Current and Future Funding Sources for Specialty Mental Health and Substance Abuse Treatment Providers

Tables 1 and 2 present estimates and percentage distributions of behavioral health spending by payer for 1986 and 2005 grouped by general treatment sites (hospitals, offices, and specialty behavioral treatment centers) and by specific type of provider. Of the $74.3 billion in specialty behavioral health treatment spending in 2005, 39% went for hospital-based care, 26% for office-based treatment, and 35% for center-based care. In 1986, a total of $26.4 billion was spent on specialty behavioral health treatment. Between 1986 and 2005, the share of spending on specialty hospital services fell from 58% to 39%. The share for office-based treatment rose from 20% to 26%, and the share for center-based care rose from 23% to 35%.

In 2005 the $29.0 billion spent for hospital-based specialty behavioral health treatment was evenly distributed between general hospital specialty units ($14.4 billion) and specialty hospitals ($14.6 billion).

In 2005, Medicaid and “other federal” sources each accounted for about one-quarter of spending for care in specialty units of general hospitals. “Other federal” sources include spending by the U.S. Department of Veterans Affairs (VA) in specialty units of VA hospitals. In specialty hospitals, “other state and local” government sources accounted for more than half of expenditures in 2005, reflecting states’ responsibility for state psychiatric hospital treatment of forensic and other patients committed to inpatient psychiatric care.

In 2005, private sources paid for 20% or less of treatment in both hospital settings. Private insurance payments alone amounted to 14% of all spending in specialty units of general hospitals and 11% of all spending in specialty hospitals. In comparison, private insurance payments in 2005 accounted for 37% of hospital treatment for all health conditions (7).

For specialty units of general hospitals, the share of spending accounted for by private insurance fell from 28% in 1986 to 14% in 2005; this decrease was accompanied by an almost equal increase in Medicaid spending—from 11% in 1986 to 24% in 2005. For specialty hospitals, similar trends were noted: an increased share of Medicaid (from 10% to 22%) and a reduction in the share paid by private insurance (from 24% to 11%). In specialty hospitals, the single largest payer for behavioral health treatment (“other state and local” government sources) continued to fund more than half of all spending in specialty hospitals—53% in 1986 and 52% in 2005.

Of the $19.5 billion spent for office-based specialty behavioral health treatment in 2005, 61% was for treatment by psychiatrists and 39% was for treatment by other licensed behavioral health professionals.

In 2005, private financing accounted for a majority of spending on services of office-based specialty behavioral health provider—67%. For both psychiatrists and other professionals, private insurance—the single largest payer—funded approximately one-third of all spending. Out-of-pocket payments accounted for significant shares of office-based spending: 31% for psychiatrists and 27% for other professionals. Only about one-third of all spending for office-based specialty behavioral health treatment came from public payers. Medicaid accounted for 12% of spending for treatment by psychiatrists and 16% of spending for treatment by other professionals.

Between 1986 and 2005, the shift in funding sources for office-based professionals was more modest than for hospitals. The shares accounted for by private insurance payments and out-of-pocket spending dropped slightly for psychiatrists and remained mostly unchanged for other professionals. The share paid by public funding sources increased from 23% in 1986 to 32% in 2005 for psychiatrists but remained fairly stable for other professionals (34% in 1986 and 33% in 2005).

In 2005, a total of $25.8 billion was spent for center-based behavioral health specialty treatment. Specialty mental health centers accounted for 63%, and specialty substance abuse treatment centers accounted for 37%. Center-based providers depended heavily on public-sector financing of treatment. Public sources accounted for 93% of spending for specialty mental health centers and 87% of spending for specialty substance abuse treatment centers.

In 2005 “other state and local” sources (that is, sources other than Medicaid) accounted for the single largest share of treatment financing for center-based providers—45% of spending in specialty mental health centers and 47% in specialty substance abuse treatment centers. For mental health centers, another 37% of funding came from Medicaid. For substance abuse treatment centers, “other federal” payers, which included SAMHSA substance abuse treatment block grants, accounted for 24% of spending; Medicaid (14% of spending) was also important. In 2005, the share paid by private funding sources was the smallest for any specialty behavioral health provider—only 7% of specialty mental health center spending and 13% of specialty substance abuse treatment center spending.

For specialty mental health and substance abuse treatment centers, the share of funding from “other state and local” sources fell between 1986 and 2005. For specialty substance abuse treatment centers, this reduction was offset by an increase in the share of spending by “other federal” sources. It was also offset, but to a much smaller extent than was seen in specialty mental health centers, by an increase in the Medicaid spending share. The proportion of “other federal” spending in specialty substance abuse treatment centers doubled over this time period.

Among payers for hospital-based treatment, Medicaid funding accounted for the largest share increase from 1986 to 2005. Because Medicaid is an entitlement program, eligibility and costs are more difficult to control than are direct subsidies by state agencies (9). Despite the general prohibition against Medicaid payments for inpatient treatment of persons aged 22–64 in institutions for mental disease (IMDs) with more than 16 beds, Medicaid’s share of funding for specialty hospitals has been increasing. States employ managed care waivers that have allowed IMDs to receive Medicaid payments for those otherwise excluded from IMDs. States have also increased inpatient treatment of children and adolescents, who are exempt from the IMD restrictions, for diagnostic and medical evaluations and for medication stabilization and adjustments (10). Medicaid disproportionate share hospital (DSH) payments provide additional funding to hospitals serving a disproportionate share of people with low income. DSH payments to state-owned specialty hospitals, which increased rapidly in 1991–1992 before limits were enacted, may have also contributed to the increase (11).

In 2005, office-based behavioral health providers depended more than any other group of specialty providers on private payments from insurance and out-of-pocket sources. Historically, private insurance has often imposed limits on the number of behavioral health visits and has also imposed higher cost-sharing requirements not found for other outpatient services (12). These restrictions resulted in privately insured patients directly paying large shares of treatment costs. Because of shortages of providers in some geographic areas, office-based specialty providers have been able to limit the number of patients from Medicaid and other public payers, which typically reimburse at lower rates (11,13), resulting in only a small share of payments from public sources.

Patients seen by center-based providers are often uninsured or covered by Medicaid. In 2005, more than 90% of funding for center-based providers came from public sources. Between 1986 and 2005, a shift in public funding sources for these providers included a decrease in the share paid by other state and local sources (non-Medicaid) and an increase in spending share by Medicaid, especially for specialty mental health treatment centers. The larger Medicaid share in center-based providers resulted from the shift in treatment sites from hospital and other institutional settings, where Medicaid funding was restricted, to outpatient settings, where treatments for Medicaid enrollees were more likely to be paid by Medicaid (14). Specialty substance abuse treatment providers experienced increases in other federal funding from SAMHSA block grants, the VA, and the Department of Defense (DoD)—agencies that are increasingly focused on mental health and substance abuse treatment within their constituent populations.

Specialty substance abuse centers receive a low share of Medicaid spending and a high share of spending from other state and local sources. In part, this stems from substantial differences among states in Medicaid coverage for substance abuse treatment in residential settings and the large criminal justice population that states serve (15). Credentialing requirements for substance abuse treatment professionals and facilities are less medically oriented than those demanded by Medicaid, which means that many substance abuse treatment facilities do not participate in Medicaid (16). In addition, specialty substance abuse centers operate on capacity grants and contracts from state mental health and substance abuse treatment authorities, thus avoiding the added overhead expense of third-party billing and documentation required to submit insurance claims. This practice has raised concern that many specialty substance abuse treatment centers will need to add a business infrastructure to handle the documentation and billing responsibilities under the Medicaid expansion and state health insurance exchanges, which will extend coverage to many who are currently uninsured.

New legislation, interacting with the effects of the recession and the increased focus on the behavioral health treatment needs of veterans and the military, is expected to further change the distribution of financing of behavioral health treatment by specialty providers from 2006 to 2013.

The Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA) expanded coverage for behavioral health treatment within employer insurance plans to be on par with that for medical-surgical care in regard to limits on visits and inpatient stays and cost-sharing requirements (17). The MHPAEA likely resulted in a small shift of out-of-pocket spending to private insurance in 2010–2011 as the parity requirements were implemented. MHPAEA is expected to raise private health insurance premiums—but by less than 1% (18). The premium increase will be small because even a substantial upturn in spending on behavioral health treatment will amount to only a small portion of all private insurance payments for all conditions.

The ACA includes some provisions with an impact on behavioral health treatment spending before the full implementation in 2014. These provisions include expansion of coverage through age 26 for adult dependent children, the establishment of insurance coverage for persons with preexisting conditions, and the prohibition of lifetime dollar limits on coverage by private insurance plans (19). The increase in enrollment- and benefits-related costs for private insurance plans is expected to be tempered by the loss of employment-related health insurance among an estimated 9.7 million workers and their families from 2007 to 2010 (20).

Some of these unemployed persons and their families were among the 7.6 million added to the Medicaid rolls from 2007 to 2010 (20). In addition, ACA gave states the option to provide coverage under Medicaid to childless adults up to 133% of the federal poverty level (FPL) before 2014, increasing enrollment even further in some states. To ease the Medicaid financial burden on states that accompanied higher enrollment, Congress passed legislation to enhance the federal Medicaid match beginning in federal fiscal year 2009 for up to 11 quarters (21). Although the enhanced match did not change the Medicaid share of specialty provider funding, it reduced states’ responsibility in matching federal Medicaid spending. In 2011, the expiration of the enhanced Medicaid match rate may have led to cuts in eligibility, benefit coverage, or provider reimbursement as states tried to balance their budgets (21,22). State behavioral health agencies’ inability to maintain funding for specialty hospital- and center-based providers resulted in further closures of state psychiatric hospitals and other center-based behavioral health providers (23–25). For the federal government, the increased recognition of behavioral health needs of military personnel and veterans should result in an increase in federal funding through the VA and the DoD during a period when federal spending through SAMHSA mental health and substance abuse block grants remained flat (26).

Behavioral health patients are expected to be positively affected by the ACA when it becomes fully implemented in 2014 because people with behavioral health conditions are disproportionately poor and uninsured.

In 2014, ACA will expand Medicaid coverage to people up to 65 years of age who are uninsured and have incomes up to 133% of the FPL. The 2012 Supreme Court decision will allow states to opt out of the Medicaid expansion without penalty and may alter expected enrollment levels, leaving some people with low income, who were expected to be covered, without insurance (27). For those between 133% and 400% of the FPL, including persons formerly covered by Medicaid, health insurance will be subsidized on a sliding scale through health insurance exchanges; all legal residents—including young adults, who are often uninsured—must enroll in health insurance or pay a penalty. In addition, small-group employers with fewer than 100 workers will be able to select insurance for their workers in the “marketplace” from affordable, qualified health plans that provide behavioral health benefits. For specialty providers, these changes are expected to boost the share of financing from private insurance and Medicaid (28).

Hospital- and center-based providers should see a continuing shift in behavioral health treatment financing from other state and local sources to Medicaid as enrollment in Medicaid increases and the Medicaid program covers care for formerly uninsured persons. However, because of the expected reduction in the number of uninsured persons, the ACA mandates cuts in Medicare and Medicaid DSH payments to hospitals—payments that were originally designed to offset costs incurred in serving a disproportionate share of uninsured patients. Specialty centers, which receive the bulk of SAMHSA mental health and substance abuse block grants, may see a repurposing of these funds for nonmedical, community-based recovery supports and rehabilitative services, which may not be well covered by Medicaid or private insurance. Specialty centers may also find new funding opportunities by partnering with or integrating behavioral health services with primary care provided by Federally Qualified Health Centers—organizations that will receive additional funding under the ACA (29).