Administration and Policy in Mental Health Vol. 18, No. 3, January 1991

MENTAL HEALTH ECONOMICS

NON-PROFIT PROVIDERS OF MENTAL HEALTH CARE: PRIVILEGES AND RESPONSIBILITIES

Richard G. Frank, Ph.D., and David S. Salkever, Ph.D.

Observers of the mental health services system have commented on trends towards "privatization" of mental health care delivery. Some have sounded alarms (Sharfstein, 1988) over these trends, while others have reserved judgment (Dorwart, 1989). An examination of the literature on the subject of privatization quickly reveals that much of the dis- comfort arises from the rapid growth of for-profit providers of inpatient psychiatric care (Bittner, 1985; Levinson, 1982; Sharfstein). One set of be- liefs is that for-profit providers of mental health care will offer fewer community services than do public or non-profit providers of mental health care. Community services include care for individ- uals unable to pay for care as well as provision of services that have not been traditional profit makers (e.g., partial care programs, hotlines, and educational programs).

Viewed in a broader context, public policy con- cerns with privatization question whether the sup- ply of community services can be maintained as the availability of publicly provided mental health care decreases. The amount of public inpatient psychiatric care has decreased noticeably during

This research was supported in part by grant #MH44407 from the NIMH. The authors are grateful to Chuanfa Guo for computing assistance.

the 1980s. The number of beds in public mental hospitals has dropped from roughly 275,000 in 1980 to 133,000 in 1988, a 52% reduction (AHA Hospital Statistics, Selected Years). The number of psychiatric beds in public general hospital psy- chiatric units has risen roughly 10% since 1980 to 8,700 beds in 1988.

The non-profit sector is often viewed as an alter- native to direct government provision of public services. The availability of care by private non- profit providers of mental health care has also grown over the past decade and should be viewed as part of the move to privatize. There was a 43 % increase in the number of beds in non-profit gen- eral hospital psychiatric units between 1980 and 1988. The number of non-profit specialty psychi- atric hospitals grew from 64 in 1977 to 125 in 1988. The number of beds in these facilities rose from 7,186 to 12,391. In addition, when local governments contract out for "private" mental health services roughly 57% of the contracts are with non-profit organizations compared to 10% with for-profit firms (Ferris & Grady, 1986). Thus there appears to be considerable opportunity for non-profit mental health providers to "fill in" for the shrinking number of public providers. A criti- cal issue for public policy is to determine whether non-profit providers offer sufficient benefits to their communities to justify the privileges be- stowed upon them.

195 �9 1991 Human Sciences Press, Inc.

196 Administration and Policy in Mental Health

PRIVILEGES AND RESPONSIBILITIES OF THE NON-PROFIT SECTOR

Non-profit providers of mental health care re- ceive privileges from society largely in the form of exemption from federal, state, and local taxes. State and local governments are paying closer at- tention to the community benefits provided by non-profit organizations than at any time in recent history (Friedman, 1990; Government Account- ing Office, 1990). Local governments in 12 states have withdrawn tax exempt status from non-profit hospitals, while some local governments have be- gun assessing user fees to non-profit organizations that are not, in their view, providing adequate levels of community services (Government Ac- counting Office, 1990). Communit ies in Utah, West Virginia, and Pennsylvania have challenged property tax exemptions based on the notion that qualifying for exemptions on the basis of being a charitable organization requires that hospitals pro- vide free care to the indigent. Recent state su- preme court decisions in Utah and Vermont have acknowledged the responsibility of hospitals to at least make free care available.1 The provision of community services by non-profit mental health providers is especially critical since 1) the medi- cally indigent are overrepresented among the mentally ill (Frank, 1989); 2) the traditional pro- viders of last resort are disappearing; and 3) men- tal health care is viewed by many as a community service (Government Accounting Office, 1990).

Communi ty mental health services might be de- fined to include the provision of free care to the indigent, the provision of services where payments do not usually fully cover costs such as emergency care or consultation and education services, tar- geted clinic activities aimed at high risk segments of the community (e.g., partial hospital care or sexual assault clinics), clinical research and train- ing of mental health professionals.

Data on the level of indigent care provided by various types of hospitals are not commonly avail- able. In order to assess the levels of indigent psy- chiatric care provided by hospitals of various own- ership types we examined data from the 1984 National Hospital Discharge Survey (HDS). The survey is based on a nationally representative probability sample of discharges. We use dis- charges classified in the self-pay or charity payor source categories to represent indigent cases or

~The Utah case went further by stripping tax ex- empt status from hospitals not providing free care.

uncompensated care. Studies of audited discharge abstracts in the states of Maryland and Massa- chusetts have shown that the vast majority (90% or more) of the self-pay cases result in uncompen- sated care. 2 The data from the survey show that 2.39% of psychiatric discharges from for-profit hospitals were in the uncompensated care catego- ries compared to 6.1% for church sponsored non- profit hospitals, 7.24% for secular non-profit facil- ities and 15.0% of public hospitals.

Hospital financial statements from non-profit psychiatric hospitals in Maryland suggest that on average uncompensated care amounted to 5% of gross revenues. Discharge abstract data from gen- eral hospitals in Maryland reveal that in 1988, 18% of the psychiatric discharges from general hospitals in the state were uninsured. This resulted in uninsured charges amounting to 17% of total psychiatric charges. This is roughly double the overall level of uncompensated care in Maryland hospitals (which was 8%).

Communi ty services also consist of other sorts of activities that localities may value. In assessing the benefits generated by non-profit organizations in the mental health sector it is necessary to examine patterns of community services supply by differing ownership classes of providers. Among the ser- vices that may often incur financial losses are emergency room services, consultation and educa- tion services, outpatient departments and partial hospital programs. Previous research by Schle- singer and Dorwart (1984) reported that non- profit psychiatric hospitals were far more likely to offer emergency telephone services and suicide prevention programs than for-profit psychiatric hospitals. Non-profits Were also slightly more likely to offer such services than public psychiatric facilities. More recent information displays similar patterns.

Data for 1988 from the American Hospital As- sociation suggest that availability of emergency services among psychiatric hospitals does not dif- fer substantially by ownership (averaging about 55 % of hospitals). In contrast there is considerable diversity in the availability of psychiatric emer- gency services among general hospitals. Roughly 40 % of non-profit general hospitals offer psychiat-

2A 1986 study undertaken by the Maryland Health Services Cost Review Commission found that 97% of charges to patient categorized as self pay were not paid. The relevant tables are avail- able from the authors.

Richard G. Frank and David S. Salkever 197

ric emergency services compared to 19% of for- profit and 22% of public general hospitals.

Consultation and education services appear to be offered by comparable portions of each hospital ownership class (approximately 85%). However, as in the case of emergency services, non-profit general hospitals are substantially more likely to provide consultation and education services than are for-profit or public general hospitals (35% versus 19% and 16% respectively). In the case of outpatient services, N I M H data show that in 1986 non-profit psychiatric hospitals provided 75% of all outpatient episodes supplied by private psychi- atric hospitals. Non-profit facilities contain 26 % of all psychiatric beds. For-profit providers treat about 15% of all outpatient cases and makeup 76% of all private psychiatric hospitals (National Institute of Mental Health, 1989). The majority of partial hospital services are accounted for by pub- lic psychiatric hospitals (51%). Non-profit hospi- tals treat 34% of the partial hospital cases.

THE COSTS OF COMMUNITY SERVICES BY NON-PROFITS

Citizens recognize the potential contributions of non-profit providers by granting non-profit status to these organizations. Each level of government forgoes potential revenues from the granting of such exemptions. The federal government allows donors to deduct contributions to hospitals and other charitable organizations, non-profits do not pay taxes on net revenues and bond holders deduct interest from tax exempt bonds which are often used to finance debt in non-profit firms (Fried- man, 1990; Government Accounting Office, 1990). In total this may amount to about 27o of hospital expenses. State governments forego less revenue from exemption of donations and interest on tax exempt bonds than does the federal govern- ment because individual tax rates are substantially lower. The Federation of American Hospitals esti- mate this to be approximately 1% of total hospital expenses.

Property taxes are also a significant component of foregone public revenues. Friedman and col- leagues (1990) estimate that roughly 1% of total hospital expenses would be paid in property taxes if hospitals currently exempt from taxes, lost that privilege, To illustrate the magnitude of the var- ious tax exemptions we can use expenditure data for non-profit specialty psychiatric hospitals in 1986 reported by N I M H (1989). Total expendi-

tures by non-profit psychiatric hospitals amounted to $928 million. We assume that exemption from federal taxes represents a 2 % of expenditure sub- sidy, with state and local government exemptions each worth 1% of expenditures. Applying a figure of 4 % to total expenditures it is estimated that the foregone revenues from non-profit psychiatric hos- pitals were $37 million in 1986.

FUTURE POLICY DIRECTIONS AND THE ROLE OF NON-PROFITS

While valid questions have been raised about the performance of individual non-profit providers in supplying nonremunerative services to the com- munity, it is clear that on average non-profit mental health providers have played a key rote in filling in as publicly provided services have been cut back and/or "privatized." The effects of the current tax exemptions and of proposed changes in these ex- emptions on the willingness of non-profits to con- tinue playing this role have yet to be evaluated rigorously. As public budgets remain tight, pro- posals to implement strict qualification standards for tax-exempt status must be approached cau- tiously. Even though they will probably have little involvement in the ongoing policy discussions, the consequences of imposing excessively strict stan- dards will fall largely on the lower-income seg- ments of the mentally ill population.

REFERENCES

Bittner, T.E. (1985). The industrialization of American psychiatry. American Journal of Psychia- try, 142, 149-154.

Dorwart, R.A. (1989). The privatization of men- tal health care and directions for mental health services research. In C. Taube, D. Mechanic, & A. Hohmann (Eds.), The future of mental health services research. Washington, DC: United States Government Printing Office.

Ferris, J . , & Grady, E. (1986). Contracting out: For what? With whom? Public Administration Re- view, July/August , 322-343.

Frank, R.G. (1989). The medically indigent men- tally ill: Approaches to financing. Hospital and Community Psychiatry, 40, 9-13.

Friedman, B. (1990). Tax exemption, uncompen- sated care and community benefits of non-profit hospitals. In R. Scheffier, & L. Rossiter (Eds.), Advances in health economics and health services re- search. Greenwich, CT: JAI Press.

198 Administration and Policy in Mental Health

Government Accounting Office. (1990). Non-profit hospitals: Better standards needed for tax exemption (HRD-90-84). Washington, DC: Author.

Levenson, A.I. (1982). The growth of investor- owned psychiatric hospitals. American Journal of Psychiatry, 139, 902-907.

National Institute of Mental Health. (1989). Pri- vate psychiatric hospitals, United States

1983-1984. Statistical Note, �9 Schlesinger, M., & Dorwart, R. (1984). Owner-

ship and mental health services: A reappraisal of the shift towards privately owned facilities. New England Journal of Medicine, 311, 959-965.

Sharfstein, S.S. (1988). Privatization: Economic opportunity and public health. American Journal of Psychiatry, 145, 611-612.