Prior to the 1960s, when federal funds for psychiatric care became available, the public psychiatric care system was almost completely run by the states, often in partnership with local counties or cities. Since then, the public psychiatric care system has become a hodgepodge of programs funded by myriad federal, state and local sources. The primary question that drives the system is not “what does the patient need?” but rather “what will federal programs pay for?”

Deinstitutionalization A Rocky Road to Nowhere

Deinstitutionalization, the name given to the policy of moving people with serious brain disorders out of large state institutions and then permanently closing part or all of those institutions, has been a major contributing factor to increased homelessness, incarceration and acts of violence.

Beginning in 1955 with the widespread introduction of the first, effective antipsychotic medication chlorpromazine, or Thorazine, the stage was set for moving patients out of hospital settings. The pace of deinstitutionalization accelerated significantly following the enactment of Medicaid and Medicare a decade later. While in state hospitals, patients were the fiscal responsibility of the states, but by discharging them, the states effectively shifted the majority of that responsibility to the federal government.

Medicaid Fuels Bad Policy

In 1965, the federal government specifically excluded Medicaid payments for patients in state psychiatric hospitals and other "institutions for the treatment of mental diseases," or IMDs, to accomplish two goals: 1) to foster deinstitutionalization and 2) to shift costs back to the states, which were viewed by the federal government as traditionally responsible for such care. States proceeded to transfer massive numbers of patients from state hospitals to nursing homes and the community where Medicaid reimbursement was available. By federal definition of looking at facilities housing as few as 16 patients, almost no facility was too small for the chopping block.

The pace of hospital closures and the shrinkage of the psychiatric bed population has accelerated, and too few options have been developed ("The Shortage of Public Hospital Beds for Mentally Ill Persons" (March 2008). State budget cuts to address fiscal shortages following the economic crisis of the late 2000s has only exacerbated the problem.

Psychiatric Patients Dumped into Nursing Homes and General Hospitals

As state psychiatric hospitals improved in quality in the 1970s and 1980s, it became increasingly common to discharge patients from relatively good hospitals with active rehabilitation programs and transinstitutionalize them to nursing homes, general hospitals or similar institutions with markedly inferior psychiatric care and no rehabilitation at all. States save state funds, but transinstitutionalized patients pay a substantial price for the substandard care.

By the mid-1980s, 23 percent of nursing home residents, or 348,313 out of 1,491,400 residents, had a mental disorder.

Costs in general hospitals are often $200 per day or more than the costs in public psychiatric hospitals. These additional costs are of little consequence to the states since federal Medicaid dollars are paying the majority of the bill; the states’ costs are lower and that is the limit of their concern. Unfortunately, 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 compromises the person’s ability to stabilize on medication.

Jails and Shelters Serve as Surrogate Hospitals

The woeful failure to provide appropriate treatment and ongoing follow-up care for patients discharged from hospitals has sent many individuals with the severest forms of mental illness spinning through an endless revolving door of hospital admissions and readmissions, jails and public shelters. At any given time there are more individuals with schizophrenia who are homeless and living on the streets or incarcerated in jails and prisons than there are in hospitals.

Approximately 200,000 individuals with schizophrenia or bipolar disorder are homeless, constituting one-third of the estimated 600,000 homeless population. Nearly 300,000 individuals with schizophrenia or bipolar disorder, or 16 percent of the total inmate population, are in jails and prisons ("More Mentally Ill Persons Are in Jails and Prisons Than Hospitals: A Survey of the States," Treatment Advocacy Center and National Sheriffs' Assn., May 2010). These inmates are primarily charged with misdemeanors, but some are charged with felonies precipitated by their psychotic thinking.

Today, fewer than 70,000 individuals with schizophrenia or manic-depressive illness are in state psychiatric hospitals receiving treatment for their disease.