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Behavioral Health Industry Insights - 2016

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  • December 2016

    Industry Insights:

    Behavioral Health

    Past to Present: A Primer on Inpatient

    Behavioral Health Facilities

  • B Y T H E

    N U M B E R S

    Thirteen states closed 25% or more of

    their total state hospital beds from 2005

    to 20101.

    In 1955 there were 558,239 public

    psychiatric beds available, or 340 beds

    per 100,000 people. By 2012 only

    40,305 public psychiatric beds

    remained a 93% reduction in bed

    capacity to 13 beds per 100,000 people.

    In 2012 the U.S. provided only 26% of

    the minimum number of public

    psychiatric beds deemed necessary for

    adequate psychiatric services






    Over the last 50 years, deinstitutionalization

    and the IMD Exclusion, which prior to 2016,

    excluded Medicaid reimbursement for most

    inpatient treatment of substance abuse and

    mental health, have significantly changed the

    behavioral healthcare landscape from

    inpatient to outpatient facilities and from

    institutions to community-based treatment


    The 2016 IMD Exclusion official rule, which

    now provides Medicaid reimbursement for 15-

    day inpatient mental health and addiction

    services for enrollees aged 21-64, could pave

    the way for increasing reimbursement and

    investment in freestanding inpatient psychiatric


    Large strategic acquirers and private equity

    investors continue to invest in inpatient

    psychiatric hospitals and substance abuse

    treatment facilities to penetrate new

    geographies and capitalize on industry


    1 No Room at the Inn, Treatment Advocacy Center ( 2 The Shortage of Public Hospital Beds, Treatment Advocacy Center



  • Since the 1960s, the number and capacity of inpatient

    psychiatric hospital facilities, mostly state operated, has

    fallen sharply. Deinstitutionalization and the Medicaid

    Institutions for Mental Disease Exclusion (the IMD

    Exclusion) have been the two primary factors affecting

    inpatient psychiatric hospitals over the last 50 years.

    Although deinstitutionalization and the IMD Exclusion have

    curtailed the reimbursement available to and ultimately the

    use of inpatient psychiatric hospitals both public and private,

    these facilities remain a critical part of the behavioral

    healthcare delivery network serving patients with severe

    chronic and forensic mental illnesses. As the shift toward

    value-based healthcare models continues, the utility and

    perception of inpatient psychiatric hospital facilities are now

    being reexamined.


    Inpatient psychiatric facilities, especially state-run facilities,

    primarily serve two needs: i) they act as the provider of last

    resort for patients with severe and chronic mental illness who

    cannot seek care in other settings and ii) they protect the

    public safety by providing care for patients with a forensic

    mental illness.

    In the 1950s, there were over 320 state run psychiatric

    hospitals serving approximately 339 people per 100,000, or

    0.3%, of the U.S. population. State governments have

    historically funded and operated psychiatric hospitals,

    constituting a significant portion of the mental healthcare

    system. However in the 1960s, public awareness began to

    grow regarding the unreasonable standards of care at state

    run psychiatric hospitals. Reports of patient abuse and poor

    conditions in these facilities prompted a desire to move

    patients out of inpatient facilities and into less-restrictive and

    inexpensive outpatient community-based treatment


    In 1963, the Community Mental Health Act was passed to

    provide federal funding for community-based mental health

    centers across the United States, shifting the cost of care

    from state resources to federal dollars and significantly

    contributing to the deinstitutionalization trend. As a result,

    states became incentivized to move patients to community-

    based treatment settings as increased federal

    reimbursement led to lower costs for states. This change

    signaled a large shift in state government expenditures away

    from psychiatric hospital inpatient services and towards

    community-based mental health services3. As shown in the

    chart below, 74% of state mental health expenditures in 2012

    were allocated towards community-based mental health

    services, while only 23% were devoted to state mental

    hospital inpatient services, down from 63% in 19814.


    3 The Vital Role of State Psychiatric Hospitals, National Association of State Mental Health Program Directors (NASMHPD) ( ) 4 The Vital Role of State Psychiatric Hospitals, National Association of State Mental Health Program Directors (NASMHPD) ( )

    33% 35% 36% 38%

    43% 49%


    66% 67% 69% 70% 70% 70% 71% 72%

    72% 73% 74% 74%

    63% 60% 60% 59%

    54% 48%


    32% 30% 29% 28% 27% 28% 26% 26% 26% 25% 24% 23%










    State Mental Health Agency Controlled Expenditures for State Psychiatric Hospital Inpatient and

    Community-Based Services as a Percent of Total Expenditures: 1981 2012

    Historical Inpatient Behavioral Health Trends

    and the Evolution of Reimbursement

    State Mental Hospital Inpatient Community Mental Health


  • At the same time, the development of pharmacological drugs

    such as chlorpromazine and non-selective monoamine

    oxidase inhibitors for the treatment of psychosis and

    depression provided new treatment options. The introduction

    and growth in psychotropic drug treatments allowed

    previously institutionalized patients to be treated effectively in

    low-acuity, community-based outpatient programs. Progress

    related to mental health patients rights further supported the

    move toward deinstitutionalization. In certain cases, patients

    rights lawsuits have been used by mental health

    administrators to support deinstitutionalization efforts.

    Deinstitutionalization has greatly affected the number of

    inpatient psychiatric beds operated by both state and private

    facilities. Intensive community-based treatment that utilizes

    case management, medication management and residential

    treatment centers continue to contribute to the reduction in

    populations treated within dedicated inpatient psychiatric


    The IMD Exclusion

    Established in 1965, the IMD Exclusion originated when the

    treatment of mental illness was primarily performed in large

    state-operated psychiatric facilities and patients were

    typically admitted for long-term stays. The IMD Exclusion

    was designed to ensure that states have primary financial

    responsibility for funding long-term institutionalization of

    behavioral health patients in large IMD facilities. The IMD

    Exclusion is one of the few instances in which federal

    Medicaid law prohibits federal contribution to the cost of

    medically necessary care delivered by licensed medical

    providers to enrolled program beneficiaries.

    An IMD facility is defined as a hospital, nursing facility or

    other institution containing more than 16 beds that is

    primarily engaged in diagnosing and treating people with

    mental diseases. IMD facilities do not include facilities with

    less than 17 beds, facilities that do not institutionalize their

    patients or that provide out-patient day treatment programs

    and facilities where less than half of the beds are not focused

    on behavioral healthcare (such as a traditional hospital

    where only a minority of its beds are dedicated to psychiatric


    Along with facility type, patient age plays a significant role in

    determining IMD Exclusion reimbursement. While Americans

    ages 21-64 are subject to the IMD Exclusion, several

    amendments to Medicaid permit reimbursement for patients

    65 years and older and patients 21 years and younger who

    are treated in an IMD facility. However, according to the

    Centers for Medicare and Medicaid Services (CMS), 7.1%

    of adults currently meet the criteria for a serious mental

    illness and an estimated 13.6% of uninsured adults within the

    Medicaid expansion population have a substance use

    disorder. This data underscores the need to improve

    Medicaid reimbursement for inpatient psychiatric and

    substance abuse disorder treatment5.

    As intended over the last 50 years, limiting Medicaid

    reimbursement via the IMD Exclusion has diminished the

    role of inpatient psychiatric facilities in providin

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