An Examination of Costs, Charges, and Payments for Inpatient Psychiatric Treatment in Community Hospitals

The PPCD contained information on 261,996 unique psychiatric hospitalizations from 418 unique hospitals. Projecting to national levels, in 2006 the estimated total cost for delivering care in U.S. community-based psychiatric hospitalizations was $10.6 billion, with charges of $26.5 billion. The resulting charge-to-cost ratio was 2.5.

The most common primary diagnostic groups were depression (27.8%), schizophrenia (19.5%), bipolar disorder (19.4%), alcohol use disorder (11.6%), and drug use disorder (11.1%), with other psychiatric disorders accounting for the remaining 10.5% of hospitalizations. However, the distribution of diagnostic groups varied by payer type, with schizophrenia (32.7%) being most common for Medicare and depression being most common for Medicaid (24.6%), private payers (35.4%), and the population without insurance (28.6%). Public payers covered over half of the psychiatric hospitalizations (Medicare, 27.2%; Medicaid, 26.0%), with private insurance covering 30.1%. A meaningful portion were uninsured (10.8%), and the remainder (5.8%) were covered by other payers, such as workers' compensation and charity care. Table 1 shows hospitalization cost by payer type and disorder. In terms of total cost of hospitalizations (mean cost times number of hospitalizations), the most expensive disorder for public payers was schizophrenia, whereas the most expensive disorder for private payers was depression, followed by bipolar disorder. For all payers, the category of other psychiatric disorders was relatively small.

When data for length of stay by payer and disorder were examined (Table 2), an interesting trend appeared, which varied by disorder. Patients without insurance tended to have the shortest stays, and those with Medicare or Medicaid tended to have the longest. Data on cost to deliver care and charges per hospitalization followed the same ordering as length of stay, suggesting that costs were largely driven by length of stay (Table 1).

The discrepancy between costs to deliver care and charges (Table 1) raised questions regarding payers' reimbursements to hospitals. This information was not available in the PPCD, but a contrast with the MarketScan commercial and MarketScan Medicaid data (37,757 and 48,676 hospitalizations, respectively) allowed an approximate comparison with PPCD data concerning observations and length of stay. There were meaningful differences in length of stay in the commercial payer data, with MarketScan generally showing longer average lengths of stay: schizophrenia (9.1 versus 10.4 days), bipolar disorder (6.5 versus 7.2 days), depression (4.9 versus 5.5 days), drug use disorder (5.1 versus 7.7 days), and alcohol use disorder (4.8 versus 6.8 days). Similarly, there were differences in length of stay in the Medicaid data between the PPCD and MarketScan data, respectively: schizophrenia (10.9 versus 10.8 days), bipolar disorder (8.9 versus 10.2 days), depression (6.8 versus 7.1 days), drug use disorder (5.7 versus 8.7 days), and alcohol use disorder (6.3 versus 5.5 days). Despite these differences, the results are informative and indicate that comparisons of reimbursed with charged amounts are confounded by other factors and must be viewed cautiously.

Table 1 also shows reimbursed amounts per hospitalization from the MarketScan data and reported costs to deliver care from the PPCD. For private payers, the estimated amounts reimbursed were consistently slightly higher than costs to deliver care for all disorders. Conversely, state Medicaid reimbursements to hospitals were lower than estimated costs to deliver care for schizophrenia, bipolar disorder, and alcohol use disorder; they were just slightly more than costs for depression care, and they were higher for drug abuse treatment. The dramatically higher charges for the uninsured from PPCD were included as the amount reimbursed to reflect the absence of negotiated rates.

Table 3 gives an overview of costs per day of hospitalization by disorder, including costs for payer type with the lowest and highest costs per day. The disorders with the shorter average length of stay tended to have the highest cost per day, possibly reflecting increased services delivered during the first days of hospitalization.

The question of cost incurred for a psychiatric hospitalization in the United States was the impetus for conducting these analyses. A single estimate was difficult to establish because length of stay varied depending on psychiatric disorder and because case mix of psychiatric disorders varied by payer type. These estimates do not include hospital profits and are, therefore, probably lower than the total cost to society.

In addition to daily cost data, an array of other findings emerged from these analyses, including mental or substance use disorder case mix by each major payer category, total costs of hospitalization by disorder, length of stay, and reimbursement rates (from disparate but relevant data) by selected payers. As expected, the case mix across payer types varied significantly. Schizophrenia was the most common diagnosis group for Medicare, and depression was the most common diagnosis group for all other payer types. Not surprisingly, over half of all psychiatric hospitalizations were publicly paid (Medicare and Medicaid), underscoring the debilitating nature of these disorders, which frequently interferes with individuals' ability to maintain employment (11).

Interestingly, the average cost and charges per hospitalization tended to be commensurate with average length of stay (Tables 1 and 2). Early research recognized that providers' supply response to payment limits was associated with length of stay and day limits. The response was significantly stronger for psychiatric disorders than for general medical or obstetric conditions (12). More recent research corroborates these findings, making it difficult to establish the link between disease severity and resources consumed, as measured by costs or charges (13). In addition, other researchers have highlighted the potential motive for “upcoding” of administrative diagnoses to increase reimbursement rates (14). It is noteworthy that Medicaid-insured patients incurred the lowest daily costs across four of the five disorders, perhaps emphasizing that publicly paid hospitalizations (Medicaid and Medicare) were significantly longer than those covered by private or uninsured payers. This observation raises a provocative research question about the underlying contributing factors. Does the difference reflect a more severe case mix for publicly funded patients, or is it an outcome of different utilization management underwritten by a private provider? Further research is warranted to better understand these underlying factors.

Analyzing the range of costs across payer types poses the obvious question of why these differences exist, although the answer is far less obvious. A limitation of these data is the ambiguity of how these cost figures are built. The variety of cost-accounting methods used by community hospitals (10) makes pinpointing the sources of this variance difficult. A consistent trend across cost and charge data is that publicly insured patients incur both higher costs and charges. This finding in psychiatric hospitalizations runs counter to a recent finding with general hospitalizations. A study by the Milliman Group suggested that general hospitalizations involve a cross-subsidization, such that “the total annual cost shift in the United States from Medicare and Medicaid to commercial payers is approximately $88.8 billion” (15). The study further states that “the hidden nature of this subsidy makes it difficult to quantify and debate.”

The average amount charged per hospitalization was 2.5 times larger than the cost to deliver care. Analysis from the MarketScan database revealed the amount being reimbursed to hospitals by private payers and Medicaid was relatively similar to cost to deliver care. The large discrepancy between charges and other cost metrics highlights the lack of transparency in hospital pricing. Anderson (9) argued that the gap between reimbursed amounts and charges has arisen as a result of payers negotiating greater discounts while hospitals respond by increasing their charges to offset the discounts negotiated. One of the unintended consequences is highlighted in Table 3: individuals without health insurance—likely representing those least able to pay—do not have negotiated rates and therefore are charged the full rate.

In the contrasts between reimbursed values and cost to deliver care, the level of reimbursement by Medicaid (the only public payer reimbursement data analyzed in this study) fell short of costs across some types of psychiatric hospitalization. This is particularly disconcerting considering that the analysis did not include charges to the uninsured that result in bad debt for hospitals. Comparatively, the private side had higher reimbursement rates than costs across all types of hospitalization. Under Medicare, this similar disparity resulted in implementation of the prospective payment system, which became effective in January 2006. This system is intended, in part, to close the gap between reimbursement rates and costs, given that this nation faces a rapidly increasing need for psychiatric hospital beds against a decreasing supply (16). Although cost of psychiatric care has increased substantially over the past 20 years, the highest relative increases have been for outpatient and pharmacological treatment (17). If reimbursement rates for psychiatric hospitalizations do not cover the cost to deliver care, this treatment option may cease to be available, and a less appropriate setting, such as correctional facilities, may become the alternative “treatment setting” for individuals with severe mental illness (18,19).

Although the data sets used for these analyses were robust, a number of study limitations must be acknowledged. First, although cost and charge data were matched from the Premier data set, reimbursement data were extracted from a separate data set (MarketScan); thus reimbursement rates can be used as only approximate comparisons. Cost data did not include direct physician-billed costs (for physicians not on the hospital's payroll) and, therefore, likely understate the total costs associated with a psychiatric hospitalization. Finally, Medicare reimbursement data were not available to compare national rates of reimbursement with state data included in the MarketScan data set; thus no strong conclusions can be drawn about overall public payer reimbursement trends.

This research was successful in estimating psychiatric hospitalization costs for policy makers, payers, and providers. In our examination of three different cost metrics, the hospitals' estimates of cost to deliver care—although an underestimate of true societal cost—appeared to give the most reasonable cost estimate. The idiosyncrasies in the different cost metrics suggest some implications for payers and policy makers. The results were consistent with past research, suggesting that previous attempts to control pricing may have led to unintended consequences, including a large gap between charges and reimbursed amounts, potential cost shifting between payers, and potentially extended lengths of stay to offset reduced per diems. The current reimbursement system in the United States, with its lack of transparency in pricing, makes it challenging to estimate the cost to society for a day of psychiatric hospitalization. Future research is needed to assist policy makers in understanding disparities and cross-subsidization between the public and private sectors, as well as to create better economic incentives to address the diminishing supply of inpatient psychiatric beds across this country.

This work was supported by grant 60660 from the Robert Wood Johnson Foundation and by Eli Lilly and Company.

At the time of the study design and data analysis, Dr. Stensland was a full-time employee of Eli Lilly and Company, which provided funding for this study. Mr. Watson is an employee of and a minor shareholder in Eli Lilly and Company. Dr. Grazier reports no competing interests.