The story goes like this: after deinstitutionalization the states began to develop outpatient service systems for people with major mental illness who no longer resided in state hospitals. The systems were not always big enough to meet consumer need, and the services were of variable quality. Nevertheless, staff in these systems believed that they were public servants, and there was never much talk about or concern with billing. Then in the 1990s, the states started to look for ways to trim their budgets, and they noticed how much was being eaten up by their public mental health systems. The states decided to "Medicaid" the problem and shift their mental health service systems over to private entities.

What was in it for the states? Medicaid is only partly funded by the states, and therefore—the logic went—states could probably cut their budgets by shifting much of the cost to the federal government. What was in it for the private entities? They saw that states were not doing a very good job of "aggressively" billing Medicaid, and they figured that they could make money by focusing on billing. Staff who worked for the private entities were asked to accept the pretense that public mental health care is a "business." They were increasingly hassled about "billable services" and became dissatisfied with their work. Dependence on Medicaid also created incentives to provide services that were not clinically necessary. Nevertheless, many applauded the short-term success of privatization.

But a surprising thing happened—although anyone who was looking past the next election could have predicted it: both state and federal Medicaid budgets started to balloon, and mental health care was a large part of the problem. The states looked for ways to cut their Medicaid budgets. Then the federal government proposed to "block-grant" Medicaid and stop paying for services billed by the private providers, forcing the states to make do with set sums of money.

Now we await the ending of the story: if the block-granting of Medicaid becomes a reality, what will happen to the current Medicaid-dependent mental health system? It is likely that block-granting will underestimate future Medicaid costs (as previous block-grant proposals did) and will leave states with the choice of picking up the cost difference themselves, or allowing services to be underfunded. Underfunding can result in fewer—or lower quality—services being offered and fewer individuals being served. No matter how the states proceed, it is unlikely that the private providers will want to stay in the "business" without unrestricted Medicaid funding, which raises the question of whether the states can reassemble the non-Medicaid-dependent service systems that they dismantled. The other, more likely, possibility is that they will simply abandon people with major mental illness to ruined systems. We await the conclusion of this story with great concern.