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c h a p t e r 4 Health Care Financing and Income Support Between 1950 and 2000 the financing and delivery of mental health care underwent structural changes as dramatic as those in the Eastern European nations after the Soviet Union’s disintegration. In a matter of twenty years, starting in the mid-1960s, mental health care moved largely from a centrally planned, state-owned and operated enterprise to a system dominated by market forces, though it still retained a large amount of public financing. These primary financing changes—not technological breakthroughs or demographic shifts—have transformed the lives of people with mental illness. In the early 1960s choices about which services to provide and how much to spend on these services were made by state legislators. Legislators allocated a yearly budget for their state’s centrally organized mental health system, whose focal point was the state mental hospital. People with a serious mental illness had few, if any, real choices about their care. Today mentally ill individuals have become consumers, choosing their care— and allocating the financial resources associated with that care—from a broad array of institutions and services. They can usually weigh for themselves whether to enter a psychiatric hospital, a general hospital, a partial hospital (an institutional setting offering services similar to those of a hospital, without the overnight stay), a clinic, or a private office—each with its own assortment of services, providers, and intensities of care. Providers of care now compete for consumers on the basis of price, quality, and convenience—the very ingredients with which any business, whether a grocery store or an electronics outlet, vies for consumers . Health care markets differ from others, and the mental health care market has its own unique imperfections. Nonetheless, today there are markets for insurance and mental health care services where none existed before.1 Health Care Financing and Income Support 49 The emergence of insurance and markets in mental health care turned individuals into consumers and thrust providers into the role of suppliers, with many of the commercial connotations of those labels. In the 1950s and early 1960s severely ill patients were cared for in what the sociologist Erving Goffman labeled “total institutions,” which took pervasive control over all aspects of life. Outside institutional walls, less severely ill people sought counseling from a few public dispensaries or from office-based psychiatrists, for which they paid out of pocket. Today in the United States 86 percent of adults—and 80 percent of mentally ill adults—have some form of public or private insurance that confers varying degrees of protection against the high cost of care.2 Financing policies have been the principal driver of system change, as they have engineered the disintegration of the centralized mental health system. With its disintegration came the erosion of what we call mental health exceptionalism. Financing Mental Health Care, 1950–2000 The first health economist to focus on mental health care financing was Rashi Fein. In Economics of Mental Illness (1958) he furnished an estimate of at least $1.14 billion for nominal spending in 1956. Fein estimated that state governments accounted for the lion’s share of this funding. They were responsible for 59 percent of overall mental health care spending, while the federal government spent 25 percent. The remaining 16 percent came from other sources such as out-ofpocket payments and private insurance. Fein could not obtain data on private insurance . He did, however, estimate spending on private psychiatrists and private psychiatric hospitals on the basis of available information, and some of these costs may have been paid by private insurance. Table 4.1 provides a summary of the level and composition of mental health service spending over the last five decades. Using data collected from a wide range of public and private sources, the table reports spending in current dollars. Spending grew more than seventyfold, from $1.14 billion in 1956 to $85.4 billion in 2001, faster than overall health care spending, with all the excess growth taking place in the 1956–71 period. Even after taking account of economy-wide inflation , mental health care spending grew dramatically over this period. These changes occurred because of specific policy and market developments. First, Medicaid was established in 1965. Just six years later, in 1971, it already accounted for roughly 16 percent of all mental health spending. Medicaid contributed to a drastic reduction in states’ share of direct spending on mental health 50...


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