Twenty years ago it would have been nearly impossible to do what Mark Frey did last week.
Frey, president and chief executive officer of Alexian Bros. Behavioral Health Hospital in Hoffman Estates, Ill., successfully pleaded his case for adding 27 beds to his 110-bed hospital. He testified before the state's certificate-of-need board that his hospital has been running at full occupancy this year, up from about 80% in 2002. The board granted the CON.
"The board had a good grasp of the critical access-to-care issues that the mentally ill face and was supportive of the project," Frey said.
Other Illinois providers also have a grasp on the need to provide the services, he said. "There has not been one letter, one phone call" in opposition to the proposal, he said. Last week's good news for Alexian Bros. reflects a broader boom in the behavioral health business.
For the past few decades, Illinois, like many other states, has been scaling back beds because of low occupancy rates. In the 1950s there were as many as 55,000 behavioral health beds in the state; there are now just 1,400, Frey said.
The types of cuts that drastically lowered the number of beds also decreased supply to the degree that providers are racing to add beds back to provide needed services. The steady stream of business, and the prospects for an improved financial outlook, aren't unique to Illinois.
Last week, a mental health task force formed by New Jersey Acting Gov. Richard Codey released a study that said waits for behavioral health services in the state have reached up to six weeks.
That demand for services, along with the CMS' new prospective payment system for psychiatric services-for which final regulations go into effect this week-are all reasons why business looks good for mental health providers. Those reasons are also providing motivation for investor-owned chains to acquire many of the independently owned free-standing behavioral health hospitals.
Too many beds in '80s
"It was a bad business in the 1980s because there were too many beds," said Nancy Weaver, an analyst who covers behavioral health companies for Stephens, an investment bank. "We spent two decades shutting down beds; now we don't have enough."
An annual member survey released last week by the National Association of Psychiatric Health Systems, or NAPHS, said occupancy rates at behavioral health hospitals have been at record highs. The study said occupancy rates in 2003 were 69.5% for hospitals with less than 50 beds, 73% for those with 51 to 100 beds and 72.5% for this with 101 or beds. In contrast, the association's 1997 survey showed overall provider occupancy rates at 54.5%.
The more robust occupancy rates show that providers are operating more successful businesses. The new PPS, which is being phased in over the next three years, also stands to improve the bottom line at free-standing behavioral health hospitals, industry observers say. The psychiatric sector was one of the last to operate under a cost-based system for Medicare, which covered about 20.6% of behavioral health admissions in 2003, according to the NAPHS study.
This year, 75% of payments made to behavioral facilities will be cost-based and 25% will be PPS-based. Next year, the payment breakdown will be 50-50, and in the following year, 25% of payments will be cost-based, while 75% will be prospective. The phase-in began Jan. 1, but only providers whose fiscal years coincide with the calendar year are operating under the PPS. Others will shift over as their fiscal year starts.
Even though providers haven't felt the full impact of the PPS, the prevailing theory is that free-standing hospitals will benefit more financially from the payments than hospital units because they have lower costs. "The free-standing facilities will do better as a group," said Mark Covall, NAPHS executive director. "The hospital units will do worse under the new system."
Before wage index and patients' age and condition adjustments, the base payment for psychiatric hospitals is $575.95 per day in 2005. Under the cost-based system, the average per-day payment to free-standing facilities in 2004 was $400 to $450 while psychiatric units in acute-care hospitals received about $700 per day, analysts said. Weaver said 10% to 20% of the units were getting close to $900 per day for a patient under the old system.
Analysts explained that the behavioral health units in acute-care hospitals were getting higher payments because they were able to shift some of the overall costs of running the acute-care facility to the psychiatric units. Also, the psychiatric units are likely dealing with patients who have more comorbidities than patients in free-standing behavioral hospitals.
Patients' age and comorbidities will be factored into payments, but providers whose average payments were high under the cost-based system may have problems under the new one. "If it's over $700 a day, there's going to be issues," said Theodore Giovanis, president of healthcare consultancy T. Giovanis & Co. He said providers need to look at costs and examine how they can bring them down. Psychiatric providers that have shorter lengths of stay will also benefit more from the PPS because after the ninth day payments begin to decrease. "The break point is at the 10th day," Giovanis said.
Changes in managed care over the years may very well have prepared the providers for this type of payment structure. The Substance Abuse and Mental Health Services Administration, or SAMHSA, released a study last week that said changes by insurers have helped decrease lengths of stay in recent years (See chart, p. 6). "Managed care has been shown to reduce the use of inpatient services, through prior approval for inpatient admission, utilization review to shorten inpatient stays and payments limited to a fixed number of days of care," the study said.
Those changes, development of new drugs and a reduction of beds were the main factors in plummeting lengths of stays at behavioral health hospitals and units. The NAPHS survey shows the average length of stay dropped to 10.4 days in 1994 from 19.8 days in 1992.
However, lengths of stay have been more stable in recent years, holding steady at about 10 days. Analysts say this is good for providers and investors because predictable lengths make it easier to anticipate business operations.
With that in mind, they say there will be more consolidation in behavioral health facilities. Darren Lehrich, an analyst at investment bank Piper Jaffray & Co., said he expects the largest providers of behavioral health services-Universal Health Services and Psychiatric Solutions-to expand. Lehrich also called Horizon Health Corp. "an emerging player."
John Pitts, Horizon's chief financial officer and senior vice president of finance, said the company plans to make three to four acquisitions of free-standing facilities each year. In the 1980s, the company sold its behavioral health hospitals because of a surplus of beds and low occupancy rates. Horizon became one of the leaders in managing behavioral health units in hospitals, but now the time is right for the company to buy free-standing facilities, he said.
"There was quite a lot of overbuilding with the number of beds," Pitts said. "That number has come back down. The market has fragmented and there's not a whole lot of consolidation that has occurred except for Universal Health Services and Psychiatric Solutions" (See related story, p. 14).
One consolidation example came last month, when for-profit Psychiatric Solutions announced it had agreed to purchase 20 inpatient psychiatric facilities from Ardent Health Services, Nashville, in a $560 million deal. The transaction eliminated a major competitor for Psychiatric Solutions and makes it the largest provider of behavioral health services, with 54 hospitals, Lehrich said.
There have been rumors that UHS may sell some its behavioral hospitals, too (March 7, p. 18). Despite the talk, Weaver said she thinks UHS will keep its 44 behavioral health hospitals.
Revenue from UHS' psychiatric line made up $699 million of the company's $3.94 billion in total revenue in 2004, according to Securities and Exchange Commission filings.
Amid the positive news for behavioral health providers, there is some concern that providers have been relying more on public spending. The NAPHS study and the SAMHSA both noted that Medicaid is increasingly becoming the main payer for spending on behavioral health.
The heavier reliance on public funds can be disconcerting because of the lack of predictability, especially with the federal and state governments considering Medicaid cuts.
From 1991 to 2001, Medicaid's percentage of mental health spending increased to 27% from 19% while private payers' share decreased to 37% from 43%, according to the SAMHSA. The NAPHS survey showed an even greater dependence on Medicaid for overnight and intensive care, with hospital-based centers getting 36.4% of admissions from Medicaid and free-standing facilities getting 37.4% in 2003.
One way lobbyists for psychiatric services are trying to lessen reliance on public spending is by pushing for a national mental health parity bill that would require most insurers to cover mental health services at the same level as medical care. Last month, Washington state enacted a mental health parity law, becoming the latest of 38 states to have done so, according to the American Managed Behavioral Healthcare Association. However, state laws' impact has been limited because large employers that offer self-insurance-coverage without the use of a commercial carrier-are exempt. They would be subject to a federal law, said Pamela Greenberg, the association's executive director.
Greenberg supports parity legislation introduced last month by Reps. Patrick Kennedy (D-R.I.) and Jim Ramstad (R-Minn.), but she said it will likely not gain enough support to pass because it is too wide-ranging. The bill calls for group health plans that offer medical and surgical coverage along with mental health coverage to eliminate limitations on mental health spending. It also requires the plans to eliminate limitations on coverage for substance abuse treatment, and that's the part that will make it difficult to pass, Greenberg said.
She said Sen. Pete Domenici (R-N.M.) is likely to introduce legislation later in the congressional session that won't include the substance abuse language and so stands a better chance of passage. Still, behavioral health parity bills have failed annually over the past four years, and there's no guarantee legislation will pass this year, said Dagmar King, spokeswoman for PacifiCare Behavioral Health, a managed behavioral healthcare organization that is neutral on the parity issue. "There's still a lot of people against this," King said.
But even if the bill doesn't pass, the business environment for behavioral health providers is better than it has been in a long time.
"Ten years ago we were looking at the number of admissions," Frey said, "and we were saying, `How are we going to sustain what we have?' "
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