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Changes In Mental Health Financing Since 1971: Implications For Policymakers And Patients
The aggregate share that total mental health spending claims of national income has been stable over the past thirty-five years. This stability is a consequence of immense changenew organizational technologies, new treatment technologies, and a growing supply of providers. Aggregate spending stability has been accompanied by major shifts in the composition of financing, which have tended to spread the costs of mental illness more broadly but also have led to fragmentation in public responsibility for people with mental illnesses. Recent developments suggest that financing could be further constrained in the future, even as fragmentation continues to increase.
THE U.S. MENTAL HEALTH CARE SYSTEM has undergone remarkable changes during the past three decades, even as the share of national income devoted to mental health care has remained roughly constant. The percentage of people with serious mental illnesses housed in all types of institutional settings has fallen by a factor of four.1 The management of care for serious mental illness, in both the private and public sectors, has moved to a novel type of organization, the managed behavioral health care organization (MBHO). New treatment options are available to those with both serious and less serious conditions. These changes have altered the financing of carehow much care is provided, and how it is paid for. We anticipate that shifts in financing will continue, which may contribute to even more policy fragmentation, a continuing lack of stewardship for mental health policy, and constraints on aggregate spending that could reduce the well-being of people with mental illnesses.
According to recent estimates, the United States spent about $85.4 billion on mental health care in 2001.2 That spending constituted about 6 percent of the nations total health spending and accounted for about 0.84 percent of U.S. gross domestic product (GDP). Tami Mark and colleagues recently showed that mental health spending grew more slowly than general health spending over the 19912001 period.3 The relatively slow growth rate of mental health spending since the mid-1990s is a continuation of a trend that has been evident since the 1970s. A useful point of comparison is a comprehensive set of estimates of mental health spending made in 1971. This comparison is complicated, because the range of diagnoses treated as mental healthrelated and the scope of services included in the estimates have changed over time.4 We adjusted the 1971 estimates to make them more comparable to the current figures.5 Using these adjusted estimates, we found that in 1971 the country spent an estimated $8.96 billion on mental health care and that mental health care accounted for nearly twice as large a share of overall health spending as in 2001, 11.1 percent.6 Total mental health spending made up about 0.84 percent of GDP in 1971. In contrast to the rising share of overall health care in national income, mental health spendings share of GDP has remained virtually constant.7 Indeed, U.S. spending on mental health care as a share of national income is consistent with the pattern in Canada and lower than the corresponding share in the United Kingdoma sharp contrast to U.S. general health care spending.8 This stability in aggregate spending as a share of income contrasts sharply with three key trends. First, the rate of use of mental health services in the noninstitutionalized population has risen: The number of Americans receiving some type of mental health care has increased by about 50 percent since 1977.9 Second, consistent with this increase, noninstitutional spending on mental health services has also increased.10 Third, state and federal policymakers point to out-of-control mental health spending as a critical factor in their budget woes. The differences between the aggregate data, patterns of service use, and policymakers perceptions reflect the way in which mental health cares unchanging share of GDP masks profound changes in the nature of mental health service delivery and the composition of mental health care financing throughout this period.
Rising general health care costs generate intense policy attention, but, as several researchers have argued, cost increases are driven by improvements in technology that have made Americans, on balance, better off.11 It is therefore natural to ask: Does the flat GDP share of mental health spending over thirty years signify an absolute or relative deterioration in the well-being of people with mental health problems? That depends on how the lower rates of spending growth have been achieved. In this case, stability reflects the introduction of new forms of social insurance, organizational technologies, and treatment technologies. New forms of social insurance. The 1971 mental health system continued to rely heavily on institutional care. An estimated 433,000 people with mental illnesses were hospitalized that year.12 These institutions provided total carehealth, mental health, room, and board. The mental health system today is mainly community-based. In 2000, only 170,000 people with mental illnesses were in such institutions.13 As has been widely documented, moving people out of institutions reduced some mental health service costs and shifted others from state mental health authorities (SMHAs) to insurance-financing mechanisms. This shift, however, depended not only on the availability of financing for community-based care, but also on the availability of financing for community-based living. The introduction of the Supplemental Security Income (SSI) program in 1972 and expansions of the Social Security Disability Insurance (SSDI) program in the 1970s provided this new source of financing. By 1999, we estimate that about 1.3 million people with serious mental illnesses were enrolled in each of these programs.14 The shift to community-based care altered the institutions that served people with mental illnesses, changed how we paid for different components of care, and affected how mental health spending is defined and measured. Community-based housing and other services do not appear in our estimates of national mental health spending. The decline in institutionalization of people with severe mental illnesses changed the financing for nonmental health resources devoted to people with serious mental illnesses. It shifted a set of services, which were previously bundled into the costs of long-term institutional care (housing and board) and counted as part of health care spending, into a class of services that were now outside the health accounts framework and thus no longer counted as mental health spending. This change in measured mental health spending, however, might reflect a decline neither in public spending and services purchased on behalf of this group nor the well-being of people with severe mental disorders. New organizational technologies. The development and spread of the behavioral health carve-outs in the early 1990s created a new rationing mechanism in mental health. MBHOs have become the dominant institution in controlling use of and spending on mental health services in the private sector, as well as in some Medicaid programs. These organizations have retained many of the features of managed care in the 1990s that contributed to slow general health cost growth during that decade: selective contracting with aggressive price negotiations, widespread utilization review, and prior authorization for costly services. In the private sector, MBHOs substitute nonprice rationing for the high copayments typical of traditional mental health insurance contracts. This reduction in copayments led to an increase in the use of services among people with less serious mental illnesses. There is less consensus about the effects of MBHO rationing on the well-being of people with serious mental illnesses.15 Whatever their effects on utilization, MBHOs, like managed care in the general health sector, negotiated aggressively with providers to keep prices down. In the area of price negotiation, MBHOs had a substantial advantage over general managed care firms. Unlike the case in general health, nonphysician providerspsychologists, psychiatric nurses, and social workersconstitute an important part of the mental health workforce. Although the physician-to-population ratio has been relatively stable (even declining in some areas) over time, the supply of mental health providers has greatly increased.16 The increase in supply gives MBHOs great leverage in negotiations. Indeed, mental health care providers incomes fell since 1969.17 Despite the increase in the supply of mental health care providers generally, the supply of psychiatrists (who can prescribe medications) has remained relatively stable. Nonetheless, this period also saw psychiatrists incomes under strain.18 Changes in treatment technologies have made it easier for generalist physicians to prescribe psychotropic medications. The rate of diagnosis and treatment of mental health problems in primary care thus increased steadily through the 1990s, which in turn reduced psychiatrists bargaining power. The use of nonprice rationing allowed MBHOs to expand access and control use. At the same time, the decline in providers negotiating power allowed MBHOs to provide this extra access without spending much more. New treatment technologies. The third factor contributing to this stable share in spending has been a change in the nature of mental health treatment technologies. Recent research shows that quality-adjusted prices for treatment of depression, schizophrenia, and bipolar disorderthree large areas of spendinghave been declining.19 For example, the amount of spending required to gain a full remission for major depression was roughly 20 percent lower in 1996 than in 1991.20 Moreover, in mental health care, unlike in general health care, treatments that were displaced by new technologies were generally not only less effective but often more expensive as well. The price index literature suggests that stable mental health spending represents an increase in the value of real services being delivered to the U.S. population. In fact, there is evidence to suggest that growth in productivity in mental health care during the late 1980s and 1990s was greater than in general medical care.21 Such evidence suggests that the differences in spending growth between general health and mental health services could be overstating the differences in the quality-adjusted growth of services in the two sectors.
The stable GDP share of mental health does not translate into a stable burden of mental health spending across payers. Rather, this stability in the aggregate has been accompanied by very large changes in the composition of financing. The early part of this history is well known. Following its introduction in 1965, Medicaid rapidly began to dominate mental health spending, taking over the role held before 1970 by state or county mental health authorities. Between 1970 and 1980, the number of inpatient psychiatric beds in state and county hospitals fell by more than half, as cases and costs were shifted to Medicaid-reimbursable settings and consumers of care enrolled in Medicaid.22 Concurrent with the expansion of Medicaid, private insurance coverage for mental health care began to expand, prodded by state mandates. The financing of care shifted away from the venerable state and county authorities and from out-of-pocket spending by individuals, toward more broadly shared forms of financing: the public Medicaid program and private insurance. These changes toward third-party payment and away from mental healthspecific financing mechanisms have intensified and accelerated since 1980. Medicaids role continues to grow, but over the past two decades, Medicare has also taken on a much greater role. State and county authorities contributions to mental health services, by contrast, have not kept up with national income growth. Principal financing sources for mental health. People with mental health problems mainly make use of the same financing arrangements as do those with other health problems. Medicare provides coverage to people age sixty-five and older and those with disabilities, including people disabled by mental illnesses and other beneficiaries with mental health problems. About one-fifth of noninstitutionalized people who used mental health services in 2002 held Medicare coverage. Just under one-quarter of this group were under age sixty-five and were covered by Medicare because they had a disabling mental illness that had forced them to stop working and hence qualify for SSDI. An estimated 27.4 percent of SSDI recipients are disabled by a mental illness.23 By definition, most members of this group have severe illnesses. About one-fifth of those with mental health problems who hold Medicare coverage also hold Medicaid coverage as a supplement. Despite the importance of Medicaid in financing mental health services, it covers a relatively small number of people who use these services. About 10 percent of people with mental health problems in 2002 reported Medicaid as their primary source of coverage. More than one-third of this group is eligible because of a disability. Medicaid provides coverage for low-income children and mothers and for people eligible because they receive SSI payments due to a disability. An estimated 35 percent of adult SSI enrollees are disabled because of a mental health problem.24 Private insurance covers just over half of those with a mental health diagnosis. Most in this group are not too disabled to work. Finally, about 20 percent of people with mental health problems are uninsured or hold other forms of coverage, a proportion that has held steady since 1996. Mental health financing also includes direct funding of services, where state funds flow to providers rather than through insurance provided to individuals.25 States have historically paid a large share of mental health spending through the budgeted SMHA system. These budgets, which place binding annual constraints on spending, accounted for 30 percent of all mental health spending in 1971.
Trends in the composition of financing, 19712001.
Two key trends about the changing sources of payment are our focus here. First is the continued expansion of public spendings share of total mental health spending, with Medicaid rising to 27.4 percent in 2001 from 16.2 percent in 1971 and Medicare rising from 2.6 percent to 7.3 percent (Exhibit 1
The stability of aggregate mental health financing hides changes in the composition of financing that are far more volatile than is the case in general health care. Changes in the composition of general health insurance coverage occur slowly and tend to follow clear secular and cyclical trends. Between 1996 and 2004, for example, the share of the entire population covered by Medicare rose just a quarter of a percentage point.26 Coverage of mental health service users, by contrast, has shifted much more. Over the same eight-year period, the share of mental health service users covered by Medicare increased more than four percentage points.27
The expansion of social insurance, which, as noted earlier, affected aggregate estimates of spending, also contributed to these compositional changes. The increase in Medicare-covered service users (and the smaller concurrent increase in the share of Medicaid-covered service users) stems from massive increases in the size of the disabled population receiving public income support over this period. Sharp increases in SSI enrollment during the late 1980s and through 1995 translated into increases in the Medicaid share of spending over this period (Exhibit 3
The introduction of new organizational technologies also led to changes in the composition of aggregate spending as treatment patterns, payment practices, and rules changed. This is most evident in the hospital sector. The share of days of care paid by private insurance plummeted in the late 1980s and early 1990s (Exhibit 4
A somewhat different set of incentive changes contributed to the initial increase and later decline in Medicares share of inpatient spending over this period. Mental health services provided in most specialized psychiatric units and nongovernmental psychiatric hospitals were initially exempted from the Medicare prospective payment system (PPS) introduced in 1983. Unlike the case for general admissions, hospitals could continue to receive cost-based reimbursement (up to a target per discharge) for mental health hospitalizations. The Balanced Budget Act (BBA) of 1997, however, implemented a payment cap well below the earlier target level.28 Hospitals responded to this change in incentives. Lengths-of-stay for Medicare patients with mental health problems fell by 2.1 days between 1996 and 2002, contributing to the decline in Medicares share of hospital costs.
Growing Medicare and Medicaid spending both imply a greater federal role in the financing of health services, directly in the case of Medicare and through federal match contributions in Medicaid. This pattern has the positive consequence that the costs of mental health care are being spread very broadly, through the federal payroll and income taxes that finance federal spending. On the other hand, the federal government has no institutional expertise in addressing the needs of people with mental health problems. Medicare, for example, does not provide coverage for innovative and effective forms of mental health treatment, such as assertive community treatment.29 Medicares general lack of benefit flexibility makes it a poor fit for mental health treatment, where innovation often requires collaboration among and financing of many different types of providers and modalities of care.30
The most dramatic change has been the phenomenal growth in Medicaids share of mental health spending since 1991 (Exhibit 1 The increasing dominance of Medicaid as the driver of spending increases for the public mental health system holds consequences that are similar to those associated with the growth of Medicare. The increase in Medicaid spending has constrained state mental health policymakers flexibility to allocate resources to serve the full range of mental health needs in poor and disadvantaged populations, in terms of both the populations that may be served and the services that may be reimbursed. The reliance on Medicaid funding has shifted the focus of state mental health authorities toward Medicaid-eligible populations: poor women and children and those disabled by mental illnesses (SSI recipients). This could displace states resources that might otherwise be directed toward the sizable number of people with severe mental disorders who do not qualify for SSI or Temporary Assistance for Needy Families (TANF) and the even larger number of people with other disabling mental health problems.31 Cost constraint through state budget control. The increase in Medicaids share of mental health spending since 1991 primarily reflects strategic decisions that have led to a great change in the method of financing a relatively constant mix of services delivered to a relatively stable population. These strategic decisions echo earlier efforts to manipulate Medicaid spending and exploit legislative loopholes in both the mental health and general health sectors.32 Most recently, however, strategic efforts in financing mental health services have put major constraints on the overall growth of the system. Although our evaluation of the stability of mental health spending in the past suggests that it has been accompanied by improvements in the well-being of people with mental illnesses, the most recent shifts leave us less sanguine about future spending growth. Medicaid spent $23.4 billion on mental health services in 2001. Mental health services financed through Medicaid dollars include the familiar general hospitals, physicians offices, private psychiatric hospitals, and prescription drugs. This spending accounts for a little less than two-thirds of total Medicaid mental health spending, and these funds, like most other Medicaid spending, are typically controlled and disbursed under the auspices of state Medicaid programs. But Medicaid also finances care provided to its beneficiaries through each states public mental health system. The state funds used to finance this Medicaid care are tied to the SMHA. The National Association of State Mental Health Program Directors (NASMHPD) reports that about $9.6 billion of Medicaid spending in 2002about 38 percent of all Medicaid mental health spending that yearwas spent on services controlled by SMHAs.33
State Medicaid spendingand the federal-match dollars that accompany itchanneled through the SMHA, supplements general revenues allocated to the authorities. Exhibit 5
State governments budget general revenue spending to SMHAs and can tightly control this funding. The fragmented nature of Medicaid spending and Medicaids status as an entitlement program mean that states have much less budgetary control over Medicaid mental health spending than over other areas. The growing Medicaid share of total state spending appears to lessen states ability to control their mental health spending. At least that was the story to date. The latest change in mental health financing, however, places major controls on that growth. State governments have increasingly adopted rules requiring that the state match for Medicaid services delivered by specialty mental health providers that participate in the public mental health system be counted as part of the SMHA budget. This formulation means that Medicaid increasingly substitutes for SMHA funds, instead of supplementing them as in the past. As state budget pressures from Medicaid spending have risen, some states have even adopted policies where the only increases in general-fund allocations are those arising from matching requirements (for example, Missouris budget).35 To date, these negative consequences have largely existed in theory and not in reality. The availability of Medicaid has led states to spend more on mental health care in aggregatemore on services outside the purview of the SMHA as well as more on services managed by the authority. The availability of federal matching funds has effectively reduced the price of state mental health services and encouraged states to expand their availability.
Future spending patterns.
This pattern might not hold in the future. If, over the next five years, mental health spending in Medicaid continues to grow relative to overall Medicaid spending as it has for the for the past five years, SMHAs could see their general funds disappear and their budgets increasingly absorbed by general-fund allocations for the state Medicaid match. Exhibit 6
Mental health spending has not grown as a share of national income for more than thirty years. Although the aggregate cost control problem in mental health is very different from that in health care in general, the spending control problems for particular payers are quite acute. The fragmented nature of the mental health systemeven more than in general healthhas offered myriad opportunities to shift the burden of spending among payers. The pattern of these shifts has led to an increase in public spending, protecting individuals from the burden of severe and persistent mental illnesses. The form that the increase in public spending has taken, however, has led to a reduction in the ability of experienced and dedicated mental health authorities to direct the shape of the mental health system. The shift of mental health spending into mainstream health insurance programs has eroded the traditional venues for public policy making in this area. Future growth in mental health spending could be constrained by the cost containment strategies of public policymakers, acting as stewards of the public purse rather than of the population with mental illness.
Richard Frank is the Margaret T. Morris Professor of Health Economics in the Department of Health Care Policy, Harvard University, in Cambridge, Massachusetts. Sherry Glied (Sag1{at}columbia.edu) is professor and chair, Department of Health Policy and Management, at Columbia University in New York City. The authors are grateful to the John D. and Catherine T. MacArthur Foundation for financial supportof this research.
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