Psychiatric Hospitals

SIC 8063

Companies in this industry

Industry report:

This industry consists of establishments primarily engaged in medical services for the mentally ill. Hospital establishments primarily engaged in providing health care for the mentally retarded are classified in SIC 8051: Skilled Nursing Care Facilities.

Industry Snapshot

Psychiatric hospitals fall into one of two categories: nonprofit or for-profit. Nonprofit entities include government-administered facilities and charitable institutions. About one-half of the nation's psychiatric hospitals are either nonprofit or government entities. In keeping with this configuration, the standards and revenues of the industry are largely shaped by government legislation.

Psychiatric hospitals are primarily inpatient, acute care units. A growing public awareness of mental disorders between 1970 and 1992 led to a significant increase in the number of these establishments and in the range of services they provided. According to the U.S. Census Bureau, the total number of psychiatric hospitals in the United States had peaked by 1992, with 919 establishments in operation, for an increase of nearly 17 percent over the 1987 figure. Between 1984 and 1991, individual hospital admissions rose 27 percent until the number of psychiatric hospital beds reached approximately 121,000 in the United States, according to the American Hospital Association.

The trend toward deinstitutionalization took over in the late 1990s and early years of the first decade of the 2000s, drastically reducing the number of state hospital beds for persons with severe mental illnesses and greatly changing the mental health services system. Excluding government-owned facilities, the number of psychiatric hospitals dropped from 433 in 1995 to 315 in 1999. The number of beds shrank from 43,497 in 1995 to 29,937 in 1999. As nursing homes assumed a larger role in the delivery of mental health services, controversy arose as to the appropriateness of the mentally ill living in and seeking treatment in nursing homes. The situation worsened for the mentally ill during the recession in 2002 and 2003, when many mental health programs were targeted for cuts nationwide. Private insurers were not filling the gap left by government programs, with one study noting that the amount of resources devoted to psychiatric care among private insurers had dropped 54 percent in the 10-year period ending in 1998. Due to these reasons, several state mental hospitals closed and private hospitals filed for bankruptcy protection in the middle of the first decade of the 2000s. Community mental health centers, a less costly alternative to inpatient psychiatric care, were overrun, and more hospital emergency rooms began taking on the care of patients with no other alternatives. When a psychiatric patient enters an emergency room, often uninsured and unable to pay out-of-pocket costs, he or she must be held until the hospital can find a bed in a psychiatric facility, taking hours or even days. As a result, many hospitals and universities began to expand their mental health facilities.

In 2009 there were 996 psychiatric hospitals and 495 mental hospitals in the United States, with posted revenues of nearly $6.9 billion. On average, individual psychiatric or mental hospitals reported estimated revenues of $11.3 million. According to the American Hospital Association, the industry would continue to grow through the 2010s because "one in four Americans experiences a mental illness or substance abuse disorder each year, and the majority also has a comorbid physical health condition."

Background and Development

Historical Evolution.
The first psychiatric hospital founded in the United States was the Eastern Lunatic Asylum in Williamsburg, Virginia, in 1772. It was around this time that Dr. Benjamin Rush had introduced a medical and humanistic approach to mental illness in the United States. However, mental illness was regarded, as it had been for centuries, as the result of physiological disorders. Connecting neurotic or hysterical behaviors with the mind did not develop until the late nineteenth century, with the origin of psychoanalysis.

Psychoanalysis altered the patient treatment at psychiatric hospitals as the psychoanalytical methods better explained diseases and offered more cures. However, psychoanalysis programs took years for patients to complete and were not suitable for most hospital settings. Eventually, psychoanalysis began to take place mostly in doctors' offices and clinics.

The 1920s marked significant change for psychiatric hospitals in the United States as a result of developments in psychiatric medicine. The connections between bacterial infection and brain functions were identified. Moreover, techniques for treating neurosis symptoms and deep-seated psychoses were also developed. In 1938 a neuropsychiatrist in Italy began using electronic shocks for the treatment of many severe mental disorders. Previous techniques had used toxic chemicals, which often produced dangerous side effects. Shock treatment soon became common at psychiatric hospitals in the United States.

Psychosurgery became a popular technique for altering behavior in the 1930s. The first lobotomy was performed in 1935, but public opinion was against the use of lobotomies because results were irreversible and were generally worse than the original illnesses. In response to public opinion, and with the development of more medications to treat severe cases, the number of lobotomies performed at psychiatric hospitals in the United States started to drop at the end of the 1940s.

In the 1950s, psychiatric hospitals began to use stimulants, tranquilizers, and vitamin therapies to treat patients. The number of patients confined to hospitals dropped considerably, because these therapies allowed patients to control their disorders on an outpatient basis or through services provided at psychiatrists' offices and clinics.

After 1970, the use of psychotherapy grew substantially, which shifted outpatient care to more group-oriented psychotherapy programs, either with family or other individuals. Psychiatric hospital care moved from emphasizing a cure to helping patients cope with their mental illnesses and disorders. Drug therapy augmented psychotherapy as a standard means for dealing with the majority of mental illnesses and disorders. Along with psychotherapy, drug treatment programs played a major role in the overall services offered by psychiatric hospitals.

Modern Services.
By the late 1900s, psychiatric hospitals in the United States expanded services and offered a variety of inpatient and outpatient services. The nature of mental illnesses and treatment dictated that inpatient care at psychiatric hospitals be linked to routine outpatient treatments, which typically continued after the patient's release from inpatient care. Follow-up treatment habitually involved psychosocial services in addition to medical treatment. More than 50 percent of psychiatric hospitals offered outpatient services. In addition to psychotherapy conducted as part of patient treatment, other therapy programs were incorporated into the services provided at psychiatric hospitals after 1970.

Substance abuse treatment was the most prevalent of outpatient services offered at psychiatric hospitals or dependency outpatient clinics, with over 40 percent of all psychiatric hospitals having such clinics. In addition, by the 1990s some 67 percent of psychiatric hospitals in the United States offered occupational therapy to help patients maintain daily living and work skills. Nearly 90 percent of psychiatric hospitals used recreational therapy as an integral part of treatment, and physical therapy and speech therapy were both employed in over 25 percent of psychiatric hospitals. In contrast to other types of hospitals, psychiatric hospitals do not perform many surgeries. For example, the peak facility year of 1992, psychiatric hospitals performed fewer than 10,000 surgeries.

Some industry growth was attributed to increases in patient insurance coverage for mental health care and came as a result of changing social attitudes during the 1980s when the image of mental health care lost much of its stigma. Demand for many services increased, and insurance companies expanded coverage of these services in response to public pressure. Consequently, many people who had previously avoided psychiatric treatment for financial reasons sought to obtain assistance. Between 1985 and 1990, the number of insurance providers for mental health care increased 500 percent, a trend that was projected to continue into the twenty-first century.

Psychiatric hospitals in the United States also developed comprehensive health promotion services. In the 1990s, more than 62 percent of psychiatric hospitals offered patient education services. Outside of the hospital establishments, 35 percent of psychiatric hospitals were engaged in community health promotion, and an additional 37 percent in work-site health promotion.

Key among the expanded service roster developed by psychiatric hospitals were programs that addressed the psychiatric and psychological problems of children and adolescents. In 1986 more than 20 percent of the patients in psychiatric hospitals were under 18 years old, and by the 1990s, more than 70 percent of psychiatric hospitals offered programs specially designed for this age group. Such programs emphasized outpatient care in an effort to encourage teens to seek treatment without the fear of inpatient hospitalization.

Modern psychiatric hospitals implemented specialized services for geriatric patients as well. In the 1990s, nearly 20 percent of psychiatric hospitals in the United States had comprehensive geriatric psychiatric assessment facilities. More than 12 percent had Alzheimer's diagnostic programs and 11 percent offered geriatric acute care units. Psychiatric hospitals met the needs of the aging population with adult day care programs and geriatric clinics.

Since the discovery of the AIDS virus in the mid-1980s, psychiatric hospitals have sought to meet the needs of the growing number of AIDS patients with special psychiatric ailments. By 1992 nearly 13 percent of psychiatric hospitals in the United States America offered special inpatient services for AIDS patients.

Industry Setback from Fraud.
In the early 1990s eight insurance companies sued National Medical Enterprises Inc. (NME, which was renamed Tenet Health Care in 1995) for providing unnecessary hospitalization and costly treatments. In addition, the company was accused of admitting patients based on health care coverage and not genuine need. Over 130 lawsuits were filed against NME by patients. In 1994 the company paid almost $375 million in fines to the Justice Department for violations. As a result of this case, similar reports surfaced concerning other private psychiatric hospitals. Some hospitals allegedly sought to acquire new patients by paying police, student counselors, and probation officers for referrals. Other accusations maintained that certain hospitals altered patient fees to collect inflated insurance reimbursements. Government investigations ensued. Some of the charges were adjudged to be true, and the resultant negative publicity affected hospitals that were not involved in the scandals. According to Employee Benefit Plan Review, other private hospitals suffered from drops in occupancy rates and diminished stock prices as a result of the scandal.

The Citizens Commission on Human Rights accused the industry of collecting $600,000 to $900,000 a year on nonexistent or bogus treatments. Additional charges alleged that the industry employed "patient brokers" who accepted finder's fees of up to $3,000 for the successful solicitation of prospective patients. Statistics revealed that psychiatrists comprised a disproportionately high percentage of the health care practitioners banned from the Medicare program for reasons of fraud.

Social Obligations.
The rapid reduction in psychiatric hospital accommodations after 1992 raised concern over the continued funding and profitability of these institutions. The issue loomed as a crucial factor in the preservation of these mental health resources for the U.S. public.

In 1999 the U.S. Surgeon General released a report that criticized the private insurance sector for failing to provide adequate coverage for inpatient care at psychiatric hospitals. The Washington Post refuted the charges, chastising the government bureaucracy for its latent failure to provide hospital benefits for psychiatric disorders under Medicaid. The Post cited the hundreds of thousands of mentally ill people in the United States who fell within the jurisdiction of the Medicaid system due to incarceration or homelessness yet failed to receive appropriate medical attention for their psychiatric problems due to government failure to provide coverage.

Economic Viability.
Restrictions imposed by the Health Care Financing Administration (HCFA), a government body that manages Medicare, placed potentially detrimental restraint on the profitability of the mental health care industry. In 1992 the HCFA began to implement a system to impose caps on the amount that health care providers could charge patients. Anticipation that similar systems would spread beyond Medicare as the federal government assumed a larger role in the nation's health care system generated new concerns over government reform of the mental health care industry.

Despite cutbacks and restrictive governmental action, the annual cost of psychiatric care reached $12.3 billion by the mid-1990s. The cost increase more than doubled the 1980 total of $5.8 billion, yet the producer price index for the psychiatric hospital industry increased at a rate that was generally slower than other medical industries. Following a 0.1 percent growth in 1995, the supplier index rose 5 percent in 1996 but fell 6.7 percent in 1997. In 1998, 0.5 percent growth was low compared to 1.3 percent for general medical and surgical hospitals and 2.3 percent for other specialty hospitals. Some suggested that future cost controls for psychiatric hospitals might focus on inpatient services, where the highest profit margins endured.

Conforming with a prevailing trend among many types of hospitals during the 1990s, psychiatric hospitals reduced inpatient facilities, replacing them with increased outpatient services. The inpatient count at state hospitals fell from 470,000 in 1965 to fewer than 60,000 by the end of the century. Due to the reduction in facilities, the average occupancy rate in all psychiatric hospitals remained consistently high and declined less than 5 percent during the 1980s and into the 1990s. By the mid-1990s, the occupancy rate for psychiatric hospitals continued in excess of 80 percent. General hospitals, in comparison, reported only 60 percent occupancy, and lower rates were reported in other specialty hospitals.

With so many psychiatric patients uninsured and unable to pay, Congress was pressured to pass mental health parity legislation, requiring insurers to pay for mental health treatment in the same manner as other health care. The American Hospital Association and the National Association of Psychiatric Health Systems asked the U.S. House of Representatives in March 2002 to pass the Mental Health Equitable Treatment Act, which had been passed by the U.S. Senate. At the time, 34 states had parity laws requiring all health plans participating in the Federal Employees Health Benefit Plan to abide by the parity as part of an order issued under President Clinton. State lawmakers also began focusing on Medicaid, which played a large part in the treatment of behavioral health issues and had stopped reimbursing behavioral health facilities for non-medical services in some states. In 2002 states were either attempting to find more resources to improve access to residential facilities, prioritizing mental health services for children, making an effort to implement treatment programs over jail, and/or enacting or amending mental health parity laws.

According to an article published in the November 6, 2000, issue of Modern Healthcare, psychiatric hospitals, as well as other behavioral health care providers, began seeing a trend in increased outpatient visits, which also meant higher outpatient revenue. The average number of outpatient visits per year for psychiatric hospitals and behavioral units in acute care hospitals was 20,332, an increase of 6.8 percent from 1997. Average net revenue per day from outpatient services was $105 in 1999, an increase of 19.3 percent from 1997 and 59 percent since 1994. This revenue partially offset the amount of increasing bad debt and charity care, which had risen from 7.6 percent in 1997 to 10.7 percent in 1999. Insurers were blamed for much of that by imposing treatment limits or random caps. Outpatient care was the only classification of care to rise between 1994 and 1999. Net revenue per day fell 6.5 percent for inpatient care, decreased 6.4 percent for residential treatment, and dropped 10.9 percent for partial hospitalization over the same time. The average inpatient length of stay in 1999 was 9.2 days, a decrease of 30.3 percent from 13.2 days in 1994.

Although most inpatient psychiatric hospitals have been co-ed since 1970 when patients began to be treated in units by disease instead of gender, at least one hospital, the 25-bed Women's Program at the Westchester Division of the Weill Cornell Westchester Hospital, a division of New York-Presbyterian Hospital, began to cater to women only in 2002. With a majority of women patients experiencing some type of abuse, hospitals that treat women only offer advantages. Additionally, the hospital encourages a home-like environment, and patients are allowed to wear their own pajamas instead of hospital gowns.

A survey of more than 600 reporting member hospitals, released by the National Association of Psychiatric Health Systems (NAPHS) in 2003 and 2004, found "hospitals have been adding beds and/or activating licensed beds within existing facilities," prompted by increased demand. There was a 3.5 percent increase in licensed beds, while the number of staffed beds rose 5.3 percent. Although admissions were on the rise, the length of stay was relatively short. Compared to 2003, the average number of days in which a patient remained under medical care fell from 9.9 days in 2003 to 9.6 days in 2004. Among hospitals with 50 to 100 beds, 25 percent reported occupancy greater than 82 percent, while hospitals with more than 100 beds reported occupancy higher than 90 percent during 2004.

According to the National Institute of Mental Health, one in four adults, or 57.7 percent of the population over age 18, endure an identifiable mental disorder according to Modern Healthcare. The Institute further noted that mental illness was the principal disability of people 15 to 44 years of age in the United States and Canada. A professor of health care policy at Harvard Medical School said, "the mental health services segment is getting more attention because employers and health insurance plans alike have noticed how much of their monthly bills are spent on antidepressant medications."

Therefore, various forms of mental health insurance parity continued to surface. Mental illness was at the forefront of the increase in the number of inpatient beds, beginning with the Garrett Lee Smith Memorial Act in October 2004 that targeted suicide prevention programs. By August 2005, 34 states had put different laws into place for mental health insurance. Legislation introduced in 2005 in the House of Representatives was expected to directly affect businesses with more than 50 workers on the payroll by requiring them to provide comprehensive mental health and substance-abuse parity.

During the early years of the first decade of the 2000s, the government was criticized for not providing mental health care to reservists who returned from military duty in Iraq. An estimated 1,333 returning soldiers from the war in Iraq and Afghanistan were experiencing mental health disorders but were denied treatment. As a result, various veterans' organizations lobbied, which resulted in change so any returning soldier after January 2003 gained eligibility for mental health care if warranted.

According to the Substance Abuse and Mental Health Services Administration (MHSA), 65 percent of mental health funding depended on individual state resources, whereas Medicaid represented 29 percent. Despite the lack of funding for mental health care during the economic recession at the end of the first decade of the 2000s, improvement was noted as the economy began to slowly improve. Only California, Nevada, and New Jersey were slow to return to prior levels.

During the second half of the first decade of the 2000s, the country continued to move away from inpatient treatment as the first choice for psychiatric care. Community-based care became increasingly emphasized, causing the number of mental health hospitals to continue to decline, along with the number of patients. For example, in 2009 Bob Glover, executive director of the National Association of State Mental Health Program Directors, told Modern Healthcare, "350 state hospitals housing nearly half a million patients existed more than 50 years ago. Today, about 235 hospitals remain and take care of only 50,000 patients." That has meant budgetary shifts for state-funded hospitals as well. At the end of the 1980s, about two-thirds of public mental health funding was assigned to state hospitals. Just 20 years later, state hospitals received roughly one-third of budgeted funds, with the remaining two-thirds going to community-based care.

However, communities began to deal with greater numbers of members with significant mental disorders being served by community-based care, and often this community-based care was proving to be inadequate. Some states were being sued to upgrade community-based services, which were guaranteed under the American Disabilities Act. One consequence of integrating people with mental health disorders into communities lacking services was a rise in the number of emergency room admittances for psychiatric disorders.

Current Conditions

Despite the economic recession at the end of the first decade of the 2000s, revenues for psychiatric hospitals in the United States increased about 2.3 percent annually from 2006 through 2011. By 2011 the psychiatric hospital industry was valued at approximately $19 billion, and more growth was predicted for the future. Although the trend was toward more outpatient services, the increasing number of people requiring psychiatric services and hospitalization was expected to balance out that downturn in demand. According to a December 2011 IBISWorld report, "Moving forward, growth [in the industry] will continue, while hospitals try to cut costs and consolidate." In addition, "While demand for care has grown during the past five years, so have the costs for employees," presenting another challenge for hospitals that specialize in psychiatric services.

According to Modern Healthcare, although the demand for psychiatric services was increasing in the United States, the total number of psychiatric hospital beds had dropped more than 25 percent between 1995 and 2008. Meanwhile, the number of free-standing psychiatric hospitals decreased from 662 to 448 over the same time, with psychiatric hospital units dropping from 1,507 to 1,320. Earl Reed, CEO of Horizon Health Corp. in Lewisville, Texas, told the journal in November 2010 that "When you look at the entire country, with 308 million people, and the number of beds that existed 10 or 12 years ago and the number that exists today, there's been a tremendous drop. There's room for a lot of players or a lot more hospitals."

Industry Leaders

HCA Inc.
HCA Inc., headquartered in Nashville, Tennessee, was number 88 on the Fortune 500 list in 2009 and number 8 on Forbes's list of largest privately owned companies. Several major acquisitions and mergers in the 1990s allowed the company to grow overall, despite internal upheaval in the wake of an investigation into the company's potentially unethical referral procedures and possible Medicare fraud. HCA owned and operated approximately 163 hospitals and 109 ambulatory surgery centers and other outpatient centers, employed 199,000 people, and reported revenues of more than $8.3 in the first quarter of 2012.

Tenet Healthcare.
As the second-largest hospital chain in the United States, Tenet Healthcare Corporation of Dallas, Texas, cut the number of its holdings from 115 to about 50 hospitals after a number of scandals over billing practices. The company offered general hospital, psychiatric, surgery, and neonatal services. Tenet's subsidiaries and holdings included home health care centers, a health maintenance organization, and a managed care insurance company. Tenet reported 57,000 employees in 2011 with sales of $8.8 billion.

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