The discovery and marketing of the first, effective anti-psychotic medication Thorazine, in 1955 unleashed deinstitutionalization, the moving of patients out of psychiatric hospital settings and into the community. Deinstitutionalization increased more rapidly following the enactment of Medicaid and Medicare in 1965. While in state hospitals, patients were the financial responsibility of the states, but by discharging them, the states transfered the monetary responsibility to the federal government.
When enacting Medicaid, the federal government specifically excluded payments for patients in state psychiatric hospitals and other institutions for mental diseases, or IMDs, for 2 reasons to promote deinstitutionalization; and to put costs back to the states which were viewed by the federal government as responsible for this type of care. The states transferred a huge number of patients from state hospitals to nursing homes and the community where Medicaid reimbursement was available.
Impoverished persons who need treatment in a hospital can count on Medicaid to pay for diseases of the heart, and most other body organs. Medicaid will not cover the individual if they are between the ages of 21 and 65 has a disease in his or her brain and needs care in a psychiatric hospital. The Federal government's Institute for Mental Disease Exclusion prohibits Medicaid from covering any treatment, even non-psychiatric, in state and private psychiatric hospitals and other IMDs.
For the most severely mentally ill, private insurance is fundamentally meaningless. Because of their illnesses, most individuals with the severest forms of brain disease are unemployed and private insurance is something that they cannot afford. While the federal government seeks equality for treatment of lesser forms of mental illness by private insurers, it continues to discriminate against those with severe mental illnesses by denying them coverage under Medicaid when they require hospitalization in a psychiatric hospital.
The federal government reimburses states for between 50 and 80 percent of treatment under Medicaid. Because treatment in an IMD is excluded from Medicaid reimbursement, the states have a major financial incentive to limit treatment in psychiatric hospitals. This is the force behind deinstitutionalization as states force patients out of the hospitals and into Medicaid eligible services where the federal government to take up most of the cost, even though treatment may be unsatisfactory, more costly and less effective.
Approximately 500,000 individuals were inpatients in state psychiatric hospitals when the Medicaid program started, compared with fewer than 60,000 in 1999. Hospital closures have actually in recent years. About forty state hospitals completely shut their doors between 1990 and 1997, and many more closures were planned.
As state psychiatric hospitals improved in quality, it became increasingly common to discharge patients from relatively good hospitals with active rehabilitation programs and institutionalize them in nursing homes, general hospitals with markedly inferior psychiatric care and no rehabilitation programs at all. States save state funds, but institutionalized patients pay a considerate price for the substandard care.
Costs in general hospitals are generally $200 per day more than the costs in public psychiatric hospitals. These additional costs are of little importance to the states; since federal Medicaid dollars are paying the majority of the bill; the states' costs are lower and that is the maximum of their concern. Evidence shows that general hospitals admit psychiatric patients with less severe illnesses, but turn away those who are more seriously ill. Inpatient stays for people with serious brain disorders are typically shorter in general hospitals, which puts the person's ability to stabilize on medication in jeopardy.
Medicaid's denial of coverage results in homelessness, incarceration, victimization and even death for many people; who are extremely ill and are unable to care for themselves. Of the 4 million Americans with schizophrenia and manic-depression, approximately 50 percent are not being treated on any given day. There are currently more than 250,000 mentally ill people locked up in the jails and prisons. Another 100,000 to 200,000 mentally ill are homeless, and 28% eat from garbage cans. More than ten percent will die from suicide. Others will commit acts of violence against family, friends and even unfamiliar persons.
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