National Expenditures for Mental Health Services and Substance Abuse Treatment 1991–2001

This chapter examines changes in mental health (MH) expenditures from 1991 to 2001. It presents trends in MH spending relative to all health care, as well as trends by payer and provider.

The MH system is constantly evolving. Each decade brings improvements in MH services. During the 1990s, new medications for depression, schizophrenia, obsessive-compulsive disorder, panic disorder, bipolar disease, and other mental disorders were developed and introduced to the market. In some cases, these medications represent new indications for existing medications; in other instances, they represent completely new therapeutic agents. At the same time, a growing body of research has elucidated the benefits of different forms of psychosocial treatments.

The context in which mental health services are provided and financed has also evolved. Over the past decade, purchasers have increasingly selected managed care approaches. Managed behavioral health care has come to dominate many private insurance programs and public sector mental health programs. Utilization review, benefit design, and payment policies under managed care have influenced where and how treatments are provided. Outpatient care is emphasized over inpatient care, and pharmacotherapy over psychotherapy (Olfson, 2002). In addition, mental health care has been influenced by broader trends in financing policy, such as the growth of Medicaid enrollment.

Attitudes toward those with mental illness and toward treatment have also been shifting over time. Today, most people have a better understanding of mental illness and its etiology. However, the stigma associated with mental illness remains a major barrier to seeking, and thus receiving, care (USDHHS, 1999).

MH expenditures in 1991 totaled $49 billion (Table A.5, Appendix A). By 2001, they were $85 billion (Table A.1). This translates into an average growth rate of 5.7 percent annually for MH spending, lower than the 6.5 percent annual growth rate for all health (Figure 4.1). In inflation-adjusted terms, MH spending grew by 3.7 percent annually and all health by 4.4 percent. Over the first half of the period (1991 through 1996), MH spending grew by 4.8 percent versus 6.5 percent for all health. Over the last half (1996 through 2001), MH grew by 6.7 percent versus 6.4 percent for all health. Overall, MH expenditures as a share of total health care declined, from 6.7 percent of total health care spending in 1991 to 6.2 percent in 2001 ( calculated from Tables A.5 and A.1, Appendix A).

What contributed to MH expenditure growth over this time period? Part of the answer to this question is that more people received treatment. Although this report does not track information on the volume of services received, other studies indicate that the number of people being treated for mental disorders has increased over time (Zuvekas, 2001; Olfson et al., 2002; Kessler et al., 2003). For example, from 1987 to 1996, the number of people using any mental health services increased by 26 percent (Zuvekas, 2001). In addition, medication prices have increased, in part because newly developed medications that are more expensive have replaced older, less expensive medications (Dubois et al., 2000). Moreover, more people are using psychotropic medications. Finally, the unit cost of providing mental health services has increased. For example, hourly wages of production workers in psychiatric and substance abuse hospitals increased by an average of 3.8 percent per year between 1990 and 2001 (BLS, 2004).

The MH expenditure growth rate was 1.7 percentage points below the all health growth rate during the first half of the period and 0.3 percentage points above the all health growth rate during the second half of the period. This accelerated growth rate during the second half of the period was due to prescription medication spending. If prescription drugs are excluded, the MH growth rate was 4.0 percent annually during the first half of the period and 3.9 percent annually during the second half of the period.

For both MH and all health, public payments grew more rapidly than private payments from 1991 to 2001. The public payer growth rate for all health care expenditures was 7.2 percent annually and the private payer growth rate was 5.9 percent annually (Table A.4, Appendix A). The same was true for mental health expenditures. Public MH expenditures increased by 6.8 percent annually, while private MH expenditures increased by 4.2 percent (Table A.4).

As a result, public payers grew in importance as a source of funding for MH services, and private payers declined. In 1991, private payers made up 43 percent of total MH spending (Table A.6, Appendix A), while in 2001 they comprised 37 percent (Table A.2). For all health care spending, private payers also shrank from 59 percent of all health spending in 1991 to 55 percent in 2001.

Private payments mainly are comprised of private insurance and out-of-pocket spending. Private insurance spending on MH care increased at a slower rate than all health care private insurance spending (5.8 percent versus 6.9 percent) (Figure 4.2). Out-of-pocket spending on MH care grew at almost the same rate as out-of-pocket spending on all health care (3.7 percent versus 3.8 percent, respectively). Public payer spending growth on MH services of 6.8 percent per year was slightly lower than public payer spending on all health care at 7.2 percent annually.

Among public payers, Medicaid (including both the State and Federal portion) grew in importance. Medicaid increased from 33 percent of total public MH expenditures in 1991 to 44 percent in 2001 (Figure 4.3). In contrast, other State and local government funding (which excludes Medicaid) dropped from 47 percent of total MH public financing to 37 percent. Medicare remained constant in 1991 and 2001, comprising 12 percent of public MH expenditures in both years. Other Federal government spending declined slightly as a proportion of public MH spending (from eight to seven percent).

Medicaid, followed by Medicare, had the highest MH public sector growth rates (9.7 and 6.8 percent per year, respectively, from 1991 through 2001) (Table A.4, Appendix A). Other Federal government and other State and local government grew more slowly (5.5 and 4.4 percent per year, respectively). The lower State and local growth rate may be, in part, caused by States shifting general revenue funds for MH to Medicaid.

The growth rate for all health care spending under Medicaid and Medicare was 9.2 and 7.2 percent per year, respectively. The average annual growth in funding for all health for other Federal government and other State and local government was 5.7 and 4.4 percent, respectively. Part of the shift toward Medicare and Medicaid likely stems from growing enrollment in those programs. Medicare enrollment increased from 35 million in 1991 to 40 million in 2001 (CMS, 2004a). Medicaid enrollment grew from 25 million to 36 million over the same period (CMS, 2004b and 2001). As enrollment has increased, expenditures for all Medicaid and Medicare, as well as mental health care, have grown.

The role played by private insurance in covering MH expenses remained fairly constant during 1991 - 2001, equaling 22 percent of total MH expenditures (Tables A.6 and A.2, Appendix A).

Out-of-pocket spending by individuals became slightly less important as a source of financing in 2001 as compared with 1991. Out-of-pocket payments accounted for 15 percent of MH spending in 1991 (Table A.6) and declined to 13 percent in 2001 (Table A.2). This trend may have been caused by several factors. One is the growth of public financing relative to private financing. Public payers tend to have lower cost-sharing requirements than do private payers, and during this period, any Medicaid cost sharing beyond nominal amounts was prohibited. The other trend is the spread of managed care, which tends to replace proportional cost sharing with copayments per service, resulting in lower overall cost sharing. These trends were more apparent in the first half of the series (1991 - 1996) than in the second half (1996 - 2001). From 1991 to 1996, out-of-pocket MH spending fell; the average annual nominal rate of change was -0.7 percent (Table A.4, Appendix A). From 1996 to 2001, out-of-pocket MH spending grew at an average annual rate of 8.3 percent. A similar (although dampened) trend is seen in all health care, where out-of-pocket spending grew at 1.4 percent annually from 1991 to 1996 and at 6.2 percent annually from 1996 to 2001 (Table A.4).

Out-of-pocket spending trends are driven partially by spending trends on private insurance premiums because they result from cost-sharing increases. For all health, out-of-pocket spending growth rates were below all health private insurance growth rates. However, for MH, the increase of out-of-pocket spending actually exceeded that of private insurance from 1996 to 2001 by 0.3 percentage points. This may stem from increases in cost sharing for retail prescription medications.

Inpatient expenditures declined from 38 percent of total MH to only 22 percent between 1991 and 2001 (Tables A.5 and A.1, Appendix A). The mix of services shifted to include greater expenditure on retail prescription drugs, which increased from seven percent of total MH spending to 21 percent. The outpatient share of MH expenditures, excluding prescription medications, remained constant at 31 percent. Residential expenditures remained constant at 19 percent of total MH expenditures. Examined from the perspective of growth rates, inpatient expenditures did not increase, outpatient expenditures (including prescription drugs) grew by 9.2 percent per year, and residential expenditures grew by 6.0 percent annually (Table A.3, Appendix A).

Total MH expenditures grew by approximately $37 billion between 1991 and 2001 (from $49 billion to $85 billion) (Tables A.5 and A.1, Appendix A). The largest component of this change was retail prescription drugs, which contributed 39 percent to the $37 billion (Figure 4.4). The next largest component was multi-service mental health organizations (MSMHOs), which made up 23 percent of the increase. General hospitals comprised 15 percent of the growth and physicians comprised 14 percent. Other professionals made up six percent of the $37 billion. Specialty psychiatric hospital expenditures actually declined.

Hospitals continue to provide an important, but declining, setting of treatment for people with mental illness. In 1991, about 40 percent of all MH dollars was spent in hospitals; in 2001, it was 27 percent (Figure 4.5). This decrease is primarily caused by a reduction in care provided in specialty psychiatric hospitals. Their reduced role stems from several sources. First, for many years, States have been closing public psychiatric hospitals and instead placing greater reliance on community services. For example, in 1990, 735 psychiatric hospitals with 143,660 beds existed in the United States; by 1998 the census had declined to 557 psychiatric hospitals and 97,168 beds (CMHS, 2001). From 1990 to 1998, the number of hospital and residential admissions decreased by 25 percent, from approximately 276,000 to 206,000. Second, managed care has been shown to reduce the utilization of inpatient services. Managed care organizations may require "pre-approval" for inpatient admission, may apply "utilization review" to inpatient stays, and may limit payments to a fixed number of days of care. Third, pharmaceutical discoveries have led to less reliance on inpatient facilities. The increased use of psychotropic medications, for example, has allowed clients to stabilize their illness more quickly and thus receive more treatment in less restrictive, more client-centered programs in outpatient settings.

In addition to the overall reduction in hospital-based MH care, there has been a shift in the locus of treatment away from specialty psychiatric hospitals. Specialty hospital expenditures for MH care provided in all settings fell by 1.6 percent annually. Both inpatient and outpatient specialty hospital expenditures also decreased substantially (by 3.4 and 7.1 percent annually, respectively) (Table A.3, Appendix A). There was significant increase, however, in residential care in specialty psychiatric hospitals, although this still represents a small portion of total psychiatric hospital expenses.

In contrast to specialty hospitals, general hospital expenditures for MH care grew 5.2 percent annually, which is the same as the all health care general hospital growth rate (Table A.3, Appendix A). The growth in general hospital expenditures was divided into care provided in inpatient, outpatient, and residential settings. Of these three settings, outpatient care grew at the fastest rate (9.4 percent annually).

General hospital expenditures were divided into general hospital specialty units and non-specialty units. Growth was much higher in non-specialty units (12.9 percent) than specialty psychiatric units (0.2 percent).

The role of prescription drugs in MH treatment grew enormously, increasing from seven percent to 21 percent of total MH spending over the ten years (Figure 4.5). From 1991 to 2001, MH prescription expenditures grew at a rate of 17.1 percent annually (Table A.3, Appendix A). This was higher than the 12.1 percent growth in total pharmaceutical costs for all diseases. During the 1990s, a number of new agents were introduced for treating problems of the central nervous system, including atypical antipsychotic agents for schizophrenia (e.g., risperidone (Risperidal®), olanzapine (Zyprexia®) quetiapine fumarate (Seroquel®), ziprasidone (Geodon®)) and new types of antidepressants (e.g., sertaline (Zoloft®), paroxetine (Paxil®), venlafaxine (Effexor®), citalopram (Celexa®), bupropion (Wellbutrin®), fluvoxamine (Luvox®), escitalopram (Lexapro®)).

Existing medications also were given approval for a greater variety of disorders, such as use of medications first employed as antidepressants later approved for use to treat obsessive-compulsive disorder, generalized anxiety disorder, social anxiety disorder, panic disorder, and post traumatic stress disorder. Finally, more clients have been receiving treatment for depression and taking medications to treat the disorder. For example, the rate of outpatient treatment for depression increased from 0.73 per 100 persons in 1987 to 2.33 in 1997 (Olfson et al., 2002). The proportion of treated individuals who used antidepressant medications increased from 37.3 percent to 74.5 percent.

After prescription drugs, the fastest growing provider expense was for care at a multi-service mental health organization (MSMHO). Spending in MSMHOs grew by 8.3 percent annually (Table A.3, Appendix A). As a result, MSMHOs increased from 14 percent of total MH expenditures in 1991 to 18 percent of total MH expenditures in 2001 (Figure 4.5). MSMHOs can provide inpatient, outpatient, or residential care. The inpatient component of MSMHOs fell by 10 percent annually. The outpatient component grew by seven percent annually, and the residential component grew by 11 percent annually. Thus, there appears to be a shift away from inpatient care toward residential care within MSMHOs.

Physicians and other professional expenditures remained about the same, at 22 percent of total MH expenditures in 1991 and 21 percent in 2001 (Figure 4.5). Physician MH expenditures grew at six percent annually, which equaled the growth of all health physician spending. Psychiatrists and non-psychiatrist physicians each experienced the same six percent annual growth rate (Table A.3, Appendix A). Expenditures on other professionals grew at only four percent, as compared with an all health other professional growth rate of eight percent. The growth rate for other professionals was twice as high in the second half of the ten-year period (6 percent) as in the first half (3 percent).

The proportion of spending accounted for by nursing homes declined over the ten-year period, from 12 percent of expenditures in 1991 to six percent in 2001 (Table A.5 and A.1, Appendix A). Nursing home MH expenditures did not grow at all from 1991 to 2001, in contrast to all health nursing home expenditures, which grew at five percent annually (Table A.3). Given the aging population, this likely implies that fewer people are receiving MH care in nursing homes. The decline may also have been influenced by a Federal law implemented in 1992. The law (sometimes known as PASSAR) requires people seeking admission to Medicaid-certified nursing homes to be screened before admission to determine if they are mentally ill or mentally retarded to prevent persons who primarily need treatment for these disorders from being placed in nursing homes.

The pattern of home health care cost growth varied radically over the first and second half of the ten-year span. From 1991 to 1996, home health grew at an annual rate of 21.5 percent. From 1996 to 2001, home health expenditures fell by 0.6 percent (Table A.3, Appendix A). This same pattern was seen for all health services, and stems from several legislative changes affecting how home care is reimbursed under Medicare (Levit et al., 2003). Home health care costs made up only one percent of total MH expenditures in both 1991 and 2001 (Tables A.5 and A.1, Appendix A).

MH providers can be classified as specialty providers or general providers. Specialty MH providers include specialty units of general hospitals, specialty hospitals, psychiatrists, other professionals, and multi-service mental health organizations. General sector providers include general hospital non-specialty units, non-psychiatrist physicians, nursing homes, and home health agencies. In addition, retail prescription drugs and the cost of insurance administration are regarded as separate categories in this analysis.

According to these definitions, MH expenditures shifted from specialty providers toward retail prescription medications. In 1991, specialists comprised 68 percent of MH expenditures, while in 2001 they comprised only 53 percent (Figure 4.6). Retail prescription drugs grew from seven percent to 21 percent of total MH expenditures over this period. General sector providers remained relatively unchanged at 20 percent in both 1991 and 2001.

Spending on MH services grew from $49 billion in 1991 to $85 billion in 2001, representing a rate of growth of 5.7 percent per year. This was lower than the rate of growth of spending for all health care during the ten-year time span. The largest component of the increase was spending on retail prescription drugs, contributing 39 percent to the growth in MH expenditures.

Growth rates for public payers were much higher than private payers over the ten-year period from 1991 to 2001. This trend was similar to that for all health care. The public-payer expansion of MH spending was primarily led by Medicaid, which grew at an annual rate of 9.7 percent and increased from one-third of all public MH spending to 44 percent of all public dollars spent on MH.

Finally, inpatient hospital expenditures declined as a percentage of total MH expenditures, from 38 percent of total MH to 22 percent. The decline in inpatient expenditures was greatest in specialty hospitals. General hospital inpatient expenditures grew, although only in non-specialty units.