As many of you already know, there are radical changes taking
place in the mental health field in the US. This article provides some
insite into these changes - Brian.
More States Turn Over Mental-Health Care to the Private Sector
Government Business Helps Some Private Companies Grow
ATLANTA -- When officials of Magellan Health Services Inc. meet with
potential clients, they often show a poignant video of the company's National
Mentor division in action. As Louis Armstrong croons "What a Wonderful
World," scenes flash by of retarded adults and children reading poetry,
being pushed on swings and making dinner, living happily in private homes.
Just four years ago, Magellan's predecessor company, squeezed by corporate
cost-cutting of health benefits, considered throwing in the towel on its
psychiatric business. But now, with surging revenue from programs like
National Mentor Inc., the mental-health business looks lucrative again.
Atlanta-based Magellan, which owns nearly 100 psychiatric hospitals, is
seeking to buy more. Meanwhile, it has 150 psychiatric outpatient facilities
across the country and is scouting new locations.
What accounts for the buildup? Government cutbacks.
Private vs. Public
Much as businesses began doing a decade ago, government agencies are
trying to keep a lid on psychiatric-care costs. Their solution: Turn to
private companies to replace expensive institutional care or fee-for-service
treatment with budget-minded programs like Mentor, which moves retarded
people from big facilities or nursing homes into private homes. The result
is a sweeping -- and controversial -- privatization of programs ranging
from Medicaid to juvenile justice.
While the impetus is economic, the impact is even more fundamental.
For several generations, mental-health treatment, particularly of lower-income
patients, has largely been a governmental responsibility. Now the care
is shifting toward businesses that, while paid with tax dollars, may lack
the level of accountability found in public agencies.
The transformation is so new that no one is certain how companies or
their patients will fare. The companies pledge to provide better care at
lower cost, but some mental-health advocates believe bottom-line pressures
will translate into skimpier treatment.
'Revolutionary Change' Government officials say they have no choice.
The costs of Medicaid, the state-administered programs that provide health
care for the poor, have doubled since the late 1980s to some $150 billion
a year today, according to the federal Health Care Financing Administration.
Government-funded mental-health costs have climbed in tandem.
"This is a revolutionary change, and one part of revolutions is
you don't go back," says Bruce M. Fried, director of the office of
managed care for the HCFA. The change has been under way for several years.
At least 15 states have waivers from the federal government allowing them
to enroll their Medicaid population in privately owned managed-care programs.
A New Clientele
The impact on mental-health care is especially significant. Private,
standalone psychiatric hospitals had been barred from admitting Medicaid
patients between the ages of 18 and 65 -- a throwback to the old policy
of "deinstitutionalizing" patients and releasing them to community
programs. Now, under the state waivers, many of these exclusions are being
Thus, as revenue from the bulimic teenagers, depressed middle managers
and alcoholic executives -- those traditionally covered by private insurance
-- continues to shrink, private companies are gearing up to treat the unemployed
drug addicts, crack babies and other chronically ill people who have historically
depended on government funds for psychiatric care.
Magellan's Mentor division has doubled its revenue to about $100 million
a year in the two years Magellan has owned it. Magellan's Green Spring
Health Services managed-care unit has picked up major Medicaid contracts
in two states since last summer. "We're defining the industry,"
says Mac Crawford, Magellan's chairman and chief executive.
Magellan isn't alone. When Tennessee sought firms to manage mental-health
benefits for the state's Medicaid and uninsured populations, 21 companies
responded. Columbia/HCA Healthcare Corp., the country's largest operator
of for-profit hospitals, has begun actively marketing its mental-health
services, in large part because of public-sector opportunities. Columbia,
in fact, is Green Spring's joint-venture partner in TennCare, the state's
But Magellan, with its $1.3 billion in sales, is the country's largest
mental-health provider and is becoming the most diversified and aggressive.
Indeed, Magellan officials say they expect the public sector to represent
as much as 40% of its business in the next five years, up from about 10%
Magellan is the new incarnation of what used to be Charter Medical
Corp., a company created in 1969 by William Fickling Jr., a former college
basketball star. Mr. Fickling launched Charter with a handful of nursing
homes and built it into a big psychiatric-hospital company through the
1970s and 1980s -- a period when corporations became increasingly sensitive
to workers' psychological woes. By the late 1980s, Charter owned more than
80 psychiatric hospitals, brimming with patients who often stayed as long
as a month. Employers and insurance companies frequently footed the entire
By the end of the 1980s, though, the tide was turning. Employers and
insurers cracked down on reimbursement rates and demanded shorter hospital
stays. The result: Charter Medical saw revenue from middle-class customers
plummet. A Chapter 11 bankruptcy filing followed.
In 1990, Charter's board recruited Mr. Crawford, who was managing some
of Mr. Fickling's personal investments, to restructure the company and
guide it out of bankruptcy. In 1993, a year after the company emerged,
Mr. Crawford took over at Charter's helm. Since then, he has been revamping
the company. He closed a few unprofitable hospitals, bought others in better
locations and opened new outpatient clinics.
In late 1995, he bought a majority interest in Green Spring and changed
Charter's name to Magellan. The move into managed care brought in millions
of corporate employees whose mental health Magellan now manages for a fee.
And Green Spring is Magellan's entree into the Medicaid business.
When the investing couple of Richard Rainwater and Darla Moore bought
four million new shares, or 12%, of Magellan last year (along with options
for an additional 6%) they highlighted Magellan's "increasing focus
on the public sector." Similarly, James Easterlin of Legg Mason Funds
in Baltimore, which owns a million shares of Magellan, calls the firm's
government opportunities "a big piece of the appeal."
One of Magellan's biggest public-sector successes is its National Mentor
division, whose client base grew 23% last year to 2,290. At a cost to taxpayers
of around $150 a day, about half of what some state-operated treatment
centers cost, Mentor places mentally impaired people into single-family
homes. Pretax profit is about 10%, says Mr. Crawford. Much of the money
compensates the caretaking families, and most of the rest pays for the
patient's medication and support services, such as 24-hour telephone counseling.
"All my wife and I have to do is take care of the child -- they
take care of the financial issues, the biological-family issues and the
government issues," says Richard Joyce, who took in a 10-year-old
boy in the Chicago area. The child has the mental capacity of a three-month-old.
The 10% Fee
Other privatization opportunities, such as TennCare, are more complex.
Last summer, TennCare contracted with two joint ventures -- including the
Green Spring/Columbia partnership -- to manage about $300 million in mental-health
benefits for more than a million people formerly uninsured or covered under
Medicaid. But there now is less money available, in part because the joint-venture
companies take a 10% management fee off the top.
Ben Dishman, head of Tennessee's Department of Mental Health and Mental
Retardation, expects managed-care companies to lose money in the first
stages of the TennCare contract "until they get their management techniques
down." But companies are eager to gain the experience. "This
is a new business," Mr. Dishman says. "If they can make this
happen, that positions them to get more business." This month, Green
Spring, in a joint venture with CMG Health Inc. of Owings Mills, Md., began
managing mental-health benefits of more than 400,000 Medicaid enrollees
and uninsured residents in Maryland.
Meanwhile, mental-health advocates are worried that savings could come
at the expense of seriously ill people. Jeanne Richardson, executive director
of Memphis's Midtown Mental Health Center, says she is trying to serve
1,600 TennCare clients this year on an $800,000 budget, compared with $3
million last year to treat the same number of people in outpatient services.
The clinic, whose TennCare budget is now in the hands of the managed-care
companies, has turned people away, eliminated group therapy and cut out
specialized counseling for problems like marital difficulties and sexual
abuse. Most psychotic patients are only getting three visits to a psychiatrist
a year -- far less than they need, she says.
Says Ms. Richardson: "There is no amount of ... retooling or re-engineering
that would allow any mental-health organizations to treat the mentally
ill with the current amounts being spent." Still, such cuts may become
more common, due both to tight budgets and a proliferation of facilities
now offering mental-health care. Community clinics "are going through
the same pressure the hospital industry has gone through over the past
10 years," says Henry Harbin, Green Spring's chief executive.
Critics also question who will monitor the companies' quality of care.
Magellan says its Mentor program dispatches a supervisor to each home at
least once a week. Some states, such as Tennessee and Connecticut, send
an inspector unannounced to each home -- but as rarely as one visit a year.
The government is "contracting out the dollars -- and the responsibility,"
says Laurie Flynn of the National Alliance for the Mentally Ill.
Not in Our Back Yard
And there are other concerns. Last month, community backlash forced
Magellan to close a Jacksonville, Fla., facility which had been converted
from a private psychiatric hospital into a center for young female offenders.
Local residents lobbied for more than a year to have the women removed
after the company won a three-year, $5.5 million state contract in 1995.
The patients have been moved to other company facilities in Florida.
Nonetheless, Magellan regards privatization of juvenile-justice programs
as one of its biggest opportunities. It is involved in 10 programs in Texas,
Florida, Georgia, Maryland and Utah. Typical is its venture at its Manatee
Palms facility near Tampa, Fla. A former private psychiatric center, the
one-story, cement-block building now houses 75 teenage boys, a third of
whom are juvenile sex offenders. The others are juvenile delinquents with
mental-health problems. The recidivism for the sex offenders is about 14%
over two years, says Ray Heckerman, Manatee Palms's chief executive, while
the recidivism for the other youths is about 17% -- about half the usual
"That is awfully impressive," says Don Lewis, an administrator
with the Florida Department of Juvenile Justice. "We've been so pleased
with the sex-offender program, we've expanded it three times" at Manatee
Mr. Crawford believes Magellan's opportunities increasingly will come
from managing government programs. It is negotiating a five-year, $35 million-a-year
contract with Hamilton County, Ohio, in the Cincinnati area, to coordinate
different sources of government funds and tailor care for underprivileged
children. "If we set this up right, we can serve more people and provide
better accessibility to services," says Don Thomas, director of Hamilton
County's Department of Human Services. "Maybe we can provide a rebate
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