REPEAL OF THE INSTITUTIONS FOR MENTAL DISEASE EXCLUSION
Schizophrenia and manic-depressive disorder (hereinafter "severe brain disorders") are physical diseases of the brain. They are no more a "choice" for the individuals who suffer from them than are other physical brain disorders such as epilepsy, Alzheimers disease and multiple sclerosis. Research has shown significant differences between brains with schizophrenia and manic-depressive disorder, and unaffected brains. Those differences have been verified in studies of affected and not-affected identical twins, and studies of those who have received anti-psychotic medication and those who did not.
About 50 percent, or 2 million of the 4 million Americans who suffer from severe brain disorders are not receiving treatment at any given time. A major reason why so many are not being treated is that, because of the effects of the illness on their brain, they lack awareness of their illness. Studies have shown that approximately half of all patients suffering from schizophrenia and mania have markedly impaired awareness of their illness as measured by tests of insight; thus, they are similar to some patients with cerebrovascular accidents (strokes) and with Alzheimers disease. Such individuals typically refuse to take medication because they do not believe they are sick.
Persons with severe brain disorders constitute between 150,000 and 200,000 of the estimated 600,000 homeless persons in the United States. It is estimated that as many as 283,800 are in jail or prison, primarily charged with misdemeanors, although it was found that the crimes committed by some of the prisoners charged with felonies were largely caused by their psychotic thinking. As a result, the Los Angeles County Jail, with some 3,400 mentally ill prisoners, has become the largest psychiatric "treatment facility" in the country. New Yorks Rikers Island Jail is the second largest with some 2,800 mentally ill prisoners.
Ten to 13 percent of individuals with schizophrenia and 15 to 17 percent of those with manic-depressive disorder will die from suicide. The rate for the general population is about one percent. While they constitute only about 0.5 percent of the general population, persons with untreated severe brain disorders account for 4.3 percent of all homicides. They commit 12.3 percent of spousal murders, 15.9 percent of murders of children by a parent, 25.1 percent of murders of a parent by a child and 17.3 percent of murders of a sibling by a sibling.
Virtually all long-term and much short-term hospitalization for severe brain disorders is in state psychiatric hospitals. In 1955, with a population of only 164 million, the United States had 558,239 patients in state and county psychiatric hospitals. By 1996, with a population that had increased to 265 million, the number of patients in state and county psychiatric hospitals had dropped to only 61,722. This is an effective deinstitutionalization rate of about 93 percent. Since 1996 the number of state psychiatric hospital beds has continued to decrease. For example, in 1996, New York had 8,886 patients in their state psychiatric hospitals. By May of 1999 New York had only 6,000 such beds remaining.
With good community services, the vast majority of persons
with severe mental illnesses do not require long-term hospitalization. Nevertheless a
small group still requires the long-term care and supervision of a psychiatric hospital or
the equivalent, but in some areas continue to face lengthy waiting lists for admission to
many of the state psychiatric hospitals.
Deinstitutionalization and the "Forgotten Population"
Deinstitutionalization is fundamentally a good concept. Many persons with severe brain disorders who are not currently receiving care can be cared for in community settings such as group homes. NAMI (formerly the National Alliance for the Mentally Ill) is actively promoting the Program of Assertive Community Treatment (PACT) model for treating those individuals who are capable of living within the community, but who require assistance in maintaining their treatment. NAMI also supports the use of outpatient commitment and involuntary commitment as a last resort for those persons who will not otherwise receive proper treatment. The treatment standard promoted by NAMI is that:
While it is unclear how many state psychiatric hospital beds will be required once (and if) adequate community-based services are in place, deinstitutionalization has, in many states, resulted in too few beds being made available for those who require the long-term structure of a psychiatric hospital or the equivalent.
An estimated 20% of individuals with severe mental illness do not respond to traditional community treatment. This population requires long-term structured residential or institutional care. The population of those with the most severe, disabling and chronic forms of severe mental illness has been labeled "The Forgotten Population" because their needs are often overlooked in the downsizing of state hospitals and in the planning and implementation of community services.
One major factor leading the states to close their psychiatric hospitals is an aspect of Federal Medicaid reimbursement policy known as the IMD Exclusion. (See What is the IMD Exclusion, infra.) In a nutshell, this exclusion prevents a state psychiatric hospital from receiving federal Medicaid funds for its patients, whereas patients hospitalized on the psychiatric ward of a general hospital or treated in a community setting are eligible for such funds. Without federal funds, state hospitals close. The result of discharging patients and then closing the state hospital beds is that states save state money. If a patient then needs rehospitalization, it is to a general hospital that is not usually properly equipped to handle long-term psychiatric care. And the quality of care is generally poorer than in private or state psychiatric hospitals.
The IMD Exclusion thus became the driving force behind
deinstitutionalization as states attempted to save their own funds by closing state
hospitals, effectively transferring costs to the Federal Government. The fact that many of
the patients should not have been discharged and were not receiving follow-up care got
lost in the rhetoric. A study carried out in Baltimore in 1981, for example, found that
one-half of all individuals with schizophrenia who were living in the community were
receiving no care whatsoever.
Yet no changes were made to care for those affected by deinstitutionalization.
What is the IMD Exclusion?
As defined by statute, "[t]he term institution for mental diseases means a hospital, nursing facility, or other institution of more than 16 beds, that is primarily engaged in providing diagnosis, treatment, or care of persons with mental diseases, including medical attention, nursing care, and related services."
Current federal law prohibits Medicaid reimbursement for
any person over age 21 and under age 65 who resides in an institution for mental diseases
(IMD), even for treatment unrelated to mental illness. This prohibition is commonly referred to as the IMD
Rule or IMD Exclusion. State and private psychiatric hospitals are IMDs as are nursing
homes that specialize in caring for the severely mentally ill.
Origin and History of the IMD Exclusion
State psychiatric hospitals were first created as asylums for the insane -- a humane alternative to the poor houses and jails, characterized by victimization and maltreatment, where the severely mentally ill had previously been abandoned.
In 1848, social activist Dorothea Dix observed that
Ms. Dix successfully lobbied Congress to finance her asylums for the insane only to have the legislation vetoed in 1854 by President Franklin Pierce on the grounds that
In other words, President Pierce rejected the creation of a system of federally funded asylums because the public provision of "care and cure" for "human infirmity" was a state responsibility under our federal system of government. As a result, the states were left to build and finance their own hospitals to care for the severely mentally ill.
Despite the failure to obtain federal financing for asylums, the humanitarian effort to house persons with severe mental illness in state-funded asylums rather than incarcerate them in jails was generally successful. In 1880, when the most complete census of mentally ill individuals ever carried out in the United States was conducted, only 0.7 percent of persons incarcerated in jails and prisons were said to be mentally ill.
In 1963, more than a century after President Pierce rejected a federal role in funding asylums, Congress again addressed the issue of care and treatment of the severely mentally ill. Congress observed that "[t]he average expenditure per patient day in State mental institutions is $4.50 as compared with $12 in the Veterans Administration psychiatric hospitals and about $32 per day in community general hospitals." It also found that "[t]he evidence seems clear. Either we must develop the quantity and quality of community services . . . or we will have to undertake a massive program to strengthen the State mental hospitals."
Rather than strengthen the state hospitals, Congress opted to fund construction of community mental health centers. These centers were to "include an emergency psychiatric unit, inpatient services, outpatient services, day and night care, foster home care, rehabilitation programs, and general diagnostic and evaluation services." The Kennedy Administration testified before Congress that the Act would reduce the population of the state hospitals by 50 percent within a decade or two. 
Two years later, when Congress enacted Medicaid, it again stressed that "it is important that States move ahead promptly to develop comprehensive mental health plans as contemplated in the Community Mental Health Centers Act of 1963." Except for the aged, Medicaid reimbursement was prohibited for persons residing in IMDs. Funding for the aged in IMDs was made "dependent upon a showing of satisfactory progress toward developing and implementing a comprehensive mental health program including utilization of community mental health centers, nursing homes, and other alternative forms of care."
Justice Lewis F. Powell observed in 1980 that "[t]he residual exclusion of large state institutions for the mentally ill from Federal financial assistance rests on two related principles: States traditionally have assumed the burdens of administering this form of care, and the Federal Government has long distrusted the economic and therapeutic efficiency of large mental institutions."
This second point should not be ignored. As recently as 1992, the Health Care Finance Administration (HCFA), which administers Medicaid, reported to Congress that "[i]n the treatment of mental disorders, hospitalization is the most expensive form of care, but no more effective (on average) than alternative, community-based programs." "No findings . . . support a recommendation for any statutory change in the IMD Exclusion."
The Federal government is also concerned about cost and the cost-shifting effect of eliminating the IMD Exclusion. The 1992 HCFA report states that
State and local governments would save money because federally subsidized Medicaid funds would be substituted for non-eligible expenditures.
While prohibited from receiving direct Medicaid
reimbursement, IMDs can and do receive Federal DSH payments.
What are DSH Payments?
Because of low Medicaid reimbursement rates, private insurance has historically subsidized patients costs covered by Medicaid. Hospitals with a high proportion of low-income patients simply lost money. Beginning in the early 1980s, Congress took steps to correct this problem by authorizing additional payments to Disproportionate Share Hospitals (DSH).
While there are other requirements, a hospital will generally qualify as a DSH if it has:
Because patients in an IMD are often indigent, states are able to obtain DSH funding for IMDs even though they are otherwise excluded from Medicaid reimbursement.
A Brief History of DSH Payments
By the early 1990s, the state governments discovered that DSH payments were a great way to generate income. Between 1990 and 1992 DSH payments grew from $1.4 billion to $17.5 billion.
Responding to the rapid growth in DSH payments, the Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991 (P.L. 101-234) imposed limitations on DSH payments beginning in 1992: national DSH payments were not to exceed 12 percent of total Medicaid costs. Further limits were added in 1993, and again under the Balanced Budget Act of 1997 (BBA). These include:
HCFA provides the following example of how DSH payments will be calculated for three states in fiscal year 2003.
State As prior year federal DSH allotment of $242 million represents approximately 16 percent of the states total federal medical assistance expenditures as estimated for 2003 ($1.5 billion). Since State As prior year federal DSH allotment exceeds 12 percent of total federal medical assistance expenditure estimates for 2003, the states federal DSH allotment for 2003 cannot be increased by the CPI and will remain $242 million.
State Bs prior year federal DSH allotment of $60 million represents approximately five percent of the states total federal medical assistance expenditures as estimated on the HCFA 37 ($1.2 billion). Since State Bs prior year federal DSH allotment does not exceed 12 percent of total federal medical assistance expenditure estimates for 2003, the states federal DSH allotment for 2003 will be $63.6 million, or $60 million increased by the CPI.
State Cs prior year federal DSH allotment of $62 million represents 11.8 percent of the states total federal medical assistance expenditures as estimated for 2003 on the HCFA 37 ($525 million). Because $62 million is less than 12 percent of total federal medical assistance expenditure estimates for 2003, the states federal DSH allotment for 2003 can be increased by the CPI, but capped at 12 percent of total federal medical assistance expenditures. State Cs federal DSH allotment for FY 2003 is $63 million.
Section 4721(b) of the BBA provides for a limit on the amount of federal financial participation available for IMD DSH payments. Federal financial participation is not available for IMD DSH payments that exceed the lesser of:
For FYs 1998-2000, the "applicable percentage" is defined as the ratio of 1995 total computable share mental health DSH payments (applicable to the 1995 DSH allotment) to the 1995 total computable share total DSH expenditures (applicable to the 1995 DSH allotment). For FYs 2001 and beyond, the applicable percentage is defined as the lesser of the applicable percentage as computed above, or 50 percent for fiscal year 2001; 40 percent for fiscal year 2002; and, 33 percent for each succeeding year.
HCFA will publish annually a state-specific chart in the Federal Register that will contain each states DSH limitation. See Appendix B.
These planned federal reductions in the total amount of DSH
funding and of the percentage of DSH funding for IMDs will result in further financial
pressure on the states to close state psychiatric hospitals to save money.
IMD Exclusion Waivers to Implement Medicaid Managed Care
A number of states have received waivers of the IMD Exclusion as part of Section 1115 demonstration projects to implement mandatory Medicaid managed care programs. These waivers appear to have the following elements in common:
Thus, even in states with Section 1115 waivers, Medicaid does not cover individuals requiring long-term hospitalization and savings from elsewhere must finance any Medicaid payments received by an IMD in the managed care plan.
Implications of Repeal of the IMD Exclusion
The Federal Government, at rates ranging from 50 percent to 80 percent, reimburses states for Medicaid expenditures. By excluding IMDs from Medicaid reimbursement, the states have a significant financial incentive to treat persons with severe brain disorders in other venues, even if those venues may be both more costly and less effective.
For example, in 1992 treatment in a general hospital was estimated to cost approximately $499.05 per day and in a private psychiatric hospital approximately $485.67. While the cost of treatment in state psychiatric hospitals varies from state to state, it is estimated to cost approximately $200 per day less than in a general hospital lets say $300 per day. The cost of incarceration is about $137 per day.
Using these figures, the daily cost to the states of each alternative is as follows:
Without the IMD Exclusion the relative cost to the states changes dramatically:
By eliminating the IMD Exclusion, the states will
have a strong financial incentive to maintain their state and county psychiatric hospitals
when compared to the alternatives. It will actually cost the states more money to close
their psychiatric hospitals when the alternative is treatment in other hospitals, and
incarcerating the ill becomes at best nominally cheaper than treating them.
Effect of Repeal on Community Services
Estimates of the cost of Community-based treatment, in the form of PACT, range from "$8,000 to $12,000 a year per client" ($22 to $33 per day) to $29,965 a year per client ($82 per day). It therefore remains cost-competitive when compared to hospitalization or incarceration. Other forms of assisted community treatment will likewise remain cost-competitive.
Moreover, the recent Supreme Court decision in Olmstead v. L.C. makes it clear that under the Americans with Disabilities Act (ADA), states are generally required to provide care in a community based setting provided that the "State's treatment professionals have determined that community placement is appropriate, the transfer from institutional care to a less restrictive setting is not opposed by the affected individual, and the placement can be reasonably accommodated, taking into account the resources available to the State and the needs of others with mental disabilities." 
Repeal of the IMD Exclusion is therefore not expected to adversely impact efforts to establish community based care for appropriate individuals, but rather to assure appropriate treatment for those individuals who are too ill to participate in such programs and who require care in an IMD.
There is no current cap on Medicaid as there is on DSH payments. As previously cited, a 1992 HCFA study estimated the cost of repeal of the IMD Exclusion at $3.2 billion dollars. Given the general under-funding of treatment for the mentally ill, large projected federal budget surpluses, expansion of Medicare payments and new proposed social programs, it is time for the mental illness community to argue for increased funding rather than how to divide an ever-decreasing budgetary pie.
Even if repeal is made contingent on federal budget neutrality, this should still mean more money for the treatment of severe mental illness. Medicaid will subsidize the cost of treatment in an IMD to the same extent as the treatment of other illnesses in other venues. This will reduce the total cost to the state for treatment of severe brain disorders relative to other covered illnesses.
What Should be Done?
The Institutions for Mental Diseases (IMD) Exclusion should be abolished as part of a broad federal and state re-evaluation of how mental health services are funded. As long as there remains a huge financial incentive for states to discharge patients with severe mental illnesses, but no financial incentive to provide aftercare, Americas jails and streets will continue to be the de facto asylums for the mentally ill of the 1990s.
NAMIs policy articulates the issue well:
Patients in Public Psychiatric Hospitals, 1955 1996
DSH Allotments Fiscal Years 1998 - 2002
(in millions of dollars)
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