Behind Medicaid's move to pay psychiatric hospitals

Medicaid, the nation's largest payer for behavioral health, is on the cusp of allowing stand-alone psychiatric hospitals into its provider networks for the first time.

The change, expected to be finalized in April, should introduce new capacity and competition in the acute-care psychiatric market. It also should increase access to acute mental-health and substance-abuse services for low-income adults, many of whom get stranded for days in emergency departments or find themselves cycling through jails and homeless shelters.

The policy represents a radical break for Medicaid, which has never reimbursed for either short- or long-term care in stand-alone psychiatric facilities. Before Congress created Medicaid, states financed the hospital bills of mentally ill adults, and legislators in the 1960s wanted to keep it that way.

But over the past half century, the nation's policies on the treatment of mental illness and substance abuse have undergone a radical transformation. Advocates for the mentally ill succeeded in pushing treatment into clinics and community settings. They won so-called parity for mental-health treatment, so that it closely matched coverage for other medical care.

The transformation has been uneven, however, with tragic consequences for the nation's 9 million most severely mentally ill. As states closed their psychiatric hospitals, federal financing for community centers—the presumed alternative—was slashed. Public policy and healthcare experts cite that lack of community investment as a major reason why a high percentage of mentally ill individuals wind up in homeless shelters and prisons.

At the same time, community hospitals, which are eligible to receive Medicaid payment for adult psychiatric hospitalizations, began seeing a stream of mentally ill people in their emergency departments. Many added licensed psychiatric beds to treat them.

But acute-care hospital capacity was never enough. It created widespread “boarding” of psychiatric patients in emergency departments because no beds were available.

The proposed change to Medicaid, which would likely go into effect in 2017, is one of several fiercely debated fixes for what Dr. Ezekiel Emanuel and two colleagues described last year in JAMA as “ethically unacceptable and financially costly” gaps in care for those with severe mental illnesses.

Since Medicaid stifled private investment when the safety net insurer refused to cover stand-alone psychiatric hospital bills for adults with mental-health problems, the new policy should reverse that trend by attracting investment. Some advocates for the mentally ill welcome the change.

It “would be a not-insignificant step in the right direction,” said Ron Honberg, a senior policy adviser to the National Alliance on Mental Illness. “We still continue to struggle with an inadequate number of beds,” he said.

But other advocates fear new incentives for hospital care will undermine the nation's ongoing but fragmented push to expand outpatient treatment and support for the mentally ill.

The National Health Law Program, in its comments on the change, warned federal health officials that allowing insurers to rely on psychiatric hospitals “for crisis services, while continuing to collect payment, would set back the current movement toward the development of community-based crisis services.”

Expanded resources and treatment in the community could alleviate demand for short-term hospital care by preventing the need for emergency care, and providing the severely mentally ill with supportive housing so they can be discharged from hospitals, said Alison Barkoff, director of advocacy at the Judge David L. Bazelon Center for Mental Health Law.

Emanuel, a professor of medical ethics and health policy at the University of Pennsylvania, and two other ethicists at the university are pushing in an entirely different direction. They want a return of long-term hospital care for the most severely mentally ill. “Bring back the asylum,” they wrote.

The ethicists called for “safe, modern and humane” institutions as an alternative to the “unmet promise” of community-based programs for the most severely mentally ill. “For persons with severe and treatment-resistant psychotic disorders, who are too unstable or unsafe for community-based treatment, the choice is between the prison-homelessness-acute hospitalization-prison cycle, or long-term psychiatric institutionalization,” wrote Emanuel, Dominic Sisti and Andrea Segal.

Many advocacy groups, including Bazelon, vehemently disagree. “Segregation and congregation inherently lead to huge concerns around abuse, neglect and whether it's even effective in helping people get better,” Barkoff said.

Under the proposed rule, which drew over 800 comments, states with Medicaid managed-care plans can draw federal funds when those plans cover hospital stays at the nation's psychiatric hospitals for adults ages 21 to 64, for up to 15 days a month.

Medicaid will now cover psychiatric hospitalization costs inside community hospitals, as long as less than half their beds are licensed for psychiatric care. Just a third of community hospitals operated psychiatric units in 2014.

More capacity is sorely needed, primary-care and mental-health professionals say. A number of advocacy groups endorsed the proposal, including the National Association of Medicaid Directors, the National Alliance on Mental Illness, the American Hospital Association and the American Medical Association.

“There simply are not enough inpatient beds for treatment, especially for people in crisis, and without a bed, many end up on the street or in jail,” the AMA wrote in support of the proposal. “While this is not a magic bullet, and does not take the place of more needed investment in community-based treatment resources, it is a step in the right direction.”

The change is giving for-profit behavioral-health providers an opening to expand their business. For companies such as Universal Health Services, King of Prussia, Pa., and Acadia Healthcare, Franklin, Tenn., the expansion could amount to an estimated 20% growth in the market for psychiatric hospital services, according to an analysis of related legislation by analysts with investment bank Jefferies.

Universal Health Services, the publicly traded behavioral-health giant, has started to pitch the potential change to acute-care hospitals with small psychiatric units that could see the new policy as a chance to exit the business. “We think there are many acute hospitals that are really not all that anxious to continue treating these patients,” UHS Chief Financial Officer Steve Filton told a crowd of analysts and investors in January.

Acute-care hospital psychiatric units have often been created out of necessity as the mentally ill arrived in emergency departments. “They had nowhere else to send these patients,” Filton said. “They've sort of gotten in the adult Medicaid business by default.”

But acute-care hospitals have multiple other services and specialties—cardiology, orthopedics, women's healthcare, for example—that also demand their attention, he said.

Psychiatric hospitals can offer more competitive rates to managed-care companies without the overhead of other services and emergency departments. Filton told analysts UHS did not have detailed growth estimates but “the potential is significant.”

That potential could require additional construction or acquisitions to meet demand. Occupancy rates across the system's behavioral-health hospitals have edged above 75% since expansion of Medicaid under the Affordable Care Act in 2014, even as the system added 500 beds across 18 facilities, and converted another 124 into acute behavioral-health beds that year. The system added another 311 psychiatric beds in the first nine months of 2015.

UHS would also gain commercial and Medicare patients from acute-care hospitals that review psychiatric operations, should the Medicaid proposal go into effect. Talks over newly covered adult Medicaid patients “may well be an entry” into other services the company could provide, Filton said.

The CMS proposed the change in Medicaid payment to psychiatric hospitals as part of its broad review of managed care last June, which represents “a mighty step forward,” said Sara Rosenbaum, a health law and policy expert at George Washington University.

The policy shift toward more comprehensive coverage of behavioral healthcare is known in policy circles as parity. “The theory is, that if you need inpatient care for acute physical illness, why can't you get inpatient care for an acute mental illness?” Rosenbaum said.

Indeed, proponents argued the CMS did not go far enough to expand access to acute-care treatment. The CMS proposed a 15-days-per-month limit on coverage, with 28 days coverage over two months. The National Alliance on Mental Illness is seeking coverage for 25 days a month.

Barkoff of the Bazelon Center counters that the CMS' proposed monthly limit will contribute to the fragmentation of psychiatric care, and leave Medicaid patients repeatedly cycling back to hospitals.

The CMS limited the change to states with Medicaid managed-care plans out of fear that allowing reimbursement for in-patient psychiatric hospitals stays under traditional fee-for-service would incentivize providers to overuse the service. The hope is that limiting it to managed-care organizations will prevent that abuse.

Numerous states have contracted out their Medicaid coverage to private managed-care companies in recent years. The District of Columbia, Kansas, Nebraska, Tennessee and West Virginia covered all low-income adults under Medicaid managed care, as of last July, according to the Kaiser Family Foundation.

In another 15 states, at least 80% of adults are enrolled in Medicaid managed-care plans.

The CMS' proposal to allow some psychiatric hospital admissions for adult Medicaid patients is not the only effort to revise safety net benefits for acute behavioral healthcare.

Legislation introduced by Rep. Tim Murphy (R-Pa.) would go further, and do away entirely with Medicaid's Institutions for Mental Diseases exclusion, the rule that prohibits Medicaid payment to free-standing psychiatric hospitals.

Jefferies analysts said that broader expansion would expand the $16 billion-a-year behavioral health market by about $5 billion annually.