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

Of the $135 billion spent on treatment of behavioral health disorders in 2005, 22% went for the purchase of prescription drugs and 7% for the administrative costs of public and private insurers. The remaining 70% ($95 billion) was paid to specific providers, with three-quarters ($74.3 billion) going to specialty behavioral health providers (1). Specialty providers include general hospitals with specialty behavioral health units; specialty psychiatric and chemical dependency hospitals; psychiatrists; other behavioral health professionals, including psychologists and clinical social workers; and specialty mental health and specialty substance abuse treatment centers. The training and experience of professionals delivering specialty behavioral health services equip them to effectively diagnose and treat behavioral health disorders, particularly among persons with serious and persistent illnesses (2,3). These professionals are also more likely to provide guideline-concordant behavioral therapies in addition to pharmacotherapy, which often improves outcomes (4–6).

Specialty providers differ from other providers in the funding sources used to pay for their services. Compared with funding sources for health spending in general, sources for specialty behavioral health care spending are more likely to be public insurance programs and grants (7). With the approach of the full implementation of the Affordable Care Act (ACA), specialty behavioral health providers will face funding changes. It is important to understand how services delivered by these specialty providers were financed in the past and the likely impacts that providers will face as a result of changes in funding. In this study, we identified historical trends in financing of services of specialty behavioral health providers. These trends can provide a baseline for studying future policy impacts. We speculate about how the recession and recent legislation will change these financing sources over the next few years.

Methods

This analysis is an outgrowth of a larger study conducted for the Substance Abuse and Mental Health Services Administration (SAMHSA) that estimated national spending on mental health and substance abuse treatment by payer and provider type (1,8). The study presented here is the first examination of detailed sources of reimbursement at the provider level by using these estimates. This study focused on funding for specialty provider services; it excluded spending for nonspecialty providers, such as nonspecialty units in general hospitals, nonpsychiatric physicians, nursing homes, and home health agencies, as well as spending for prescription drugs and the administrative costs of private and public insurance. [A list of specialty providers included in this study, along with the typical services that they provide and the populations that they serve, is presented in an online supplement to this article.] The estimates are based on information from a number of surveys and administrative data sets, including SAMHSA’s Survey of Mental Health Organizations and National Survey of Substance Abuse Treatment Services, as well as the Economic Census for the health care and social assistance sector, Census Services Annual Survey, and Medicare Hospital Cost Reports. The methods used to produce these estimates are described in detail elsewhere (1).

Two approaches were used to estimate behavioral health treatment expenditures. The first method measured spending for psychiatric hospitals, psychiatric units in community hospitals, and specialty behavioral health centers by using SAMHSA’s two national surveys of specialty organizations, the Survey of Mental Health Organizations and the National Survey of Substance Abuse Treatment Services, augmented with data from the National Hospital Ambulatory Medical Care Survey, the National Ambulatory Medical Care Survey, the Healthcare Cost and Utilization Project, and Medicare Hospital Cost Reports. In the second approach, spending was estimated by payer for psychiatrists and other professionals by using the proportion of all-health spending from the National Health Expenditure Accounts (7) attributable to behavioral health conditions. The proportions were developed by using patient encounter data from surveys such as the National Ambulatory Medical Care Survey and the Medical Expenditure Panel Survey, adjusted for cost differences for visits and stays for all health compared with behavioral health. Data from the Economic Census were also used.

To define behavioral health disorders, only principal diagnoses identified by the International Classification of Diseases, Ninth Revision, Clinical Modification were used: codes in sections 290 through 319 (mental disorders) as well as 648.3 and 648.4 (pregnancy complications related to mental illness or substance use disorders). Excluded were codes for organic brain disease, cerebral degenerations, developmental delays, intellectual disabilities, and tobacco addiction.

Results

Specialty providers and their funding, 1986 and 2005

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%.

Hospital-based providers

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.

Office-based providers

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).

Center-based providers

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.

Discussion

The shift in funding sources for specialty behavioral health providers has been more prominent for hospital- and center-based providers than for office-based providers. The historical changes in funding sources are a prelude to potentially larger shifts in funding resulting from new legislation and economic events since 2005.

Historical financing

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.

Recent financing, 2006–2013

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).

Future financing, 2014 and beyond

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).

Conclusions

Historical sources of financing of treatment have changed substantially for many specialty behavioral health providers. Over the next few years, major transformations in the financing of behavioral health treatment supplied by specialty providers will take place as the ACA is implemented. First, spending for specialty providers has been trending away from services in specialty behavioral health hospitals. For public facilities, the shortfalls in state revenue may force further closures of hospital beds operated by state governments. Such closures place increased demand on general hospitals to treat patients in need of acute behavioral health care. However, general hospitals already face pressures. Some psychiatric units have been closed, and many general hospital emergency departments are overcrowded because hospitals lack psychiatric beds in which to place patients.

Second, treatment by office-based professionals has historically been financed by private payers. Parity will push more behavioral health payments from out-of-pocket to private insurance as visit limits and copayments are brought in line with those for medical-surgical care. Because of the increase in the number of people with private insurance as a result of the ACA, there will be increased demand for the services of a limited number of office-based professionals, which could drive up the price for these scarce services.

Third, with the decline in the number of uninsured individuals under the ACA, we expect a continuing drop in the share of financing of specialty center–based provider services through grants and contracts from state behavioral health authorities. Although the role of other state financing (non-Medicaid) will likely remain important for those who remain uninsured and for services not covered by public and private insurers, the relative importance of state and local funding will probably diminish as private insurance and Medicaid become insurers for many formerly uninsured people.

Fourth, the importance of funding under federal rules governing Medicaid will accelerate. Medicaid programs are increasingly paying attention to the behavioral health population that is expected to grow disproportionately under the ACA. This is an opportunity for state behavioral health authorities to coordinate with state Medicaid agencies to more closely integrate funding streams and continuity of care for persons with behavioral health problems.

Last, spending by both public and private insurance is likely to increase for behavioral health conditions. The parity law may increase private insurance spending to the extent that demand for services was curtailed by limits on visits and stays and by higher cost-sharing requirements under private insurance plans. The largest effects, however, will come through Medicaid expansion and the insurance exchanges. Although the increase in private insurance enrollees through the exchanges (20 million persons) is expected to outweigh the Medicaid enrollee increase (17 million), the incidence of significant mental and substance use conditions is disproportionately high in the Medicaid expansion population (30), increasing the likelihood of similar growth in behavioral health spending for both populations.

These predictions are based on historical trends estimated as part of the SAMHSA spending estimates (1), from a critical review of changing legal requirements on the health care industry, and from an assessment of various studies on behavioral health care. Through its spending estimates and other resources, SAMHSA will continue to monitor the trends and financing shifts in behavioral health care and compare them with trends and shifts in overall health care. SAMHSA will also offer support to providers as they adjust to the substantial changes that lie ahead.