MEDICAID

FINANCING

of State and County

PSYCHIATRIC

 HOSPITALS
C2 blank
U.S. Department of Health and

Human Services

Substance Abuse and Mental Health

Services Administration

Center for Mental Health Services

Debra Draper

Megan McHugh

Lori Achman

Sylvia Kuo

Special Report

 MEDICAID

FINANCING

of State and County

PSYCHIATRIC

 HOSPITALS
ii Special Report

Acknowledgments

The authors of this report are Debra Draper, Megan McHugh, Lori Achman, and Sylvia Kuo

of Mathematica Policy Research, Inc. Judith Teich, of the Center for Mental Health Services

(CMHS), Substance Abuse and Mental Health Services Administration (SAMHSA) was the

Government Project Officer, and Jeffrey A. Buck, Associate Director for Organization and

Financing, CMHS/SAMHSA, served as advisor.

Disclaimer

Material for this report was prepared by Mathematica Policy Research, Inc., for the Substance

Abuse and Mental Health Services (SAMHSA), U.S. Department of Health and Human

Services (DHHS), under Contract Number 282-98-0021, Task Order No. 29. The content of

this publication does not necessarily reflect the views or policies of CMHS, SAMHSA, or

DHHS.

Public Domain Notice

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

without permission from SAMHSA or CMHS. Citation of the source is appreciated. However,

this publication may not be reproduced or distributed for a fee without the specific, written

authorization of the Office of Communications, SAMHSA, DHHS.

Electronic Access and Copies of Publication

This publication can be accessed electronically at www.samhsa.gov/. For additional free

copies of this document, please call SAMHSA’s Mental Health Information Clearinghouse

at 1-800-789-2647.

Recommended Citation

Draper DA, McHugh MC, Achman L, Kuo S. Medicaid Financing of State and County

Psychiatric Hospitals. DHHS Pub. No. (SMA) 03-3830 Rockville, MD: Center for Mental

Health Services, Substance Abuse and Mental Health Services Administration, 2003.

Originating Office

Office of the Associate Director for Organization and Financing, Center for Mental Health

Services, Substance Abuse and Mental Health Services Administration, 5600 Fishers Lane,

15-87, Rockville, MD 20857. 

DHHS Publication No. (SMA) 03-3830

Printed 2003
Table of Contents

Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

A. Historical Context of Public Psychiatric Hospitals . . . . . . . . . . . 4

B. Focus of This Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

C. Study Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

D. Organization of the Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

II. Sources of Medicaid Funds for State and County Psychiatric Hospitals . . . 9

A. IMD Optional Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

B. Medicaid Managed Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

C. Disproportionate Share Hospital Payments . . . . . . . . . . . . . . . 13

D. Administrative Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

E. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

III. Medicaid Funding of State and County Psychiatric Hospitals 

in Five States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

A. The Role of Public Psychiatric Hospitals in States’ Public 

Mental Health Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

B. States as Primary Funders of State and County Psychiatric 

Hospitals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

C. Sources of Medicaid Funds . . . . . . . . . . . . . . . . . . . . . . . . . . 23

D. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

IV. National Estimate of Medicaid Funding . . . . . . . . . . . . . . . . . . . . . . . . 29

A. Previous Estimates of Medicaid Funding . . . . . . . . . . . . . . . . . 29

B. National Estimate of Medicaid Funding of Public Psychiatric 

Hospitals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

C. Assumptions and Limitations of the National Estimate . . . . . . 32

D. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Medicaid Financing of State and County Psychiatric Hospitals iii
V. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

A. Medicaid Funding and Public Psychiatric Hospitals . . . . . . . . . 33

B. Pressures Affecting Future Medicaid Funding . . . . . . . . . . . . . 34

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Appendix A. Expert Advisory Panel Members . . . . . . . . . . . . . . . . . . . . . . 41

Appendix B. The Use of Intergovernmental Transfers in the 

Disproportionate Share Hospital Payment Program . . . . . . . . 43

Appendix C. Profiles of Public Psychiatric Hospitals in the Five 

Case Study States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Profile of Public Psychiatric Hospitals in Arkansas . . . . . . . . . 45

Profile of Public Psychiatric Hospitals in California . . . . . . . . 47

Profile of Public Psychiatric Hospitals in Iowa . . . . . . . . . . . . 50

Profile of Public Psychiatric Hospitals in Maryland . . . . . . . . 52

Profile of Public Psychiatric Hospitals in New Jersey . . . . . . . 55

Appendix D. Data Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Figures

I.1 Number of Psychiatric Hospitals by Ownership Type, 1970–1998 . . . . . 7

I.2 Number of Psychiatric Hospital Beds by Ownership Type, 1970–1998 . . 8

II.1 Total IMD DSH (including public and private IMD payments), 

1991–2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

B.1 Hypothetical Example of a State Medicaid Financing Strategy . . . . . . . 44

C.1 State Psychiatric Hospitals in Arkansas . . . . . . . . . . . . . . . . . . . . . . . . 45

C.2 State and County Psychiatric Hospitals in California . . . . . . . . . . . . . . 48

C.3 State and County Psychiatric Hospitals in Iowa . . . . . . . . . . . . . . . . . . 51

C.4 State and County Psychiatric Hospitals in Maryland . . . . . . . . . . . . . . 53

C.5 State and County Psychiatric Hospitals in New Jersey . . . . . . . . . . . . . 56

iv Special Report
Tables

II.1 IMD Optional Services by State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

II.2 1915(b) and 1115 Waiver Provisions Affecting IMDs . . . . . . . . . . . . . . 12

II.3 State DSH Allocations by Psychiatric Hospital Ownership, FY 1998 . . . 14

II.4 IMD DSH Payments by State (including public and private 

IMD payments), 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

III.1 Revenues of State-Owned Psychiatric Hospitals by Source 

and Percentage of Total (in millions of dollars) . . . . . . . . . . . . . . . . . . 23

III.2 Number and Percentage of Children/Adolescent and Geriatric Beds 

in the State Psychiatric Hospital Systems . . . . . . . . . . . . . . . . . . . . . . . 24

IV.1 Conversion of Federal Medical Assistance Percentage (FMAP) 

to Available State Financial Information . . . . . . . . . . . . . . . . . . . . . . . 31

IV.2 Total Medicaid Funding of State Psychiatric Hospitals in Five 

Case Study States (in millions of dollars) . . . . . . . . . . . . . . . . . . . . . . . 31

IV.3 Total Estimate of Medicaid Funding of State and County 

Psychiatric Hospitals: 2001 (in billions of dollars) . . . . . . . . . . . . . . . . 32

D.1 Descriptions and Limitations of Currently Available Data 

on Medicaid Financing of Public Psychiatric Hospitals . . . . . . . . . . . . 60

Medicaid Financing of State and County Psychiatric Hospitals v

Acommon perception is that public psychiatric hospitals

receive little or no Medicaid funds because of the

Institutions for Mental Diseases (IMD) exclusion. This

policy prohibits Medicaid reimbursement for care provided to individuals older than 21 years or younger than 65 years if the care is delivered

in psychiatric institutions. Nevertheless, while States continue to provide

substantial support to public psychiatric hospitals, in recent years

Medicaid has funded an increasing share of the operations of these facilities. This study was undertaken to address the lack of comprehensive

information regarding the nature and scope of such Medicaid support.

The study identifies potential sources of Medicaid funds paid on behalf

of public psychiatric hospitals and provides an estimate of the amount

of such funds in 2001. The Medicaid funding experiences of public psychiatric hospitals in five States—Arkansas, California, Iowa, Maryland,

and New Jersey—were examined in depth for the study. 

Executive Summary

Major findings:

■ In 2001, an estimated $2.6 billion in

Medicaid funds were paid on behalf of

public psychiatric hospitals in the United

States. This represents approximately

one-third of total operating costs for these

institutions. 

■ Medicaid funding for State and county

psychiatric hospitals can be derived from

several sources: 

— IMD Optional Services: States may

choose to provide coverage for inpatient services in an IMD for Medicaideligible individuals age 65 and over or

under age 21, as well as for nursing

facility services in an IMD for persons

age 65 and over.

— Medicaid Managed Care: States can

obtain IMD expenditure authority

through a 1115 Medicaid waiver; pay

for IMD services with savings from

Medicaid managed care programs;

or indirectly pay for IMD services if

IMDs participate in the provider networks of behavioral health organizations (BHOs) that contract with the

State’s Medicaid program. 

— Disproportionate Share Hospital (DSH):

The Medicaid program provides

supplemental payments to hospitals,

including IMDs, that render a large

volume of care to indigent patients. 

— Administrative payments: IMD

residents’ Medicaid eligibility allows

Medicaid Financing of State and County Psychiatric Hospitals 1
payment for administrative services

provided to them, such as administrative case management. 

■ Of these sources, DSH payments currently

represent the overwhelming majority of

Medicaid funds paid to State and county

psychiatric facilities. 

■ The pursuit of each of these funding

sources varies considerably from State to

State, as dictated by local circumstances.

Even among States that avail themselves

of the same sources of Medicaid funds,

methods and amounts differ significantly. 

The role of public psychiatric hospitals is

changing constantly. States have worked since

the 1960s to move large numbers of patients

out of these facilities into community-based

treatment settings. The challenges faced by

State and county psychiatric hospitals are

substantial and are likely to affect future

Medicaid financing strategies pursued by

the hospitals themselves or on their behalf. 

2 Special Report
I. Introduction

Even though the IMD exclusion and

changes in mental health care delivery generally have limited Medicaid reimbursement

for services in State and county psychiatric

hospitals, these hospitals potentially may

avail themselves of other sources of

Medicaid funds. For example, Federal assistance in the form of disproportionate share

hospital (DSH) payments is available to State

and county psychiatric facilities serving a

disproportionate number of low-income

patients. However, Federal laws enacted

Medicaid Financing of State and County Psychiatric Hospitals 3

While States enjoy significant flexibility in the design

and operation of their Medicaid programs, they

nonetheless rely heavily on financial support from

the Federal Government. The Medicaid financing process is highly complex, and more so in many ways for State and county psychiatric hospitals than for other facilities and services. Much of the complexity is rooted in the Federal Government’s longstanding policy that long-term

psychiatric care—primarily for adults—is the responsibility of the

States. Consequently, Federal law does not generally allow Medicaid

reimbursement for care provided to individuals older than 21 years or

younger than 65 years if the care is delivered in institutions for mental

diseases (IMDs) (Geller 2000; National Association of State Mental

Health Program Directors 2001a).1 Dramatic shifts in mental health

care delivery also have added to the complexity surrounding Medicaid

financing of State and county psychiatric hospital services. In a trend

commonly referred to as deinstitutionalization, sites of care have moved

rapidly from inpatient to outpatient facilities and from institutions to

community-based treatment programs (Geller 2000). 

1 An IMD is defined as “a hospital, nursing facility, or other institution of more than 16 beds that is primarily

engaged in providing diagnosis, treatment, or care of persons with mental diseases, including medical attention, nursing care, and related services” (U.S. Department of Health and Human Services (USDHHS)1992,

1994). Further, “[a]n institution is an IMD if its overall character is that of a facility established and maintained primarily for the care and treatment of individuals with mental diseases” (USDHHS 1994). When

Congress created the Medicaid program in 1965 and subsequently amended it in 1972, it relaxed the IMD

rule. The rule allowed funding for inpatient psychiatric care rendered in general hospitals as well as certain

services for IMD residents age 65 years and older and persons under age 21 (USDHHS 1992). Medicaid

reimbursement for inpatient psychiatric care provided by IMDs is available for individuals under age 21 and

for individuals age 65 years and older if the State elects these optional services under its Medicaid State plan.
during the 1990s set limits on payment

amounts.2 Congress also imposed significant

restrictions, to be phased in over time, on the

use of DSH monies to finance IMD services

(National Association of Public Hospitals

and Health Systems 2001a; National

Association of State Mental Health Program

Directors 2001b, 2001c; U.S. General

Accounting Office (USGAO) 2000).

Although many public psychiatric hospitals

have benefited from the availability of

Medicaid supplemental funds such as DSH,

the continued availability of the funds, at

least at recent levels, may be less certain in

the future.

Thus, the overarching question is,

“What share of State and county psychiatric

hospital operations does Medicaid finance?”

While existing evidence is limited and dated,

it does suggest that Medicaid has been

financing an increasing share of public psychiatric hospital operations. One estimate

suggested that Medicaid represented approximately 10 percent of State and county psychiatric hospital revenues in 1990; a more

recent estimate suggested that it accounted

for 18 percent in 1994 (Manderscheid et al.

2001). However, given the extensive variation in State Medicaid programs as well as

in States’ approaches to the use of Medicaid

financing, the experiences of individual

States may differ dramatically from these

national estimates. Further, much has happened since the mid-1990s that could affect

trends both nationally and in individual

States, including the proliferation of the

DSH program and of Medicaid managed

care programs.

A. Historical Context of

Public Psychiatric Hospitals

Medicaid’s role in funding services for patients

in public psychiatric hospitals has been influenced greatly by the IMD exclusion and

deinstitutionalization.

1. IMD Exclusion

Although the roots of the IMD exclusion

predate the Medicaid program, the rule continues to confound today’s financing relationship between Medicaid and State and county

psychiatric hospitals. The 1950 amendments

to the Social Security Act established the prohibition of Federal assistance for IMD residents as well as for patients diagnosed with a

psychosis found in other medical institutions

(USDHHS 1992). When the Medicaid program was established in 1965, it created the

State option that, for the first time, allowed

Medicaid funding for inpatient psychiatric

care rendered in general hospitals as well as

funding for specific services provided to IMD

residents age 65 years and older. Further

amendments in 1972 allowed for optional

coverage, under certain circumstances, for

IMD residents under age 21 or, in some

cases, under age 22. Thus, the IMD exclusion

generally prohibits Medicaid reimbursement

for services obtained in IMDs by Medicaideligible adults age 22 to 64 years of age

(Office of the Inspector General (OIG)

2001a, 2001b, 2001c).3 However, the IMD

exclusion does not bar Medicaid reimburse4 Special Report

2 Among these laws are the Omnibus Budget

Reconciliation Act of 1993 (OBRA) and the

Balanced Budget Act of 1997 (BBA) (National

Association of Public Hospitals and Health

Systems 2001a; National Association of State

Mental Health Program Directors 2001b, 2001c;

USGAO 2000).

3 Some States, such as Iowa, specify that IMD residents can be covered through age 22 if they are

hospitalized in an IMD before their 21st birthday

(Center for Health Services Research and Policy

2001; OIG 2001b).
ment for inpatient psychiatric services per se,

only services provided in specific types of

facilities.4 Medicaid funds may be available

for the same services rendered in a non-IMD

environment. 

An IMD is defined as “a hospital, nursing facility, or other institution of more than

16 beds that is primarily engaged in providing diagnosis, treatment or care of persons

with mental diseases, including medical

attention, nursing care, and related services”

(USDHHS 1992, 1994). Further, “[a]n

institution is an IMD if its overall character

is that of a facility established and maintained primarily for the care and treatment

of individuals with mental diseases”

(DHHS 1994).5 Both Federal and State

governments generally concur that State

and county psychiatric hospitals qualify as

IMDs. In fact, the literature often uses the

terms “IMD” and “public psychiatric hospital” interchangeably. While the Centers

for Medicare and Medicaid Services (CMS)

has Federal regulatory authority over IMDs,

it does not maintain a comprehensive list

of existing IMDs but instead expects States

to be self-policing in this area (personal

communication, 12/11/01, M. Mullen at

Center for Medicaid and State Operations

(CMSO)). Consequently, the nationwide

number of IMDs beyond those that are

public psychiatric hospitals remains

unknown.

2. Deinstitutionalization and

Public Psychiatric Hospitals

Since the late 1960s, the Nation has seen

a dramatic shift in the settings of care for

persons with mental illness. Much of the

shift resulted from a change in Federal

policy during the mid-1960s, when policymakers were intent on moving people out

of State psychiatric hospitals and into community-based programs. Important factors

contributing to deinstitutionalization

included the promotion of community care

settings that developed with the passage of

the Community Mental Health Centers Act

of 1963; the creation of the Medicaid and

Medicare programs in 1965, which provided funding for community-based mental

health services; the introduction of psychotropic medications during the 1960s;

and the growing patient-rights movement,

including the development of patientfocused mental health law (Grob 2001;

Gronfein 1985; Mechanic 1969). More

recently, managed care has continued the

move toward community-based treatment

settings for persons with mental illness,

as have legal rulings such as the Supreme

Court decision Olmstead v. L.C (Hogan

Medicaid Financing of State and County Psychiatric Hospitals 5

4 According to the State Medicaid Manual, the key

criteria for a facility to be designated as an IMD

include the following: has more than 16 beds; specializes in the treatment of persons with mental illness; the current need for institutionalization for at

least 50 percent of the residents results from mental diseases; is licensed and/or accredited as a psychiatric facility; and operates under the jurisdiction

of a State mental health authority. The manual further specifies guidelines in the event of ambiguity

about a particular facility—for example, whether

a general hospital psychiatric ward is considered

a component of the hospital or an independent

institution (USDHHS 1994).

5 Over the years, there has been considerable debate

about what other facilities fit the IMD definition.

For example, some of that debate has focused on

whether nursing homes can be designated as IMDs.

According to a 1995 Supreme Court ruling, they

can be if they meet the criteria (USDHHS 1992).

The IMD exclusion has led to the growth of nonIMD facilities such as psychiatric facilities with 16

or fewer beds and psychiatric hospitals that have

become affiliated with a general hospital to bypass

the 50 percent rule, and to the shifting of persons

with mental illness into non-IMD nursing homes

(Administration for Children and Families 1999;

OIG 2000).
1999; Perlin 2000; Ray and Oss 1993;

White House 2002).6

The impact of these forces on public psychiatric hospitals over the years is striking.

The number of public psychiatric hospitals

declined by 26 percent between 1970 and

1998 (see Figure I.1). Despite substantial

growth in the number of private psychiatric

hospitals early in the same period, by 1992

these hospitals’ numbers likewise began to

decline. Between 1992 and 1998, the number

of private facilities decreased by 27 percent.

At least through 1998, however, the number

of psychiatric units in general hospitals continued to grow, although at a much more

moderate pace in recent years.

While the trends in the number of psychiatric hospitals by ownership type generally

reflect the impact of shifts in mental health

care settings, the effects are more dramatic

in terms of changes in bed capacity (see

Figure I.2). In 1970, the Nation counted

more than 400,000 public psychiatric hospital beds, but by 1998, the number had

decreased to just over 63,000, an 85 percent decline. During the same period, the

number of private psychiatric hospital beds

increased more than twofold, from just over

14,000 to more than 33,000. In addition,

the number of psychiatric beds in general

hospitals more than doubled, increasing

from approximately 22,000 in 1970 to

just over 54,000 by 1998. 

In sum, public psychiatric hospitals represented the overwhelming majority of psychiatric hospital beds in 1970, but the picture

changed dramatically by 1998. The loss of

nearly 350,000 public psychiatric hospital

beds during this period was only partially

offset by the combined increase in the number of private and general hospital psychiatric beds (approximately 50,000).

According to the National Association of

State Mental Health Program Directors

Research Institute (2000), the shrinkage in

State psychiatric hospital capacity led to an

escalation in the number of closures and

consolidations of State psychiatric hospitals

over the past decade. 

B. Focus of This Report

As the role of State and county psychiatric

hospitals in public mental health systems has

evolved, many people believe, incorrectly,

that these institutions receive few, if any,

Medicaid funds. This misperception may be

bolstered by a general lack of information

and data bearing on the issue. Although

some research, for example, has looked at

DSH payments to public psychiatric hospitals, the information on the overall share of

facility funding represented by Medicaid is

limited at best. Further, the available information is dated and does not reflect changes

in Medicaid financing policies over the past

10 years.

The purpose of this report is to identify

the sources of Medicaid funds that State and

county psychiatric hospitals receive, changes

in these sources over time, and the pressures

and local circumstances that influence the

Medicaid financing strategies that States

pursue on behalf of these public institutions.

In addition, the report updates previous

estimates of the share of public psychiatric

hospital operations financed by Medicaid.

This information will help to gauge more

accurately the effect of changes in Medicaid

6 Special Report

6 The court ruled on the case in June 1999. It held

that “in appropriate circumstances, the ADA

[Americans with Disabilities Act] requires the

placement of persons with disabilities in a

community-integrated setting whenever possible”

(White House 2002).
financing policies on these public institutions

and the persons they serve.

C. Study Methods

This report draws from a multifaceted study

of State and county psychiatric hospitals.

Specifically, information was collected from

four sources: 

■ Review of the literature. The review

focused on articles and other information

discussing sources of and changes in

Medicaid funds available to public psychiatric hospitals and the factors that have

shaped the role of Medicaid involvement

with these institutions.

■ Expert advisory panel. The panel providing

guidance to the project included representatives from State mental health authorities,

State Medicaid agencies, mental health

researchers, relevant national trade organizations, public consulting, and CMS.7

■ Case studies of five States. The study

team conducted site visits to five States:

Arkansas, California, Iowa, Maryland,

and New Jersey, selected for their broad

range of demographic characteristics

and Medicaid funding experiences.8

Medicaid Financing of State and County Psychiatric Hospitals 7

Year

Number of Hospitals

1970 1980 1990 1998

0

200

400

600

800

1000

1200

1400

1600

1800

Source: Manderscheid et al. 2001.

Public Private General Hospital Units

Figure I.1: Number of Psychiatric Hospitals by Ownership Type, 

1970–1998

7 Appendix A presents a list of the expert panel

members.

8 The characteristics considered in selecting States

for inclusion in the case studies were (1) geographic

location; (2) population size; (3) number of State psychiatric hospitals; (4) existence of county psychiatric

hospitals; (5) IMD participation in the DSH program; (6) IMD optional services for the population

under age 21 and/or the population age 65 and over;

(7) Medicaid waivers with provisions for IMDs such

as IMD expenditure authority; and (8) inclusion of

public psychiatric hospitals in Medicaid managed

care organizations’ provider networks.
■ Interviews with CMS regional office staff.9

Conducted by telephone, the interviews

solicited the insights and perspectives of

CMS regional office staff on the process

of adding, terminating, or altering

Medicaid financing strategy for a State’s

public psychiatric hospitals.

D. Organization of the Report

The balance of this report examines the

above issues more fully. Chapter II identifies

and describes the sources of Medicaid funds

that may be available to State and county

psychiatric hospitals. Chapter III examines

the specific Medicaid funding experiences of

these institutions in the five case study States

and the local circumstances that may affect

Medicaid financing strategies pursued by

each State. Chapter IV reconciles earlier

estimates of Medicaid’s contribution to the

overall funding of public psychiatric hospitals

with today’s situation. Finally, Chapter V

draws overall conclusions and discusses

pressures—such as States’ budget crises—

that may affect future Medicaid financing

of public psychiatric hospitals.

8 Special Report

Year

Number of Beds (in thousands)

1970 1980 1990 1998

0

50

100

150

200

250

300

350

400

450

Source: Manderscheid et al. 2001.

Public Private General Hospital Units

Figure I.2: Number of Psychiatric Hospital Beds by Ownership Type,

1970–1998

9 CMS regional office staff who participated in

interviews were those who work directly with

the five case study States.
II.

I

dentifying and understanding Medicaid funding sources for public

psychiatric hospitals is difficult because information about them is

limited and because funds are used in complex ways. Although

some sources of Medicaid funds have been available to State and county

psychiatric hospitals under the State option for some time, the past

decade has seen these facilities tap into new Medicaid funding streams,

such as DSH payments. This chapter examines the different Medicaid

funding streams available to State and county psychiatric hospitals.

A. IMD Optional Services

Federal law requires that States provide certain basic services that are deemed medically

necessary to Medicaid recipients. In addition,

States may choose to provide certain optional

services under their Medicaid plan as allowed

by Federal regulations. Optional services

must be offered consistently within a State

without discrimination based on disease

category or geographic location (Johns

Hopkins AIDS Service 2003).

For IMDs such as State and county psychiatric hospitals to receive Medicaid reimbursement for inpatient services provided to persons under 21 years of age and/or to persons

age 65 years and older, the State must choose

specifically to cover these optional services

under the State Medicaid plan. States, however, are not required to choose any of the

IMD optional services, although most have

opted for them (see Table II.1).10 Specifically,

States may choose to provide the following:

■ Coverage of inpatient hospital services

under the direction of a physician for

Medicaid-eligible individuals aged 65

and over in an IMD. Forty States and

the District of Columbia cover this

optional service. 

■ Nursing facility services for Medicaideligible individuals aged 65 and over in

Medicaid Financing of State and County Psychiatric Hospitals 9

Sources of Medicaid

Funds for State and

County Psychiatric

Hospitals

10Whether services received by IMD residents outside

the IMD are Medicaid-reimbursable has been the

subject of considerable discussion between the

States and the Federal government. The Federal

Government recently conducted a series of audits

through the Office of the Inspector General in which

it found States improperly claiming Medicaid reimbursement for adult and child IMD residents temporarily released to receive care in acute care hospitals (OIG 1995, 2001a, 2001b, 2001c); however,

some States have resisted such an interpretation.
an IMD. This option includes nursing

services provided in nursing homes that

meet IMD requirements. Nursing services

must be needed on a daily basis and be

provided on an inpatient basis. Thirtythree States and the District of Columbia

cover this optional service.

■ Coverage of inpatient psychiatric care only

for Medicaid-eligible IMD residents under

age 21. In order to qualify for Medicaid

reimbursement, the inpatient psychiatric

services must be provided under the direction of a physician and also must be provided in a psychiatric hospital, inpatient

psychiatric program in a hospital, or other

psychiatric facility accredited by the Joint

Commission on Accreditation of

Healthcare Organizations (JCAHO) or

another accrediting organization. Thirtynine States and the District of Columbia

cover this optional service (CMS 2002b).

B. Medicaid Managed Care

The advent of Medicaid managed care has

led to the creation of new funding opportunities for IMD services. States may request a

10 Special Report

Table II.1: IMD Optional Services by State

Under 21a 65 Years and Older Under 21a 65 Years and Older ________________ ________________

Inpatient Inpatient Nursing Inpatient Inpatient Nursing

State Psychiatric Hospital Services State Psychiatric Hospital Services

Alabama X X X Missouri X X

Alaska X X Montana X X X

Arizona X X X Nebraska X X X

Arkansas X Nevada X X X

California X X X New Hampshire X X X

Colorado X X X New Jersey X X X

Connecticut X X X New Mexico X

Delaware X X New York X X

District of X X X North Carolina X X X

Columbia North Dakota X X

Florida X Ohio X X X

Georgia Oklahoma X X

Hawaii Oregon X X

Idaho X X Pennsylvania X X X

Illinois X X X Rhode Island X X X

Indiana X X South Carolina X

Iowa X X X South Dakota X

Kansas X X X Tennessee X X X

Kentucky X X X Texas

Louisiana X X Utah X X X

Maine X X Vermont X X X

Maryland X X X Virginia X X

Massachusetts X X X Washington X X X

Michigan X X X West Virginia

Minnesota X X X Wisconsin X X X

Mississippi X Wyoming X

Source: Medicaid State Plan Summaries (Commerce Clearing House, Inc. 2001).

Notes: The number of States and the District of Columbia choosing IMD optional coverage for the under-21 population = 40; the number of States and the

District of Columbia choosing optional coverage for inpatient hospital services for IMD residents 65 years and older = 41; and the number of States

and the District of Columbia choosing optional coverage for nursing facility services for IMD residents 65 years and older = 34.

aThe definition of the “under-21” group varies slightly by State; some States cover those through age 21, others cover those strictly under the age of 21,

and still others cover those aged 22 if they are hospitalized on their 21st birthday (Center for Health Services Research and Policy 2001).
waiver from the Federal Government in order

to operate a specific kind of program (CMS

2002a). Medicaid waivers often are used to

authorize managed care or alternative delivery or reimbursement systems. States may

obtain two distinct types of Medicaid waivers

to implement managed care in their Medicaid

programs. Both types—Section 1915(b) and

Section 1115—fall under the purview of Title

XIX of the Social Security Act.

More recently, the Balanced Budget Act

of 1997 gave States the option of amending

their State plans to require Medicaid beneficiaries’ enrollment in managed care. This

option allows States to forgo the waiver as

long as certain exempted populations, such

as supplemental security income (SSI) populations and children with special health care

needs, are not required to enroll. If there is

mandatory enrollment for exempted populations, a waiver is still required (Federal

Register 2001c).

There are three ways in which States can

use managed care programs to pay for IMD

services. First, States can pay for IMD services with savings generated from Medicaid

managed care programs. Second, States can

indirectly pay for IMD services in State and

county psychiatric hospitals if those hospitals

participate in the provider networks of BHOs

that contract with the State’s Medicaid program. Third, States can obtain IMD expenditure authority through an 1115 Medicaid

waiver. 

1. Paying for IMD Services Through Savings 

Section 1915(b) waivers, known also as freedom-of-choice waivers, permit States to

bypass certain provisions of the Medicaid law

and require beneficiaries to enroll in managed

care. CMS requires that 1915(b) waiver programs cannot negatively affect beneficiary

access or quality of care of services, and cannot cost more than what the Medicaid program would have cost without the waiver.

The waiver programs are approved for 2

years and may be renewed if the State applies

(CMS 2002a). The 1915(b) waiver permits

States to use cost savings to provide additional services to existing Medicaid-eligible beneficiaries. This waiver does not grant “IMD

expenditure authority.” That is, it does not

give States the authority to reimburse IMDs

directly for inpatient services provided to

adults (CMS 2002a; personal communication,

11/14/01, R. Rhodes at CMSO). However,

given that States are allowed to use any savings generated from managed care to provide

additional services to Medicaid beneficiaries,

States technically can use the savings to pay

for inpatient services provided to adults in

IMDs.

2. Inclusion of Public Psychiatric Hospitals

in BHO Provider Networks 

Medicaid dollars may filter through to IMDs

indirectly if the facilities participate in the

provider networks of behavioral health

organizations (BHOs) that contract with a

State’s Medicaid program. The inclusion of

State and county psychiatric hospitals in such

a network may be a State requirement, as in

Hawaii and Iowa (see Table II.2); however,

these hospitals may also be included at the

discretion of the BHOs themselves.11

Medicaid Financing of State and County Psychiatric Hospitals 11

11Members of the expert panel confirmed that if

inpatient hospital services are included in the

State’s capitation payment to BHOs, then these

organizations could potentially purchase services

from public facilities such as State and county

psychiatric hospitals.
3. Section 1115 Waiver IMD Expenditure

Authority

Section 1115 waivers, also referred to as

research and demonstration waivers, allow

States to carry out experiments to test

new approaches to benefit design, service

organization, delivery, and financing as

well as eligibility. In fact, States often use

the waivers to expand coverage to the

uninsured (Health Care Financing

Administration (HCFA) 1997; Physician

Payment Review Commission 1995, 1996;

Rotwein et al. 1995). Section 1115 waiver

projects are typically approved to operate

for a 5-year period and must be budget

neutral over the life of the project (CMS

2003). The flexibility of the waivers has

encouraged some States to incorporate IMD

services into their Medicaid managed care

programs by obtaining IMD expenditure

authority (see Table II.2). Eight States currently have 1115 waivers with IMD expenditure authority. 

Depending on the State, the IMD expenditure authority may not extend to all

IMDs in the State but rather to a designated

group, such as private freestanding psychiatric hospitals. In other words, just because

a State has IMD expenditure authority does

not necessarily mean that such authority

12 Special Report

Table II.2: 1915(b) and 1115 Waiver Provisions Affecting IMDs

State Type of Waiver Description of IMD Provisions

Arizona 1115 Medicaid coverage of all Medicaid-eligible adults at all IMDs;

coverage up to 30 days per episode; aggregate annual limit of 60 days

Delaware 1115 Medicaid coverage of all Medicaid-eligible adults at all IMDs;

coverage up to 30 days per episode; aggregate annual limit of 60 days

Hawaii 1915(b) Mandates State psychiatric hospital inclusion in Medicaid managed care

networks

Iowa 1915(b) Mandates State psychiatric hospital inclusion in Medicaid managed care

networks

Maryland 1115 Medicaid coverage of only Temporary Cash Assistance (TCA) adults at

all IMDsa

; coverage up to 30 days per episode; aggregate annual limit of

60 days

Massachusetts 1115 Medicaid coverage of all Medicaid-eligible adults at all IMDs;

coverage up to 30 days per episode; aggregate annual limit of 60 days

Oregon 1115 Medicaid coverage of all Medicaid-eligible adults only at Eastern Oregon

Psychiatric Center (a private facility); coverage up to 30 days per episode;

aggregate annual limit of 60 days

Rhode Island 1115 Medicaid coverage of all Medicaid-eligible adults only at Butler Hospital

(a private facility); no limits

Tennessee 1115 Medicaid coverage of all Medicaid-eligible adults at all IMDs; coverage

up to 30 days per episode; aggregate annual limit of 60 days

Vermont 1115 Medicaid coverage of all Medicaid-eligible adults at all IMDs; coverage

up to 30 days per episode; aggregate annual limit of 60 days

Source: Compiled from the Center for Health Services Research and Policy (2001) and information from various State project officers in the Division of

Integrated Health Systems, Family and Children’s Health Program Group, CMSO.

a

The Temporary Assistance for Needy Families (TANF) program in Maryland is known as Temporary Cash Assistance (TCA).
applies to State and county psychiatric hospitals. Furthermore, all IMD expenditure

authority States except Rhode Island impose

a 30-day limit per episode and a 60-day

annual limit for inpatient mental health services; the coverage is intended to treat IMDs

as acute care facilities for new admissions

rather than as long-term care facilities

(Center for Health Services Research and

Policy 2001; personal communications,

11/19/01, various State project officers at

CMSO). 

States have not actively pursued Section

1115 waivers as a vehicle for receiving IMD

expenditure authority. In fact, most of the

existing waivers were approved during the

mid-1990s, and States have demonstrated

little activity recently in the pursuit of these

waivers (personal communication, 11/19/02,

M. Fiori at CMSO). CMS reports that as the

Section 1115 waivers with IMD expenditure

authority expire, this authority will not be

renewed (Peltz 2002).

C. Disproportionate Share

Hospital Payments

For many State and county psychiatric hospitals, Medicaid’s DSH program is a major

funding source. The intent of the DSH program is to provide supplemental payments to

hospitals that render care to a large volume

of indigent patients; these facilities are often

unable to generate revenues sufficient to

cover their uncompensated care costs

because they do not serve enough privately

insured patients and because Medicaid

reimbursement is low (Coughlin and Liska

1997). Subject to some minimal Federal

requirements, the States have substantial discretion in setting the criteria for hospitals’

eligibility for DSH payments, and the criteria

almost always encompass both public and

private psychiatric hospitals.12 Over a short

period, the size of the DSH program increased

dramatically, rising from a total of $1.4 billion in payments with 6 participating States

in 1990 to $17.5 billion with 39 participating

States by 1992 (Coughlin and Liska 1997).

In 2001, the size of the DSH program was

reportedly $15.9 billion, with 47 States and

the District of Columbia participating

(CMS-64 Files 1991–2001).

Most State and county psychiatric hospitals far exceed minimum requirements for

DSH payments to hospitals. In the early

1990s, amid State budget shortfalls and

expansions in Medicaid eligibility, States

began using DSH for their IMDs (Coughlin

and Liska 1997; Coughlin et al. 1994).13 The

DSH program gave States the opportunity to

obtain additional Federal dollars, subject to

the Federal match.14 Yet, owing to Federal

restrictions on the use of DSH monies, many

States turned to intergovernmental transfers

(IGTs)—monetary transfers within or across

different levels of government—to revert

DSH funds back to State general treasuries

Medicaid Financing of State and County Psychiatric Hospitals 13

12According to the U.S. General Accounting Office

(1998), “[H]ospitals must receive DSH payments

if their Medicaid utilization rate is at least one

standard deviation greater than the average for

hospitals participating in Medicaid or if their

low-income utilization exceeds 25 percent...[and]

[s]tates may designate other hospitals to receive

DSH funding if the hospital’s Medicaid utilization

rate is at least 1 percent of its total bed days.” 

13The Federal Government consistently has used

the term “IMD” in relation to DSH program

participation; however, evidence indicates that

the “IMDs” participating in the DSH appear to

be only psychiatric hospitals under State, county,

and/or private ownership (CMS Medicaid DSH

Files 1998–2000; Coughlin, Ku, and Kim 2000).

14The Federal match applies to qualified State

Medicaid expenditures, with the current matching

rates ranging from 50 percent for the “richest”

States up to 76 percent for the “poorest” States

(Federal Register 2000a).
or to fund other, sometimes non-Medicaid,

services (Coughlin and Liska 1997; OIG

2001d; USGAO 1994, 1998, 2000, 2001).

An expanded discussion of how IGTs are

used within a DSH program can be found in

Appendix B.

Typically, data do not break down

Medicaid funding source by type of provider.

The one exception, is DSH receipts, which

offer data on the extent of DSH funds paid

on behalf of public psychiatric hospitals in

1998 (see Table II.3). Nonetheless, the data

14 Special Report

Table II.3: State DSH Allocations by Psychiatric Hospital Ownership, 

FY 1998

Ownership Type Percent DSH ______________

State Total DSH for State to IMDs IMD DSH Private Public

Alabamaa $394,719,037 1.4 $5,445,255 $ — $5,445,255

Alaska 12,688,347 100.0 12,688,347 — 12,688,347

Arizona 122,347,000 — — — —

Arkansas 1,656,113 28.2 466,593 466,593 —

California 442,104,105 0.5 2,155,189 — 2,155,189

Connecticut 370,130,366 27.9 103,267,503 103,267,503 —

Delaware 3,534,500 100.0 3,534,500 — 3,534,500

District of Columbia 32,857,143 — — — —

Floridaa 370,754,045 26.8 99,347,719 34,958 99,312,761

Idaho 1,436,990 — — — —

Indiana 116,439,213 64.5 75,117,785 — 75,117,785

Iowa 19,837,652 93.5 18,540,540 1,817 18,538,723

Kansas 43,392,800 86.2 37,406,858 — 37,406,858

Kentucky 194,685,251 — — — —

Louisianaa 734,339,152 0.1 452,364 452,364 —

Maryland 143,283,966 70.8 101,452,469 — 101,452,469

Massachusetts 548,500,577 18.9 103,700,000 — 103,700,000

Mainea 71,392,621 — — — —

Minnesotaa 56,382,060 17.5 9,885,420 — 9,885,420

Missouri 666,056,964 1.3 8,989,089 8,333,767 655,322

Montana 220,052 — — — —

Nevada 73,560,000 — — — —

New Hampshirea 103,411,171 — — — —

New Mexico 6,886,109 0.9 60,914 60,914 —

North Carolina 338,800,136 49.1 166,276,389 42,336 166,234,053

North Dakota 1,194,829 83.6 998,478 — 998,478

Oklahoma 22,691,824 14.2 3,221,641 311,823 2,909,818

Oregon 28,234,851 66.9 18,889,988 — 18,889,988

Pennsylvania 40,955,369 — — — —

Rhode Island 55,985,977 0.1 38,558 38,558 —

South Carolina 433,786,686 8.5 36,981,675 868,472 36,113,203

Utah 72,810,270 12.9 9,363,448 — 9,363,448

Vermont 29,071,994 31.1 9,039,342 — 9,039,342

Virginia 160,677,775 — — — —

Washingtona 330,274,439 31.7 104,656,857 30,355 104,626,502

West Virginia 82,222,530 21.5 17,704,657 — 17,704,657

Wisconsin 11,177,730 24.8 2,775,257 88,076 2,687,181

Wyoming 67,001 — — — —

Source: Compiled from CMS Medicaid DSH files by state, the Knowledge Exchange Network (KEN), NASMHPD State psychiatric hospital database, and

various Web sites.

Notes: California, Indiana and Louisiana use State fiscal year 1998; Minnesota uses calendar year 1997. States not included in the list are “no report.”

Some of these States have no State DSH payments, while others are still reconciling their accounts. The information reflects combined Federal

and State DSH payments.

a These States did not identify hospital type and/or ownership. In this case, KEN was used to identify psychiatric hospitals, while the NASMHPD database and various hospital or State Web sites were used to derive ownership. If ownership was still unclear, then private ownership was assumed.
do not indicate which States are using IGTs

or, for those that do use IGTs, the uses to

which the States allocate the funds.15

Federal concerns about the dramatic rise

in DSH spending prompted Congress to pass a

statute designed to curb DSH expenditure

growth. Legislation enacted during the early

1990s created State-specific Medicaid DSH

allocations that limited expenditures to 1992

levels for “high-DSH” States and allowed

growth in proportion to State Medicaid spending based on 1992 levels for “low-DSH”

States.16 The Omnibus Budget Reconciliation

Act of 1993 (OBRA) introduced further

restrictions that created facility-specific caps,

under which total DSH payments to a

provider could be no more than the total nonreimbursed costs of providing inpatient care to

Medicaid and uninsured patients (Coughlin

and Liska 1997; National Association of

Public Hospitals and Health Systems 2001a). 

More recent legislation has curtailed overall State DSH spending still further by specifically focusing on IMD DSH in light of the

rapid escalation in payments during the early

to mid-1990s (see Figure II.1). The Balanced

Budget Act of 1997 (BBA) specified StateMedicaid Financing of State and County Psychiatric Hospitals 15

15Coughlin et al. (2000) attempt to estimate where

DSH funds end up by using State surveys on revenue

and expenditures for their DSH programs overall.

Across the 40 responding States, the researchers

found that the total gain to States and hospitals

through the DSH program was $8 billion, $2 billon

of which went to State hospitals, $1.2 billion of

which States retained in residual funds, and the

remainder of which went to non-State hospitals.

However, the estimates aggregate both psychiatric

and acute care hospitals and cannot distinguish

whether the $2 billion to State hospitals funded

services or was offset by lower appropriations

from the State budget. 

16 “High-DSH” States were those whose DSH payments exceeded 12 percent or more of their total

Medicaid expenditures; “low-DSH” States were those

with less than 12 percent (Coughlin and Liska 1997).

Year

Dollars (in millions)

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Source: CMS-64 Files 1991–2001 (combined Federal and State DSH payments).

Figure II.1: Total IMD DSH (including public and private IMD payments), 

1991–2000
by-State allocations for fiscal years 1998

through 2002 in which the amounts were to

remain fixed or to decrease over the period.

For IMDs, each State could spend no more

on DSH for these facilities than it did in fiscal

year 1995, either in absolute dollars or as a

percentage of total State DSH spending.

The BBA placed specific restrictions on

those States that spent more than half of their

DSH allocation on IMDs, limiting future

IMD DSH expenditures as a percentage of

total DSH to 50 percent in fiscal year 2001,

40 percent in fiscal year 2002, and 33 percent thereafter (HCFA 1997; National

Association of Public Hospitals and Health

Systems 2001a; National Association of State

Mental Health Program Directors 2001b,

2001c). Temporary relief came from the

Beneficiary Improvement and Protection Act

of 2000 (BIPA), which allowed State DSH

allocations to increase by the Consumer

Price Index for fiscal years 2001 and 2002.

Consequently, IMD DSH payments were not

subject to the 50 percent limit imposed by

the BBA for 2001 and continued to represent

a substantial portion of the total DSH payments in many States in that year (see Table

II.4). In fiscal year 2003, however, the allocations reverted to the level specified in the

BBA (HCFA 2001; NAPH 2001a). Using

2001 data on DSH, it appears the BBA’s 33

percent IMD cap affects 15 States in 2003.17

Florida is one of the States affected by the

BBA IMD caps. A 2000 audit report by the

Florida Office of Program Policy Analysis

and Government Accountability anticipated

that the State would lose $29.6 million, or

almost 11 percent of the State’s budget for

mental health institutions, as a result of IMD

caps in the DSH program. To offset the loss,

the State chose to close down a State mental

hospital by moving patients to other hospitals

or into community treatment settings. All

patient transfers were completed for this

hospital on February 8, 2002 (Florida

Department of Children and Families 2003).

While the BBA has placed limits on the

amount of DSH paid on behalf of IMDs, this

source of funds is likely to continue to contribute a significant portion of the overall

Medicaid funding that States receive. It is

expected that States pursuing this funding

strategy will continue to seek DSH funds on

behalf of their public psychiatric hospitals

to the extent possible under the law.

D. Administrative Payments

While Federal regulations allow States to be

reimbursed for the costs necessary to administer their Medicaid programs, the intent of

the regulations becomes less clear when

administrative costs are associated with IMD

residents. The reason stems largely from the

IMD exclusion that prohibits Medicaid reimbursement for most IMD services. Given,

however, that the IMD exclusion applies

only to services, it does not preclude the use

of Medicaid funds for administrative costs

related to Medicaid-eligible IMD residents

(USDHHS 1992). A 1992 USDHHS Report

to Congress clarified that IMD residents’

Medicaid eligibility allows them to receive

applicable administrative services, even

though no Federal financial participation is

available for treatment services. 

Several different types of Medicaid administrative services are eligible for Federal financial participation (FFP). FFP is available for

direct program management; costs incurred

16 Special Report

17The 15 States, according to Table II.4, are Alaska,

Delaware, Florida, Kansas, Maine, Maryland,

Michigan, Missouri, New Jersey, North Carolina,

North Dakota, Oregon, Pennsylvania, South

Dakota, and Washington.
Medicaid Financing of State and County Psychiatric Hospitals 17

Table II.4: IMD DSH Payments by State (including public and private

IMD Payments),a 2001

Mental Health Mental Health DSH Payments

State DSH Payments as % of Total DSH Payments

Alabama $3,301,620 0.9

Alaska 9,086,653 65.0

Arizona 28,474,900 27.7

Arkansas 862,932 3.8

California 0 0.0

Colorado 23,144 0.0

Connecticut 9,499,186 4.5

Delaware 4,140,000 100.0

District of Columbia 3,845,809 4.7

Florida 149,714,986 44.2

Georgia 0 0.0

Hawaii 0 —b

Idaho 0 —b

Illinois 114,957,399 30.3

Indiana 141,698,773 21.6

Iowa 0 0.0

Kansas 36,315,789 77.3

Kentucky 36,470,274 19.1

Louisiana 77,400,268 8.9

Maine 49,160,020 100.0

Maryland 31,443,762 50.1

Massachusetts 102,999,998 21.2

Michigan 214,684,937 49.7

Minnesota 2,806,270 4.4

Mississippi 0 0.0

Missouri 176,489,923 38.8

Montana 0 0.0

Nebraska 0 0.0

Nevada 0 0.0

New Hampshire 27,631,468 17.5

New Jersey 412,820,368 36.5

New Mexico 229,258 1.5

New York 574,400,000 23.4

North Carolina 174,935,077 42.1

North Dakota 601,485 56.7

Ohio 93,432,758 14.7

Oklahoma 1,320,022 5.8

Oregon 17,242,348 56.5

Pennsylvania 399,730,333 52.5

Rhode Island 1,576,714 2.0

South Carolina 51,251,895 13.8

South Dakota 751,298 70.0

Tennessee 0 —b

Texas 234,740,519 17.4

Utah 181,503 25.0

Vermont 0 0

Virginia 1,752,745 0.7

Washington 115,310,820 35.2

West Virginia 23,300,694 22.8

Wisconsin 3,341,469 28.2

Wyoming 0 0

Source: CMS-64 Files 1991–2001 (Combined Federal and State DSH payments).

aIncludes all Mental Health DSH payments, not just payments to State and county psychiatric hospitals. The data do not provide this level of specificity.

bNo DSH payments to the State.
in the design, maintenance, and operation of

automated systems; and the processing of

Medicaid applications, appeals, and general

information to the public about the program.

In addition to services eligible for FFP,

Federal policy defines other IMD services

that can be claimed as necessary to manage

a State’s Medicaid program. Those services

include monitoring of certain medications

and administrative case management (including assessment, care planning, and referrals

and linkages to other programs and

providers). 

Currently, only a few States receive administrative payments on behalf of IMD residents. In one State, for example, the State

Medicaid Authority, as the lead agency

responsible for the largest percentage of IMD

facilities, claims activities and costs associated

with the administration of the Medicaid hospital and nursing home system. This State

does not segregate the IMD facilities from its

total claim. In two other States, the State

Mental Health Authority claims the Federal

match for the costs of administrative services

related to maintaining Medicaid eligibility,

conducting disability assessments, and

preparing predischarge benefits applications

for IMD residents. Although the staff doing

the reimbursable work is located in the

State’s public hospitals, it is actually assigned

to a central administrative unit within the

Mental Health Authority. Also, since the staff

conducting the work performs these administrative tasks exclusively, cost identification

and claiming are rather straightforward.

These indirect costs are separated out from

the facilities’ cost reports. 

E. Conclusion

Several sources of Medicaid funds—including

those from DSH payments, IMD optional

services, Medicaid managed care, and administrative payments—are available to State

and county psychiatric hospitals.18 However,

the pursuit of each of these funding sources

varies considerably from State to State as

dictated by local circumstances. Even among

States that avail themselves of the same

sources of Medicaid funds, methods and

amounts differ significantly. A good example

is the disparate approaches to the use of

DSH payments for IMDs.

The existing information is suggestive but

insufficient to provide an understanding of

the overall financial impact of Medicaid

funding on State and county psychiatric hospitals, both in individual States and nationally. In addition, it offers little insight into why

States vary in their pursuit of funding sources

for their public psychiatric hospitals or into

the factors that influence their decisions.

Through case studies, the next chapter examines the Medicaid funding experiences of

public psychiatric hospitals in five States—

Arkansas, California, Iowa, Maryland, and

New Jersey—and begins to piece together

some of the missing information.

18 Special Report

18The use of enhanced payment programs for public

psychiatric hospitals was also explored. Although

some of the States have used upper payment limit

arrangements for general hospitals and/or nursing

homes, none were found to be using these arrangements for their public psychiatric hospitals.
III.

While States may take advantage of several Medicaid

funding strategies to help support their public psychiatric hospitals, they nonetheless face unique local circumstances that dictate variation in the Medicaid policies they follow. This

review of five case study States—Arkansas, California, Iowa, Maryland,

and New Jersey—reveals which Medicaid strategies are most common

and significant and examines the role of public psychiatric hospitals in

the five States and the funding strategies used to support such hospitals.19

Medicaid Funding

of State and County

Psychiatric Hospitals

in Five States

A. The Role of Public Psychiatric

Hospitals in States’ Public Mental

Health Systems

The public mental health system, including

the availability of and State preference for

treatment settings, differs among the five case

study States. The role and place of public

psychiatric hospitals in a State’s continuum of

mental health care influence the Medicaid

financing strategies States pursue on behalf of

these facilities. In some States, State psychiatric hospitals, operating largely outside the

overall treatment continuum, serve limited

niche populations: the hardest to serve, most

chronically ill patients. In other States, these

public hospitals are a major component of

the overall public mental health care system,

serving both short- and long-term patients. 

1. Arkansas

In contrast to the other four States, Arkansas

operates only one public psychiatric hospital.

With several hospital closures in recent years,

the number of beds in the private sector,

including both freestanding psychiatric hospitals and psychiatric units within general hospitals, has decreased sharply. Consequently,

demand for the State psychiatric hospital’s

services from both the forensic and civil populations has escalated. The lack of alternative

treatment settings has created a 100-person

waiting list for forensic beds and a 40-person

waiting list for civil beds. 

Medicaid Financing of State and County Psychiatric Hospitals 19

19Appendix C contains profiles of the public psychiatric hospitals in the case study States, including the

role played within the public mental health system,

the hospital admission process, operational changes

in recent years, and expected changes at the time of

the site visits.
2. California

In California, the State’s 58 counties are

responsible for public mental health services,

including services for Medicaid-eligibles. The

counties are at risk for mental health services

for their residents, and they control how

mental health dollars are spent. When a

county needs to place a resident in a State

facility, it pays a predetermined per diem

rate. Counties use the State psychiatric hospitals only as a last resort, mostly to treat the

hardest to serve, most chronically ill civil

patients. This is due to the high cost of State

facilities, their long distance from many communities, and the fact that the State hospitals

primarily serve forensic patients. California’s

State psychiatric hospitals receive a small

share of their operating budgets from

Medicaid, with those Medicaid dollars generally intended for civilly committed patients

65 years and older and 21 years and younger,

both noticeably small groups. 

California’s system of psychiatric health

facilities (PHFs) (both publicly and privately

owned), along with psychiatric units in general hospitals and freestanding psychiatric hospitals, serve local needs for acute inpatient

psychiatric treatment. The length of stay in

PHFs is typically short—5 to 7 days. Most

PHFs can collect Medicaid reimbursement for

persons from 22 to 64 years of age because

the hospitals are small enough—16 beds or

fewer—to avoid the IMD exclusion. PHFs

often receive more Medicaid dollars for services, as a percentage of total budgets, than do

the State hospitals. 

3. Iowa

Iowa’s four State psychiatric hospitals, an

integral part of the State’s public mental

health system, primarily serve short-term

patients (shorter than 30-day stays). Among

the five case study States, Iowa’s State psychiatric hospitals are the only ones that admit

voluntary patients; patients do not have to

meet the more rigorous commitment requirements of posing an imminent danger to themselves or others. 

Medicaid-eligible, voluntarily admitted

adults and all Medicaid-eligible child patients

receive services through the State’s Medicaid

managed behavioral health care plan, known

as the Iowa Plan.20 Given that the State hospitals accommodate voluntary patients for

short stays, the State requires the behavioral

health organization that holds its Medicaid

contract to include these hospitals in its

provider network, thereby allowing the hospitals to secure some Medicaid funding for

patients between the ages of 22 and 64 years.

For patients in that age range who are involuntarily committed, the State and counties

share the costs of care in the State hospitals,

with the State paying 80 percent of the per

diem and the county of residence paying the

remaining 20 percent plus any costs of care

beyond that covered by the per diem rate. If

county residency is not established, the State

pays 100 percent of costs.21 In addition, once

a Medicaid-eligible child’s commitment is

decertified by the State’s managed behavioral

health care plan, the State is responsible for

100 percent of costs. 

4. Maryland

Maryland has a Section 1115 waiver that

grants the State IMD expenditure authority;

however, the State excludes State psychiatric

20 Special Report

20 Services for children admitted through the criminal

justice system are not reimbursed through Medicaid.

21The State is responsible when the patient cannot

establish “legal settlement” in a county. Legal

settlement is established when a resident has lived

in a county for 12 or more months.
hospitals from the IMD waiver provision. It

prefers to have short-term patients (those

with 30-day or shorter stays) served in private facilities so that the State psychiatric

hospitals can remain the treatment setting of

last resort. As a consequence, State psychiatric hospitals forgo some Medicaid funds

that they might otherwise receive. Like many

other States, Maryland has focused on reducing its State psychiatric hospital population

and redirecting patients to community-based

programs. 

5. New Jersey

New Jersey also has a policy to reserve its State

and county psychiatric hospitals for longerterm patients. However, instead of using a

Section 1115 waiver as Maryland does, New

Jersey set up a system of short-term-care

facilities, which are psychiatric units within

general hospitals, for stays of up to 2 weeks.

The short-term-care facilities are not State or

county owned but instead are private facilities which the State formally designates and

to which it provides some financial support.

New Jersey has also set up a statewide

structured admissions process under which all

individuals admitted to a public psychiatric

hospital or a short-term-care facility must

undergo evaluation by a county screening

center. The centers, funded through the State’s

Division of Mental Health Services (DMHS),

try to place individuals meeting the involuntary admission criteria in the least restrictive

setting, preferably the local short-term-care

facility. The direction of patients into shortterm-care facilities allows Medicaid reimbursement for psychiatric services because the

facilities do not meet the criteria that make

them subject to the IMD exclusion. Persons

needing longer-term care are transferred to

State or county psychiatric hospitals.

The county hospitals serve essentially the

same clientele as the State hospitals in terms

of length of stay and patient characteristics.

However, county facilities serve mostly county residents, whereas the geographic service

area of the State psychiatric hospitals is much

broader. Another difference is that the State

hospitals have a larger forensic population.22

The State psychiatric hospitals also operate

some specialized programs that are not available at county facilities, including programs

for children and the dually diagnosed (persons with developmental disabilities and

mental illness). Both the short-term-care facilities and county hospitals alleviate some of

the capacity pressure faced by the State psychiatric hospitals.

B. States as Primary Funders of State

and County Psychiatric Hospitals

Public psychiatric hospitals in the five case

study States rely on State or county general

funds as their main source of funding. State

hospitals in three of the States—Iowa,

Maryland, and New Jersey—are 100 percent

State-appropriated; that is, the hospitals’

entire operating budget comes from a State

appropriation. All revenue collected from

patients or insurers (including Medicaid) is

turned over to the State general fund. One

respondent suggested that in States where

hospitals are 100 percent State-appropriated,

an individual hospital might be relatively

insulated from budget swings resulting from

changes in revenue sources. 

In California, the State and the counties

together fund the State psychiatric hospitals:

a State appropriation covers forensic patients,

while counties, using funds they receive from

Medicaid Financing of State and County Psychiatric Hospitals 21

22Only one of the county psychiatric hospitals

accepts forensic patients.
the State, pay a per diem rate for civilly committed patients.23 Any revenues collected from

private or public insurance for civilly committed patients are deposited into a fund that

is used periodically to adjust (e.g., lower) the

per diem rate that counties are charged.

However, in California, State psychiatric hospitals receive little Medicaid funding because

of the high proportion of forensic patients in

the State system.

In Arkansas, the situation is different. A

State appropriation covers about 90 percent of

the single State hospital’s operation, with the

hospital at risk for funding the remainder of

the budget. For example, the hospital’s operating budget in the fiscal year beginning July

2001 is $23.5 million. The State appropriation

totaled $21 million, meaning that the hospital

is responsible for collecting the remaining $2.5

million. In accordance with a sliding-fee scale,

the hospital bills all patients, regardless of ability to pay, to cover its costs beyond the State

appropriation.24 If the hospital fails to collect

from Medicaid or other payers, the State

does not reimburse it for the lost collections.

Appropriations for State psychiatric hospitals in all five case study States have held

steady or declined slightly in recent years.

However, all five States were facing budget

deficits at the time of the case study site visits, and, as a result, their public psychiatric

hospitals were likewise in the throes of fiscal

challenges. In Arkansas, the State usually

appropriates enough money to fund annual

payroll increases, but there was no increase

in fiscal year 2001. At the time of the case

study site visit, the hospital was considering

either closing its 16-bed adolescent unit or

changing the intensity of the unit to a subacute level, a move that might open up new

funding opportunities. Respondents in

California did not believe that the State budget shortfalls would affect the State psychiatric

hospitals; given that the hospitals treat primarily forensic patients, their capacity is a

public safety priority. In Iowa, the budgets

of the four State psychiatric hospitals had

remained steady over the past 5 years but

had seen some recent declines in response to

the statewide budget shortfall. In Maryland,

recent budget declines for the State psychiatric hospitals have led to delays in purchases, in hiring, and in the initiation of capital

projects. Respondents in New Jersey were

hopeful that, despite the State’s budget

deficit, the impact on its public psychiatric

hospitals would not be significant.

California and New Jersey also operate

county-owned psychiatric hospitals. Ten

county-owned psychiatric units or hospital

facilities in California provide 24-hour inpatient care.25 PHFs, which have a special

licensure and receive county appropriations,

provide service intensity similar to acute psychiatric hospitals, but they lack an emergency

room and other onsite ancillary services, such

as laboratories. Because only two PHFs have

more than 16 beds, most are not subject to

the IMD exclusion. In New Jersey, the six

county-operated psychiatric units or hospitals

participate in a “90/10 program” for uninsured patients whereby the State pays 90 per22 Special Report

23Every county receives “realignment funds” from

the State sales tax and vehicle license fee. It uses

the funds to lease beds from the State psychiatric

hospitals on an annual basis per expected need.

If one of the county’s beds is not needed, the

county may sublease it to another county.

24The hospital is legally obligated to bill all patients,

but few patients actually pay. The hospital does not

use a collection agency, but the billing department

performs a State income tax intercept in cases

where the patient clearly has the ability to pay. 25The State also has six privately owned PHFs.
cent of the cost 

of care and the county pays 10 percent; if the

patient is not a resident of any county, the

State pays 100 percent. The “90/10 program” also applies to State psychiatric hospitals, in that counties support 10 percent of

the costs in those hospitals for county residents.

C. Sources of Medicaid Funds 

Reliance on Medicaid revenues to fund State

psychiatric hospital operations varies across

the five States (see Table III.1). 

1. IMD Optional Services 

Persons under the age of 21. Every case

study State covers inpatient psychiatric services for persons under the age of 21, but

not all public psychiatric hospitals accept

patients in this age group. Most of the public psychiatric hospitals in the case study

States no longer offer inpatient services to

children under 12; however, they do have

some capacity to serve adolescents. Public

psychiatric hospitals in Maryland stopped

admitting children 5 or 6 years ago, and

only two of them currently serve adolescents.

The State directs children in need of inpatient

psychiatric services—a covered group under

Medicaid—to private hospitals. California

and New Jersey each have one State psychiatric hospital serving children. In Arkansas,

the State psychiatric hospital does not treat

children but has 16 beds for adolescents

and an additional 16 beds for juvenile sex

offenders. In Iowa, two of the four State

psychiatric hospitals specialize in treating

children, although service capacity for children has recently shrunk. 

Overall, children and adolescents make up

a small share of the State psychiatric hospitals’

patient load (see Table III.2). Consequently,

the amount of Medicaid funds collected for

the population under age 21 is small.

Medicaid Financing of State and County Psychiatric Hospitals 23

Table III.1. Revenues of State-Owned Psychiatric Hospitals by Source

and Percentage of Total (in millions of dollars)

Non-DSH DSH

Federal Medicaid Federal Medicaid

State Funding Share Share Medicare Other Funding

Total Percentage Percentage Percentage Percentage Percentage

Funding of of of of of

State Amount Amount Total Amount Total Amount Total Amount Total Amount Total

Arkansas $ 23.5 $ 20.8 88.5 $ 0.5 2.1 $ 0 0 $ 0.8 3.4 $ 1.4 6.0

California 575.0 555.0 a 96.6 7.5 1.3 0 0 12.2 2.1 0.3b 0.0

Iowa 47.7 28.8 60.3 9.0 18.9 0 0 NAc NA 9.9c 20.8

Maryland 200.9 132.2 65.8 5.9 2.9 57.4 28.6 2.2 1.1 3.2 1.6

New Jersey 230.5 44.1 19.1 10.2 3.9 140.7 61.0 6.5 2.8 29.0 12.6

Source: Analysis of data collected from State mental health agencies during case study site visits. 

Notes: Other funding includes revenue from self-pay patients, other insurers, counties, and leasing arrangements. Arkansas and Iowa data cover State fiscal year 2001;

California data cover calendar year 2001; Maryland data cover State fiscal year 2001; and New Jersey data are projected for State fiscal year 2003. With recent

funding relatively stable, the different time periods should not materially affect the comparability of the data.

a

Represents State funding and “other payers” aside from Medicaid, Medicare, and third parties.

b

Represents third-party revenues.

c

NA: Not available separately. “Other Funding” includes Medicare revenue.
Persons age 65 and older. Four of the five

case study States cover inpatient psychiatric

services provided to patients 65 years and

older as a Medicaid optional service. The

exception is Arkansas. Representatives from

the mental health division in Arkansas have

initiated discussions with the Medicaid division about amending its State plan by 2004

to include individuals age 65 and over, but,

at the time of the site visit, no final decision

had been reached. Unlike the case with children, most State psychiatric hospitals do

not restrict services for those over age 64.

In fact, many offer a specialty in geriatric

care. However, evidence from the case study

site visits suggests that beds specifically

designated for the elderly, like those for

children, represent a relatively small share

of State psychiatric hospitals’ overall capacity (Table III.2). Providing further evidence,

California’s Department of Mental Health

reported that as of June 30, 2001, 146 of

the total 4,377 clients in the State hospitals,

or 3.3 percent, were over 64 years of age

(California Department of Mental Health

2002). Of those 146, only 36 were reported

as “county-billable,” meaning even potentially Medicaid-eligible. 

2. Medicaid Managed Care

Two States, Iowa and Maryland, use Federal

waivers to obtain Medicaid funding for the

nonelderly adult population that is typically

disqualified from Medicaid reimbursement

for certain services under the IMD exclusion.

Iowa’s Section 1915(b) waiver, known as the

Iowa Plan, allows the State to take the savings generated from the use of managed care

to provide services not otherwise covered

under the State Medicaid plan, including

inpatient services in State psychiatric hospitals. Medicaid largely funds the Iowa Plan

for services provided to Medicaid-eligible

persons. SAMHSA block grants and public

health funds provide additional support for

services provided to the indigent through the

Iowa Plan.

Under the Iowa Plan, the State psychiatric

hospitals become, by contract, part of the

provider network of Medicaid’s behavioral

health care vendor, Magellan Behavioral

Care of Iowa (formerly Merit). As long as

24 Special Report

Table III.2: Number and Percentage of Children/Adolescent 

and Geriatric Beds in the State Psychiatric Hospital Systems

Total Number of Percentage of Beds Percentage

Total Number of Beds for Children for Children and Total Number of of Beds

State Beds in the State and Adolescents Adolescents Geriatric Beds for Geriatric Care

Arkansas 202a 32—all adolescent 15.8 NA NA

California 4,984b 140 2.8 NA NA

Iowa 436a 47 10.8 60 13.8

Maryland 1,319a 30—all adolescent 2.3 42 3.2

New Jersey 2,080a 50 2.4 323 15.5

Source: Interviews with representatives from mental health service authorities in the five case study States. Geriatric beds are psychiatric beds

specifically designated for persons age 65 years and older.

NA: Not available indicates that the State does not operate a special program for geriatrics and therefore does not designate a certain number of

civilly committed beds for such patients. In all States, some of the general population adult beds may also be used by persons 65 years and over.

a Number of staffed beds (number of beds that are operational).

b Number of licensed beds (number of beds the State has been granted the authority to operate, which may be higher than the actual number of staffed

beds).
Magellan approves admissions and lengths

of stay, the State psychiatric hospitals may

be reimbursed for services provided to the

voluntary (noncommitted) Medicaid-eligible

adult population over 21 years of age and

under 65 years of age and to Medicaid-eligible

children, whether voluntary or involuntary.

According to a Magellan representative, in

2001, the State psychiatric hospitals received

$4.3 million through this arrangement. 

Maryland has a Section 1115 waiver that

carves out mental health services for all

Medicaid-eligible persons, including children

with severe emotional disturbance (SED) and

adults with serious and persistent mental illness (SPMI). Under this waiver, which grants

the State IMD expenditure authority, private

psychiatric hospitals receive payment for 30

days per episode, up to 60 days per year,

and 120 days in a lifetime for adult patients

(ages 22 to 64). However, because the State

hospitals are excluded from the waiver, they

receive no Medicaid funds via the waiver

program. The State psychiatric hospitals will

admit patients when their Medicaid funding

ends. Due to CMS’s decision to eliminate

IMD expenditure authority waivers,

Maryland’s IMD waiver program will likely

end when it comes up for renewal. This

change could potentially shift significant

capacity pressure from the private psychiatric

hospitals back onto the State hospitals,

which already maintain waiting lists.

3. Disproportionate Share Hospital

Payments 

Public psychiatric hospitals participate in

DSH in three States—Arkansas, Maryland,

and New Jersey. In Arkansas, the DSH funds

are deposited into the hospital’s account with

the Department of Human Services for hospital-designated use. Because State psychiatric

hospitals in Maryland and New Jersey are

100 percent State appropriated, DSH funds

are deposited directly into the State general

fund. In Maryland, the State psychiatric hospitals receive a notification letter stating that

the hospital has been “credited” with DSH

funding, but it is unclear whether those DSH

funds returned to the Maryland State treasury are set aside for a particular purpose.

When DSH funding is returned to the State

of New Jersey, the money is earmarked for a

charity care fund and a hospital relief fund,

a small portion (reportedly 10 percent) of

which is set aside for psychiatric hospitals

and allocated through the Division of Mental

Health Services. In Maryland and New

Jersey, the State appropriation is considered

the State match for DSH. In Arkansas, the

State psychiatric hospital funds the match. 

DSH payments to public psychiatric hospitals. The amount of DSH funding public

psychiatric hospitals receive varies considerably with the different DSH systems in each

State, reflecting States’ localized health systems and funding priorities.26 For example,

as part of an overall DSH funding increase

for the State, the Arkansas State Hospital

received DSH funds for the first time in fiscal year 2002. The Balanced Budget Act

(BBA) of 1997 replaced the statutory formula for DSH with specified DSH amounts by

State; Arkansas’s share was $2.7 million.

In 2000, the Federal Benefits Improvement

and Protection Act (BIPA) helped low-DSH

States, such as Arkansas, by setting the minimum State DSH payment equal to 1 percent

Medicaid Financing of State and County Psychiatric Hospitals 25

26The amount of DSH funding public psychiatric

hospitals receive also reflects, to some degree, the

length of time the facilities have been participating

in their State’s DSH program. For example, public

psychiatric hospitals in New Jersey have participated in the State’s DSH program for many years.
of total Medicaid expenditures (HCFA 2001;

National Association of Public Hospitals

and Health Systems 2001a). Arkansas’s DSH

funding rose to approximately $21 million

in 2002, and the State psychiatric hospital

benefited.

Maryland has a unique system in which all

insurers (Medicare, Medicaid, and private)

pay the same amount for the same treatment

at general hospitals. A commission sets rates

so that payment for uninsured patients (charity care) is included. The general hospitals

are then ineligible to participate in the DSH

program because their rates already cover

the costs of caring for indigent persons. As a

result, only the public and private psychiatric

hospitals, two chronic hospitals, and three

specialty hospitals are eligible to participate

in the State’s DSH program. With so few hospitals eligible, Maryland has not been able

to collect its full DSH share since 1999; however, the State always collects the maximum

amount of funding available under the IMD

DSH caps. In 2001, Maryland collected $40

million in retroactive DSH payments. The

State realized that it had been using an incorrect rate and was not collecting all of the

funding for which it was eligible. Using the

correct rates, the State will receive an additional $14 million annually in DSH. 

New Jersey has a minimum requirement—

essentially a 1 percent Medicaid utilization

rate—for hospitals to qualify for DSH. All

State and county psychiatric hospitals are

eligible to participate in DSH, and the maximum funds allowed under the IMD DSH

cap are received on their behalf. The State

claims DSH for all DSH-eligible expenditures in the county psychiatric hospitals;

that revenue is also deposited into the State

general fund.

One of the results of California’s creation

of a county-based public mental health system is that State psychiatric hospitals are

not eligible to participate in the State DSH

program. Given that the counties are responsible for indigent care—medical and mental

health—the State has essentially passed the

DSH program on to the counties. Counties

and individual hospitals decide whether to

claim DSH payments, and hospitals are eligible as long as they meet the State’s minimum

requirements. County-owned PHFs are

potentially eligible to receive DSH funding,

and a few have received minimal payments in

the past. As one respondent noted, however,

counties are more likely to spend DSH funds

on general medical care. According to the

California Department of Health Services,

one publicly owned PHF received DSH

payments totaling $276,360 for fiscal year

1999–2000. Another county-owned PHF

was eligible but did not receive any payments.

In fiscal year 1998–1999, two county-owned

PHFs received DSH payments totaling

$141,414 (California Department of Health

Services 2000).

Public psychiatric hospitals in Iowa do not

participate in DSH. In Iowa, DSH payments

are made to general hospitals only—not to

IMDs. The largest share of DSH funding

(more than 60 percent) goes to the University

of Iowa, and IGTs are reportedly used to

move these funds from the university back

to the State.

IMD DSH caps. Recent reductions in the

IMD DSH caps will affect both Maryland

and New Jersey over the next year. One

Maryland respondent fears that, if the reductions lead to lower State appropriations,

the quality of care provided by the State

psychiatric hospitals may be jeopardized.

Other respondents were not sure how, if

26 Special Report
at all, the new DSH caps would affect the

hospitals. One New Jersey respondent did

not expect the lower DSH caps to affect

the State psychiatric hospitals because the

facilities receive a State appropriation to

cover all operating costs. For 2002, the

Arkansas State psychiatric hospital received

approximately half the IMD DSH cap for

the State. Given that private freestanding

psychiatric hospitals in Arkansas participate

in the DSH program, they are also funded

within the IMD DSH cap constraints. 

Relationship between DSH funds and

State appropriations. In Arkansas and

Maryland, respondents suggested that there

does not appear to be a direct relationship

between the State appropriation and DSH

collections. As one Maryland respondent

notes, DSH historically has not affected

State hospital appropriations. Another

respondent agreed, noting that, while the

State appropriation has decreased in each of

the past 2 years, the decline is attributable

to a statewide budget shortfall rather than

to lower DSH revenues.

In contrast, New Jersey respondents say

that there is a connection between DSH

funds and the State appropriation. When

the Department of Human Services (Division

of Mental Health Services) submits a budget

to the legislature, the department makes

sure that legislators understand that the

State will receive some DSH funds to offset

the full 100 percent State appropriation.

Respondents believe that the New Jersey

legislature understands that if it cuts funding

to the State psychiatric hospitals or the hospitals become decertified, the State will no

longer have access to Federal DSH funds, at

least not at the same level. The respondent

says that in the early 1990s some county

psychiatric hospitals sued the State for the

DSH money that the State claimed on their

behalf. The court ruled that use of the

money was at the discretion of the State

legislature.

4. Administrative Payments 

None of the five States collect Medicaid

funds related to administrative services provided on behalf of public psychiatric hospital

patients. Most were not aware that these

payments could be claimed. 

D. Conclusion

While States fund a substantial portion of

public psychiatric hospital operations,

Medicaid also plays an important role. States

tend to favor funding strategies related to

DSH programs, IMD optional services, and

Medicaid managed care rather than strategies

involving reimbursement for administrative

services.

Some of the case study States have pursued similar Medicaid funding strategies,

but the effects of those strategies vary with

the specifics of each State’s public mental

health care system. For example, all five

States cover optional services for children

under the age of 21, but most States divert

children to private hospitals or primarily

serve children from the juvenile justice system; in the latter case, sources other than

Medicaid fund services.

The specific Medicaid funding streams

pursued by a State depend on several factors.

Not all States may be eligible for, nor may

all States want to pursue, every funding

opportunity. The sources of funding a State

pursues for its public psychiatric hospitals

are closely linked to the mental health and

Medicaid systems’ views of the hospitals, the

populations served by the hospitals (forensic

versus civil commitments), and length of

Medicaid Financing of State and County Psychiatric Hospitals 27
stay (long, intermediate, or short term).

Furthermore, the role of public psychiatric

hospitals in the States is constantly changing;

States have worked since the 1960s to move

large numbers of patients out of these facilities

into community-based treatment settings.

Many hospitals are trying to supplement

their decreasing budgets by pursuing alternative sources of funding, such as leasing

or selling land and building space or serving

the expanding forensic population. As

Medicaid funding sources become subject

to more restrictions, such as DSH payment

limits, and as the IMD expenditure authority

under managed care waivers is phased out,

the level of Medicaid funding likely will

decline.

28 Special Report
IV.

Although it is clear that public psychiatric hospitals receive

Medicaid funds, the share of total funding represented by

such funds remains less clear. This chapter attempts to

clarify the issue by creating a national estimate of the amount of funding that public psychiatric hospitals receive from Medicaid. This estimate is derived from available DSH data as well as from the Medicaid

funding experiences of the five case study States.

National Estimate

of Medicaid Funding

A. Previous Estimates

of Medicaid Funding

The most recent estimate of Medicaid funding, based on 1994 data, suggests that

Medicaid funds account for approximately

18 percent of State and county psychiatric

hospital revenues (Manderscheid et al. 2001).27

Since 1994, however, several notable developments have affected Medicaid funding for

public psychiatric hospitals. 

■ States increasingly have included their

public psychiatric hospitals in DSH programs, although not all of the DSH monies

actually stay with these facilities but often

are retained by or returned to the State

for use at the State’s discretion (Coughlin

and Liska 1997; Coughlin et al. 1994).

■ The role of public psychiatric hospitals

continues to evolve as the facilities assume

dual responsibility as the (1) provider of

last resort for persons, primarily adults,

with severe and chronic mental illness

who do not have the resources to seek care

elsewhere and (2) protector of the public

safety in providing care for a forensic

population with mental illness (National

Association of State Mental Health

Program Directors Research Institute 2002). 

■ Since the mid-1990s, States have expanded their use of Medicaid managed care—

an arrangement that often makes special

provisions for mental health services

(HCFA 1997; Physician Payment Review

Commission 1995, 1996; Rotwein et al.

1995).

With these developments in mind, the

following section discusses a more current

estimate of the Medicaid-funded share of

public psychiatric hospital operations. 

B. National Estimate of Medicaid

Funding of Public Psychiatric Hospitals

To develop an overall national estimate of

the amount of Medicaid funds supporting

public psychiatric hospitals, estimates of two

components are required: (1) DSH funding

Medicaid Financing of State and County Psychiatric Hospitals 29

27This compares to an earlier estimate of 10 percent

based on 1990 data (Manderscheid et al. 2001)

Note: The 1990 estimate is from the same source as

the 1994 estimate.
and (2) non-DSH funding. An estimate of

total operating costs for public psychiatric

hospitals is also required. The most recent

figure available is for fiscal year 2001, when

State mental health authorities reported

spending $7.4 billion on inpatient services

in State psychiatric hospitals (personal communication, 3/19/2003, T. Lutterman at the

National Association of State Mental Health

Program Directors Research Institute).28

1. DSH Medicaid Funding Estimate

As previously noted, DSH funding represents

the largest share of Medicaid funding for

State and county psychiatric hospitals. The

only year for which data are available on

IMD DSH spending, which separate it by

public and private hospitals, is 1998 (Table

II.3). That evidence is limited, however, as

only 37 States and the District of Columbia

reported the information in this fashion.

For those States reporting, DSH allocations

for public psychiatric hospitals were

$838 million of $6 billion in total DSH

allocations, or 14 percent.29

To estimate the amount of DSH allocations

made on behalf of public psychiatric hospitals,

the 14 percent figure from the preceding paragraph is used as the basis for the calculation.

In 2001, total DSH spending for all States was

$15.9 billion (CMS-64 Files 1991–2001).

Applying the 14 percent to this $15.9 billion

figure results in a DSH estimate for public psychiatric hospitals of $2.2 billion for 2001, or

29 percent of the $7.4 billion operating costs. 

2. Non-DSH Medicaid Funding Estimate

The non-DSH Medicaid funding estimate is

developed based on the experience of the five

case study States. Given, however, that the

information from the States reported only the

Federal share of Medicaid, not their own

share, the latter had to be calculated to determine the total amount of non-DSH Medicaid

funding. To do so, the Federal medical assistance percentage (FMAP) was used. However,

the calculation is more complex than it

appears because the FMAP is based on the

Federal fiscal year (October 1 to September

30), whereas the State data are based on

either the State fiscal year (July 1 to June 30)

or the calendar year (January 1 to December

31), as noted in Table IV.1. Consequently,

the FMAP was converted to the period comparable to that covered by the State data

(see Table IV.1).

Using the converted FMAP, the percentage

of the overall operating costs for the State psychiatric hospitals in the five case study States

represented by non-DSH Medicaid funds was

calculated (see Table IV.2). This calculation

resulted in an estimate of 6 percent. Applying

the 6 percent to the $7.4 billion estimate of

2001 spending on inpatient public psychiatric

hospital services results in a non-DSH

Medicaid funding estimate for public psychiatric hospitals of $0.4 billion for 2001.

3. Overall National Estimate

of Total Medicaid Funding

It is estimated that Medicaid provided

$2.6 billion in funding on behalf of public

psychiatric hospitals in 2001 (Table IV.3).

This includes an estimated $2.2 billion in

30 Special Report

28Although the $7.4 billion estimate pertains to State

psychiatric hospitals only, it is assumed that

because so few county psychiatric hospitals exist, as

noted earlier in this report, it provides a reasonable

base on which to develop the national estimate of

Medicaid funding for public psychiatric hospitals

overall—State and county facilities. 

29These totals are derived from Table II.3, which is

based on various data, including CMS Medicaid

DSH files and reflect combined Federal and State

DSH payments. Appendix D details data sources

and limitations.
Medicaid Financing of State and County Psychiatric Hospitals 31

Table IV.1: Conversion of Federal Medical Assistance Percentage (FMAP)

to Available State Financial Information

State Fiscal Year 2001 Data 

2000 FMAP 2001 FMAP State Fiscal Year

(applies to one-quarter (applies to three-quarters 2001 FMAP

of State fiscal year) of State fiscal year)

Arkansas 72.85 73.02 72.98

Iowa 63.06 62.67 62.77

Calendar Year 2001 Data 

2001 FMAP 2002 FMAP Calendar Year

(applies to three-quarters (applies to one-quarter 2001 FMAP

of State fiscal year) of State fiscal year)

California 51.25 51.40 51.29

State Fiscal Year 2000 Data 

1999 FMAP 2000 FMAP State Fiscal Year

(applies to one-quarter (applies to three-quarters 2001 FMAP

of State fiscal year) of State fiscal year)

Maryland 50.00 50.00 50.00

State Fiscal Year 2003 Dataa

2002 FMAP 2003 FMAP State Fiscal Year

(applies to one-quarter (applies to three-quarters 2001 FMAP

of State fiscal year) of State fiscal year)

New Jersey 50.00 50.00b 50.00

Source: Federal Register 1999, 2000a, 2000b.

Notes: Different years’ FMAPs were used because States reported data from different time periods. Arkansas and Iowa data cover State fiscal year

2001; California data cover calendar year 2001; Maryland data cover State fiscal year 2001; and New Jersey data are projected for State fiscal

year 2003. With recent funding relatively stable, the different time periods should not materially affect the comparability of the data.

a

Projected data.

b

Projected FMAP for 2003.

Table IV.2: Total Medicaid Funding of State Psychiatric Hospitals in

Five Case Study States (in millions of dollars)

Medicaid Non-DSH Funds

Medicaid Non-DSH 

Total Federal State as Percentage

State Funding Share Share Total of Total Funding

Arkansas $ 23.5 $ 0.5 $ 0.2 $ 0.7 3

California 575.0 7.5 7.1 14.6 3

Iowa 47.7 9.0 5.3 14.3 30

Maryland 200.9 5.9 5.9 11.8 6

New Jersey 230.5 10.2 10.2 20.4 9

Total $ 1,077.6 $ 33.1 $ 28.7 $ 61.8 6

Source: Analysis of data collected from State mental health agencies during site visits to case study States. 

Notes: Arkansas and Iowa data cover State fiscal year 2001; California data cover calendar year 2001; Maryland data cover State fiscal year 2000;

and New Jersey data are projected data for State fiscal year 2003. 
Medicaid DSH funding and nearly $0.4 billion in Medicaid non-DSH funding. This

represents approximately one-third of public

psychiatric hospitals’ total operating costs

in 2001. However, various caveats and limitations, detailed in the next section, may

have a substantial impact on the accuracy

of the estimate.

C. Assumptions and Limitations

of the National Estimate

The estimate should be interpreted cautiously

in light of the following assumptions and

limitations associated with its development.

■ Significant State-to-State variability exists

in terms of Medicaid funding. Therefore,

it is difficult to determine the true

“national representativeness” of the

estimate, since it was based in part on

five States’ experiences.

■ The widest variation in Medicaid funding

of public psychiatric hospitals among the

States is in DSH funding. The estimate does

not attest to the amount of these funds that

actually remain with the hospitals versus

the amount retained by or returned to the

State for State-designated use.

■ The estimate is a “snapshot” in time.

Consequently, it may not reflect future

changes in local circumstances and

Federal policies related to Medicaid. 

D. Conclusion

In sum, the evidence suggests that the

amount of Medicaid funds paid on behalf

of public psychiatric hospitals is increasing.

For 2001, Medicaid provided an estimated

$2.6 billion in funding on behalf of these

facilities, which represents approximately

one-third of total operating costs. This compares to previous Medicaid funding estimates

of 18 percent in 1994 and 10 percent in

1990. DSH monies comprised the largest

share of the $2.6 billion—nearly 85 percent.

However, various caveats and limitations

may affect the accuracy of the estimate,

including the extensive State-to-State variability and the fact that the estimate represents a snapshot in time and may not hold

true for other years. In addition, the estimate

makes no assumptions as to the amount of

Medicaid funds that stay with these public

facilities, as opposed to being retained by or

returned to the State for use at the discretion

of the State.

32 Special Report

Table IV.3: Total Estimate of Medicaid Funding of State and County

Psychiatric Hospitals: 2001 (in billions of dollars)

Total Medicaid Total Medicaid as 

Operating Medicaid Non–DSH Medicaid Percentage of 

State Costs DSH Funding Funding Funding Total Funding

Totals $7.4 $2.2 $0.4 $2.6 35

Source: Total operating costs for fiscal year 2001 from personal communication, 3/19/03, with T. Lutterman at the National Association of State Mental

Health Program Directors Research Institute. “Medicaid non–DSH” based on estimate of five case study States. “Medicaid DSH” from 2001

CMS-64 files. Medicaid amounts include both State and Federal Shares.
V.

Despite the perception that few people are served by public

psychiatric hospitals, these facilities continue to hold a critical place in the continuum of care for persons with mental

illness. It is true that the capacity of these institutions has diminished

significantly as a result of deinstitutionalization—a trend in which the

traditional site of care has moved from inpatient to outpatient facilities

and from institutions to community-based treatment programs.

However, many public psychiatric hospitals continue to play an essential

role, serving persons, primarily adults, with severe and chronic mental

illness who do not have the resources to seek care elsewhere, and a forensic population with mental illness.

Conclusions

Another common, but inaccurate, perception is that public psychiatric hospitals

receive few or no Medicaid funds because of

the Federal Government’s long-standing policy, known as the IMD exclusion, that longterm psychiatric care is the responsibility of

the States. Evidence does suggest, however,

that Medicaid is funding an increasing share

of public psychiatric hospital operations.

This chapter provides a number of overall

conclusions about this evidence, as well as a

brief discussion of pressures that may affect

future Medicaid funding of public psychiatric hospitals. 

A. Medicaid Funding and Public

Psychiatric Hospitals

Although States avail themselves of various

sources of Medicaid funds for their public

psychiatric hospitals, there is substantial

State-to-State variability as to the specific

sources and amounts pursued. The most

significant sources of Medicaid funds paid

on behalf of public psychiatric hospitals

are those from IMD optional services,

Medicaid managed care, and DSH payments.

Of these sources, DSH payments represent

the overwhelming majority of Medicaid

funds pertaining to these facilities. 

It is estimated that in 2001, $2.6 billion

in Medicaid funds were paid on behalf of

public psychiatric hospitals, including $2.2

billion in DSH funds and $0.4 billion in

non-DSH funds. Medicaid represented

approximately 35 percent of these public

facilities’ operating costs during that year.

This estimate is higher than previous estimates of 18 percent from 1994 and 10 percent from 1990 (Manderscheid et al. 2001).

It was derived using available Medicaid

data, as well as from the experiences of

the five States included in this study—

Arkansas, California, Iowa, Maryland,

and New Jersey. It is important to note,

Medicaid Financing of State and County Psychiatric Hospitals 33
however, that the extensive State-to-State

variation that exists with regard to

Medicaid funding may limit the accuracy

of the estimate when extrapolating to a

national basis. Also, because the estimate

is based on data from a limited time period,

it may not be applicable to other time periods. In addition, the estimate makes no

assumptions as to the amount of Medicaid

funds that actually remains with these

public facilities versus being returned to

States’ treasuries. 

B. Pressures Affecting Future

Medicaid Funding

The challenges faced by State and county

psychiatric hospitals are both substantial

and likely to affect the Medicaid financing

strategies pursued by the hospitals themselves

or on their behalf. Beyond the specific challenges brought about by changes in Medicaid

funding—such as the recent establishment

of DSH caps or the future disallowance of

IMD expenditure authority under Section

1115 waivers—the following broader environmental pressures may also influence

funding strategies:

■ Fiscal crises in the States. Nearly all States

are facing budget shortfalls for which

higher spending in Medicaid programs

is at least partially responsible (National

Governors Association 2002; Smith et al.

2002).

■ Continuing deinstitutionalization. Federal

policy that continues to emphasize community-based rather than institutional care

has been reinforced by the U.S. Supreme

Court’s decision in Olmstead vs. L.C.

(White House 2002).

■ Reconfiguring and redefining roles. As

public safety at the community level

becomes more and more important, the

demand on public psychiatric hospitals for

forensic services is likely to grow, perhaps

affecting hospitals’ capacity to serve other

populations (Daigneau 2002; National

Association of State Mental Health

Program Directors Research Institute

2000). Forensic patients typically are not

funded by Medicaid, but instead are funded through States’ correctional budgets.

■ Mental health parity. An absence of parity

in insurance coverage for mental health

and substance abuse raises the pressure

on the public mental health system,

including State and county psychiatric

hospitals. These facilities act as the safety

net not only for indigent and low-income

individuals but also for persons who

have exhausted their insurance benefits

(National Mental Health Association

2002). Efforts that establish parity could

significantly change this situation.

In terms of Medicaid financing strategies

for State and county psychiatric hospitals, the

States themselves and others assisting them

will need to consider a wealth of factors. In

addition to the environmental pressures mentioned here, there is extensive State-to-State

variation in the level of Medicaid support as

well as continuing change in local circumstances and, at the Federal level, changes in

Medicaid financing policies. Consequently,

what holds true today may not hold true in

the future. Therefore, it is necessary to monitor continuously the shifts in these factors

and the various approaches to Medicaid

financing of public psychiatric hospitals.

34 Special Report
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Medicaid Financing of State and County Psychiatric Hospitals 39

Appendix A.

Expert Advisory

Panel Members

Barry Brauth

Director of Financial Planning

New York State Office of Mental Health

Teresa Coughlin

Senior Research Associate

Urban Institute

Robert Day

Medicaid Director

Kansas Department of Social and

Rehabilitation Services

Thomas Entrikin

Manager, Government Health Care

Information Technology

Public Consulting Group, Inc.

Lynne Fagnani

Vice President for Finance and

Reimbursement

National Association of Public Hospitals

and Health Systems

Trevor Hadley

Director

Center for Mental Health Policy

and Services Research

Kevin Ann Huckshorn

Director of the Office of Technical Assistance

National Association of State Mental Health

Program Directors

John Klemm

Senior Actuary

Centers for Medicare and Medicaid Services

Danna Mauch

Consultant

Stephen Mayberg

Director, Department of Mental Health

California Health and Human Services

Agency

Matthew Rehak

Director, Mental Health Core Service Agency

Cecil County Core Service Agency

John F. Shepardson, Jr.

Director of Finance

New York State Office of Mental Health

Richard Surles

Vice President and Executive Director

of Medical Information Technology

Comprehensive Neuroscience, Inc.

Medicaid Financing of State and County Psychiatric Hospitals 41

Some observers believe that States’ inclusion of Institution for

Mental Diseases exclusions (IMDs) in their disproportionate

hospital share (DSH) programs is closely tied to the use of

intergovernmental transfers (IGTs).

Medicaid Financing of State and County Psychiatric Hospitals 43

Appendix B. The Use

of Intergovernmental

Transfers in the

Disproportionate

Share Hospital

Payment Program

A hypothetical example, adapted from

Coughlin and Liska (1997), illustrates how

the IGT process works (see Figure B.1).

Consider a hospital with $2 million in

uncompensated care. If the hospital were

located in a State where the Federal match

was 50 percent, the State would reimburse

the hospital $2 million in DSH payments

by funding $1 million itself and receiving

the additional $1 million from the Federal

Government as a result of the match. With

an IGT, the process might change. For

example, the State may pay the hospital

$12 million in DSH monies, well above the

actual cost of $2 million (1a). The Federal

Government would match half of that payment, or $6 million (1b). If the hospital were

publicly owned, the State could institute an

IGT and transfer $10 million back from the

hospital (2). In the end, the hospital would

be just as well off; it would be reimbursed

for its uncompensated care cost of $2 million, the State would receive a net of $4 million in additional monies (spending $6 million and taking back $10 million), and the

Federal Government would pay out $6 million. The net of $4 million received by the

State could then be applied to other operations, such as funding other mental health

services, offsetting any State appropriations

made to the hospitals, or just reverting to

the State general fund for State-designated

use (Coughlin and Liska 1997). Given this

context, Coughlin and Liska (1998) have

hypothesized two reasons why States decided

to incorporate IMDs into their DSH programs. First, given that many IMDs are

publicly owned, States may take back the
money through IGTs. Second, the use of

IMDs makes it easier to spread DSH

payments over more hospitals and thus

spend down the entire State DSH allotments,

since facility-based caps limit the allotment

that can go to individual facilities.

44 Special Report

Provider State Federal

+ $12m from state

– $10m paid to state

+ $ 2m net to provider

$12 million $6 million

Federal Medicaid match

1a 1b

$10 million

Intergovernmental

Transfer (IGT)

2

+ $10m from provider

+ $6m federal match

– $12m paid to provider

+ $ 4m net to provider

– $ 6m paid to State

Source: Adapted from Coughlin and Liska (1997).

Medicaid DSH payment

(Federal & State shares)

Figure B.1: Hypothetical Example of a State Medicaid Financing Strategy
Appendix C. Profiles

of Public Psychiatric

Hospitals in the Five

Case Study States

Profile of Public Psychiatric

Hospitals in Arkansas

Public Psychiatric Hospitals as a Component

of the State’s Public Mental Health System

Arkansas has one State psychiatric hospital,

which serves adults and adolescents. It is

also the provider of last resort. Most patients

there are seriously and chronically mentally

ill and have little or no insurance and few

assets. At the time of our visit, the State

had five freestanding private psychiatric

hospitals.

The State hospital recently formalized its

admission priorities as follows:

■ First Priority. Adults and adolescents with

the greatest need for treatment (homicidal

and suicidal) and no financial resources

or treatment alternatives 

■ Second Priority. Adults and adolescents

with severe mental illness who have

family support

■ Third Priority. Adults and adolescents

with severe mental illness who reside in

a correctional facility 

■ Fourth Priority. Adults and adolescents

with mental illness who are either uninsured or whose insurance carrier has

denied further treatment, and who are

already receiving care in other hospitals 

Children (defined as youth under the age

of 12) needing inpatient psychiatric services

are treated in private hospitals.

Hospital Admission Process

The Arkansas State Hospital has a singlepoint-of-entry system. All patients, including

court-ordered individuals or those requesting

Medicaid Financing of State and County Psychiatric Hospitals 45

Figure C.1: State Psychiatric Hospitals in Arkansas

Hospital Number

Name of Beds a Facility Characteristics Average Length of Stay (Days)

Arkansas State Hospital 202 Adult civilly committed (90 beds) Adult civilly committed (< 30)

Adult forensic (80 beds) Adult forensic (long term)

Adolescent (16 beds) Adolescent (90)

Juvenile sex offenders (16 beds) Juvenile sex offenders (400)

Source: Interviews with representatives from the Division of Mental Health.

aThe number of licensed beds is 315. Occupancy runs approximately 95 percent of staffed beds.
transfer from a private hospital, must be

evaluated by one of 15 community mental

health centers (CMHCs) located throughout

the State. As part of this admission evaluation, CMHCs try to find a community placement, which is a local hospital if inpatient

services are deemed necessary. The goal is to

use the State psychiatric hospital only as a

last resort. 

Although all CMHCs receive State funds

to finance “alternatives to State hospitalization,” they vary in their use of these funds.

Some use them to pay for local psychiatric

beds, while others use them for support

services, such as assisting patients with their

medications, in order to lessen the need for

hospitalization. Because of mounting fiscal

pressure, CMHCs have recently begun to

seek local hospitalization less frequently,

thus raising the demand for State psychiatric

hospital beds. At the same time, the demand

for forensic beds has also been increasing.

As a result, there are now wait lists at the

State hospital. At the time of the site visit,

there was a 100-person wait list for adult

forensic beds and a 40-person list for adult

civil beds. 

Major Operational Changes

The existing adult forensic unit opened during the early 1990s. It was originally housed

in a separate building, but the State’s loss

of a 1988 class action lawsuit alleging mistreatment of patients in this unit forced the

State to move the unit into the main hospital

building. With this change, the number of

forensic beds fell from 120 to 80. The 16-bed

juvenile sex offender unit, a relatively recent

addition to the hospital, opened during the

past 10 years.

State fiscal year 2002 was the first year

that the Arkansas State Hospital participated in the State’s DSH program. This

opportunity came as a result of and to

protect an overall increase in DSH funding

for the State. In 2000, the Federal Benefits

Improvement and Protection Act (BIPA)

helped low-DSH States such as Arkansas

by setting a floor on DSH payments

equal to 1 percent of total Medicaid

expenditures. Arkansas’ DSH funding rose

to approximately $21 million in 2001,

up from $2.7 million in previous years. 

Anticipated Operational Changes

Over the next several years, Arkansas

expects that several operational changes

will affect the State psychiatric hospital.

First, the State is contemplating either

closing or reconfiguring the adolescent

unit because of funding cuts. In conjunction with this, the State is reportedly

exploring the possibility of refocusing the

care delivered in the adolescent unit from

an acute to a subacute level, as demand

for the latter appears to be higher.

Although Medicaid reimbursement is

lower for the subacute level of care, some

believe that the higher demand for these

services will more than offset the rate

differential.

Second, the State expects changes as

a result of having recently lost a lawsuit

filed by the American Civil Liberties Union

on behalf of inmates waiting for a bed in

the State psychiatric hospital. A Federal

judge ruled that the State was in error in

denying inpatient psychiatric services to

prisoners because there were no available

forensic beds. At the time of the site visit,

the State was awaiting the judge’s ruling

on what remedial actions would be

required. Some believe that the State will

be required to increase the number of

46 Special Report
forensic beds to accommodate inmates in

need of services.

Third, there is some concern that an

Arkansas law, Act 911, may raise legal challenges on behalf of individuals needing civil

commitment beds. According to this statute,

people who are acquitted of a crime because

of mental incompetence, after they serve

their sentence, are not required to receive

inpatient treatment following their release

from jail, but they can be placed in a group

home, a State psychiatric hospital, or another

appropriate setting for a minimum of 5 years.

Act 911 patients in the community who

violate the terms of their release are immediately sent to the State psychiatric hospital.

Because this has happened in so many cases,

the State has had to place many Act 911

patients in civil commitment beds, thus

reducing its capacity to serve civilly committed patients. Respondents fear that this shift

in capacity may spawn legal challenges

brought on behalf of individuals who need

civil commitment beds.

A final change that may take place relates

to IMD optional services. Arkansas State

Hospital does not currently receive Medicaid

funding for patients over the age of 64

because the State has not elected this optional IMD service. Some discussion is taking

place between the mental health and the

Medicaid divisions about moving forward

with a State plan amendment that would

allow Medicaid to fund services for the 65

and older population receiving services in

the State psychiatric hospital. At the time

of the site visit, however, no final decision

had been made.

At the time of the site visit, the retirement

of the director of the mental health division

was imminent. A permanent replacement

had not yet been named.

Profile of Public Psychiatric Hospitals

in California

Public Psychiatric Hospitals as a Component

of the State’s Public Mental Health System

The responsibility for administering and

managing mental health services in California

is delegated to the State’s 58 counties. Each

county’s mental health department provides

care for Medicaid-eligible and uninsured

patients using (1) earmarked funds from a

portion of the State sales tax and the vehicle

licensing fee, and (2) a distribution of funds

from the State for Medicaid mental health

services. Most inpatient psychiatric services

are provided by psychiatric units of general

hospitals, private psychiatric hospitals, and

skilled nursing facility IMDs.

In addition to these facilities, California

has 16 psychiatric health facilities (PHFs),

10 of which are county owned. PHFs are

essentially the equivalent of freestanding

acute care psychiatric hospitals, although

licensing requirements differ from those of a

psychiatric hospital. (For instance, the scope

of ancillary services required to be on site is

smaller for PHFs.) PHFs are primarily used

for short-term stays (5 to 7 days), usually

for crisis stabilization. Most PHFs have

16 or fewer beds and may be eligible for

Medicaid reimbursement, as they do not

meet the criteria for an IMD. A few of the

PHFs are larger but are not eligible for

Medicaid funds for 22- to 64-year-olds

under the IMD exclusion.30

California’s four State psychiatric hospitals represent a specific niche in the public

mental health system. These facilities serve

Medicaid Financing of State and County Psychiatric Hospitals 47

30California has selected optional IMD services for

both the under-21 population and the 65 and older

population.
a predominantly forensic population. Only

two of the four State hospitals—Napa and

Metropolitan—accept civil patients (i.e.,

long-term, chronic patients who have no

alternative community treatment options

because of the severity of their illness and

because they are a threat to public safety).

All civil patients in the State psychiatric

hospital system must meet civil commitment

requirements (i.e., be a danger to themselves

or others). To accommodate residents in

need of State psychiatric hospital beds, counties lease beds annually from the State at a

per diem rate. 

Hospital Admission Process

State hospitals often represent “the end of

the road” for civilly committed patients. The

patients are typically transferred from other

treatment settings in which they could not be

cared for appropriately. All civilly committed

patients must meet the involuntary commit48 Special Report

Figure C.2: State and County Psychiatric Hospitals in California

Number Average Length

Hospital Name of Beds a Facility Characteristics of Stay (Days) b

State Psychiatric Hospitals

Atascadero State Hospital 1,145 Maximum-security forensic 348.0

Metropolitan State Hospital 1,184 140-bed children’s unit, minimum-security 

forensic, and adult civil commitments 276.0

Napa State Hospital 1,362 Low- to moderate-security forensic and 

adult civil commitments 440.0

Patton State Hospital 1,293 Maximum-security forensic 284.0

Psychiatric Health Facilities (County Owned)

Butte County Mental Health 16 Adults 3.8

El Dorado County Mental Health 15 Adults 6.4

Fresno County PHF 16 Adults 7.9

Marie Green Psychiatric Center 16 Adults and children 5.6

Sacramento County Mental 

Health Treatment Center 100 Adults and children 19.7

San Joaquin County Mental 

Health Service 40 Adults 9.2

Santa Barbara County PHF 16 Adults 5.3

Sempervirens PHF 16 Adults 7.3

Shasta County Mental 

Health Services 15 Adults and children 5.3

Sutter-Yuba PHF 16 Adults 10.9

a Licensed bed information from California Office of Statewide Health Planning and Development’s Hospital Quarterly Financial Reports. Second Quarter

of 2002. Accessed at www.oshpd.state.ca.us/HQAD/HIRC/hospital/finance/quarterly_data/index.htm. 

b State hospital information from Department of Mental Health (2001, November) “State Hospital Benchmark Reports FY00–01,” available at

www.dmh.cahwnet.gov/SADA/default.asp. PHF information from Office of Statewide Health Planning and Development’s Hospital Quarterly Financial

Reports.
ment requirements and are hospitalized

through the courts. Forensic patients are

hospitalized for a number of different reasons, including being found guilty by reason

of insanity, being incompetent to stand trial,

and committing sexually violent predatory

behaviors.

In sharp contrast to the State psychiatric

hospitals, the PHFs provide short-term care,

often in the form of emergency crisis stabilization. While PHFs accept both voluntary and

involuntary patients, their target population is

individuals who meet medical necessity criteria for acute psychiatric care. For instance,

Fresno County’s PHF defines its target population as “those with a suspected or established mental disorder diagnosis or who may

pose a danger to themselves and/or others,

have impaired judgment or are exhibiting

uncooperative behavior to the extent that they

cannot reasonably be assured a lower level of

care or cannot provide the basic necessities of

living such as food, clothing or shelter.”31

Major Operational Changes

In 1991, California went through what it

calls “realignment.” The major operational

change during this time was the designation

of portions of the sales tax and vehicle

license fees to counties specifically for the

provision of mental health services, including

inpatient psychiatric care at the State hospitals. Realignment essentially shifted the

responsibility for public mental health services to the counties. The realignment funds

were intended to serve what the State identified as the target populations: seriously and

persistently mentally ill (SPMI) adults and

seriously emotionally disturbed (SED) children. For patients receiving Medicaid, the

county became responsible for funding the

State match.

Four years later, in 1995, the State added

to the counties’ mental health responsibilities

under a plan called the Medi-Cal specialty

mental health services consolidation. At the

time, Medi-Cal, the State’s Medicaid program, was moving toward a managed care

model, and there was concern in the State,

particularly among the advocacy community,

that this model of care would not be appropriate for the financing and delivery of mental health services. Consequently, the State

redirected the money that had historically

been spent on Medi-Cal “specialty mental

health services” directly to the counties.

Respondents defined specialty mental health

services as any mental health service not

provided by a primary care doctor. Phase

One of the Medi-Cal specialty mental health

consolidation, which occurred in 1995,

involved transferring the responsibility for all

inpatient mental health services to the counties. Previously, counties were responsible for

inpatient services under realignment only for

SPMI adults and SED children. The Medi-Cal

consolidation added to the county responsibility for services to Medi-Cal-eligible individuals outside this target population. Phase

Two of the Medi-Cal specialty mental health

consolidation in 1997–98 involved the transfer of outpatient services to the counties. For

all Medi-Cal services, the counties now fund

the State match out of their realignment and

mental health consolidation funds.

The county-level assumption of responsibility for inpatient mental health services

prompted a dramatic shift in civil commitments from the State hospitals to what

counties perceived as a more cost-effective

Medicaid Financing of State and County Psychiatric Hospitals 49

31Fresno County Human Services System Web site:

www.fresnohumanservices.org/adultservices/

psychiatrichealthfacility/targetpopulation.htm. 

Accessed November 17, 2002.
setting—local providers. In turn, the State

hospitals shifted their focus from a civilly

committed population to a forensic population. Before realignment, the State psychiatric hospitals housed approximately 70

percent civil commitments and 30 percent

forensic patients. Now, the reverse is true.

Care for forensic patients is funded

through State appropriations based on the

established per diem rate. The payments go

to the State Department of Mental Health.

Anticipated Operational Changes

The trend toward treating primarily forensic

patients in California’s State hospitals is

expected to continue. In fall 2001,

California’s Department of Mental Health

began construction on its fifth State hospital,

Coalinga State Hospital. This facility is slated

to have 1,500 beds and serve only sexual

offenders. Construction is expected to be

completed in fall 2004. In addition, construction recently was completed on a 64-bed

inpatient mental health treatment center

inside Salinas Valley State Prison. The

California Department of Corrections and

the Department of Mental Health will operate the Salinas Valley Psychiatric Program

jointly. The two departments currently run

a similar program at Vacaville State Prison.

Profile of Public Psychiatric Hospitals

in Iowa

Public Psychiatric Hospitals as a Component

of the State’s Public Mental Health System

Each quadrant in Iowa is served by one of

four State psychiatric hospitals known as

mental health institutes (MHIs). Each MHI

also provides specialty services that cut

across the entire State. For example,

Clarinda MHI (in the southwest) draws from

the entire State for its geropsychiatric program; Mt. Pleasant MHI (in the southeast)

does the same for dual diagnoses and substance abuse care. Two facilities specialize

in psychiatric care for children and adolescents—one in the eastern part of the State

(Independence MHI) and the other in the

west (Cherokee MHI). Independence MHI

also has a Psychiatric Medical Institute for

Children (PMIC), which is a stepdown unit

from acute care but provides a higher level

of service than residential treatment. 

There are no private freestanding psychiatric hospitals in Iowa, which limits the

alternatives for patients needing inpatient

services. As a consequence, the MHIs are

responsible for a large segment of the treatment continuum, from acute to long-term

care. However, most MHI patients are shortterm cases (length of stay fewer than 30

days). The MHIs admit voluntary patients,

meaning that patients do not necessarily

have to meet the more rigorous commitment

requirements of being a danger to themselves

or others. Another attribute unique to the

public health system in Iowa is that the

MHIs are included in the Medicaid managed

behavioral health care network. 

Under Iowa law, the State pays for 20

percent of the per diem in MHIs, while the

county of legal responsibility pays the remaining 80 percent and any costs of care beyond

those covered by the per diem rate. Counties

reportedly view the MHIs as a good buy, since

they deliver relatively inexpensive care and

generally do a “good job” of filling a need.

Major Operational Changes

The past 10 years have ushered in a greater

emphasis on specialization among the four

MHIs. As mentioned, each hospital has a

specialty and draws patients from across the

50 Special Report
State in that specialty area. The State has also

stepped up efforts to avoid institutionalization when possible and to reduce the length

of stay. With regard to deinstitutionalization,

MHIs have been more or less successful,

depending on the other providers and community resources in their area. In terms of

their mission, MHIs are trying to make the

transition to becoming short-term facilities

that focus on acute psychiatric care.

Until recently, lengths of stay in the

MHIs were becoming shorter, but they are

now on the upswing. For example, at the

Clarinda facility, stays are becoming longer

because of the difficulty of returning

patients to the community for continued

care. Eighteen months before the site visit,

the average length of stay for adults was

8 days; 4 months later it was 12 days, and

at the time of the site visit in April 2002,

it had risen to 20 days.

The pattern is similar for the average daily

census (at least at one of the hospitals), initially on the decline but now beginning to

rise again. From 1985 through 1995, the

average daily census at the Independence

facility was 170 patients. Beginning in 1995

and continuing through the late 1990s, the

average daily census began to fall, hitting a

low of 113 in 1998. Much of this decline was

a function of the introduction of Medicaid

managed care, which emphasizes less restrictive treatment settings, and the advent of new

psychotropic drugs, which made it increasingly possible for patients to be maintained

outside of an institutional setting. However,

patients who once responded well to psychotropic medications are reportedly relapsing with greater frequency and returning to

the MHI. Respondents also said that many

of these individuals have not been able to be

maintained appropriately in the community. 

The MHIs’ organizational relationships

within Iowa’s Department of Human

Services (DHS) have changed in several

ways in recent years. Four years ago, the

MHIs were part of the Mental Health

Developmental Disabilities Division, but

the Administrator of that division did not

report directly to the director of DHS.

The MHIs are now under the Operations

Division, whose deputy director reports

Medicaid Financing of State and County Psychiatric Hospitals 51

Figure C.3: State and County Psychiatric Hospitals in Iowa

Number

Hospital Name of Beds a Facility Characteristics Average Length of Stay (Days)

Independence Mental 170 Adult Adult (53)

Health Institute Adolescent Adolescent (79)

Children Children (89)

PMICb Child/Adolescent (121)

Clarinda Mental 80 Adult Adult (20)

Health Institute Geriatric Geriatric (1,178) 

Mount Pleasant Mental 89 Adult Adult (40) 

Health Institute Substance abuse Substance abuse (27) 

Dual diagnosis Dual diagnosis (26) 

Cherokee Mental 97 Adult Adult (29) 

Health Institute Adolescent Adolescent (74) 

Children Children (60) 

Source: Iowa Council on Human Services Budget Recommendation for fiscal year 2003.

aNumber of staffed beds.

bBeds in the Psychiatric Medical Institute for Children are not acute and are not included in the total bed count.
directly to the director of DHS. Respondents

believe that the change has made the MHIs

more accountable to DHS.

Over the past 10 years, the MHIs have

been exploring opportunities to reduce administrative costs by sharing services with other

organizations. For instance, the Clarinda and

Mount Pleasant facilities co-located with a

State prison. The Independence MHI shares

its campus with a private adolescent center,

and the Clarinda facility does the same with

a private academy for nonviolent delinquent

youth.

Iowa has a very large managed behavioral

care carve-out contract with Magellan (formerly Merit). Under this contract, launched

in 1995 and known as the Iowa Plan, all

four State psychiatric hospitals contract with

Merit to be network providers. The carve-out

covers both the voluntary (noncommitted)

adult population over 21 and under 65 who

are Medicaid eligible and Medicaid-eligible

children, whether voluntary or involuntary.

Anticipated Operational Changes

Net budgeting was recently introduced as

a new accounting method in the State. The

PMIC at the Independence MHI is piloting

the new methodology. Previously, the PMIC

used the same accounting system as the State

psychiatric hospitals; operations were 100

percent State appropriated, and any payments received from third parties were

deposited to the State general fund to offset

the appropriation. Under net budgeting, the

PMIC receives a State appropriation for the

total operational budget less anticipated collections/receipts. The facility, in turn, keeps

all collections from third-party payers and

others. Because net budgeting is a change

only in accounting technique, it does not

affect billing or admission processes.

Several respondents believe that the State

eventually may close one or more of the

MHIs. Historically, local politicians have

reportedly fought against this because these

facilities employ many people in rural areas

where the employment base is relatively

small. However, the inpatient psychiatric

hospital operations on the Clarinda and

Mount Pleasant campuses are now smaller

and co-located with much larger correctional

facilities. Consequently, the psychiatric hospitals no longer employ as many people as

they once did.

Profile of Public Psychiatric Hospitals

in Maryland

Public Psychiatric Hospitals as a Component

of the State’s Public Mental Health System

Maryland has eight State psychiatric hospitals, most of which serve a mix of patients:

acute, long-term, and forensic. However,

the Carter Center serves only acute care

patients, and the Perkins Hospital serves

only forensic patients. Five years ago, the

State hospitals stopped admitting children

under the age of 12. They are treated

instead in private hospitals or in one of

the three State-run residential institutes

for children and adolescents (RICAs).

Only two State psychiatric hospitals accept

adolescent patients. 

The hospitals have specific catchment

areas, but in recent years, when the hospitals

have been operating at full capacity, new

admissions sometimes have been sent to any

hospital that has an open bed. The State,

which views the hospitals as providers of last

resort, attempts to place patients with insurance in private facilities first. However, longterm patients, even if insured, typically end

up in one of the State psychiatric facilities

52 Special Report
when the insurance is exhausted or no longer

covers treatment.

Lengths of stay vary as follows: about

one-third of patients are discharged in fewer

than 30 days, one-third are discharged in

31 to 90 days, and one-third are discharged

after 90 days or longer. The length of stay

has risen in recent years because of an

increase in the severity of illness and in the

number of forensic patients. At the time of

the site visit, 100 patients in the State psychiatric hospital system were reportedly ready

to be discharged to another setting, but an

appropriate community placement was not

available. Respondents say that the dually

diagnosed (persons with a developmental

disability and mental illness) are the most

difficult to place.

Hospital Admission Process

Patients must be referred by some other

facility or organization. Referrals come primarily from emergency rooms (60 percent),

courts (14 percent), jails (11 percent), acute

care hospitals (7 percent), and other facilities

(primarily adolescent patients). The State

psychiatric hospitals do not admit walk-ins,

but they do accept voluntary admissions.

At the time of the site visit, 82 people were

waiting to be admitted to a State psychiatric

hospital bed; 55 of those waiting were in

other hospitals.

Major Operational Changes

Maryland has a Section 1115 waiver that

carves out mental health services for

Medicaid eligibles. The waiver gives the

State IMD expenditure authority, which

is primarily used for services rendered in

private psychiatric hospitals. Under the

waiver, these hospitals receive payment for

30 days per episode, up to 60 days per

year and 120 days in a lifetime for adult

Medicaid patients (age 22 through 64).

This policy relieves some pressure on the

State psychiatric hospitals and reinforces

their role as safety net providers. The

State hospitals admit patients from private

hospitals when the patients exhaust their

Medicaid coverage.

The number of patients served by the

State psychiatric hospitals has declined

steadily over the past 10 years. For example,

Springfield Hospital had 900 patients in

Medicaid Financing of State and County Psychiatric Hospitals 53

Figure C.4: State and County Psychiatric Hospitals in Maryland

Hospital Name Number of Beds a Patient Characteristics

Crownsville Hospital 204 Civil, forensic, adult geriatric, adolescent

Eastern Shore Hospital 80 Civil, forensic

Springfield Hospital 325 Civil, forensic, deaf

Spring Grove Hospital 285 Civil, forensic

Perkins Hospital 220 Forensic

Finan Hospital 114 Forensic, civil, geriatric, adolescent

Upper Shore Hospital 40 Civil, forensic

Carter Center 51 Civil, forensic

Source: Interviews with representatives from the Mental Hygiene Administration and calls to the hospitals.

aThe number of staffed beds.
1990, 400 in 2000, and 325 at the time of

the site visit. One respondent said that the

downsizing stems from several changes that

began about 10 years ago. First, a State

recession forced facilities to downsize due

to budget constraints. Second, there was a

concurrent push toward the use of community-based services. And last, a gubernatorial commission recommended the closure

of one of the three largest State psychiatric

hospitals in central Maryland. To comply,

however, the State needed to increase funding for community-based services while

continuing to operate the State psychiatric

hospital that was scheduled for closure.

But because the State did not have the

money to fund this dual system of care,

it developed a 5-year plan to reduce the

patient load to 1,150 individuals Statewide.

The plan called for the State psychiatric

hospitals to be streamlined and remodeled

to run more efficiently. Although three facilities have reduced the number of beds and

remodeled, the State has not yet met this

patient load goal. 

During the same 10-year period, there

was a dramatic shift in the types of patients

served by the State psychiatric hospitals.

While the total number of forensic patients

remained relatively steady, the number of

civilly committed patients fell. At the time

of the site visit, only 500 of the approximately 1,400 beds in the State were for

nonforensic patients. This disproportionate

shift in patient mix towards the longer-term

forensic patient has increased the length of

stay across the State psychiatric facilities.

Hospital downsizing prompted the

Mental Hygiene Administration to look

at ways to use patient buildings for other

purposes. For example, some facilities have

leased the space to compatible community

services, such as substance abuse treatment

facilities or office space for State agencies,

such as the Mental Hygiene Administration.

The Eastern Shore Hospital sold a large

parcel of land to Hyatt Hotels, and the State

used the proceeds to build a new Eastern

Shore Hospital, reducing the number of beds

from 300 to 80. 

Anticipated Operational Changes

Many respondents said that Maryland’s current fiscal crisis has fueled the debate about

whether the State should close one of the

three largest State psychiatric hospitals, as

recommended by a gubernatorial commission several years ago. To date, political

pressure has prevented closure, and unions

representing State employees have opposed

such a move. Still, one of the goals of the

current administration reportedly is to

reduce the size of the hospitals such that

none serves more than 250 patients.

Another option, according to one respondent, would be for the State to run more

specialized rather than “generic” psychiatric

hospitals. Under such a system, one large

hospital would serve as the core facility,

providing general services. This “nucleus”

would be surrounded by a number of specialty hospitals, each providing a distinct

set of services geared, for example, toward

children, adolescents, or geriatric patients.

Although some are concerned that such a

system would create a hardship for families

in terms of travel, others believe that

Maryland’s relatively small size makes

travel a “nonissue.”

In addition to raising the possibility of

closing or restructuring State psychiatric

hospitals, the State fiscal crisis has

prompted other changes that are likely to

affect hospital operations. For instance,

54 Special Report
the State Senate recently passed a bill

calling for the elimination of 3 to 8 percent

of personnel in all State agencies and departments. For the State psychiatric hospitals,

this translates into 210 to 290 positions.

One respondent noted that the hospitals

could adjust staffing by approximately

100 positions, but cuts beyond this would

require an overall reconfiguration of the

hospitals. Another respondent said that

Mental Hygiene Administration staff would

have to absorb the remaining cuts. A final

decision on how to respond to the budget

cuts had not been made at the time of the

site visit.

Under the present public mental health

system, the State pays community mental

health centers, or core services agencies,

through a fee-for-service system for care

to uninsured, or “gray zone” patients. At

the time of the site visit, there was language

in the budget bill that would change the

funding for these patients such that they

would be covered by a grant, and providers

would limit services to the amount of the

grant. As a result, gray zone patients would

not be able to receive outpatient services

on demand if the grant funding was depleted. Restrictions in such services might, in

turn, raise demand for inpatient services

from the State psychiatric hospitals.

Furthermore, if the State also decides to

limit pharmacy services as part of the new

arrangement, the provision will apply only

to new patients; current patients will be

grandfathered in.

The final change observed at the time of

the site visit was that the longstanding director of the Mental Hygiene Administration

was in the process of leaving his position.

A permanent replacement had not yet been

named.

Profile of Public Psychiatric Hospitals

in New Jersey

Public Psychiatric Hospitals as a Component

of the State’s Public Mental Health System

In New Jersey, the State and county psychiatric hospitals serve primarily as intermediate- and long-term care facilities. Short-term

care is provided through a State-designated

system of short-term care facilities (STCFs),

which comprise psychiatric units in general

hospitals. The State psychiatric hospitals primarily serve their regional catchment areas,

although specialty units (such as Ancora’s

dual diagnosis unit for individuals with a

mental illness and a developmental disability)

sometimes serve the entire State. Brisbane

Child Treatment Center is the only State hospital for children, so it draws from the entire

State. The six county hospitals/units serve

essentially the same population as the State

hospitals, although their catchment area is

generally limited to the county in which they

are located. Although these hospitals report

directly to their respective county boards of

freeholders, who are elected officials, they

must submit a business plan every year to

the State Division of Mental Health Services

for review and approval.

Patients in the State and county psychiatric

hospitals are primarily indigent persons with

serious and chronic mental illness. All must

meet the involuntary admission criteria—that

they pose a threat to themselves or others.

According to one State respondent, about

73 percent of the patients in State psychiatric

hospitals are discharged within 6 months of

admission, while the remaining 27 percent

require longer-term care.

The State psychiatric hospitals are

gross budgeted through the State’s regular

appropriations process, meaning that their

Medicaid Financing of State and County Psychiatric Hospitals 55
entire budget is funded by the State. All

hospital revenues, including Medicaid funds

for services and DSH payments, go directly

to the State treasury to offset the State

appropriation. Counties are responsible for

funding a portion of the cost for county residents in State and county psychiatric hospitals. County payments are also sent to the

treasury to offset the State appropriation.

New Jersey’s 90/10 State Aid program

reimburses counties for the services provided

to indigent persons in county hospitals. For

county residents, the State pays 90 percent

of the per diem, and the county picks up the

remaining 10 percent.32 For individuals not

meeting the county residency criteria, the

State pays the full 100 percent. If a patient

is Medicaid eligible, the county psychiatric

hospital must accept the Medicaid rate as

56 Special Report

32County residency is established by residing in the

county for at least 5 years.

Figure C.5: State and County Psychiatric Hospitals in New Jersey

Hospital Number Average Length

Name of Beds b Facility Characteristics of Stay (Days)

State Psychiatric Hospitals a

Ancora Psychiatric Hospital 726 Adults and 33 developmentally 1,224

disabled/mentally ill; 135 geriatric

and 116 forensic beds

Brisbane Child 50 Children 11–18 years old 118

Treatment Center

Hagedorn Psychiatric Hospital 288 Adults and 188 geriatric beds 576 general population

513 geropsychiatric

Greystone Park 

Psychiatric Hospital 538 Adults 566

Trenton Psychiatric Hospital 478 Adults 477

County-Owned Psychiatric Hospitals

Bergen Regional 307c Adults, 120 geriatric, 

Medical Center 8 forensic Intermediate cared

Buttonwood Hospitale 30 Adults 28

Camden County Health 

Services Center 158 Adults Usually 30 days or less

Essex County Hospital Center 400 Adults Intermediate care

Meadowview Hospital 84 Adults Intermediate care

Runnells Hospitale 44 Adults Intermediate care

Sources: Information provided by staff from the Department of Mental Health Services and Buttonwood Hospital during study team site visit.

a The Division of Mental Health Services also runs the Ann Klein Forensic Center, a 200-bed inpatient psychiatric unit within a State prison.

bStaffed beds.

c 100 beds are classified as IMD, the remaining 207 beds are not. The psychiatric hospital is part of a larger 1,185-bed surgical/acute care facility.

d Intermediate care generally refers to lengths of stay of more than 30 days but less than 6 months. 

eNot an IMD. Part of a larger, long-term care facility.
payment in full even if it is less than the rate

for indigent persons.33 Approximately 87

percent of patients in the county hospitals

are covered through the State Aid program.

Hospital Admission Process

All individuals receiving inpatient psychiatric

services in a public psychiatric hospital must

be admitted through a State-certified screening center.34 There are 23 such centers (one

in each county other than Essex County,

which has three). Individuals can be assessed

at the screening center or by a screener who

travels to where the individual is located.

The screeners evaluate potential admissions

based on the involuntary commitment criteria. If the screener recommends admission,

a psychiatrist must personally evaluate the

patient and must approve the admission.

The screening process focuses on placing

individuals in the least restrictive treatment

setting, which is often an STCF. New Jersey

has approximately 300 STCF beds in

approximately 15 facilities throughout the

State. These STCFs primarily serve patients

with stays shorter than 2 weeks. If an STCF

bed is not available, or if the screener knows

the patient’s history and believes a longerterm placement is necessary, the screener

may refer the patient to a State or county

psychiatric hospital.

Individuals needing longer-term treatment

are typically transferred to a State or county

psychiatric hospital. The majority of State

and county psychiatric hospital admissions

are transfers from STCFs. The State facilities

have no licensed bed capacity per se and

must accept all patients admitted through

the screening centers. There is little movement of patients between State and county

psychiatric hospitals, since the latter are

intended to serve their respective counties

exclusively. Residents of counties with a

county psychiatric hospital would normally

go to a State psychiatric hospital only if they

met the admission criteria for one of the special treatment programs (e.g., having a dual

diagnosis) or if the county facility was full. 

While all patients in the public psychiatric

hospital system must initially meet the involuntary admission criteria, they may change

to a voluntary status following admission.

Major Operational Changes

In 1987–88, New Jersey changed its policy

such that the preferred place of treatment for

individuals with acute psychiatric problems

was no longer a public psychiatric hospital,

but a community-based setting.35 The STCF

system was developed in response to this policy change. As mentioned, STCFs are intended to serve patients needing short-term care,

provide services closer to the patient’s homes,

and to reserve the State and county hospitals

for intermediate and long-term patients. As

originally developed, STCFs served patients

needing stays of up to 28 days. The average

length of stay is now 10 to 11 days.

In 1995, New Jersey launched the

Redirection plan, the purpose of which was

to close a State-owned facility, Marlboro

Psychiatric Hospital, and redirect all of the

$65 million used to operate that facility to

community-based services. This operational

change was the largest in the State inpatient

mental health system in the past 10 years.

Medicaid Financing of State and County Psychiatric Hospitals 57

33According to respondents, the per diem rate is

currently higher than the Medicaid rate of reimbursement.

34The screening centers are always located in a

general hospital.

35Acute is defined as requiring 30 days of treatment

or less.
At its peak in 1994, Marlboro had 780 beds.

Resources from its closure were used to

finance 480 community placements (including

approximately 388 community residential

beds) and approximately 280 additional

inpatient beds at the remaining State psychiatric hospitals. Marlboro officially closed

in June 1998, after which time the Statewide

admissions dropped by over 30 percent and

overall State hospital census fell, although it

has begun to rise slightly in recent years.

Anticipated Operational Changes

New Jersey is in the early stages of the

Redirection II program, under which the

State plans to construct a smaller replacement facility for Greystone Park Psychiatric

Hospital. Greystone’s replacement facility

will initially have 400 beds, a reduction of

138 beds from its current capacity, although

there will be the potential for expanding by

an additional 50 beds.

Under this plan and with additional State

appropriations, the State plans to expand

community-based mental health services,

including supportive housing placements,

which are expected to relieve some of the

pressure on discharge planning at the State

psychiatric hospitals. At present, the State

estimates that nearly 400 patients in the

entire State psychiatric hospital population

are appropriate for discharge to another

treatment setting, but the absence of placement options essentially keeps them in the

State psychiatric hospital system. The

State has committed to funding both the

inpatient and outpatient components of the

Redirection initiative so that the expansion

in the community-based infrastructure takes

place before patients are discharged.

As the hospital census declines, the State

does not intend to reduce overall hospital

staffing so as to improve the staff-to-patient

ratio and improve staff recruitment and

retention at all of the State hospitals. A

major component of the Redirection II Plan

is to improve statewide quality of care in

both community and hospital services.

Despite New Jersey’s current budget problems, funding to initiate this plan was provided in State fiscal year 2003 and additional

funding is anticipated for fiscal year 2004.

58 Special Report
The financing role that Medicaid assumes with regard to

State and county psychiatric hospitals is highly complex,

and is made more so because of severe data limitations.

Despite the existence of several publicly available national datasets on

Medicaid, mental health, and psychiatric hospitals, each has limitations

that may conceal the “true” magnitude of Medicaid funds received by

public psychiatric hospitals (see Table D.1).

Appendix D.

Data Limitations

First, the data tend to express Medicaid

expenditures in the aggregate, making it

impossible to identify funds apportioned

specifically to public psychiatric hospitals.

The exception is in the accounting for DSH

spending through the Medicaid DSH files,

but those data are available only for 1998.

In accounting for Medicaid reimbursements,

HCFA-64 reports “mental health” (nonDSH) expenditures, but the data cover all

providers within States, not just public psychiatric hospitals.

Second, even if it were possible to “back

out” expenditures on public psychiatric hospitals, the existence of IGTs complicates the

determination of the amount of Medicaid

dollars that remain with these facilities. No

information exists on the extent of funds

flowing through IGTs, which States use IGTs,

or the purposes for which States use the

funds (e.g., other mental health services,

offsets of State appropriations made to the

hospitals, or other State-designated use).

In addition, States vary substantially in

their portfolio of Medicaid funding sources

and the extent of their use. For example,

Wisconsin does not use IGTs in its DSH program for public psychiatric hospitals (personal communication, 11/12/01, D. Zimmerman

at the Wisconsin Department of Health and

Family Services; Coughlin and Liska 1998)

but is heavily involved in enhanced payments

to county nursing facilities (GAO 2001;

personal communication, 11/12/01, D.

Zimmerman at the Wisconsin Department

of Health and Family Services). Delaware,

on the other hand, runs all its DSH funds

through one State psychiatric hospital.

Finally, CMS cannot verify the use of upperpayment limit strategies for IMDs or for

county-owned psychiatric hospitals in particular. State plan amendments altering payment

methodologies to take advantage of enhanced

payment strategies are too general to reveal

whether the payments apply to IMDs (personal communication, 11/14/01, L. Reed at

CMSO). Further, it is difficult to identify

county-owned psychiatric hospitals along

with the set of States in which they are located. Overall, data limitations have exacerbated

a thin knowledge base on Medicaid financing

of State and county psychiatric hospitals.

Medicaid Financing of State and County Psychiatric Hospitals 59
60 Special Report Table D.1: Descriptions and Limitations of Currently Available Data on Medicaid Financing of Public Psychiatric Hospitals Dataset Source Purpose/Description Relevant Aspects Limitations HCFA-64 CMS Actual Medicaid expenditures incurred by States, broken into 24 statutorily defined categories, filed for the purposes of obtaining the Medicaid Federal match Two categories • Mental health • Mental health DSH, by State, 1994–1999 • Categories are total expenditures not broken out by provider type • Does not include revenues (i.e., impact of IGTs)

Medicaid DSH files CMS DSH expenditures by hospital, categorized

as public, private, psychiatric, acute, andchild, filed with CMS to verify DSH caps

• Identifies all psychiatric

hospitals that receive DSH,the amount, and whetherpublic or private 

• By hospital, by State,

1998–2000

• Collection began only in fiscal year 1998• Does not identify ownership beyond “public,”

i.e., State- versus county-owned

• Not all States have reported; there are

State-by-State variations in reporting

• Inconsistencies with HCFA-64 “mental

health DSH”

• Does not include revenues (i.e., impact of IGTs)

Inventory of MentalHealth Organizationsand General HospitalMental HealthServices (IMHO)

Center forMental HealthServices(CMHS)

Inventory of all specialty mental healthorganizations and separate psychiatricservices of non-Federal general hospitals;collects funding source, expenditures,patients served, and so forth for researchand policymaking

Identifies State and countypsychiatric hospitals, showsMedicaid funding, 1994

• Data from 1994; collection also for 1998

and 2001, but only for sample (not completeinventory)

• Sources of funding are broad categories:

Medicaid, client fees, Federal blockgrants, and so forth

• Does not include revenues (i.e., impact of IGTs)

State Mental HealthAgency Revenues andExpenditures Study

NRI, NASMHPD Funding sources and expenditures of

State mental health agencies (SMHA)

Funding from SMHA to Statepsychiatric hospitals, 1997

• Funding from SMHA to State mental hospitals

not broken out by hospital or funding type(DSH versus other things)

• Does not include revenues (i.e., impact of IGTs)

Mental HealthFacilities 2000

KnowledgeExchangeNetwork (KEN)at CMHS

Database with all mental health serviceorganizations by facility type andaddress; provides consumer informationabout where to seek psychiatric services

Identifies psychiatric facilitiesby State and type of organization(i.e., “psychiatric hospital”), 2000

• Does not identify ownership

(private/State/local)

• No expenditure/revenue information

Directory of StatePsychiatric Hospitals

NASMHPD Database of all State psychiatric hospitals

in the county, by State, and with address;consumer information

Identifies all State psychiatrichospitals, 1998

• Does not include county psychiatric hospitals• No expenditure/revenue information

Source: Assessment of noted databases.


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DHHS Publication Number (SMA 03-3830)

Printed 2003 Substance Abuse and Mental

Health Services Administration