Historically, people with SMI were cared for primarily in hospitals. States developed a system of public mental hospitals, but by the 1960s they were viewed as ineffective and inadequate because of overcrowding, staff shortages, and poor facilities. Advocates and reformers contended that long-term institutional care in the hospitals had been characterized by patient neglect and ineffective treatment. Improved medications that reduced some of the symptoms of mental illness allowed more people to live in the community with support. Certain legislative and judicial actions contributed to a changed focus of providing community-based rather than institutional care. In 1963, the Community Mental Health Centers Act authorized the development of a nationwide network of community mental health centers (CMHC) to replace state institutions as the main source of treatment for people with SMI and to decrease the incidence of mental illness in the broader population.The act and amendments created federal grants for states to build the CMHCs and staff them for 8 years. Funds were intended to supplement existing state and local revenues to help communities develop the new services necessary for adequate community mental health care. States and communities were expected to develop alternative funding sources to eventually replace the federal funds. CMHCs were required to provide a number of services, including inpatient, outpatient, emergency, and day care services; follow-up care for people released from mental health facilities; and transitional living facilities. CMHCs were also required to coordinate service delivery with other mental health and social service providers in the community. The vision of a national network of community mental health centers was not fulfilled. Many communities were unable to find the funds to match federal dollars to build the CMHCs or to provide all the required services; others were unable to find qualified professionals to staff the centers.As of 1980, only 768 of the projected 2,000 CMHCs had been funded. Moreover, implementation of the CMHC act did not adequately address the needs of people with SMI who were released from institutions. The CMHC program’s regulations emphasized the prevention and treatment of mental disorders in the broader population, and CMHCs did not provide the intensive, more comprehensive services people with SMI required, such as housing, support services, and vocational opportunities in addition to treatment. Medication was the only service provided to many patients. Further, the extent to which CMHCs coordinated with mental hospitals concerning the release of patients to their communities varied. Section 901 of the Omnibus Budget Reconciliation Act of 1981 ended federal funding to states specifically for community mental health centers and replaced it with block grants to the states to support services for people with SMI. A series of court decisions in the 1970s establishing that institutionalization is a deprivation of liberty also played a role in moving people with SMI away from institutions into the community. States had previously exercised broad latitude in allowing an individual with mental illness to be involuntarily confined, but court rulings recognizing individuals’ right to refuse treatment made it difficult to commit people to a psychiatric hospital without their consent. In 1975, the Supreme Court held that mentally ill individuals could not be committed involuntarily unless they were found to be dangerous to themselves or others.This led to a reform of state laws, which now generally allow involuntary inpatient commitment only if persons present a clear danger or threat of substantial harm to themselves or others. Some state laws specify that inpatient commitment is appropriate only after full consideration of less restrictive alternatives, such as involuntary outpatient commitment. (See app. II for a discussion of involuntary outpatient commitment.) A recent Supreme Court opinion has brought additional pressure on states to offer community-based treatment to people with mental illness when such treatment is appropriate, the individuals do not oppose such treatment, and the placement can be reasonably accommodated, taking into account the state’s resources. The public mental hospital population declined. Many people with SMI returned to communities without adequate mental health services and some of these people became homeless. Other major factors contributing to homelessness were unemployment, a decline in the supply of low- income housing, and alcohol and drug abuse. State mental health agencies (SMHA) have primary responsibility for administering the public mental health system, through their role as a purchaser, regulator, manager, and, at times, provider of mental health care. The public mental health system serves as a safety net for people who are poor or uninsured or whose private insurance benefits run out in the course of their serious mental illness. Many people with SMI are unemployed, and they are often poor and financially dependent on government support. SMHAs arrange for the delivery of services to more than 2 million people each year, most of whom suffer from a serious mental illness. Services are delivered by state-operated or county-operated facilities, nonprofit organizations, and other private providers. The sources and amounts of public funds SMHAs administer vary from state to state but usually include state general revenues and federal funds. The federal funds that SMHAs administer generally include Medicaid and Medicare payments for services provided in state-owned or state-operated facilities and other Medicaid payments when the state Medicaid agency has authorized the SMHA to control all Medicaid expenditures for mental health services. HCFA’s Medicaid and Medicare programs pay for certain mental health services for eligible beneficiaries. States operate their own Medicaid programs within broad federal requirements. Medicaid pays for mandatory services, such as physician services, and optional benefits that states may choose to provide, such as rehabilitation and targeted case management. Since Medicaid is an entitlement program, states and the federal government are obligated to pay for all covered services that are provided to an eligible individual.Each state program’s federal and state funding share is determined through a statutory matching formula, with the federal share ranging from 50 to 80 percent. In the 1990s, state Medicaid programs increasingly turned to capitated managed care plans to provide medical and behavioral health services as a way to control costs and improve services. Twenty-two states have “carved out,” or separated, mental health services from physical health services in contracting with managed care plans, placing them under separate financing and administrative arrangements. Some states create separate capitated arrangements and others use fee-for-service arrangements. Medicare covers elderly persons and persons who receive Social Security Disability Insurance, and it pays for a range of inpatient and outpatient mental health services.The Medicare statute requires a 50-percent co- payment from beneficiaries for outpatient care of mental disorders, compared with 20 percent for other medical outpatient treatment.Furthermore, the Medicare statute limits treatment in a freestanding psychiatric hospital to a total of 190 days in a patient’s lifetime. SMHAs also administer the funds they receive from SAMHSA’s Community Mental Health Services Block Grant program. Block grants are allocated to states according to a statutory formula that takes into account each state’s taxable resources, personal income, population, and service costs. The grants give states and territories a flexible funding source for providing a broad spectrum of community mental health services to adults with SMI and children with a serious emotional disturbance. Funding for the block grant program totaled $356 million in fiscal year 2000; SAMHSA used about $18 million for state systems development, including technical assistance, data collection, and evaluation. The remainder was awarded to the states and territories, with an average award of about $5.7 million. (See app. III for other SAMHSA programs that help implement community-based mental health services.) In 1997, the nation spent about $73 billion for the treatment of all mental illness, up from $37 billion in 1987.Mental health spending grew at about the same rate as overall health spending during this period. After adjusting for overall inflation, spending for all health care grew by 5 percent a year, on average, compared with 4 percent for spending on mental health services.In 1997, the public sector (that is, federal, state, and local governments) provided 55 percent of mental health spending, in contrast to providing less than half (about 46 percent) of overall health care spending. From 1987 to 1997, adjusted annual federal spending for mental health grew, on average, more than twice as fast as state and local mental health spending (6.3 percent versus 2.4 percent). This led to the federal government’s share of total mental health expenditures increasing from 22 to 28 percent during the period, while state and local governments’ share of spending declined from 31 to 27 percent.The proportion from private spending sources also declined slightly from 46 to 45 percent (see fig. 1). Medicaid and Medicare played increasingly important roles in funding mental health services between 1987 and 1997. Medicaid’s proportion of mental health spending (federal and state) rose from slightly more than 15 percent ($5.7 billion) to about 20 percent ($14.4 billion). Medicare’s share rose from 8 percent to slightly more than 12 percent, with expenditures increasing from about $3 billion to $9 billion. HCFA and SAMHSA officials have suggested several reasons for Medicaid’s increase. These include the trend toward Medicaid beneficiaries receiving their inpatient care in psychiatric units of general hospitals, where services are covered by Medicaid, rather than in psychiatric hospitals, where services are not covered; increased costs for psychiatric medications; and states’ increased use of Medicaid to pay for community-based mental health services. The increase in Medicare spending may be associated in part with a 1990 statutory change that expanded coverage to nonphysician professionals providing mental health services, such as psychologists, clinical social workers, and nurse practitioners. Over the past 20 years, states have largely shifted the care of people with SMI from institutions to the community. The continued development of psychotropic medications that both are more effective and produce fewer side effects has facilitated the ability to care for more people with SMI in the community. Furthermore, treatment approaches such as ACT, supported employment, and supportive housing can provide the multiple forms of ongoing assistance that adults with SMI often need to function. These approaches can also help homeless people with SMI, who have particularly complex treatment needs and who often have difficulty gaining access to the multiple services they need.