Psychiatric Hospitals Tap Into Profits : Yet Congressional Cost-Cutting Moves Could Pose Problems
When psychiatrist Mark S. Gold began working at Fair Oaks Hospital here in 1977, he encountered a scene as chilling as Dante’s “Inferno”: Two dozen patients he thought were waiting for lunch were actually lined up for shock treatment.
“I got sick to my stomach,” Gold recalled recently. “These patients received the (shock) treatment and spent the rest of the day sitting around.”
A decade ago, hospital and New Jersey health officials say, those suffering from mental disorders or alcoholism received little innovative treatment at Fair Oaks, whose poor reputation at the time was reflected by the fact that only about 60 of its 100 hospital beds were occupied.
But in the years since 1977, when it was acquired by a company that is now a subsidiary of Los Angeles-based National Medical Enterprises, Fair Oaks has become a leading psychiatric hospital: There are now 10 people on the waiting list for each of its 144 beds, it has a $500,000 drug-testing laboratory as sophisticated as labs used by many law enforcement agencies, and Gold and his colleagues appear in professional journals and on TV talk shows almost as frequently as they make rounds at the 10-acre facility.
Revenue Surging
Once stepchildren of medicine, for-profit psychiatric hospitals such as Fair Oaks are now among the fastest-growing and most profitable segments of the nation’s $400-billion-a-year health-care industry.
Investor-owned chains such as NME, Nashville-based Hospital Corp. of America, Charter Medical Corp. of Macon, Ga., and San Francisco-based Community Psychiatric Centers now operate 50% of the 215 hospitals that are members of the National Assn. of Private Psychiatric Hospitals, compared to 25% in 1980, according to the association. Likewise, the industry’s annual revenue is expected to more than double to $7.2 billion by 1988 from last year’s $3 billion, says Hambrecht & Quist, a San Francisco investment house.
Largely unaffected by federal reforms imposed on other health-care providers to control escalating insurance reimbursement costs, and unburdened by high capital expenses, psychiatric hospitals have used the promise of improved treatment techniques to aggressively market their services. Many companies have smartly decorated hospitals that seem more akin to hotels than the dismal fictional psychiatric institutions depicted in, for example, the 1948 movie “The Snake Pit.” And they use everything from toll-free hotlines to television commercials to reach consumers.
The National Institute of Mental Health (NIMH) released preliminary results of a three-year study last year concluding that nearly one of every five adult Americans suffers from mental illness, drug abuse or alcoholism serious enough to require professional treatment. Of those affected, the report said, only 20% are seeking help.
Major Obstacle Looms
But a major obstacle looms as the industry tries to reach that vast market.
The NIMH is scheduled to submit a year-end report to Congress that lawmakers will review to determine whether, and how, to extend to psychiatric hospitals the federal Medicare cost-containment measures that now apply to most hospitals treating physical ailments and injuries.
Although Medicare patients now make up less than 10% of those treated by free-standing psychiatric facilities and are covered for fewer than 180 days of psychiatric care in a lifetime, industry officials fear that private insurers would adopt any cost ceilings that Congress may impose.
What’s more, some observers predict that any congressional examination of cost containment in the psychiatric industry could lead to a broader airing of such potentially embarrassing issues as profits and quality of care.
“We all are concerned about it; it’s going to be a tough battle,” said John Wolfe, president and chief executive of Psychiatric Services, a subsidiary of Beverly Hills-based American Medical International. But Wolfe is optimistic that lawmakers “can structure a prospective system that is a more rational one than that which applies to the rest of the health-care system.”
Any cutbacks are likely to compound the woes of many Americans whose insurance policies have never been especially generous for psychiatric care, experts say.
Limited Coverage
“If the government cuts back, the public generally tends to turn to their insurers and say, ‘Make up the difference,’ ” said Jeffrey Miles, president of the Los Angeles Assn. of Health Underwriters. But “policies for psychiatric illness typically give $10,000 to $25,000 total lifetime reimbursement--much less than the $1-million lifetime reimbursement for all other medical conditions. And most (psychiatric) policies I’ve seen are not getting better; they are getting worse” in coverage, Miles said.
That trend could undermine advances made in recent years.
In 1959, for example, the 671,640 psychiatric beds operated by federal, state and county governments made up more than 95% of all beds, while non-government, or proprietary, facilities accounted for only 6,736, according to the American Hospital Assn. Although the association has not compiled recent figures, Hambrecht & Quist estimates that by 1984 the number of government-owned beds had dropped to 156,699, while psychiatric beds at proprietary hospitals nearly tripled to 17,699.
Meanwhile, the development of tranquilizers and anti-depressant drugs to treat mental illnesses has drastically shortened the length of stay in psychiatric hospitals. The rapid expansion of the $1.9-billion U.S. psychotherapeutic drug market--now second only to the cardiovascular drug market in size--has made it possible for patients to seek treatment for brief periods in small mental health facilities near their jobs and families.
Stigma Decreased
As a result, the stigma associated with seeking treatment has decreased. And with hospitals gaining more expertise treating traditional mental disorders, they have begun extending their reach by specializing in substance-abuse treatment, eating disorders, adolescent depression and other programs that have fueled the industry’s growth.
For the third quarter ended Feb. 28, revenue for NME’s Psychiatric Group, which consists of 34 facilities in 17 states, rose to $62.5 million, up 20% from the same period a year ago. Profits for the quarter climbed 16% to $11 million.
Community Psychiatric Centers and Charter Medical have set an even more stunning financial pace.
In the fiscal year ended Sept. 30, 1984, Charter posted net income of $35.2 million on revenue of $425 million, and its earnings have increased 25% or more in every quarter but two since 1980. Community’s quarterly earnings have increased 20% or better since it went public in 1969. In fiscal 1984, the company posted net income of $36 million on revenue of $173.6 million.
In its quest to treat those with mental disorders, however, the for-profit psychiatric industry has been attacked for shunning poor patients, conducting minimal research, draining off the more lucrative services--such as alcohol and depression counseling--that can help defray the costs of charitable services and discharging patients when their insurance money runs out.
A study published last year in the New England Journal of Medicine, for instance, concluded that proprietary psychiatric hospitals “are less likely to admit patients who cannot fully pay for care than are government-owned institutions.” It also said that “there is no evidence . . . the profit motive leads to more efficient delivery of mental health care” and that “proprietary facilities are notably less likely to supply services for which there are broad community benefits but inadequate reimbursement.”
Concern Over Attitude
Although one of the study’s authors, Mark Schlesinger of Harvard University’s Center for Health Policy and Management, points out that “private, nonprofit psychiatric hospitals have not been paragons of delivering free care to people, either,” he is not alone in his concern about the industry’s unwillingness to serve the less fortunate.
The Health Systems Agency of Northern Virginia has been pressuring an NME-owned psychiatric facility, Springwood in Leesburg, Va., to serve poor and elderly patients.
“They only cater to a very affluent clientele,” said Dean Montgomery, director of the regional agency, which was set up to eliminate unneeded health care services.
“He’s wrong,” countered Don McArthur, administrator of Springwood. “We do take Medicare patients, (but) you have to keep in mind that it’s a suburban Northern Virginia population that we serve”--an area that has mostly affluent households.
Nevertheless, the agency has rebuffed a Springwood request to expand to 48 from 30 hospital beds until the facility treats more Medicare patients. “They have not lived up to their duty to serve those patients,” Montgomery said. “They’ve been dragging their feet.”
The investor-owned companies counter that they are more effective than nonprofit hospitals because administration is centralized. They also say they can amass specialized staffs to serve a number of hospitals and make bulk purchases of equipment and supplies. They contend that they do their part to serve the poor.
“Our policy is to provide free and part-pay care if the doctor is willing to do that in individual cases,” said Robert Green, president of Community Psychiatric Centers.
Fulfilling a Need
Fair Oak’s Gold adds: “The needs of investors and the needs of people may not be the same. I understand that NME is in business, but the quid pro quo is that our beds are full . . . and we are fulfilling a need in this community.”
Despite the criticism, psychiatric hospitals have, because of their cost advantages, become the darlings of Wall Street investors.
It costs about $60,000 per bed to build a psychiatric hospital, compared to more than $120,000 to build a general hospital, according to Robert Thomas, executive director of the National Assn. of Private Psychiatric Hospitals. And, while the federal government utilizes its prospective payment system to impose Medicare reimbursement ceilings on specific physical illnesses, psychiatric hospitals are free to charge whatever the traffic can bear--from a low of about $300 per patient day at Community Psychiatric Centers to nearly $800 a day at Fair Oaks.
That’s because Medicare and most private insurance programs usually limit a patient’s length of stay or total lifetime reimbursement but not the cost of specific medical procedures.
Can’t Predict Costs
“The psychiatric hospital industry is an attractive sub-segment of the hospital industry for investors,” a Salomon Bros. investment report advised last year. “Causes of mental illness are difficult to determine, and the diagnoses are often merely descriptions of the symptoms. . . . Thus, even when a psychiatric disorder is properly identified, there is no accurate means to predict the costs of care . . . (and) reported diagnoses may reflect predominant financial incentives.”
That last contention was perhaps best illustrated recently in New Jersey, where admissions for psychoses increased to 80% from 58% of all psychiatric admissions between 1978 and 1982, when the state enacted a reimbursement system that paid substantially more for psychoses than for other illnesses, said Edna Kamis-Gould, chief of the bureau of research and evaluation at the New Jersey Division of Mental Health and Hospitals.
The percentage dropped to previous levels only after “we stepped up our monitoring to make them (hospitals) stop doing that,” Kamis-Gould said.
Patients, too, can be affected by diagnostic imprecision.
After being variously diagnosed as a schizophrenic and a manic depressive at three private psychiatric hospitals and a state-run mental institution, Gail, a 31-year-old former schoolteacher, came to Fair Oaks, where doctors determined that she was suffering from a physical disorder that made her exhibit seizures.
When Gail arrived at Fair Oaks, she was so self-destructive that the former New York resident had to be restrained and have a full-time nurse, according to her doctor, Robert K. Davies, medical director at Fair Oaks.
Hit Rock Bottom
“I felt like everything had hit rock bottom,” Gail recalled during an interview at Fair Oaks. “I could only watch TV. My house was dark. I turned out all the lights and only burned candles for light. . . . I don’t remember much about my life then.”
She says she feels better now. Drugs and therapy have helped, she and her doctors agree, but so, too, have some unusual techniques.
Doctors determined that Gail’s seeming affinity for darkness was apparently not a mental aberration but stemmed from a physical sensitivity to light. She now wears sun glasses, even indoors.
To combat rising costs and the conflicting diagnoses that often contribute to cost increases, Gerard DeWolf, a claims analyst with the Los Angeles office of William M. Mercer Inc., a benefits consulting firm, said insurers are establishing per diem allowances for psychiatric hospital care, setting up treatment review panels and pressuring patients to get second opinions.
Yet experts such as Alan Levenson, chairman of the University of Arizona’s Department of Psychiatry and president-elect of the American College of Psychiatry, feel that, despite the demands to reduce costs, the investor-owned chains can adapt.
“I think right now there’s a lot of expectation that the multi-hospital investor-owned chains will probably do quite well adapting to any changes,” Levenson said. “Their size and financial strength gives them the ability. . . . They also have the advantage of watching the experience of acute care hospitals.”
