Chapter 6
Organizing and Financing
Mental Health Services

Overview of the Current Service System

The Costs of Mental Illness

Financing and Managing Mental Health Care

Toward Parity in Coverage of Mental Health Care


Appendix 6-A: Quality and Consumers’ Rights


Chapter 6
Organizing and Financing
Mental Health Services

This chapter examines what recent research has revealed about the organization and financing of mental health services as well as the cost and quality of those services. The discussion places emphasis on the tremendous growth of managed care and the attempts to gain parity in insurance. Understanding these issues can inform the decisions made by people with mental health problems and disorders, as well as their family members and advocates, and health care administrators and policymakers. Earlier chapters reviewed data on the occurrence of mental disorders in the population at large and described the treatment system. In each stage of the life cycle, issues related to mental health services have been discussed, including, for example, the breadth of mental health and human services involved in caring for children with mental health problems and disorders; deinstitutionalization and its role in shaping contemporary mental health services for children and adults; the problems associated with discontinuity of care in a fragmented service system; and the importance of primary care medical providers in meeting the mental health needs of older persons. Special mental health services concerns such as homelessness, criminalization of persons with mental illness, and disparities in access to and utilization of mental health services due to racial, cultural, and ethnic identities as well as other demographic characteristics have been discussed throughout the report.

There are four main sections in this chapter. The first section provides an overview of the current system of mental health services. It describes where people get care and how they use services. The next section presents information on the costs of care and trends in spending. The third section discusses the dynamics of insurance financing and managed care. It also addresses both positive and adverse effects of managed care on access and quality and describes efforts to guard against untoward consequences of aggressive cost-containment policies. The final section documents some of the inequities between general medical and mental health care and describes efforts to correct them through legislation, regulation, and financing changes.

Overview of the Current Service System

The Structure of the U.S. Mental Health Service System

A broad array of services and treatments exists to help people with mental illnesses—as well as those at particular risk of developing them—to suffer less emotional pain and disability and live healthier, longer, and more productive lives. Mental disorders and mental health problems are treated by a variety of caregivers who work in diverse, relatively independent, and loosely coordinated facilities and services—both public and private—that researchers refer to, collectively, as the de facto mental health service system (Regier et al., 1978; Regier et al., 1993).

About 15 percent of all adults and 21 percent of U.S. children and adolescents use services in the de facto system each year. The system is usually described as having four major components or sectors:

  • The specialty mental health sector consists of mental health professionals such as psychiatrists, psychologists, psychiatric nurses, and psychiatric social workers who are trained specifically to treat people with mental disorders. The great bulk of specialty treatment is now provided in outpatient settings such as private office-based practices or in private or public clinics. Most acute hospital care is now provided in special psychiatric units of general hospitals or beds scattered throughout general hospitals. Private psychiatric hospitals and residential treatment centers for children and adolescents provide additional intensive care in the private sector. Public sector facilities include state/county mental hospitals and multiservice mental health facilities, which often coordinate a wide range of outpatient, intensive case management, partial hospitalization, and inpatient services. Altogether, slightly less than 6 percent of the adult population and about 8 percent of children and adolescents (ages 9 to 17) use specialty mental health services in a year.
  • The general medical/primary care sector consists of health care professionals such as general internists, pediatricians, and nurse practitioners in office-based practice, clinics, acute medical/surgical hospitals, and nursing homes. More than 6 percent of the adult U.S. population use the general medical sector for mental health care, with an average of about 4 visits per year—far lower than the average of 14 visits per year found in the specialty mental health sector.1 The general medical sector has long been identified as the initial point of contact for many adults with mental disorders; for some, these providers may be their only source of mental health services. However, only about 3 percent of children and adolescents contact general medical physicians for mental health services; the human services sector (see below) plays a much larger role in their care.
  • The human services sector consists of social services, school-based counseling services, residential rehabilitation services, vocational rehabilitation, criminal justice/prison-based services, and religious professional counselors. In the early 1980s, about 3 percent of U.S. adults used mental health services from this sector. But by the early 1990s, the National Comorbidity Survey (NCS) revealed that 5 percent of adults used such services. For children, school mental health services are a major source of care (used by 16 percent), as are services in the child welfare and juvenile justice systems, which serve about 3 percent.
  • The voluntary support network sector, which consists of self-help groups, such as 12-step programs and peer counselors, is a rapidly growing component of the mental and addictive disorder treatment system. The Epidemiologic Catchment Area (ECA) study demonstrated that about 1 percent of the adult population used self-help groups in the early 1980s; the NCS showed a rise to about 3 percent in the early 1990s.

Table 6-1 summarizes the percentage of U.S. adults who use different sectors of the de facto mental health treatment system. (There is overlap across these sectors because some people use services in multiple sectors.) Table 6-2 summarizes the percentage of U.S. children and adolescents using various sectors of this system.

Table 6-1. Proportion of adult population using mental/ addictive disorder services in one year

Total Health Sector 11%*
Specialty Mental Health 6%
General Medical 6%
Human Services Professionals 5%
Voluntary Support Network 3%
Any of Above Services 15%

*Subtotals do not add to total due to overlap.
Source: Regier et al., 1993; Kessler et al., 1996

Table 6-2. Proportion of child/adolescent populations (ages 9–17) using mental/addictive disorder services in one year

Total Health Sector 9%*
Specialty Mental Health 8%
General Medical 3%
Human Services Professionals 17%*
School Services 16%
Other Human Services 3%
Any of Above Services 21%

*Subtotals do not add to total due to overlap.
Source: Shaffer et al., 1996

The Public and Private Sectors

The de facto mental health service system is divided into public and private sectors. The term“public sector” refers both to services directly operated by government agencies (e.g., state and county mental hospitals) and to services financed with government resources (e.g., Medicaid, a Federal-state program for financing health care services for people who are poor and disabled, and Medicare, a Federal health insurance program primarily for older Americans and people who retire early due to disability). Publicly financed services may be provided by private organizations. The term“private sector” refers both to services directly operated by private agencies and to services financed with private resources (e.g., employer-provided insurance). Funding for the de facto mental health service system is discussed later in the report.

State and local government has been the major payer for public mental health services historically and remains so today. Since the mid-1960s, however, the role of the Federal government has increased. In addition to Medicare and Medicaid, the Federal government funds special programs for adults with serious mental illness and children with serious emotional disability. Although small in relation to state and local funding, these Federal programs provide additional resources. They include the Community Mental Health Block Grant, Community Support programs, the PATH program for people with mental illness who are homeless, the Knowledge Development and Application Program, and the Comprehensive Community Mental Health Services for Children and Their Families Program.

The fact that 16 percent of the U.S. adult population—largely the working poor—have no health insurance at all is the focus of considerable policy activity. Many others are inadequately insured. Initiatives designed to increase enrollment for selected populations include the newly created Child Health Insurance Program, which provides block grants to states for coverage of children not eligible for Medicaid.

These federally funded public sector programs buttress the traditional responsibility of state and local mental health systems and serve as the mental health service“safety net” and“catastrophic insurer” for those citizens with the most severe problems and the fewest resources in the United States. The public sector serves particularly those individuals with no health insurance, those who have insurance but no mental health coverage, and those who exhaust limited mental health benefits in their health insurance.

Each sector of the de facto mental health service system has different patterns and types of care and different patterns of funding. Within the specialty mental health sector, state- and county-funded mental health services have long served as a safety net for people unable to obtain or retain access to privately funded mental health services. The general medical sector receives a relatively greater proportion of Federal Medicaid funds, while the voluntary support network sector, staffed principally by people with mental illness and their families, is largely funded by private donations of time and money to emotionally supportive and educational groups. The relative quality of care in these various sectors is a matter of intense interest and discussion, although there is little definitive research to date.

Effective functioning of the mental health service system requires connections and coordination among many sectors (public–private, specialty–general health, health–social welfare, housing, criminal justice, and education). Without coordination, it can readily become organizationally fragmented, creating barriers to access. Adding to the system’s complexity is its dependence on many streams of funding, with their sometimes competing incentives. For example, if as part of a Medicaid program reform, financial incentives lead to a reduction in admissions to psychiatric inpatient units in general hospitals and patients are sent to state mental hospitals instead, this cost containment policy conceivably could conflict with a policy directive to reduce the census of state mental hospitals.

The public and private parts of the de facto mental health system treat distinct populations with some overlap. As shown in Table 6-1, 11 percent of the U.S. population use specialty or general medical mental health services each year. Nearly 10 percent of the population—almost all users—received some care in private facilities, while 2 percent of the population received care in public facilities. About 1 percent of the population used inpatient care; of these, one-third received care in the public sector, suggesting that those requiring more intensive services rely more heavily on the public safety net (Regier et al., 1993; Kessler et al., 1994). Nonetheless, many people with severe and persistent illness now receive at least some of their care in the private sector. This makes it important to ensure that the private sector can meet the full treatment needs of this population.

Patterns of Use


Americans use the mental health service system in complex ways, or patterns. A total of about 15 percent of the U.S. adult population use mental health services in any given year. These data come from two epidemiologic surveys: the Epidemiologic Catchment Area (ECA) study of the early 1980s and the National Comorbidity Survey (NCS) of the early 1990s. Those surveys defined mental illness according to the prevailing editions of the Diagnostic and Statistical Manual of Mental Disorders (i.e., DSM-III and DSM- IIIR) and defined mental health services in accordance with the “de facto” system described above. Figure 6-1 presents a hierarchy of sectors in the treatment system (i.e., specialty mental health, general medical, and other human services).2 About 6 percent of the adult population use specialty mental health care; 5 percent of the population receive their mental health services from general medical and/or human services providers, and 3 to 4 percent of the population receive their mental health services from other human service professionals or self-help groups. (The overlap across these latter two sectors accounts for these figures totaling more than 15 percent) (Figure 6-1).

Also, slightly more than half of the 15 percent of the population that use mental health services have a specific mental or addictive disorder (8 percent), while the remaining portion has a mental health problem or a disorder not included in the ECA or NCS (7 percent). The surveys estimate that during a 1-year period, about one in five American adults—or 44 million people— have diagnosable mental disorders, according to reliable, established criteria. To be more specific, 19 percent of the adult U.S. population have a mental disorder alone (in 1 year); 3 percent have both mental and addictive disorders; and 6 percent have addictive disorders alone. Consequently, about 28 percent of the population have either a mental or addictive disorder (Regier et al., 1993; Kessler et al., 1994).

Given that 28 percent of the population have a diagnosable mental or substance abuse disorder and only 8 percent of adults both have a diagnosable disorder and use mental health services, one can conclude that less than one-third of adults with a diagnosable mental disorder receives treatment in one year. In short, a substantial majority of those with specific mental disorders do not receive treatment. Figure 6-1 depicts the 28 percent of the U.S. adult population who meet full criteria for a mental or addictive disorder, and illustrates that 8 percent receive mental health services while 20 percent do not receive such services in a given year.

Among the service users with specific disorders, between 30 and 40 percent perceived some need for care. However, most of those with disorders who did not seek care believed their problems would go away by themselves or that they could handle them on their own (Kessler et al., 1997). In a recent 1998 Robert Wood Johnson national household telephone survey, 11 percent of the population perceived a need for mental or addictive services, with about 25 percent of these reporting difficulties in obtaining needed care (Sturm & Sherbourne, 1999). Worry about costs was listed as the highest reason for not receiving care, with 83 percent of the uninsured and 55 percent of the privately insured listing this reason. The inability to obtain an appointment soon enough because of an insufficient supply of services was listed by 59 percent of those with Medicaid but by far fewer of those with private insurance.

Children and Adolescents

Comparable data on service use by children and adolescents with diagnoses of mental disorder and at least minimal impairment only recently have been obtained from a National Institute of Mental Health (NIMH) multisite survey of children and adolescents ages 9 to 17 years (Shaffer et al., 1996). Results from this survey are summarized in Table 6-2 and in Figure 6-2.

Although 9 percent of the entire child/adolescent sample received some mental health services in the health sector (that is, the general medical sector and specialty mental health sector), the largest provider of mental health services to this population was the school system. As shown in Figure 6-2, nearly 11 percent of the child/adolescent sample received their mental health services exclusively from the schools or the human services sector (with no services from the health sector); another 5 percent (not shown in Figure 6-2) received school services in addition to health sector services. Many children served by schools do not have diagnosable mental health conditions covered in available surveys—some may have other diagnoses such as adjustment reactions or acute stress reactions. In addition, 1 percent of children and adolescents received their mental health services from human service professionals, such as those in child welfare and juvenile justice. The latter is a setting under increasing scrutiny as the result of pending Federal legislation. At present, child data are unavailable that would exactly match the adult data on service use (analyzed by diagnostic severity and by public versus private sectors).

Almost 21 percent of children and adolescents (ages 9 to 17) had some evidence of distress or impairment associated with a specific diagnosis and also had at least a minimal level of impairment on a global assessment measure. Almost half of this group (almost 10 percent of the child/adolescent population) had some treatment in one or more sectors of the de facto mental health service system, and the remainder (more than 11 percent of the population) received no treatment in any sector of the health care system. This translates to a majority with mental disorders not receiving any care. Of the 21 percent of the young population receiving any mental health services, slightly less than half (about 10 percent) met full criteria for a mental disorder diagnosis; the remainder (more than 11 percent of the population) received diagnostic or treatment services for mental health problems, conditions that do not fully meet diagnostic criteria (Shaffer et al., 1996).

In summary, the mental health treatment system is a dynamic array of services accessed by patients with different levels of disorder and severity, as well as different social and medical service needs and levels and types of insurance financing. Disparities in access due to sociocultural factors have been described in earlier sections of this report. In a system in which substantial numbers of those with even the most severe mental illness do not receive any mental health care in a year, the match between service use and service need is clearly far from perfect. Neither the number nor the proportion of people with mental health problems who need or want treatment is yet established, and many factors influence perceived need for treatment, including severity of symptoms and functional disability as well as cultural factors. But obviously not everyone with a diagnosable mental disorder perceives a need for treatment, and not all who desire treatment have a currently diagnosable disorder. Providing access to appropriate mental health services is a fundamental concern for mental health policymakers in both the public and private arenas.

Figure 6-1b. Annual prevelence to mental/addictive disorders and service for adults

Click to enlarge

Figure 6-2b Annual prevalence of mental/disorders and service for children

Click to enlarge

1 The National Comorbidity Survey, using a single interview requiring a 12-month recall period, determined that 4 percent of adults sought mental or addictive treatment services from primary care physicians. With a more intensive examination of primary health care use involving three interviews about service use during a 1-year period in the Epidemiologic Catchment Area study, more than 6 percent of adults indicated that they specifically spoke with their general medical physicians about their “emotions, nerves, drugs or alcohol.”

2 For those who use more than one sector of the service system, preferential assignment is to the most specialized level of mental health treatment in the system.

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