want more detail on methods should consult the Technical Report 

on the 1997 estimates (Mark et al., 2000a). 

Consultation and Improvements for the Second Set of Estimates 

The methods used to estimate the 1997 national SA expenditures took advantage of extensive 

suggestions from substance abuse and mental health experts – researchers, clinicians, and 

policymakers. This accomplished panel of experts is listed in Appendix A. With guidance 

from three methodology experts in the field (also identified in Appendix A), the project team 

implemented a number of improvements in this second set of estimates over the first set. The 

changes affecting substance abuse estimates were 1) using more conservative trim points for 

specialty data and 2) allocating expenditures on co-occurring alcohol and drug abuse by 

separating them into the “alcohol” and “drug” abuse categories proportionate to the 

expenditures reported for only alcohol and only drug abuse. (In a prior set of estimates, all 

co-occurring alcohol/drug abuse spending was allocated to drug abuse for the purpose of 

assessing drug control policies. Estimates under that alternative method are available in 

Mark et al., 2000a). 

Overview of Methods 

The estimation approach differed according to the type of provider: 1) specialty facility 

service providers such as substance abuse clinics and 2) other providers and services, 

including providers who may treat any type of health care problem, independent substance 

abuse practitioners (e.g., alcohol counselors), and prescription drugs. Because the nature of 

the data differed between the two groups, the methods for estimating expenditures for these 

two groups of services also differed. 

Specialty facility providers were identified through the SAMHSA census of facilities that 

treat substance abuse disorders (the Uniform Facilities Data Set (UFDS)). Aggregate facility 

level statistics (for example, total number of Medicaid clients or total alcohol abuse clients) 

are available, but no encounter-level or patient-level records are available from these surveys. 

For other services, various administrative data and surveys that collect encounter-level or 

patient-level data were used. With characteristics of each encounter or patient, we could 

calculate expenditures for specific diagnoses, such as alcohol or drug abuse, or all health care 

for various combinations of facility and patient characteristics. 

Given the different types of data sources, methods used to develop estimates for each of the 

two types of services also differed. Specialty facility estimates were drawn from total 

revenues reported in the SAMHSA surveys by facility and by payment source. Estimates for 

the other providers were derived from and calibrated against the NHA totals. This was done 

to take advantage of the substantial work that had been done for the NHA for all health care 

providers and to make the final SA expenditures comparable to the NHA estimates. The 

processes for deriving estimates for both types of services are described in Appendix B. 
6

For accurate comparisons between SA and all health, we computed an NHA-equivalent 

estimate of SA expenditures, which eliminated some social services (relevant only to SA 

treatment) from the SA estimate. For example, expenditures related to job placement 

services provided by social workers billing independently to private payers and provided to 

those recovering from addiction were included in total SA spending, but were excluded from 

the NHA estimates and from our NHA-equivalent SA estimates. Nevertheless, some such 

social services funded under public health budgets were included in the NHA because they 

cannot be separated in those budgets; for the latter public health facilities, we kept their 

social service expenditures in our NHA-equivalent SA estimates. For another example, 

substance abuse services provided by employees of the jail and prison systems and, thus, not 

included in State or Federal public health budgets, would not be captured by the NHA 

estimates. They were included in the total SA expenditures to the extent that they report as a 

substance abuse facility on SAMHSA surveys; they were excluded from the NHA-equivalent 

SA estimates. 

We used the NHA-equivalent SA figures in this report whenever we compared SA estimates 

to all health care spending. Whenever social services were particularly relevant to a 

comparison within SA (i.e., between alcohol and drug abuse), we used the total SA estimates. 

Both types of estimate are presented in the detailed tables of spending estimates in 

Appendices D and E. 

In addition, we use “all health care” as the comparison group, rather then “all other health 

care” so that estimates are easy to compare to the NHA “all health care” estimates. 

Finally, we examined spending trends that were adjusted for economy-wide price inflation. 

This provides a perspective on the real growth in treatment expenditures, as opposed to 

expenditure increases that also result from general inflationary pressures in the United States 

economy. The same inflation adjustment used in the National Health Accounts (NHA) – the 

“Gross Domestic Product deflator” – is used here and is explained in Appendix B. 

Limitations of Approach 

Generally, two limitations affect the spending estimates – underlying data sets and methods 

of estimation. Two specific methodologic problems affect the SA estimates in particular, and 

both represent an improvement in the estimate, albeit, one creates problems for comparisons. 

First, the trend for SA specialty facility expenditures is more reliable than that for MH 

estimates. This occurs because specialty SA expenditures are based on UFDS data, available 

through 1996, while MH expenditures are based on the Inventory of Mental Health 

Organizations (IMHO) data, available only through 1994 for this study. The more recent 

data for SA without the same for MH creates a problem when attempting to compare the two. 

The MH trends are based on estimated data from a period of faster growth, while the more 

recent actual SA data show a slowdown for SA. If the missing MH data also show a 

slowdown in spending, then we have overestimated the MH component and overstated the 

differential between the two. 

A second issue is lower SA expenditures from this second set of expenditures than from the 

first set of estimates reported earlier (Mark et al., 1999). (Appendix C compares estimates 
7

from the two rounds of estimation for a common year, 1996.) The lower estimate in this 

study is due to two factors. First, the addition of a year of data (UFDS for 1996) revealed an 

earlier flattening of SA expenditures and a decrease in 1996. This accounted generally for 

over half of the difference in SA expenditures between the two studies and, for some years, 

for nearly two-thirds of the difference. Second, the method of estimation for the time series 

used more conservative and symmetrical trim points than were used in the first set of 

estimates. We made this change after extensive consultation with outside MH/SA and 

quantitative-methods experts. 

In addition, the data and methods of the study are limited in several other ways. SA 

diagnoses in claims for reimbursement may be under-reported as a result of limits on 

substance abuse benefits and concern about the stigma of SA on health care records. These 

reporting biases would lead to an underestimate of SA spending, although such reporting bias 

should be present across the entire time period. 

Furthermore, the use of claims to track out-of-pocket spending on care in general hospitals 

(on other than specialty units) can underestimate personal spending, particularly when limits 

on inpatient services cause the cost of a hospitalization to be borne entirely or partially by the 

client. This is not a problem for out-of-pocket spending on care outside the hospital, because 

data sources for those estimates (the National Ambulatory Medical Care Survey (NAMCS) 

and the National Hospital Ambulatory Medical Care Survey (NHAMCS), described in 

Appendix B Table 1.2) capture such self-payments correctly. This is also not a problem for 

out-of-pocket spending in specialty units of general hospitals because they report such 

spending through the SAMHSA (UFDS and IMHO) surveys. Thus, such an underestimate is 

likely to be small because the use of “scatter beds” – those in general hospitals but outside of 

specialty SA units – is likely to be rare. 

There may be errors in allocations of expenditures among payers due to provider confusion 

about insurance type. For example, the use of Medicaid managed care cards indistinguishable from private insurance cards can lead to incorrect payment-source coding in facility 

databases that feed into the surveys. Finally, we strove to eliminate duplicate expenditures 

across data sources. For example, the National Hospital Discharge Survey (NHDS), 

described in Appendix B Table 1.2, as well as the IMHO and UFDS data sets include 

specialty hospitals which we must not count more than once in the expenditure estimates. 

This problem can be eliminated only if survey coverage is documented accurately and types 

of facilities are delineated in the data sets. 

In addition to underlying data issues, methods also create limitations in our findings. For 

example, tying the estimation process to the NHA imposes limits on SA estimates. The 

NHA includes expenditures only for health services. However, social services (such as 

custodial residential care or group homes or job counseling outside the health system) can be 

essential complements to treatment of persons recovering from alcoholism or drug addiction. 

Likewise, substance abuse services beyond the health system (such as that provided entirely 

within the penal system) are important substance abuse services that generally are not 

captured in the NHA. For this reason, we developed two sets of estimates – one of total SA 

spending and one of NHA-equivalent spending. Nevertheless, any of these services (such as 
8

penal-system-based treatment) may be underestimated to the extent that they are 

underreported in SAMHSA substance abuse surveys. 

Benefits of Approach 

The foremost benefit of this project’s approach to estimating national SA spending is that it 

levels the playing field for an analysis of SA (alcohol and drug abuse), mental health, and 

total health care spending. When the same methods and underlying numbers are used for all 

disorders, the data can be made consistent for meaningful comparisons. Thus, SA and total 

health care spending can be tracked over time as public programs and the health care system 

change. Furthermore, spending by disorder – alcohol versus drug abuse, substance abuse 

versus mental illness – can be studied to understand patterns of public and private spending 

on these health problems. 

Organization of the Report 

This report highlights major findings from the CSAT/CMHS Spending Estimates Project. 

Chapter 1 and Appendix B summarize the methods. Chapter 2 examines SA spending for 

1997, the most recent year estimated, and compares that to mental health (MH) and all health 

care spending by type of service and payer. Chapter 3 reviews trends in expenditures since 

1987 for SA, MH, and all health care. Chapter 4 looks, in detail, at spending on alcohol and 

drug abuse services in 1997, while Chapter 5 examines the 10-year trend in those services. 

Each chapter attempts to assess changes in the expenditures in relation to major Federal and 

State policy changes related to SA services. Chapter 6 summarizes the study conclusions and 

discusses major shifts in patterns of treatment evident in the SA services literature over the 

1987 to 1997 time period. 

While the chapters display the general findings graphically, the appendices provide more 

detailed results in tables. Appendix D reports expenditure estimates for SA treatment, MH 

services, and all health care. Appendix E reports expenditures for alcohol abuse, drug abuse, 

MH and all health. In Appendix D and E, both NHA-equivalent SA expenditures and total 

SA expenditures are shown by service and payer. For each of the tables, three types of 

calculation related to the expenditures are displayed: (a) nominal dollar expenditures, (b) 

percent distributions of expenditures across providers or payers, and (c) average annual 

inflation-adjusted growth rates of expenditures for 10- and five-year increments. Footnotes 

below the graphs in the chapters reference the table sources in the appendices. 
9

Chapter 2. Expenditures for Substance Abuse (SA) Treatment and All 

Health Care, 1997 

Two Estimates of SA Expenditures 

As Chapter 1 explains, two estimates of substance abuse (SA) expenditures were developed 

for this study – “National-Health-Account-equivalent (NHA-equivalent) SA expenditures”

(excluding some social services) and “total SA expenditures” (including those social 

services). In this report, we use the NHA-equivalent numbers for accurate comparisons to all 

health care expenditures. In some instances for which social service is an important 

component and where we are not comparing to all health care, we use “total SA spending.”

SA Expenditures in Context

National expenditures for total SA treatment were $11.9 billion in 1997, a very small 

expenditure relative to the total social costs associated with the consequences of substance 

abuse. Social costs include direct SA treatment costs, indirect treatment costs of medical 

problems that result from SA (for example, HIV infection, trauma, cirrhosis of the liver), plus 

other indirect costs related to premature death, lost wages, impaired productivity, crimerelated losses, property destruction, and social welfare costs. Harwood et al. (1998) 

estimated the social cost of alcohol and drug abuse to be $276.3 billion in 1995, which, 

inflated by price and population growth, totaled about $294 billion in 1997 (Figure 2.1). 

Thus, the total cost to society of substance abuse is nearly 25 times what the Nation spends 

on treatment of substance abuse.

Figure 2.1 SA Treatment Expenditures Were Very Small Relative to the Total Social 

Cost of Substance Abuse in 1997 

Source: CSAT/CMHS Spending Estimates (Table D.1(a) and Harwood et al., 1998). 

1

 The 1995 social-cost estimate was inflated to 1997 dollars using the GDP deflator (2.2 percent per year) and a 

population adjustment (1.0 percent per year). 

To understand these SA expenditures and social costs, they should be viewed relative to 

figures for other behavioral disorders – mental illnesses. In contrast, spending on treatment 

of mental disorders is more in line with the total social cost of mental illnesses. The total 

social cost of mental illness imposed a $184.7 billion burden on the U.S. economy in 1995 

$11.9

$294.3

$0

$100

$200

$300

$400

Treatment Total Social Cost

Expenditures in Billions
10

(Harwood et al., 2000), which translates to about $197 billion in 1997 dollars, while mental 

health services dollars were $73 billion in 1997.

SA Treatment Providers 

A Specialty Network of Providers 

Substance abuse disorders can be diagnosed by many types of health care provider and 

treated by different types of provider. A network of “specialty” providers focuses exclusively 

on SA treatment. That group includes specialty hospitals, specialty dependency units of 

general hospitals, psychiatrists, other SA professionals (such as alcohol and drug abuse 

counselors, psychologists, and social workers), and specialty substance abuse centers 

(SSACs), including other programs that treat substance abuse (such as churches or jails and 

prisons). In addition, some mental health facilities also treat substance abuse (such as multiservice mental health organizations (MSMHOs) and residential treatment centers for 

emotionally disturbed children (RTCCs)). 

Some providers who treat physical health problems also may treat mild or moderately severe 

SA disorders. We call them “general providers” in this study. That group includes nonspecialty units of general hospitals, nursing homes and home health agencies, and nonpsychiatric physicians. 

Specialty providers are a much larger force in SA treatment than are general health care 

providers (Figure 2.2). Specialty providers received 78.2 percent ($9.3 billion) of the $11.9 

billion of total SA expenditures in 1997. General providers received 17.4 percent ($2.1 

billion). Insurance administration accounted for about 4.1 percent of spending, although data 

limitations preclude the estimate from reflecting the full cost of managed behavioral health 

plans. The remaining, almost imperceptible proportion was spent on prescription drugs. 

Figure 2.2 Specialty Providers Received a Very Large Share of SA Expenditures in 

1997 

Source: CSAT/CMHS Spending Estimates (Total SA expenditures calculated from Table D.3(a)). 

Insurance 

Administration

4.1%

General Providers

17.4%

Specialty Providers

78.2%

Retail Drugs

0.3%

SA 

($11.9 Billion) 
11

Retail drug spending differs greatly between substance abuse and mental health (Figure 2.3). 

While spending on drugs to treat mental illness is quite large, 12.3 percent of MH spending, 

pharmacotherapy for SA is very small, only 0.3 percent of SA spending. Some of this large 

disparity is due to the lack of drug therapy to treat drug abuse; some may reflect the kinds of 

providers who typically treat substance abuse rather than mental illness, as noted below. 

Figure 2.3 Retail Drug Spending for SA Treatment Was Very Small Compared to 

MH Services in 1997 

Source: CSAT/CMHS Spending Estimates (NHA-equivalent expenditures, Table D.3(b)). 

Some Specialized Professionals Do Not Treat SA 

One of the striking distinctions between SA and MH treatment relates to both the treating 

professional and the treatment setting. Few SA treatment dollars went to independent 

practitioners, including psychiatrists and, as a group, other non-physician, independent 

professionals – psychologists, counselors, and social workers. Only 2.4 percent of SA 

dollars went to independent psychiatrists in 1997 compared with 9.7 percent of MH dollars 

(Figure 2.4). Likewise, only 2.4 percent of SA spending went to independent professionals 

other than physicians compared with 13.4 percent of MH spending. 

These differences suggest that independent specialty practitioners treat primarily MH 

disorders and that most SA professionals work for and are counted in spending for facilities. 

This finding raises the question of whether SA services, which currently do not meet the need 

for treatment (OAS, 1998a), could be expanded through the network of independent 

practitioners, if insurance and other programs expanded. To answer this question the source 

of the large differences in treatment patterns by type of professional must be understood. Do 

these professionals avoid treatment of drug abusing clients? Are these services poorly 

covered by health insurance? Do these providers tend to diagnose SA patients with MH 

diagnoses? We know that Medicare only has covered psychologists and social workers since 

1991. In contrast to the finding for MH/SA professionals, non-psychiatric general physicians 

received much more similar portions of SA and MH dollars. Non-psychiatric physicians 

received 6.3 percent of SA dollars and 5.4 percent of MH dollars. A substantial amount of 

0.3%

12.3%

0%

2%

4%

6%

8%

10%

12%

14%

SA MH

Percent of Expenditures
12

the SA spending on independent non-psychiatric practitioners is on primary care physicians 

(Table D.3(b)). However, it is not known how much of SA spending on general physician 

services is related to detoxification rather than SA treatment. 

Figure 2.4 Few SA Treatment Dollars Went to Independent Psychiatrists, 

Psychologists, Counselors, and Social Workers Compared to MH Dollars 

in 1997. 

Source: CSAT/CMHS Spending Estimates (Total SA expenditures, Table D.3(b)). 

The low proportion of SA expenditures on retail prescription drugs, noted above in Figure 

2.3, may be related to the lesser involvement of MH/SA professional in SA treatment. As 

Chapter 4 will show, use of pharmaceuticals for treating alcohol disorders is rare and for drug 

abuse is almost non-existent (outside of methadone and LAAM). Psychiatrists, the primary 

specialized SA professionals who prescribe drug therapy, rarely treat substance abuse. 

Although the FDA approved naltrexone in 1994, its sales have grown little compared to other 

psychotropic drugs (Goodman et al., 1997). Another possible explanation is resistance to the 

prescribing of medications by alcohol treatment specialists who view alcoholism as a 

personal choice or weakness that must be overcome with will power and commitment to 

abstinence (Schaler, 2000), rather than with drug therapy. 

Most of SA Specialized Care Is Facility-Based 

Many types of facilities have evolved to serve the needs of substance abuse clients (Figure 

2.5). Hospitals received 40 percent of SA expenditures in 1997 (Table D.3(b)). Outside of 

hospitals, most SA spending is for services provided in specialty substance abuse centers 

(SSACs) (33.4 percent in 1997). SSACs in this study include freestanding substance abuse 

centers and units of other facilities that specialize in substance abuse treatment, such as 

substance abuse units of public health clinics, ambulatory treatment clinics, health 

maintenance organizations (HMOs), charitable organizations, correctional facilities, and 

other facilities. Multi-service mental health organizations (MSMHOs) also received 9.0 

percent of SA dollars in 1997. Thus, in total in 1997, 82 percent of SA spending went to 

facilities, rather than to independent practitioners, retail drugs, or administrative expenses. 

13.4%

6.3%

2.4% 2.4%

5.4%

9.7%

0%

5%

10%

15%

20%

Psychiatrists Professional

other than

physicians

Nonpsychiatric

physicians

Percent of Expenditures

SA

MH
13

Figure 2.5 SA and MH Dollars Supported a Spectrum of Treatment Facilities in 

1997 

Source: CSAT/CMHS Spending Estimates (Total SA and MH expenditures Table D.3(b)).

1

Specialty substance abuse centers. 2Multi-service mental health organizations 

Other than hospitals, only MSMHOs received both MH and SA service dollars between 1987 

and 1997. SSACs are assumed to provide only substance abuse treatments (by the nature of 

the UFDS Survey). In a general population survey, about half of SA and MH patients each 

are diagnosed with the other comorbidity (MH or SA) (Kesseler et al., 1996). Patients with 

co-occurring MH and SA disorders may be treated simultaneously by different providers. 

How this separation of providers influences the continuity and quality of care for persons 

with dual diagnosis is unknown. 

Most of SA Treatment Is in Outpatient and Residential Settings 

In 1997, as for all health care, non-hospital-based outpatient and residential treatment were 

the most likely settings for spending on SA treatment (Figure 2.6). Fifty-four percent of the 

$11.4 billion in NHA-equivalent SA spending in 1997 was for care in settings not affiliated 

with hospitals (non-hospital-based care). Likewise, 53 percent of the total health care dollar 

was spent in non-hospital-run outpatient or residential settings. However, hospital-based 

services were more likely to be used for SA care (41 percent of dollars) than for all health 

care (35 percent of dollars) in 1997. For MH dollars, 53 percent was spent on non-hospitalbased outpatient and residential care, and only 31 percent was on hospital-based treatment. 

(Table D.1(b)). 

9.6%

8.3%

33.4%

9.0%

13.3%

15.1%

22.0%

14.7%

0.0%

1.6%

0%

10%

20%

30%

40%

General hospital

non-specialty care

General hospital

specialty units

Specialty hospitals SSACs MSMHOs

Percent of SA or MH Expenditures

SA

MH

1 2
14

Figure 2.6 Outpatient and Residential Treatment Dominated SA Spending as with 

All Health Care in 1997 

Source: CSAT/CMHS Spending Estimates (NHA equivalent expenditures calculated from Table D.1(b)). 

These percents underestimate the full extent of outpatient and residential treatment because 

some outpatient care is provided by hospitals. In future studies, we will attempt to allocate 

hospital-based expenditures to inpatient and outpatient settings to give a clearer picture of the 

extent to which SA patients are treated outside of institutional settings. 

SA Financing 

SA Treatment Funding Predominantly Public 

Public sources of funding covered a much larger share of SA treatment dollars than of MH in 

1997. For SA, 64 percent of spending came from public sources; for MH, 57 percent was 

from the public sector (Figure 2.7). Only 36 percent of SA expenditures are covered by 

private insurers, philanthropy, or out of the pockets of clients or their families. 

0.3% 7.5%

41.5%

54.2% 52.7%

4.1% 4.7%

35.1%

0%

25%

50%

75%

100%

SA

($11.4 billion)

All Health

($1,057.5 billion)

Percent of Expenditure

Other Outpatient and

Residential Services

Hospital-Based Services

Drugs

Insurance Administration
15

Figure 2.7 Public Funding Was A Larger Share of SA Treatment than of MH in 

1997 

Source: CSAT/CMHS Spending Estimates (Table D.2(b)). 

1

 NHA-equivalent expenditures. 

Individuals Who Pay for SA Treatment Face High Out-of-Pocket Spending 

With public funding such a dominant source of support for SA treatment, out-of-pocket SA 

expenditures look inconsequential in the aggregate. That is, relative to all payers and all 

services, out-of-pocket spending was only 10.5 percent of total SA spending in 1997 (Table 

D.4(b)). However, when the out-of-pocket costs are examined in relation to the specific 

services sought and paid for, the story is quite different. 

For most services, individuals with SA disorders paying for their own treatment faced much 

higher out-of-pocket expenses than individuals with MH disorders. Likewise individuals 

with MH disorders paid increasingly higher out-of-pocket costs compared to persons with 

physical conditions over the 10-year period (Coffey et al., 2000). Nevertheless, the SA-MH 

out-of-pocket differential is particularly wide for allied MH/SA professionals and for nonpsychiatric physicians (Figure 2.8). For allied professionals (psychologists, counselors, and 

social workers), 67 percent of spending on their services for SA treatment comes from 

personal out-of-pocket payments. By comparison only 41 percent of spending on allied 

professionals treating MH disorders comes from the pockets of patients or their families. 

Likewise, for non-psychiatric physicians treating SA, 32 percent of their funds come from 

individual payments, while for the MH patients only 16 percent is paid by the individual. 

Given the wide gap between the need for and treatment of SA disorders (OAS, 1998a), the 

above findings raise the concern that high out-of-pocket costs for SA treatment may 

discourage many from seeking care who need it. Further study is needed to determine how 

much personal costs inhibit care-seeking behavior and how much resistance to treatment 

plays a role, among other factors. 

SA 

($11.4 billion1)

Private

35.7%

Public

64.3%

MH 

($70.8 billion1)

Private

42.7%

Public

57.3%
16

Figure 2.8 Out-of Pocket SA Treatment Spending High Relative to MH in 1997 

Source: CSAT/CMHS Spending Estimates 

The reasons for the substantial differences in the extent of public versus private financing are 

complex. Historically, State governments have organized and funded the bulk of services to 

care for persons with chronic and severe SA disorders. Private insurers, on the other hand, 

typically have viewed their role as paying for medical treatment of acute problems –

detoxification, physical or medical emergencies associated with substance abuse, medical 

sequelae, but generally little ongoing treatment for substance abuse. This mirrors the view of 

employers who aim, first, to keep substance abusers out of their workplaces through 

applicant drug screening, and, second, to keep the costs of employee benefits, such as 

behavioral health benefits, as low as possible (IOM, 1990a). Private insurers constrain the 

use of SA services by exclusion of such benefits, by use of annual and lifetime limits on 

those benefits, and through other controls on service utilization. Recent legislative activity 

attempts to make private insurance for MH, and sometimes SA, more on par with that for 

other health problems. The results here suggest considerable room for improvement in SA 

parity.

Federal Contribution Foremost for SA Treatment 

Federal contributions for SA treatment constituted a larger share of all SA spending than 

Federal support for MH or all health. Federal funding accounted for 36.1 percent of SA 

treatment spending, but only 29.1 percent of MH spending in 1997 (Figure 2.9). The Federal 

share of SA spending in that year even surpassed the Federal share of all health expenditures 

(33.3 percent), which includes the massive Medicare program (Table D.2(b)). These Federal 

figures encompass total Federal funding – Medicare, the Federal share of Medicaid, and all 

other Federal programs (such as SAMHSA block grants and Federal veterans and military 

programs). 

5%

32%

40%

67%

2%

16%

44% 41%

0%

20%

40%

60%

80%

100%

Hospital based Nonpsychiatrist

physicians

Psychiatrists Professionals

other than

physicians

Percent of Expenditures

SA

MH
17

Figure 2.9 Federal Funding A Larger Share of SA than of MH in 1997 

Source: CSAT/CMHS Spending Estimates (NHA-equivalent expenditures, Table D.2(b)). 

1

 Medicaid dollars here were apportioned to Federal and State/local Spending. 

The Federal government makes substantial contributions to SA treatment through Federal 

block grants to the States. These grant dollars provided 7.7 percent of the funds for all SA 

treatment (public and private), while they were the support for only 0.3 percent for MH care 

(Figure 2.10). These block grant funds represented 12.0 percent of all public funds (Federal, 

State and local) for SA and 21.3 percent of Federal funds for SA services; the comparable 

block grant dollars for MH services were only 0.6 percent of MH public funds and only 1.2 

percent of MH Federal funds. The SA block grants support services provided by substance 

abuse treatment facilities (Huber et al., 1994). By 1997, the Federal block grant program for 

SA treatment services was nearly $900 million, compared to $245 million for MH services.

Figure 2.10 Federal Block Grants Provided Substantial SA Funding in 1997 

Source: CSAT/CMHS Spending Estimates. (Special calculations not shown in appendix tables.) 

1

 NHA-equivalent expenditures. 

SA

($11.4 billion)

Federal1

36.1%

Private

35.7%

State/Local1

28.2%

MH

($70.8 billion)

Private

42.7%

Federal1

29.1%

State/Local1

28.1%

7.7%

0.3%

0%

2%

4%

6%

8%

10%

SA MH

Federal Block Grants as a Percent of 

Expenditures1
18

State and Local Government Manages the Majority of All Spending on SA 

State and local governments have the dominant role in managing SA treatment dollars even 

though the dollars do not all come from State/local sources of revenue. In addition to State 

tax-support for SA treatment, the States manage both the substantial Federal match to State 

Medicaid funding and the large Federal block grants for SA programs. In 1997, State and 

local agencies managed 47.8 percent of all SA dollars (Figure 2.11). This is enormous 

compared to their role in managing general health dollars (21.8 percent), and larger than their 

role in managing MH service dollars (40.7 percent). 

Figure 2.11 State and Local Governments Managed Nearly Half of SA Dollars in 

1997 

Source: CSAT/CMHS Spending Estimates (NHA-equivalent expenditures; based on Table D.2(b) and other 

estimates not shown). 

1

 State/local management dollars include all Medicaid dollars, Federal block grants, and other State and local 

programs. 

Medicaid Has an Important Role in SA Treatment 

Medicaid is a larger funder of SA services than of general health services. Medicaid 

supported about 20 percent of SA treatment expenditures in 1997, about the same as MH 

service expenditures, but a lower portion of all health care expenditures (15.1 percent) 

(Figure 2.12). The substantial role of Medicaid in SA treatment is consistent with 

characteristics of Medicaid recipients and of people who are more likely to use illicit drugs. 

People with drug abuse disorders are more likely to be younger, with less than a high school 

education, and to be unemployed (OAS, 1998). Medicaid recipients are likely to be younger, 

47.8%

40.7%

21.8%

16.5% 16.6%

24.1%

35.7%

42.7%

54.1%

0%

20%

40%

60%

SA

($11.4 billion)

MH

($70.8 billion)

All Health

($1,057.5 billion)

Percent of Expenditures

State and Local

Federal

Private
19

less educated, and unemployed, although Medicaid predominantly covers low-income 

women and children and, less often, low-income men. One study shows that Medicaid 

recipients are more likely to suffer from substance abuse disorders (Larson et al., 1998). 

Figure 2.12 Medicaid Supported a Larger Share of SA (and MH) Expenditures than 

of All Health Spending in 1997 

Source: CSAT/CMHS Spending Estimates (NHA-equivalent expenditures, Table D.2(b)). 

In addition to Medicaid, other State and local government programs provided a comparable 

20-percent share of SA spending as a treatment safety net. These aggregate, national 

Medicaid and other State-local spending shares mask likely variation among States in their 

support of substance abuse services (Buck et al., forthcoming). 

Summary 

National spending on substance abuse services in 1997 was a small $11.9 billion compared to 

the total costs to society of substance abuse ($294 billion), as others have estimated. 

A primarily publicly supported, specialty provider network received the majority of SA 

dollars to deliver treatment to persons with substance abuse problems. In fact, compared 

with MH, a very small proportion of SA dollars went to private practitioners (psychiatrists, 

psychologists, counselors, and social workers). In addition, a very small amount of SA 

spending paid for pharmacotherapy compared to MH spending. As with all health care 

expenditures, over 50 percent of SA spending went for care in freestanding outpatient and 

residential settings, as opposed to hospital-based services. 

The financing of SA services was predominantly from public sources (64 percent). Federal 

support of SA spending was foremost at 36 percent, while Federal funds supported only 33 

percent of all health care, despite Medicare funding for all health services for elderly and 

disabled populations. Furthermore, Federal block grants for SA were crucial funding 

sources, with nearly eight percent of SA spending coming from those grants, compared with 

19.9% 20.4%

15.1%

0%

5%

10%

15%

20%

25%

SA MH All Health
20

less than one percent of MH spending. Medicaid was another important contributor to SA 

treatment (20 percent of SA spending), compared to its funding for all health (15 percent). 

However, by counting funds based who pays the bill, the role of State and local governments 

in SA treatment is masked. State and local governments manage nearly half of all 

expenditures for SA treatment. They managed only 22 percent of all health care service 

dollars. 
21

Chapter 3. Trends in Substance Abuse (SA), Mental Health (MH), and All 

Health Care, 1987-1997 

Inflation-Adjusted Growth and National-Health-Accounts-Equivalent Expenditures 

Expenditure trends discussed in this chapter are based on inflation-adjusted growth rates. 

The adjustment uses the general price inflation in the Gross Domestic Product (GDP)), the 

deflator HCFA uses to report real growth in national health expenditures. This adjustment is 

made to examine real increases in spending for substance abuse treatment, in contrast to 

increases that may be confounded by price inflation. 

Because this chapter also compares trends for SA to all health care, we use NHA-equivalent 

SA estimates throughout. The concepts of inflation adjustment and NHA-equivalence are 

explained in Chapter 1. To understand SA spending in the context of behavioral health care, 

SA is also compared to MH spending in this chapter. 

SA Spending Grew Much More Slowly than MH and All Health Care 

Inflation-adjusted SA spending grew much more slowly than MH and all health care 

spending in the decade between 1987 and 1997. SA spending grew at half the rate per year 

(2.5 percent) at which all health care expenditures grew (5.0 percent) over the 10 years and 

less than two-thirds the rate of MH spending growth (4.0 percent) (Figure 3.1). 

The rate of growth shifted during the 10-year period (Figure 3.1). During the first five years 

(1987-1992), SA expenditures grew at 3.5 percent per year (about half the rate of all health 

(6.8 percent per year)). However, during the second five-year period, SA spending slowed 

significantly to 1.6 percent, again at half the rate of all health spending at 3.2 percent. 

Compared to MH, the SA slowdown was significantly greater. While SA spending shifted 

from 3.5 to 1.6 percent per year between the two five-year periods, MH spending declined 

from 4.1 to only 3.7 percent. Whatever was responsible for the slowdown in expenditures 

between the two five-year periods, it had a larger effect on SA, cutting the average annual 

rate of SA spending by more than 50 percent, but cutting the average annual rate of MH 

spending by 10 percent. We examine below some of the reasons for the differential 

slowdown. 
22

Figure 3.1 SA Expenditures Grew Much More Slowly than MH and All Health 

between 1987 and 1997 

Source: CSAT/CMHS Spending Estimates (Table D.1(c)).

1 Inflation-adjusted, NHA-equivalent expenditures. 

Reasons for Slower SA Spending 

The reasons for the relatively slow growth of SA expenditures can be deduced, in part, from 

spending trends by type of service and by payer that are measured in this study. Some of the 

explanation must be deduced from the literature on SA services over this period and on 

general health care trends. 

The long, quarter-century trend of the NHA highlights in relief the dramatic slowdown in all 

health care spending in the last five years of 1992-1997 (Braden et al., 1998). By viewing 

only 10 years of SA spending, we cannot see the full context. There is some evidence that 

SA spending grew relatively rapidly prior to 1987. Some employers added SA health 

insurance or employee assistance benefits in the early 1980s. Federal block grants for SA 

that started in the early 1980s, grew rapidly, stimulating expansion of SA treatment facilities 

(Huber, et al., 1994). Thus, the slowdown may be a natural response to relatively rapid 

growth in the early and mid-1980s. SA spending since 1987 also may represent a substantial 

slowdown in SA services because of efforts by employers and private insurers to introduce 

managed behavioral health care carve-out arrangements. Alternatively, SA treatment 

spending may have grown more slowly relative to all health care expenditures because SA 

expenditures may not be driven as relentlessly by medical and surgical advances and 

increases in treatment intensity. We explore some of these issues below. 

3.5%

6.8%

5.0%

1.6%

2.5%

3.7%

4.1% 4.0%

3.2%

0%

2%

4%

6%

8%

1987-1992 1992-1997 1987-1997

Average Annual Growth Rate 1

SA

MH

All Health
23

Hospital-Based Services Declined 

Real SA expenditures for hospital-based services declined noticeably between 1987 and 1997 

on average by 0.6 percent per year, while such spending on other conditions accelerated 

(Figure 3.2). Spending on hospital care for MH and all diseases grew – less for MH at 0.7 

percent than for all health care at 3.6 percent annually. This clearly influenced the slower 

growth of SA spending overall compared to MH and all health care, because hospital care is 

the most expensive mode of treatment for disease. 

Figure 3.2 SA Spending Declined in Hospital Settings and Grew More Rapidly in 

Outpatient Settings than MH and All Health between 1987 and 1997 

Source: CSAT/CMHS Spending Estimates (Table D.1(c)). 

1 Inflation-adjusted, NHA-equivalent expenditures.

The slower pace of hospital-based spending occurred earlier in the study decade for SA than 

for MH, and it occurred in non-community hospitals (specialty and VA hospitals) (Figure 

3.3). In the first five years of the period, SA specialty and VA hospital spending declined 

almost two percent per year, while such spending grew at 1.5 percent for MH and 1.8 percent 

for all health care. In the second period, 1992-1997, SA spending on these hospital services 

had a precipitous drop of 4.0 percent per year. MH spending in these non-community 

hospitals also had a dramatic decline in the second five years, down 4.3 percent per year. 

The drop in all health spending on specialty and VA hospitals was much less, down 1.0 

percent per year. 

5.8%

0.7%

3.6%

5.5%

-0.6%

5.1%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Hospital based Other outpatient and

residential

Average Annual Growth Rate 1

SA

MH

All Health
24

Figure 3.3 Non-Community Hospital Spending Declined Earlier for SA than for MH 

and All Health Care between 1987 and 1997.

Source: CSAT/CMHS Spending Estimates (Table D.1(c)). 

1 Inflation-adjusted, NHA-equivalent expenditures.

Outpatient/Residential Spending Rose 

As Figure 3.2 also shows, while hospital spending declined, spending on care in outpatient 

and residential settings increased for SA slightly faster than for MH and all health care. SA 

spending in these settings increased 5.8 percent per year between 1987 and 1997, and MH 

and all health spending in these settings increased by 5.1 and 5.5 percent, respectively. Small 

differences in annual growth rates can mean substantial differences over a decade because 

small differences every year accumulate over the 10 years. 

The increase in outpatient services cuts across provider type. For example, Residential 

Treatment Centers for Emotionally Disturbed Children (RTCCs) historically have specialized 

in residential treatment. However, between 1986 and 1994, RTCCs expanded their 

outpatient services at a greater rate (18.4 percent per year) than their residential services 

(which increased only 4.4 percent per year) (Mark et al., 2000a). To some extent, even 

general hospitals have increased their outpatient services faster than their inpatient care. 

Although we did not separate outpatient from inpatient spending for all hospital services, we 

did a special analysis for general hospitals. Between 1987 and 1997, general hospitals 

expanded psychiatric and substance abuse outpatient services by 9.9 percent per year and 

such specialty inpatient services by 8.5 percent per year (Mark et al., 2000a). 

Thus, SA clients may be receiving more outpatient treatment than the numbers in the first 

paragraph of this section imply. Hospital-based services as configured in these 

classifications include some outpatient and residential treatment. If hospital-based SA 

outpatient services have increased relative to SA inpatient care, more so than for MH or all 

health, then the differences in expenditures found here could be greater. We plan to redefine 

categories as inpatient, outpatient, and residential for future studies to address this. 

-1.9%

-4.0%

1.5%

-4.3%

1.8%

-1.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

1987-1992 1992-1997

Average Annual Growth Rate 1

SA

MH

All Health
25

Declining hospital-based SA expenditures, combined with slightly faster growth in other 

outpatient and residential treatment, may reflect a faster movement of clients from hospitalbased to community-based treatment for SA than for MH and all health care. For example, 

improved detoxification agents enable providers to detoxify patients in outpatient settings. 

Alternatively, the differential in expenditures may reflect less treatment for SA patients 

simply because the are kept out of hospitals. How spending is distributed among chronic 

severe, moderate, and occasional substance users cannot be ascertained from this study. 

Independent Allied Professional Services Rose 

Although less than 2.5 percent of SA spending in 1997 went to non-physician, independent 

professionals (Table D.1(b) and D.3(b)), the rate of growth of spending for their services for 

SA increased rapidly. This “other professionals” group includes independently billing 

psychologists and some independently billing counselors and social workers in the NHAequivalent comparisons in Table D.1(b) and Figure 3.4. The group does not include 

counselors and social workers providing non-health services (such as job placement 

counselors who independently bill those services to private payers), because those are 

excluded from the NHA. “Other professionals” in the total SA expenditures in Table D.3(b) 

include these non-health services of independent SA counselors and social workers. 

Spending on SA services provided by “other professionals” grew much more rapidly (10.3 

percent yearly) than for MH services (6.9 percent) and for all types of other professional 

services for all health care (7.4 percent over the entire period) (Figure 3.4). This overall 

relatively rapid growth was likely influenced by Medicare changes that provided payment for 

psychologists and social workers in 1990 (Rosenbach and Ammering, 1997; Frank, 2000). 

There was a spurt in SA spending between 1992 and 1997 for independently billing “other 

professionals” (12.1 percent increase per year). Spending for services of allied health 

professionals in MH and in all health care (chiropractors, podiatrists, optometrists and others) 

grew at about half that rate (Figure 3.4). 
26

Figure 3.4 SA Spending on “Other Professionals” Was Most Rapid between 1992 

and 1997

Source: CSAT/CMHS Spending Estimates (Table D.1(c)). 

1 Inflation-adjusted, NHA-equivalent expenditures.

While comparisons based on NHA-equivalent expenditures omit some independent 

counselors and social workers, the patterns are similar when we include them in total 

spending estimates for SA and MH presented in Tables D.3(a) and (c). In the second fiveyear period, SA spending rose 13.1 percent for SA treatment professionals other than 

physicians, with MH spending on these professionals increasing 6.4 percent per year during 

the same period. 

While expenditures on care by professionals other than physicians were accelerating for SA 

treatment, spending on physician services were not. Physicians’ receipt of SA treatment 

dollars rose at a 2.5-percent-per-year rate over the 10 years, a rate much slower than the 

annual increase of physician services for MH treatment (5.9 percent) or for all health care 

(4.5 percent) (Table D.1(c)). This juxtaposition of two substitute service provider groups 

suggests that the slower growth in overall SA spending may have been caused, in part, by the 

substitution of less expensive providers compared to patterns of spending for providers who 

diagnose and treat other diseases. 

Community SA Facility Services Rose 

Increased spending for outpatient care of SA relative to MH and all health is apparent for 

another much larger category – “other personal health care and government public health 

activities (PHC&GPH),” an aggregation specific to the NHA-equivalent estimates only, 

which we refer to here as “community services.” This PHC&GPH category includes 

community public health services, as well as other direct health care services provided by 

employers for their employees and provided in non-health facilities for school children, jail 

inmates, etc. For all health spending, this class is dominated by community health centers. 

8.5%

12.1%

10.3%

7.4% 6.9%

9.1%

5.7%

7.4% 6.5%

0%

5%

10%

15%

20%

1987-1992 1992-1997 1987-1997

Average Annual Growth Rate 1

SA

MH

All Health
27

For SA and MH, this category represents over 40 percent of SA spending and about 19 

percent of MH spending (Table D.1(b)). For those services, the category is dominated by 

spending in substance abuse and other public health facilities (such as specialty substance 

abuse centers, multi-service mental health centers, residential treatment facilities, and special 

programs in schools, jails, churches, and military field stations, reported through SAMHSA 

surveys of specialty health care facilities). The category includes both residential and 

outpatient services. 

SA spending at specialty substance abuse centers and other facilities rose more slowly over 

the 10-year period (at 6.8 percent yearly) compared to MH or all health spending at similar 

facilities (8.2 and 8.9 percent per year, respectively) (Figure 3.5). However, in the first five 

years, SA facility spending outpaced both MH and all health spending. During that period, 

SA spending in these facilities grew 10.4 percent annually; MH grew 6.3 percent; and all 

health grew 8.4 percent per year. When we explore financing (below), we will see that the 

early SA-spending increases at these facilities correspond with large increases in Federal 

block grant funding for SA between 1987 and 1992. These facilities were and remain the 

primary recipients of such funds. 

Figure 3.5 Community SA Facility Spending Rose Rapidly between 1987 and 1992 

Source: CSAT/CMHS Spending Estimates (Table D.1(c)). 

1 Inflation-adjusted, NHA-equivalent expenditures of “other personal health care and government public health 

expenditures.”

Pharmacological Therapy for SA Increased -- An Uncertain Harbinger 

Prescription drugs for SA treatment were an insignificant part of SA spending both in 1987 

and a decade later in 1997 – less than one percent of total SA spending (Table D.1(b)). 

However, in the second five years of this study, SA spending on drug therapy grew 

tremendously (35.8 percent per year compared to less than one percent per year in the first 

five years (Table D.1(c)). Part of the large growth rate is an artifact, due to the small base of 

10.4%

3.2%

6.8%

10.1%

8.4% 8.2%

8.9%

6.3%

9.6%

0%

2%

4%

6%

8%

10%

12%

1987-1992 1992-1997 1987-1997

Average Annual Growth Rate1

SA

MH

All Health
28

retail drug spending on which subsequent growth was calculated. Thus, the growth rate 

should not be compared between SA and MH. Although the increase coincides with the 

introduction of naltrexone as new drug treatment for alcoholism, little of the increase may be 

attributed to it. Most of the increase results from the use of antabuse, an alcohol-sensitizing 

agent. (The use of drug therapy for opiate addiction – methadone and LAAM – can only be 

prescribed by licensed methadone and detoxification programs and hospital pharmacies and 

are not dispensed as retail drugs. They are counted in facility expenditures, here. Generally, 

the counts for prescription drugs for SA treatment reported are based on weak estimates 

because the national survey of physician office visits (NAMCS) is based on so few cases 

relative to the universe of visits and because SA diagnosis and treatment is a relatively rare 

occurrence for physician office visits.) 

Is drug prescribing the start of a new trend in therapy for substance abuse disorders? At least 

one new type of medication for the treatment of narcotic addiction, buprenorphine products, 

is pending approval of the FDA. If approved, it may eventually increase expenditures for 

retail prescriptions for the treatment of substance abuse. Beyond that, we can only speculate 

that new understanding of brain functions and biochemical reactions (McLellan et al., 2000) 

might revolutionize substance abuse treatment as it has MH treatment since the late 1980s 

(USDHHS, 1999). However, new medications introduced to treat heroin addiction (LAAM) 

and alcoholism (naltrexone) have been used only minimally in clinical practice. 

For example, naltrexone was introduced in January of 1995 after FDA approved it as the first 

new drug for alcohol treatment in 50 years. Despite evidence of its efficacy shown in 

double-blind clinical trials, it is being used with perhaps fewer than two percent of persons 

receiving alcohol treatment. Total naltrexone retail prescriptions (including prescriptions for 

narcotic treatment but excluding those dispensed directly by SA facilities) were 12,000 

prescriptions per month in 1997 (Gordon, 1999). The one-day census of specialty substance 

abuse facilities indicates that in 1997, 624,000 clients were in treatment for alcoholism, a 

figure which undercounts clients in treatment because it excludes persons receiving alcohol 

treatment in private primary care settings, in programs such as Alcoholics Anonymous, and 

in MH institutions (OAS, 1999). Furthermore, the 1997 National Household Survey on Drug 

Abuse estimated that 11 million adults were heavy drinkers in 1997 (OAS, 1999c). The use 

of naltrexone is substantially below levels predicted by the drug manufacturer (Goodman et 

al., 1997). 

For two reasons, the path of adoption of new drug treatments may not be taken readily when 

new SA pharmacotherapies are discovered. First, a strong philosophy of personal-choice, 

will-power, and self-help through support groups dominate SA treatment (IOM, 1990a). 

Such a philosophy may not be accepting of the use of medication. Second, in the MH/SA 

field, there are twice as many psychologists as psychiatrists and four times as many social 

workers/counselors as psychiatrists (Ivey et al., 1998). Among them, usually only 

psychiatrists (MDs) are licensed to prescribe drugs. An unwillingness by non-physician 

practitioners to refer clients to physicians for such treatment may dampen the diffusion of 

new drug therapies in the SA field. The extent to which resistance to the use of naltrexone is 

a consequence of perceived effectiveness, philosophical aversions to treating alcoholism with 

dependence on another substance, or the results of regulated prescribing patterns is unclear. 
29

Research underway to answer these questions will elucidate the potential clinical significant 

of future advances in pharmacotherapy for substance abuse. 

Public Funding Slowdown and Private Funding Erosion 

As described in Chapter 2, public sources of funding supported a much larger share of SA 

treatment dollars than of MH in 1997. During the 10-year study period, public funding for 

SA treatment grew at about the same rate as did MH (4.5 and 4.3 percent per year, 

respectively) (Table D.2(c)). However, the rate of increase in SA spending declined over the 

period, from a 6.6-percent increase per year for the period 1987-1992 to a 2.3-percent 

increase per year for the period 1992-1997. The rate of increase in spending for MH had the 

same pattern. 

Private support for SA treatment expenditures did not keep pace with inflation, falling 0.2 

percent per year on average over the 10-year period; private funding for MH grew 3.6 

percent per year during the same decade (Figure 3.6). Private spending for all health care 

services grew 4.1 percent annually, faster than either SA or MH. 

Figure 3.6 Private Funding for SA Was Outpaced by Inflation and Was Much 

Slower than for MH and All Health between 1987 and 1997 

Source: CSAT/CMHS Spending Estimates (Table D.2(c)).

1 Inflation-adjusted, NHA-equivalent expenditures. 

Furthermore, between 1987 and 1997, private insurance (one component of the private 

spending shown in Figure 3.6) declined at a faster inflation-adjusted rate, 0.6 percent per 

year. Between 1987 and 1992, inflation-adjusted private insurance payments declined, on 

average, 1.0 percent per year; these payments fell 0.2 percent per year between 1992 and 

1997 (Table D.2(c)). 

-0.2%

4.1%

3.6%

-2%

0%

2%

4%

6%

SA MH All Health

Average Annual Growth Rate1
30

Pressure from employers to reduce insurance expenses and the exclusion of SA from most 

MH parity laws during the 1990s prompted researchers to ask: How much would coverage of 

SA cost relative to MH? Coverage of SA treatment under private insurance has very small 

total cost implications for those insurers relative to MH treatment (Sing et al., 1998), 

primarily because a very low proportion of the privately insured population needs SA 

treatment. Two other studies of private insurance parity for SA and MH also found little 

effect on SA costs, again because few enrollees use those services, even though SA treatment 

episodes typically were twice as expensive, on average, as MH episodes (Schoenbaum et al., 

1998; Sturm et al., 1999). These latter SA and MH comparisons are relevant for privately 

insured persons only; private insurance generally excludes people with the most severe and 

persistent mental illnesses, who usually are treated in the public mental health sector. 

Furthermore, insurers and employers have used managed care to restrain the use of MH/SA 

services (Callahan et al., 1995; Larson et al., 1997). 

At the same time that private insurance was declining, out-of-pocket payments for specific 

types of SA treatment service were increasing. For example, the amount spent out of pocket 

for psychiatrist services increased from 36 percent of SA expenditures on psychiatrists in 

1987 to 40 percent in 1997. More disconcerting is the significant rise in out-of-pocket 

spending related to psychologists, counselors, and social workers providing SA treatment. 

Out-of-pocket spending on these allied professionals grew from 42 percent of their total 

receipts in 1987 to 67 percent in 1997. We do not know whether this increase relates to 

increasing restrictions by private insurers on reimbursements to these allied professionals, 

resulting in more of the expense being borne directly by clients. Nor do we know whether 

the increase might be due to increasing numbers of clients without insurance who make some 

financial contribution to the cost of their treatment. 

Figure 3.7 Out-of-Pocket Spending a Much Higher Proportion of SA Spending on 

Non-Physician Professionals in 1997 Compared to 1987 

Source: CSAT/CMHS Spending Estimates (not in Tables, total SA Spending, unadjusted). 

The overall decline in private insurance spending and the rise in out-of-pocket spending on 

some types of SA services raise important questions for future research. Are the declines in 

11%

36% 36%

42%

5%

32%

40%

67%

0%

20%

40%

60%

80%

HospitalbasedNonpsychiatric

physicians

Psychiatrists Professionals

other than

physicians

Percent of Expenditures

1987

1997
31

private insurance payments related to increasing efficiencies in treating SA patients that are 

associated with managed behavioral health care? Are the declines due to employer and 

private insurer coverage limits on SA-related services? Are employers becoming more 

vigilant and effective in excluding or removing employees with substance abuse problems 

from their workforce? Do SA benefit limits result in private patients being shifted to public 

programs or out of treatment altogether? Is the criminal justice system stimulating the 

treatment of persons with substance abuse disorders? We explore the penetration of 

managed care and managed behavioral health care in Chapter 6, but cannot address these 

questions definitively. 

Federal Funding Grew Rapidly for SA 

In 1987, Medicaid and “other Federal program” shares of SA treatment expenditures were a 

moderate-sized 12 and 10 percent, respectively, compared to other sources of funding (Table 

D.2(b)). Medicare contributed a small five-percent share in 1987. However, all three 

sources of payment grew rapidly, about seven percent per year each, between 1987 and 1997 

(Figure 3.8). For MH services, only Medicare and Medicaid grew rapidly; other Federal 

support declined slightly. 

Other State and local funding of SA services, despite representing 26 percent of SA funding 

in 1987, did not keep pace with general inflation, declining 0.1 percent per year. The slower 

“other State and local” spending on SA treatment, along with faster spending by other 

contributors to SA treatment, moved “other State and local” spending down to a share of 20 

percent in 1997. This shift is part of a long-term trend away from direct State funding of MH 

and SA care. During this period, States closed many public hospitals and moved patients 

into community settings (Mechanic et al., 1998). Also, to the extent possible, States moved 

funding of health-related programs into the Medicaid program to obtain Federal Medicaid 

matching funds (Holahan et al., 1998).
32

Figure 3.8 Public Funding Grew Differentially for SA and MH Treatments between 

1987 and 1997 

Source: CSAT/CMHS Spending Estimates (Table D.2(c)). 

1 Inflation-adjusted, NHA-equivalent expenditures. 

Federal Block Grants Grew Dramatically 

The large increases for “other Federal” funds for SA reflected an active SAMHSA block 

grant program (Huber et al., 1994). In 1982, 10 categorical grant programs for mental health 

and substance abuse were combined into the Alcohol, Drug Abuse and Mental Health 

(ADAMH) Services block grant program, and total funds were reduced by about 20 percent 

(Jacobson et al., 1996). In 1992, a new Substance Abuse Prevention and Treatment block 

grant program was instituted (under the ADAMHA Reorganization Act, P.L. 102-321), 

replacing the ADAMH block grant program. 

Inflation-adjusted block grants for SA treatment services1

 increased by 27.1 percent per year, 

on average, between 1987 and 1992 (Figure 3.9). This growth rate subsided to 2.0 percent 

per year between 1992 and 1997. Both trends dwarfed block grant funding for MH, which 

declined during both periods. By 1997, the Federal block grant program for SA services was 

almost $900 million, while funding for the MH block grant was about $250 million. 

 1

 The SA block grant dollar estimates exclude set-asides of 20 percent for preventive 

services, 5 percent for evaluation research, and 5 percent for State administration. 

7.8%

-0.1%

7.7%

-0.1%

7.4%

6.5%

8.5%

1.5%

-2%

0%

2%

4%

6%

8%

10%

Medicaid Medicare Other Federal Other

State/Local

Average Annual Growth Rate 1

SA

MH
33

Figure 3.9 Federal Block Grants for SA Grew Rapidly between 1987 and 1992 

Source: CSAT/CMHS Spending Estimates (not shown in Appendix Tables). 

1 Inflation-adjusted block grant funds. 

Medicaid Growth – Reduced in Last Five Years 

While Medicaid spending on SA services was only $800 million by 1997, social and health 

policy changes appear to have had strong effects on Medicaid trends in SA (and MH) 

expenditures over the 10-year period. Medicaid spending on SA rose rapidly at an inflationadjusted rate of 9.8 percent yearly between 1987 and 1992, still slower than the 11.8 percent 

annual increase in Medicaid spending on all health care during that period. In the second 

five-year period, Medicaid programs slowed the rate of increase of spending on SA treatment 

to an annual 5.7-percent increase between 1992 and 1997 (Figure 3.10). Federal and State 

policies designed to expand Medicaid eligibility in the early 1990s, particularly for pregnant 

women and children, fueled dramatic growth in Medicaid enrollment (from 23.1 million 

recipients in 1987 to 32.1 million recipients in 1997). In addition, an economic downturn in 

the early 1990s increased the number of people in need (Ku and Bruen, 1999). However, the 

increasing general enrollment in Medicaid reversed in 1996-1997, in part due to welfare 

reform implemented by the States, and also due to better economic conditions (Holahan et 

al., 1998). 

27.1%

2.0%

13.8%

-1.8% -1.4% -1.6% -5%

0%

5%

10%

15%

20%

25%

30%

1987-1992 1992-1997 1987-1997

Average Annual Growth Rate 1

SA

MH
34

Figure 3.10 Medicaid Spending on SA Slowed in the Second Five Years, as for All 

Health 

Source: CSAT/CMHS Spending Estimates (Table D.2(c)).

1 Inflation-adjusted, NHA-equivalent expenditures. 

While Medicaid enrollment was growing rapidly, States were restructuring their health 

services financing. The Federal match for disproportionate share hospital (DSH) payments 

for low-income recipients of hospital services caused States to expand greatly their financing 

of DSH services through provider taxes and donations. From 1988 to 1992, DSH payments 

rose at 263 percent per year on average, and States aggressively shifted health programs to 

Medicaid to reap the Federal matching funds (Holahan et al., 1998). In 1991 and 1993, 

Congress passed legislation limiting State access to Federal DSH payments (Coughlin and 

Liska, undated). However, since SA has been covered poorly under State Medicaid 

programs (Johnson, 1999), these DSH payment changes probably had greater impact on 

Medicaid expenditures for MH and other health care than on SA. 

The Medicaid program also shifted from large hospital spending increases before 1992 to 

lower increases afterward. At the same time, Medicaid stepped up funding for outpatient 

services, particularly at comprehensive mental health organizations (Witken et al., 1999). 

The slowdown in Medicaid SA expenditures also corresponds with accelerated enrollment of 

Medicaid recipients in managed care programs (Braden et al., 1998). This policy change 

should have affected all health care spending as well. Medicaid spending on all health care 

grew 11.8 percent per year (inflation-adjusted) for the first five years, but fell to about half of 

that rate, 6.2 percent growth annually, for the second five years (Figure 3.10). Thus, the 

general Medicaid change affected SA and all health care spending. (MH was affected 

similarly – see Table D.2(c).) 

The slowdown in Medicaid SA spending measured here was not yet influenced by a law 

passed in 1996 (P. L. 104-121) that removed people disabled due to drug addiction or 

alcoholism from eligibility for Medicare and Medicaid coverage because they would be 

ineligible for disability benefits under the Social Security Disability Insurance (SSDI) and 

Supplemental Security Income (SSI) programs. The law denied benefits to individuals who 

applied for such benefits on or after July 1, 1996. Individuals already collecting benefits on 

11.8%

9.8%

5.7% 6.2%

0%

2%

4%

6%

8%

10%

12%

14%

Average Annual Growth Rate 

SA All Health

1

1987-1992

1992-1997
35

July 1, 1996, continued to receive them until January 1, 1997 (SSA, 1996). Our estimates for 

SA are based on actual UFDS data that end in 1996, too soon to see the effect of this law. 

Simply counting SSDI and SSI beneficiaries who qualified on the basis of substance abuse 

would not reveal the impact of this policy change, because some of those SA-SSI 

beneficiaries who lost their benefits may have reapplied and obtained SSI benefits on the 

basis of other disabilities. 

Medicare Spending Accelerated Over the Period 

While Medicaid was slowing SA treatment expenditures, Medicare was expanding them 

rapidly, even though Medicare accounted for only eight percent of all SA expenditures in 

1997. The growth of Medicare SA expenditures more than doubled over the two five-year 

intervals, from a growth rate of 4.7 percent per year to a rate of 10.7 percent per year, on 

average (Figure 3.11), a rapid increase relative to increases for MH and all health care. 

Medicare spending on MH slowed slightly from an 8.8-percent-per-year increase in the first 

five years to 8.3 percent in the second five years. Medicare spending on all health care 

problems accelerated slightly from 6.5 percent to 7.1 percent per year across the decade. 

Figure 3.11 Medicare Spending on SA Accelerated during the Second Five Years 

Source: CSAT/CMHS Spending Estimates (Table D.2(c).

1 Inflation-adjusted, NHA-equivalent expenditures. 

The Medicare expansion for SA spending may be related to coverage policy shifts. Medicare 

expanded benefits to reimburse psychologists and social workers, starting in 1990 

(Rosenbach and Ammering, 1997; Frank, 2000). In addition, Medicare expanded home 

health and nursing home benefits, although these are rarely used for SA treatment. (In fact, 

the Omnibus Budget Reconciliation Act of 1987 disallowed admissions to nursing homes for 

people with primary SA or MH disorders). Nevertheless, reimbursement for treatment by 

independent psychologists and social workers under Medicare may have increased the 

treatment of SA in the eligible disabled and elderly populations. 

4.7%

8.8%

6.5%

10.7%

8.3%

7.1%

0%

2%

4%

6%

8%

10%

12%

SA MH All Health

Average Annual Growth Rate 1

1987-1992

1992-1997
36

Findings in Context 

These results occurred in the context of a changing health care system and changing patterns 

of treatment for MH/SA. In Chapter 6, we explore those changes and their effects on 

MH/SA services and expenditures. We also explore the meaning of slower MH/SA 

expenditure growth compared to all health care spending. 
37

Chapter 4. Alcohol and Drug Abuse Treatment Expenditures, 1997 

Chapters 2 and 3 examined substance abuse – the combined category of alcohol abuse and 

drug abuse – in relation to mental health and all health care expenditures. This chapter 

reveals the differences in alcohol and drug abuse treatment expenditures. 

Recall from Chapter 1 that the assignment of spending to alcohol and drug abuse categories 

required methodological choices. First, we based the assignment of spending solely on the 

first-listed diagnostic code from encounter-level data. We made allocations of expenditures 

for co-occurring drug and alcohol treatment in specialty facilities. For this report, those 

allocations were made proportionate to the “alcohol only” and “drug abuse only” categories 

of revenues reported by facilities in the UFDS surveys. (For those policy analyst who want 

any drug-abuse-related spending allocated completely to the drug abuse category, we provide 

such estimates in the Technical Report from this study (Mark et al., 2000a).) 

Furthermore, because the comparisons in this chapter are between alcohol abuse and drug 

abuse spending (rather than comparisons to all health care), we use the total expenditures that 

include health-related social services. These are shown in Appendix E Tables E.3(a-c) and 

E.4(a-c). (The NHA-equivalent estimates used in earlier chapters are also reported in 

Appendix E, Tables E.1(a-c) and E.2(a-c).) 

Alcohol and Drug Abuse Treatment Expenditures Very Small Relative to Total Cost to 

Society 

National expenditures for alcohol abuse and drug abuse in 1997 were split fairly evenly on a 

dollar basis. Alcohol abuse expenditures were $6.4 million (54 percent) and drug abuse 

expenditures were $5.5 million (46 percent), including the costs of health-related social 

services. 

For both alcohol and drug abuse, spending on treatment is only about five percent of the 

total cost to society of these disorders. Harwood et al. (1998) estimated the indirect cost of 

alcohol and drug abuse in 1995 at $166.5 billion and $109.8 billion, respectively. These 

translate to $177.3 and $116.9 billion, respectively, in 1997 U.S. dollars (Figure 4.1). Thus, 

the total cost to society of these two substances is on the order of 20 to 30 times what the 

Nation spends on their treatment. 
38

Figure 4.1 Both Alcohol and Drug Abuse Treatment Expenditures Were Very Small 

Relative to their Total Social Cost in 1997 

Source: CSAT/CMHS Spending Estimates (Table E.3(a) and Harwood et al., 1998). 1

 The 1995 social-cost estimate was inflated to 1997 dollars using the GDP deflator (2.2 percent per year) and a 

population adjustment (1.0 percent per year). 

Other Similarities between Alcohol and Drug Abuse Treatment Expenditures 

Similar to overall spending on substance abuse, spending on alcohol and drug abuse 

separately is predominantly for specialized provider services and is more likely to pay for 

treatment in outpatient and residential settings than in hospital-based settings. Most spending 

for specialty care is through facilities, especially specialty substance abuse centers, rather 

than through independent practitioners. 

Expenditures for both alcohol and drug abuse problems are more likely to be made by public 

rather than private sources. While the Federal government played a substantial role, once 

again State and local government administered the majority of all funds for both alcohol and 

drug abuse treatment. 

Beneath these aggregate categories, some differences arise related to relative spending for the 

range of providers and to levels of support from different payers. 

Differences between Alcohol and Drug Abuse Treatment Expenditures 

Specialty Sector Larger for Drug Abuse 

Providers of specialty services are a larger force in drug abuse treatment than in alcohol 

treatment (Figure 4.2). Specialty providers received 85.7 percent of total drug abuse 

expenditures in 1997, while they received 71.8 percent of dollars spent on alcohol treatment 

in that year. General providers, thus, received a larger part of alcohol spending than of drug 

abuse spending. This probably reflects the greater spending on general hospital-based 

services for alcohol treatment, shown in the next section. It also may reflect a medical 

profession that deals more with alcohol problems than drug abuse problems and that views 

$6.4 $5.5

$177.3

$116.9

$0

$50

$100

$150

$200

Alcohol Abuse Drug Abuse

Expenditures in billions 

Treatment

Total Social Cost(1)
39

alcohol problems within the domain of general health care. The Institute of Medicine may 

have stimulated that view by arguing that the treatment of alcohol problems should not be 

considered the sole responsibility of specialized providers (IOM, 1990b). 

Differential spending on retail drugs is not a meaningful comparison between alcohol and 

drug abuse. Prescription drugs for treatment of drug abuse (methadone and LAAM) are 

dispensed only by licensed facilities and such data are not broken out on those drugs. Thus, 

they are counted in total facility spending in this study. 

Figure 4.2 Drug Abuse Treatment Expenditures Reflected a Larger Specialty Sector 

than Alcohol Expenditures in 1997 

Source: CSAT/CMHS Spending Estimates (Total expenditures, calculated from Table E.3(a)). 

Hospital-Based Spending Higher for Alcohol Abuse 

More money was spent on alcohol treatment in hospital facilities than was spent on drug 

abuse treatment in the same facilities. Of the $6.4 billion spent on alcohol treatment in 1997, 

42.5 percent of that amount paid for hospital-based care (inpatient or outpatient care 

affiliated with hospitals) (Figure 4.3). Of the $5.5 billion spent on drug abuse treatment, only 

36.6 percent of that went to hospital-based care in 1997. 

The spending differences in Figure 4.3 also reflect that both alcohol and drug abuse treatment 

at hospitals are more likely to occur in specialty units of general hospitals. However, alcohol 

treatment is more likely than drug abuse treatment to be provided in general services units 

and general clinics at these hospitals than in their specialty units. This is consistent with the 

older average age of persons admitted to hospitals with alcohol rather than drug abuse 

problems (OAS, 1999b). Older patients are more likely to have more comorbidities and more 

serious complications of alcohol disorders that frequently would be treated on general rather 

than specialty services. We do not know the extent to which greater use of general (nonRetail Drugs

0.0%

Insurance 

Administration

4.0%

Specialty 

Providers

85.7%

General 

Providers

10.3%

Drug Abuse 

($5.5 billion)

Alcohol Abuse 

($6.4 billion)

Insurance 

Administration

4.1%

Retail Drugs

0.6%

Specialty 

Providers

71.8%

General 

Providers

23.5%
40

specialty unit) hospital services is related to detoxification rather than treatment of alcohol 

problems. 

Figure 4.3 Hospital-Based Spending Higher for Alcohol than Drug Abuse in 1997 

Source: CSAT/CMHS Spending Estimates (Total expenditures, Table E.3(b)). 

 Drug Abuse Treatment More Likely at SSACs; Alcohol Treatment More Likely 

at MSMHOs 

As Chapter 2 showed, the overwhelming majority of substance abuse dollars spent outside 

hospital services went to specialty substance abuse centers (SSACs), whether freestanding or 

part of an HMO, a general ambulatory clinic, a jail, a prison, or a school. 

Drug abuse treatment dollars were more likely to be spent at these facilities than were 

alcohol treatment funds. Of the total $5.5 billion in expenditures on drug treatment in 1997, 

37.1 percent went to SSACs (Figure 4.4). Of the $6.4 billion in alcohol treatment spending 

in the same year, 30.2 percent went to SSACs. 

The next largest recipient following SSACs was multi-service mental health organizations 

(MSMHOs). These facilities attracted slightly more of the alcohol than the drug abuse 

treatment dollar (10.2 percent versus 7.6 percent, respectively). 

42.5%

8.1%

15.1%

25.0%

19.4%

8.5%

3.2%

36.6%

0%

10%

20%

30%

40%

50%

HospitalBased CareSpecialty

Hospitals

Specialty

Units in

General

Hospitals

NonSpecialty

Hospital

Care

Percent of Expenditures

Alcohol Abuse

Drug Abuse
41

Figure 4.4 Drug Abuse Spending Higher on SSACs1; Alcohol Abuse Spending 

Higher on MSMHOs1

 in 1997 

Source: CSAT/CMHS Spending Estimates (Total expenditures, Table E.3(b)). 

1

SSACs are specialty substance abuse centers; MSMHOs are multi-service mental health organizations. 

Independent Practitioners More Relevant for Drug Abuse 

Although the shares of substance abuse spending paid to independent practitioners were 

small compared to MH (as we learned in Chapter 2), the proportions across practitioners 

varied by disorder. SA professionals other than physicians are more likely to treat drug 

abuse than alcohol abuse based on expenditure estimates for 1997. They received four 

percent of the drug abuse dollars but only 1.1 percent of alcohol abuse dollars (Figure 4.5). 

Psychiatrists received 2.9 percent of drug abuse treatment dollars, but only 1.9 percent of 

alcohol treatment dollars in 1997. 

Figure 4.5 Spending on “Professionals Other than Physicians” Was Greater for 

Drug Abuse Treatment than Alcohol Treatment in 1997 

Source: CSAT/CMHS Spending Estimates (Total expenditures, Table E.3(b)). 

30.2%

10.2%

37.1%

7.6%

0%

10%

20%

30%

40%

50%

SSACs(1) MSMHOs(1)

Alcohol Abuse

Drug Abuse

1.9% 1.1%

6.1%

2.9%

4.0%

6.5%

0%

5%

10%

Psychiatrists Professionals

other than

physicians

Non-psychiatric

physicians

Percent of Expenditures 

Alcohol Abuse

Drug Abuse
42

 The Importance of Funding Sources Differed Little by Type of Substance Abuse 

Federal funding was somewhat higher for alcohol than for drug abuse treatment. In 1997, 

Federal funds supported 36.3 percent of the spending on alcohol abuse treatment and 32.9 

percent of drug abuse treatment. 

Figure 4.6 Similar Funding Sources by Type of SA Disorder in 1997 

Source: CSAT/CMHS Spending Estimates (Total expenditures; Table E.4(b)). 

1

 Medicaid dollars here were apportioned to Federal and State/Local Spending. 

Otherwise, sources of funding were more closely divided for both alcohol and drug abuse 

treatment. State and local governments funded 25.7 percent of alcohol and 28.6 percent of 

drug abuse treatment in 1997 (Figure 4.6). Private funding was comparable for alcohol and 

drug abuse treatment at about 38 percent of dollars spent on each type of treatment (Figure 

4.6). However, neither disorder received private support to the degree that mental health care 

was supported by private sources. Mental health care was 45 percent privately funded in 

1997 (Table E.4(b)). 

For a comparison to all health care services, we must return to NHA-equivalent estimates in 

Table E.2(b), which presents the disparity between alcohol/drug abuse treatment dollars and 

all health care dollars from private sources. For alcohol and drug abuse each, about 36 

percent of NHA-equivalent dollars are from private payers. For all health care, 54 percent of 

dollars are from private payments. 

These results support the contention of others that discrimination in coverage of substance 

abuse exists (IOM, 1990a). The U.S. health care system has not reached the public policy 

goal of providing non-discriminatory coverage for alcohol and drug abuse treatment 

equivalent to that for other health problems. 

Alcohol Abuse

Private

38.0%

Federal

36.3%

State/Local1

25.7%

Drug Abuse

Private

38.5%

Federal

32.9%

State/Local1

28.6%
43

Chapter 5. Trends in Alcohol and Drug Abuse Treatment Expenditures, 

1987-1997 

Inflation-Adjusted Growth and “Total” and “NHA-Equivalent” Expenditures 

As in Chapter 3, growth rates for alcohol and drug abuse treatment expenditures are 

inflation-adjusted to reveal spending changes that are beyond general price inflation. See 

Chapter 1 for how the adjustment was made. 

In this chapter, comparisons between alcohol and drug abuse sometimes are made on the 

basis of total expenditures for these disorders. Total (as opposed to NHA-equivalent) 

expenditures capture the full range of services, including health-related social services. 

Whenever alcohol and/or drug abuse spending is compared to all health care spending, the 

NHA-equivalent estimates are used. (Both “total” and “NHA-Equivalent” estimates are in 

tables in Appendix E -- “total” in Tables E.3 and E4; “NHA-equivalent” in Tables E.1 and 

E.2.) 

Drug Abuse Grew Much More Rapidly than Alcohol Treatment and Almost as Fast as 

All Health Care Spending 

In NHA-equivalent inflation-adjusted terms, drug abuse treatment expenditures grew at a rate 

of 4.6 percent per year between 1987 and 1997 (Figure 5.1). In contrast, alcohol abuse 

treatment dollars barely exceeded inflation with a growth rate of 1.1 percent per year. In 

fact, drug abuse treatment spending grew slightly faster than the 4.0-percent increase 

annually for mental health. And, drug abuse spending grew almost as fast as spending for 

all health care, which increased 5.0 percent yearly, on average. 

Figure 5.1 Drug Abuse Spending Increased More Rapidly than Other MH/SA 

Spending between 1987 and 1997 

Source: CSAT/CMHS Spending Estimates (NHA-equivalent expenditures, Table E.1(c)). 

This finding suggests that treatment for drug abuse was expanding during the 10-year period, 

an observation confirmed from other sources in the next section. The increase in drug abuse 

spending was fairly uniform over both five-year periods, with a 4.8 percent increase between 

1.1%

4.6%

4.0%

5.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Alcohol

 Abuse

Drug

 Abuse

Mental

 Health

All

 Health

Average Annual Growth Rate
44

1987 and 1992 and a 4.3 percent increase between 1992 and 1997 (Table E.1(c)). Thus, drug 

abuse expenditures were not affected as significantly by the slowdown in spending that 

occurred for other conditions in the second half of the study period (discussed in Chapter 3). 

The foregoing finding about drug abuse spending makes it clear that the slower substance 

abuse spending overall was due to significantly slower growth in spending on the treatment 

of alcohol problems than on the treatment of drug abuse. 

Reasons for Faster Growth in Drug Abuse Spending 

More Treatment 

With respect to substance abuse treatment expenditures, slower growth for alcohol and faster 

growth for drug abuse treatment are consistent with trends in the types of substance abuse 

reported by clients in U.S. treatment centers. The SAMHSA Treatment Episodes Data Set 

(TEDS) showed that State-agency-funded admissions for treatment of primary alcohol abuse 

declined from 59 percent of admissions in 1992 to 48 percent in 1997 (Figure 5.2; OAS, 

1999b). These alcohol abuse admissions declined both in relative percentage and in absolute 

numbers of admissions. Primary drug abuse treatment increased from 41 percent of 

admissions in 1992 to 52 percent in 1997, in both relative and absolute terms. Individual 

abuse of both substances increased from 40 percent to 44 percent over the same period. 

Abuse of both substances when drug abuse was the primary diagnosis grew faster than when 

alcohol was the primary diagnosis (OAS, 1999b). 

Figure 5.2 Treatment Admissions for Alcohol Abuse Declined and for Drug Abuse 

Increased between 1992 and 1997 

Source: Office of Applied Studies, 1999b, p.47. 58.6% 56.1% 52.6%

50.5%

50.1%

48.3%

41.4%

43.9%

47.4%

49.5%

49.9%

51.7%

0%

25%

50%

75%

100%

1992 1993 1994 1995 1996 1997

Percent of Treatment Admissions

Drug Abuse

Alcohol Abuse
45

Federal Expenditures Increased Significantly for Drug Abuse Treatment 

Federal expenditures (that is, Medicare, the Federal share of Medicaid, and other Federal 

expenditures) for drug abuse treatment grew faster at 9.5 percent per year than they did for 

all other health conditions between 1987 and 1997. Federal spending during the same period 

for alcohol treatment grew 6.7 percent per year, in line with the growth of Federal spending 

on all health care, 6.9 percent per year. 

Figure 5.3 Federal Funding of Drug Abuse Treatment Increased Faster than 

Federal Funding of All Health Care between 1987 and 1997 

Source: CSAT/CMHS Spending Estimates (NHA-equivalent expenditures, Table E.2(c)). 

Federal block grants played an important role in this expansion, as we saw in Chapter 3. The 

Federal SA block grant program gives considerable discretion to States. In the past, the 

SAPT grants required only that not less than 35 percent be spent for alcohol and not less than 

35 percent be spent for drugs. (That requirement was stricken in the Youth Drug and Mental 

Health Act of 2000, P. L. 106-310.) During 1987-1997, the 14-percent-per-year increase in 

Federal block grant funds (Figure 3.9) outstripped the relative percentage increases in SA 

spending (either for alcohol or for drug abuse services) from all other sources of funding 

(Tables D.4(c) and E.4(c)). 

Spending of Federal Medicaid funds on SA varies considerably. Many States cover 

substance abuse only within stringent limits on treatment services or only for detoxification 

rather than treatment (Johnson, 1999). In addition to block grants, Medicaid and Medicare 

funding for drug abuse treatment expanded greatly over the period. Medicaid funding 

increased 7.9 percent per year (Table E.4(c)) on a relatively large base, accounting for 14 

percent of all drug abuse treatment spending in 1987 and resulting in a 20-percent share by 

1997 (Table E.4(b)). During this period, other State and local funding of drug abuse services 

grew (at 2.1 percent per year), despite State action to move many of their health programs 

under Medicaid to reap the benefit of matching Federal Medicaid funds (Holahan et al., 

1998). Again, some States even by 1998 did not cover substance abuse services under 

Medicaid (Johnson, 1999). 

6.7%

9.5%

6.3%

6.9%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Alcohol Abuse Drug Abuse Mental Health All Health

Average Annual Growth Rate
46

Medicare spending also increased dramatically for drug abuse treatment, although the 

Medicare base in 1987 was small (3.5 percent of all drug abuse treatment spending (Table 

E.2(b))). The most notable Medicare spending occurred after 1992: a rate of 15.9 percent per 

year (Table E.2(c)). That fast pace was likely related to the effects of a 1990 law expanding 

mental health benefits and supporting drug abuse treatment – reimbursement of 

psychologists, counselors, and social workers, coverage of medical management visits at 

parity with ambulatory visits, and inclusion of partial hospitalization (Frank, 2000). 

Slow Increase in Private Funding of Drug Abuse Treatment; Decline for Alcohol 

Private support for drug abuse treatment grew at a 2.3-percent-per-year rate, while the rate 

for alcohol abuse declined (-1.8 percent per year) (Table E.2.(c)). The increasing private 

support for drug abuse services was considerably less rapid than for mental health services 

(3.6 percent annually) and all health care (4.1 percent yearly) over the period. 

While private insurance led the increases for mental health and all health care, out-of-pocket 

dollars led the increase for drug abuse (Figure 5.4). Private out-of-pocket payments rose 

about twice as fast for drug abuse (4.9 percent annually) as they did for MH (2.6 percent per 

year) and faster yet than all health (1.8 percent yearly). Out-of-pocket spending on alcohol 

abuse services declined 1.9 percent per year, suggesting different dynamics for personal 

spending on treatment of alcohol abuse than for drug abuse, discussed in Chapter 6. 

Figure 5.4 Private Out-of-Pocket Payments for Drug Abuse Treatment Increased 

Faster than for All Other Health Problems between 1987 and 1997 

Source: CSAT/CMHS Spending Estimates (NHA-equivalent expenditures, Table E.2(c)). 

Evidence of More Efficient Treatment 

Despite a disparity in spending for alcohol and drug abuse treatment, changes in patterns of 

treatment did affect both fields during the period of 1987 to 1997. 

-1.9%

4.9%

2.6%

1.8%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

Alcohol Abuse Drug Abuse Mental Health All Health

Average Annual Growth Rate
47

Alcohol and Drug Abuse Spending Shifted from Hospital-Based to Other 

Services 

Between 1987-1997, judging from spending patterns, hospital-based services for alcohol and 

drug abuse treatment were constrained relative to other treatments (Figure 5.5). This shift in 

treatment dollars was more prominent for SA than for other types of care. Spending on 

hospital-based alcohol services actually declined over the 10 years by an average 1.7 percent 

per year, while alcohol spending on other outpatient and residential treatments rose 4.4 

percent per year. The decline in spending on hospital-based alcohol treatment may have been 

driven by the elimination of inpatient alcohol treatment programs, such as the “28-day 

program.”

While hospital-based drug abuse service spending rose by 1.4 percent per year, drug abuse 

spending in other outpatient and residential settings rose much faster by an average of 7.5 

percent annually over the 10 years. This growth for drug abuse was actually greater than for 

MH (5.1 percent yearly) and all health (5.5 percent yearly). Many would view these trends 

toward greater outpatient treatments as positive results caused by changes in technology and 

pressures from managed care. 

Figure 5.5 Outpatient/Residential Services Grew Notably Faster than HospitalBased Services for Alcohol and Drug Abuse Treatment between 1987 and 

1997 

Source: CSAT/CMHS Spending Estimates (Inflation-adjusted, NHA-equivalent, Table E.1(c)). 

These important shifts in the locus of treatment for alcohol and drug abuse echo the 

literature, which has described the effectiveness of treatment outside the hospital. 

Furthermore, shorter hospital lengths of stay became possible for both detoxification and 

rehabilitation programs over this period (NIAAA, 1997). Detoxification now can be 

accomplished in outpatient settings for many patients with less serious withdrawal 

symptoms, given the improved drugs used for detoxification (IOM, 1990a). -1.7% 1.4% 0.7% 3.6%4.4% 7.5% 5.1%5.5%

-4%

-2%

0%

2%

4%

6%

8%

10%

Alcohol

Abuse

Drug Abuse Mental

Health

All Health

Average Annual Growth Rate

Hospital

based

Other

Outpatient/ 

Residential
48

Spending on Specialty Hospital Services Declined Dramatically 

Spending for treatment in specialty hospitals declined dramatically for both drug abuse and 

alcohol treatment. Drug abuse treatment spending in specialty hospitals declined by 2.3 

percent per year after inflation. Alcohol treatment spending in specialty hospitals declined 

by three times as much, almost a seven-percent-per-year reduction across the 10-year period

(Figure 5.6). 

The substantial declines for drug abuse treatment in specialty hospitals were not evident in 

specialty units of general hospitals (including in VA hospitals) (Figure 5.6). For alcohol, 

spending on those units declined, but by only 1.5 percent per year. For drug abuse, however, 

spending on those units took up some of the dollars that previously had gone to specialty 

hospitals. Drug abuse spending for treatment in specialty units of general hospitals rose 5.2 

percent annually over the 10-year period. At the same time, expenditures on drug-abuse 

treatment in general service units of general hospitals declined markedly by 6.4 percent per 

year. The majority of hospital-based drug abuse treatment occurred in specialty units of 

general hospitals, and the net effect on drug abuse treatment spending for all hospital-based 

services was an increase of 1.4 percent per year (Figure 5.5). 

Figure 5.6 Specialty Hospital Spending Declined for Alcohol and Drug Abuse 

Treatment between 1987 and 1997

Source: CSAT/CMHS Spending Estimates (Total expenditures, Table E.3(c)). 

1”

Specialty units in general hospitals” includes community and VA hospitals. 

As noted in earlier chapters, this view of hospital-based treatment does not show how much 

of the treatment dollars were for inpatient treatment as opposed to outpatient clinic or other 

facility based treatment modalities. It also does not distinguish between detoxification 

services and treatment for SA. Separation of detoxification and treatment services might 

have resulted in different conclusions. 

-1.5%

2.3%

-6.4% -6.8%

5.2%

-2.3%

-10%

0%

10%

Specialty

Hospitals

Specialty

Units in

General

Hospitals(1)

Non-Specialty

Hospital Care

Alcohol Abuse

Drug Abuse
49

Meaning of Trends in Alcohol and Drug Abuse Spending 

These trends occurred in the context of a changing health care system and changing patterns 

of treatment for both alcohol and drug abuse disorders. In Chapter 6, we explore those 

changes and their effects on SA services and expenditures. 
50

Chapter 6. Conclusions 

Substance abuse (SA) disorders are associated with a substantial degree of morbidity and 

mortality, draining resources of individuals. The behavioral problems associated with 

substance abuse too frequently are lead to substantial losses in productivity and property and 

impose a high cost on society. 

Over the past 10 years, major strides in the neurological and behavioral sciences have led to 

better understanding of the diversity of genetic and behavioral factors that influence the 

propensity of individuals to abuse substances (McLellan, et al, 2000). The health care 

system has struggled to treat SA disorders by finding financial resources to pay for treatment 

regimens and by searching for more effective treatments. A diverse network of professionals 

provides treatment that is rarely standardized or evaluated in terms of outcomes for patients. 

Changes in treatment philosophy and more recently managed care have moved care out of 

hospitals and into community settings. These forces may have reduced SA expenditures 

(e.g., less reliance on expensive hospital care, shorter hospital stays, and detoxification in 

outpatient settings) or they simply may have shifted the locus of care from private insurance 

to public programs, without reducing the cost of treatment. 

Given the dramatic changes in the health care landscape it is important to follow how SA 

treatment dollars are changing and to evaluate that pattern relative to overall spending in the 

health care industry. On a national scale, who is paying for SA treatment? Are government 

roles increasing? Are private insurers cutting SA benefits? Who is providing treatment and 

receiving SA dollars? How is the locus of care changing? 

Study Methods 

This document is derived from a larger study of mental health and substance abuse (MH/SA) 

treatment expenditures in the United States (Coffey et al., 2000; Mark et al., 2000(a and b)). 

Those reports discuss a second set of estimates that are part of a series of planned, periodic 

updates of national expenditures for MH/SA treatment. The estimates can be compared with 

all health care spending nationally, as contained in the National Health Accounts of the 

United States (see for example, Braden et al., 1998). 

This study also provides an historical perspective developed with a single consistent method 

so trends in, for example, SA treatment expenditures can be identified. In addition to all 

health care expenditures, this work also distinguishes spending for mental health (MH), 

substance abuse (SA), alcohol abuse, and drug abuse, separately. These separate estimates 

permit policymakers to discern whether and where their program policy initiatives have had 

an impact. And they provide a way to assess how public policy changes may interact with 

the dynamics of the private health care system. 
51

National Trends in Health Care in Relation to SA Treatment 

Nationally, the trend toward slowing the rise in health care costs began in 1991, propelled by 

industry changes such as the shift to managed care plans, price competition among health 

plans, and low general and medical inflation (Braden et al., 1998). The same forces likely 

restrained SA spending growth, although it is possible those forces took hold sooner and had 

a greater impact on SA than on MH or all health, judging from the rate of growth of 

spending. It is also possible that the slower growth of SA spending reflects an erosion of 

health insurance benefits for SA. 

Enrollment Trends in the Private Sector 

Enrollment in managed care plans and in plans that specialize in managing behavioral health 

benefits has grown rapidly since the early 1990s. In 1987, traditional insurance based on feefor-service was the dominant method of financing health care; by 1998, fewer than 15 

percent of active employees covered in employer-sponsored health plans were enrolled in 

indemnity insurance (Collective Bargaining Reporter, 1998). While in 1987, behavioral 

health care plans were essentially unknown, they enrolled 48 percent of the insured 

population by the end of 1992 and 57 percent by the end of 1997 (Open Minds, 1993 and 

1998). These facts likely have had significant effects on SA- and MH-related utilization and 

expenditures by private insurers. 

Enrollment Trends in the Public Sector 

Public payers followed private payers in adopting managed care. Managed care grew from 

9.5 percent of total Medicaid enrollment in 1991 to nearly one-half (47.8 percent) in 1997 

(Braden et al., 1998). Likewise, enrollment of Medicare beneficiaries in HMOs increased, 

although at a much more conservative pace, from about three percent of Medicare enrollees 

to 13.5 percent over the same period (Braden et al., 1998). 

Information is limited on Medicaid adoption of behavioral health care plans (BHCPs) for 

their recipients. One qualitative study of Medicaid BHCPs indicates that they have grown in 

use and complexity among 54 Medicaid contracts (GWU, 1998). Understanding the 

penetration and effects of BHCPs is essential to understanding the slower growth of SA in 

relation to all health care and for understanding a slowdown in Medicaid funding for SA in 

the second half of the study period. 

Effects of Managed Care 

Research has shown that managed care organizations (MCOs) constrain utilization and 

expenditures. BHCPs apparently control spending for SA treatment more effectively than 

they do for MH services. The introduction of a capitated behavioral health care carve-out 

plan for Massachusetts Medicaid had a substantial impact on SA treatment and expenditures. 

While the number of users of inpatient services per 1000 Medicaid enrollees declined 2.4 

percent for MH, it declined 61.2 percent for SA. Other SA services (detoxification and 

methadone maintenance) increased substantially (Callahan et al., 1995). 
52

Savings come from shifting use from inpatient services to outpatient services and decreasing 

the volume of services, typically number of admissions, average length of stay, and to a 

lesser extent, mean number of outpatient visits (Callahan et al., 1995; Frank and McGuire, 

1997; Ma and McGuire, 1998; Larson et al., 1997; Huskamp, 1998; Brisson and Frank, 1999; 

Leslie and Rosenheck, 1999; Stein et al., 1999; Weisner et al., 1999; Wickizer and Lessler, 

1998; see Grazier and Eselius, 1999 and Weisner et al., 1999 for reviews of the issue). 

Furthermore, utilization review of hospital admissions and length of stay may have a greater 

impact on SA and MH care than on care for other conditions (Callahan et al., 1995; Wickizer 

and Lessler, 1998). 

BHCPs argue that they substantially lessen the costs of SA and MH treatment by utilizing 

case management. The management may involve many activities: access to case managers, 

use of community care instead of inpatient treatment, follow-up after hospitalization and 

after treatment in an emergency room, and/or family involvement in treatment. SA program 

directors concur that while services are unduly restricted, marketing, outreach, and follow-up 

are enhanced; outcomes are an increasing focus under managed care (McNeese-Smith, 1998; 

Alexander, Lemark, 1997). These sources also question the effects of managed care on 

treatment quality. Findings such as increased detoxification services under BHCPs raise 

warning flags (Callahan et al., 1995). Detoxification alone is not considered treatment for 

substance abuse (IOM, 1990a). Does the increased use of detoxification come at the expense 

of counseling and continuing care? Few quantitative findings on quality of care are 

available. One study found that recidivism rates for SA in one institution were the same 

under managed care and traditional payment methods (Renz, 1995). 

Variation in the cost of treating SA is consistent with the apparent ability of BHCPs to reduce 

the cost of SA. Therapeutic community treatment programs for drug abuse compared across 

three sites in three States (Arizona, New Jersey, and New York) ranged from $10,893 to 

$29,117 per treatment episode (French, 1996). This variation across programs with 

apparently similar goals suggests that large price variation may be one reason why BHCPs 

have been able to reduce the cost of SA treatment. 

Based on this literature, we speculate that the slower growth of SA spending in the first five 

years of the 10-year trend might have been due to managed care influences. In particular, 

enrollment under managed care contracts was greater in the first half than the second half of 

the study period (Open Minds, 1993 and 1998). The strong evidence on the effectiveness of 

BHCPs suggests that managed care may have made substantial contributions to the greater 

decline in hospital expenditures for SA than for all health care services over the study period 

and likely also constrained the use of residential and outpatient services. 

Changes in Treatment Philosophy 

The shift away from hospital care also reflects a long-term shift in thinking about the most 

cost-effective and beneficial modes for treating behavioral health disorders (IOM, 1990a; 

NIDA, 1999). Since the 1950s, State governments have been downsizing and closing public 

mental hospitals and other specialty hospitals; long-term patients have been returned to 

community residence and care in general hospitals (Mechanic et al., 1998; Bachrach, 1996). 

Because the Medicaid program prohibits payments to Institutions for Mental Disease for 
53

those between the ages of 21 and 65, Medicaid has held down funding for care of many 

persons who formerly would have received care in public mental hospitals or in residential 

centers with more than 16 beds (Frank, 2000). 

Private SA and MH facilities responded to this trend by enhancing their services. Partial 

hospitalization became one approach for treating people with serious substance abuse 

problems (IOM, 1990a). Residential treatment in therapeutic communities expanded 

(Callahan et al., 1995 and 1998). 2000a). Since detoxification on an outpatient basis is more 

often recommended today than in the 1980s, only persons with severe withdrawal and other 

medical complications now require hospitalization (IOM, 1990a). 

What Does Slower SA Growth Mean? 

The slower growth rate of SA spending relative to mental health and all health care may 

reflect two important policy shifts or perhaps simply a different technology of care. One 

policy change, discussed above, is the greater influence of managed behavioral health on SA 

disorders. The other policy shift may be new restrictions on SA coverage under private 

insurance or public programs. Understanding these potential causes helps delineate whether 

remedies are warranted or not. 

A number of questions are raised if restraints on SA spending are due to greater efficiency of 

managed behavioral health care. Does management of services create greater access barriers 

to SA treatment resulting in fewer people being treated? Or do these changes indicate that 

SA treatment has become relatively more cost-effective with the same number of (or more) 

people being served with fewer dollars? While reduction of treatment costs is desirable, the 

consequences of those reductions should be monitored closely. The continued long waiting 

lists, particularly in urban SA programs (IOM, 1990a; ONDCP, 2000), attest to the fact that 

managed care in Medicaid and private insurance has not alleviated those problems. 

If slower SA spending is the result of growing SA coverage restrictions by private and public 

programs, the policy prescription is more straightforward. Laws to promote substance abuse 

treatment parity with all health care will be necessary. 

An alternative viewpoint is that slower SA spending growth may have occurred because SA 

is fundamentally different from the rest of the health care system and, increasingly, different 

from MH. SA services have faced less of the rapid, continuous change in underlying 

technologies that can dramatically increase the cost of health care once new treatments 

become widespread. For example, new, expensive surgical procedures (such as organ 

transplants (Andrews et al., 1994)) save lives but sizably increase the cost of health care, 

especially as they become disseminated widely. New, expensive drug therapies widely 

disseminated for mental illness may have accelerated MH expenditures, while they clearly 

have not been used for SA treatment to the same extent, perhaps contributing to the 

differential growth of SA and MH expenditures. 
54

This study shows several trends consistent with slower growth of SA spending than of all 

health care services over the period from 1987 to 1997: 

• faster reduction in inpatient care; 

• similar growth in outpatient and residential spending; 

• stronger cost containment pressures from third-party management of SA (fairly 

convincing in the literature) and; 

• a treatment regimen that is less pressured by new technological imperatives. 

However, these conclusions are more circumstantial than definitive explanations of why SA 

spending has risen more slowly than MH and all health care. More detailed work is needed 

and is underway on these issues (e.g., Frank et al., 1998). 

Our study of SA expenditures raises another other important question about the capacity of 

substance abuse providers. Why do independent specialists in MH/SA treatment 

(psychiatrists, psychologists, counselors, and social workers) receive a lower proportion of 

SA dollars than MH dollars? Are these specialists less likely to accept addiction clients than 

mental health clients? Are these professionals less well trained to treat SA than mental 

illness? Are their SA services less likely to be covered by third-party payments than their 

MH services? What is the impact of the high degree of separation of SA and MH services on 

persons who suffer from dual diagnoses of substance abuse and mental disorders? Research 

is needed for definitive conclusions about the capacity of the substance abuse network of 

treatment providers, insurance coverage of their services, and about the continuity of care 

available to clients with dual disorders. 

Another area for concern is the substantial lag in private financing for SA treatment behind 

that for mental health and all health care problems. Private insurers’ inflation-adjusted 

payments for SA treatment declined 0.6 percent each year on average over this period, while 

private insurance expenditures grew 4.7 percent annually for MH and 5.4 percent yearly for 

all health. If the declines in private reimbursement for SA services were the result of 

increased efficiencies in treatment of SA, we would look to find the same trend (a decrease) 

in out-of-pocket costs to those being treated. But this is not the case. Out-of-pocket costs to 

SA clients and/or their families increased over the period, albeit at a rate below out-of-pocket 

increases for MH and all health care. 

Meaning of Trends in Alcohol and Drug Abuse Spending 

Literature over the last 10 years reports major changes in the treatment settings and regimens 

for alcohol and drug abuse (IOM, 1990a; NIAAA, 1997; Weisner et al., 1999). These 

changes encompass: 

• restrained use of inpatient services reserved for the most severe drug problems; 

• use of partial hospitalization rather than long stays whenever possible; 

• use of outpatient and social (residential, non-hospital treatment) settings for 

detoxification (except for complicated withdrawal cases); 

• earlier community-based rehabilitation; 

• better integration of services to coordinate care across settings; and 

• focus on continuity and outcomes (as yet unsubstantiated) of treatment. 
55

These changes are generally acknowledged to have been stimulated by the financial 

imperative of managed care and credited to the specialized knowledge of managed 

behavioral health care plans. 

What Does the Growth in Drug Abuse Treatment Spending Mean? 

The faster spending on treatment for drug abuse did not mirror exactly the rates of drug abuse 

by the U.S. population (OAS, 1999b). The National Household Survey on Drug Abuse 

(NHSDA) shows that illicit drug use was at its zenith in the late 1970s and mid-1980s for 

those residents in households (including those in shelters and group homes). Use of any 

illicit drug reported in “the past month” has been fairly steady since 1988 – declining slightly 

from 7.7 percent of the population in 1988 to 6.4 percent in 1997. Thus, while expenditures 

and treatment for drug abuse have been growing, the prevalence of abuse in the general 

population has remained fairly steady. 

As a result, estimates of the “treatment gap” for drug abuse suggest that the gap has narrowed 

(Epstein and Gfroerer, 1998). This gap is the difference between the number of people in 

drug abuse treatment (based on the UFDS data) and the number of people who need 

treatment based on severe abuse of drugs (from the NHSDA). This treatment gap declined 

for most of the period during which it has been measured, from 3.5 million people without 

treatment in 1991 to 3.3 million untreated in 1996. 

Despite improvements in the treatment gap brought about by more spending on drug abuse 

treatment, the majority of people with serious drug abuse problems (63 percent) still go 

untreated. An estimated 3.3 million of the 5.3 million people with severe drug abuse 

problems in 1996 were not treated for those problems (Epstein and Gfroerer, 1998). This 

high percentage, coupled with the existence of waiting lists for drug treatment especially in 

urban areas (IOM, 1990a; ONDCP, 2000), suggests that drug abuse treatment capacity is still 

inadequately financed to significantly reduce the drug abuse problem and its associated social 

costs in the United States. 

What Does the Slow Growth in Alcohol Treatment Spending Mean? 

The proportion of the United States population treated for alcohol-related problems has 

declined over the period of this study. The number of people treated on a single day in 1988 

in facilities licensed or tracked by States was 875.7 thousand; the number in 1997 was 713.7 

thousand (OAS, 1999b). At the same time, heavy use of alcohol (defined as “five or more 

drinks on the same occasion on each of five or more days in the past thirty days” reported in 

the NHSDA household surveys) remained fairly steady in the United States. In 1988, an 

estimated 11.5 million people indulged in heavy alcohol consumption, in 1997, 11.2 million 

did (OAS, 1998). 

While the OAS statistics do not capture all treatment for alcohol problems, those figures 

coupled with alcohol treatment expenditure estimates from this study (which are 

comprehensive) suggest a wide, and perhaps widening, gap in the treatment of people with 

serious alcohol problems. Total spending on alcohol treatment remains nearly unchanged 

over the decade compared to spending on all health care problems. 
56

This might raise little concern for alarm, except that one vision for alcohol treatment is to 

reach all of those with alcohol dependence and also many of those with less serious alcohol 

problems. The Institute of Medicine assembled a panel of experts in the late 1980s who 

recommended broadening the base of treatment of alcohol problems – not only providing 

better, more integrated treatment for those with the most serious problems, but also providing 

treatment for those with less serious conditions (for example, teenage binge alcohol 

consumption) and providing early intervention to reach teenagers before they are caught in a 

chronic health problem. If those recommendations had been acted upon, we would have 

expected substantially increased numbers of people in treatment and greater expenditures on 

alcohol treatment. 

At the same time managed care has been pressuring providers of alcohol and drug abuse 

treatment services to reduce the use of services. Because of frequent medical complications 

which plague those with alcohol dependence, managed care has likely had a dual impact on 

alcohol treatment. We cannot assess in this study whether these effects of managed care and 

slower spending on alcohol problems compared to other diseases represent less treatment or 

more efficient care. Even if the result is more efficient care, the question that remains in 

evaluating these aggregate spending trends is what effect the constraints have on outcomes 

for people with alcohol problems. 

Conclusion 

What can be concluded from the fact that during the period 1987 to 1997 SA spending grew, 

but at a rate significantly below mental health and all health care expenditures? First, given 

the significant gap between prevalence and treatment of substance abuse disorders reported 

in SAMHSA surveys (OAS, 1998a), growth in expenditures is a welcome finding. We know 

that, overall, more people are seeking treatment at SA facilities. For example, the UFDS 

survey of substance abuse facilities shows that 929 thousand clients on a single day in 1997 

sought help in coping with substance abuse problems, up from 768 thousand on the same day 

in 1990 (OAS, 1999a). Unfortunately, we do not know whether the number of people in the 

privately financed treatment system has risen, stayed the same, or declined. And, we do not 

know whether there is a trend forcing private clients to move to public programs. 

Second, without further work that dissects the rate of expenditure growth into changes in 

utilization and changes in prices, it is impossible to say whether access and use of needed 

services did indeed improve over the time period. The relatively low growth rate of SA 

spending relative to MH and all health care spending is particularly troubling in this regard. 

This is particularly disconcerting in light of the fact that about five million people are in need 

of drug abuse treatment while only about two million are receiving treatment (OAS, 1998b; 

ONDCP, 2000). 

Evidence from this report and other research also demonstrates that SA expenditures can be 

contained. Over the study period, there was a greater recognition that alcohol and drug 

treatments can be accomplished for many cases in less expensive outpatient and residential 

settings. This was especially apparent from the estimates for alcohol treatment, where 

private insurance has historically played a larger role and where the cutbacks were large. 
57

If we can resolve the questions about the quality of treatments received by persons suffering 

from addictions under managed care, we can be more certain about the best directions for 

substance abuse treatment programs in the future. Assuming no adverse effects on the 

quality and outcomes of treatment, the trend in slower spending on substance abuse treatment 

(evident from this study) could create a financial opportunity to treat more people with SA 

problems by reinvesting the savings in substance abuse treatment. Reinvestment is more 

likely to play out under public programs (which are substantial in this field) than under 

private insurance. Under private insurance, savings are normally translated into lower 

premiums for employers and employees or larger profits for insurers. The challenge remains 

for public payers – primarily the State and local governments that manage the majority of 

public substance abuse dollars – to realize potential for savings in both alcohol and drug 

abuse services and translate them into treatments for additional people who suffer from 

substance abuse problems. Only with greater efforts to ensure access to treatments, monitor 

quality of services provided, and, at the same time, contain treatment costs can we increase 

the number of people reached by substance abuse treatment. This is one way we can strive to 

lessen the tremendous costs to society of substance abuse and create a more satisfied life for 

those who are plagued by substance abuse disorders. 
58

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Glossary of Acronyms and Terms 

Acronyms: 

GDP = Gross Domestic Product 

HCFA = Health Care Financing Administration 

HCUP-NIS = Healthcare Cost and Utilization Project, Nationwide Inpatient Sample 

IMHO = Inventory of Mental Health Organizations 

MH/SA = Mental Health and Substance Abuse, including alcohol and drug abuse 

MSMHO = Multi-Service Mental Health Organizations 

NAMCS = National Ambulatory Medical Care Survey 

NDATUS = National Drug and Alcoholism Treatment Unit Survey 

NHA = National Health Accounts 

NHAMCS = National Hospital Ambulatory Medical Care Survey 

NHDS = National Hospital Discharge Survey 

NHHCS = National Home and Hospice Care Survey 

NMES = National Medical Expenditure Survey 

SAMHSA = Substance Abuse and Mental Health Services Administration 

SIC = Standard Industrial Classification 

UFDS = Uniform Facility Data Set 

Terms: 

General Hospital Specialty Units: Specialty psychiatric or substance abuse units of 

community hospitals and Veterans Affairs hospitals. 

Hospital-based Services: All services owned and operated by hospitals – inpatient, 

outpatient (including clinics and home health), and residential facilities (including 

nursing homes). 

Insurance Administration: Administrative expenses of all third-party payers and profit 

and reserve adjustments for private insurers. 

MarketScan: A private database of The MEDSTAT Group, Inc. The database 

includes paid insurance claims for seven million privately insured persons from large 

employers across the Nation. 

Medicaid: A State-administered and State-and-Federally-funded program which 

provides health care services for certain low-income persons. 

Medicare: A Federal government health insurance program for persons 65 years of age 

and over, for people entitled to social security disability payments for two years or more, 

and for people with end-stage renal disease, regardless of income. 

Multi-Service Mental Health Organizations (MSMHOs): A variety of providers such as 

community mental health centers, residential treatment facilities for the mentally ill, and 

partial care facilities. Some MSMHO providers treat people with substance abuse disorders. 

National Health Accounts: A system of accounting for expenditures on health care in 

the United States developed and maintained by the Health Care Financing 

Administration. 

Non-Community Hospitals (for NHA comparisons): Psychiatric hospitals, Veterans 

Affairs hospitals, and other specialty hospitals and all of their hospital-based services. 

Non-Specialty Care in Community Hospitals: That portion of care provided in 

community hospitals outside of specialty psychiatric or substance abuse treatment units. 
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This category excludes VA hospitals. 

Other Federal Government: Health care covered or provided by Federal government 

agencies and programs other than Medicaid or Medicare (e.g., Veterans Affairs, 

Department of Defense, and Federal block grants to the States). 

Other Non-Durable Medical Products: Non-prescription drugs and medical sundries. 

Other Outpatient and Residential Care: All providers except for hospital-based services, 

retail prescription drugs, and insurance administration. Note hospital-based services include 

some outpatient services, which are thus excluded from the “other outpatient and residential 

care” category. This latter category captures most (albeit imperfectly) outpatient and nonhospital-based services to MH/SA clients. 

Other Personal Health Care and Government Public Health Activities: Direct services 

provided by community health centers (SA or MH). Also, it includes direct services 

provided by employers for the health care needs of their employees, offered either on-site or 

off-site. Government expenditures for care not specified in kind, or health care spending that 

is not elsewhere classified. This tends to include services offered at non-health facilities 

such as at schools, military field stations, prisons, and community centers. Health care 

spending at prisons is excluded when it is paid for by the correctional system and funded 

internally [or outside government health agencies]. If the services are obtained through 

contract with other health facilities or independent practitioners, they are included in the 

respective provider category.

Other Private: A residual category of nonpublic funds which include philanthropy, 

foundation grants, gift shops, and cafeterias, as well as health care provider investment 

income. 

Other Professionals: This category includes non-physician professionals including 

psychologists, counselors, and social workers. For the NHA-equivalent estimates, this 

category 1) includes only health-related services of non-physician health professionals such 

as psychologists, chiropractors, optometrists, podiatrists, and other licensed medical 

practitioners, as well as miscellaneous health and allied services, and 2) excludes 

independently billing, social service providers who provide services outside of what is 

considered typically to be health services (such as job placement). The latter group includes 

counselors and social workers.

Other State/Local Government: Health care expenditures by State and local 

governments other than that for Medicaid. 

Out-of-Pocket Spending: Expenditures that are made by individuals or their families for 

health care services that are not reimbursed by health insurers or publicly subsidized 

programs. This includes payments by those without and with insurance. For the insured, 

out-of-pocket payments can include: copayment and deductible amounts, services 

uninsured or beyond insurance limits, as well as MH/SA encounters paid entirely by the 

client or family to avoid the stigma of MH/SA treatment on insurance records. Health 

insurance premiums are excluded from this category. 

Residential Treatment Centers for Children: These residential facilities primarily treat 

emotionally disturbed children and may include a small amount of inpatient treatment, as 

well as outpatient care. They also treat adolescents for substance abuse problems. 

Retail Prescription Drugs: Prescriptions obtained through retail (pharmacy or mail order) 

distribution. Inpatient drug treatment and facilities which dispense drugs through public 

programs, such as methadone clinics, are not included in this category, but rather are part of 
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the specific facility expenditure. 

Specialty Hospitals: Psychiatric hospitals, which specialize in mental health or substance 

abuse treatment, and all of their hospital-based services. 

Specialty Substance Abuse Centers (SSACs): Freestanding substance abuse centers and 

units of other facilities. Thus, for example, it includes methadone maintenance clinics, other 

facilities that primarily serve persons with substance abuse problems, and units of public 

health clinics, charitable organizations, correctional facilities, and other entities. Some of 

these organizations have substance abuse as their primary mission and others treat substance 

abuse as a secondary function. We assume that all services provided at these facilities are 

primarily for treatment of substance abuse rather than mental health disorders. 

Standard Industrial Codes: A classification system used by the Bureau of the Census to 

classify businesses.