SIC 8063
PSYCHIATRIC HOSPITALS



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.

NAICS Code(s)

622210 (Psychiatric and Substance Abuse Hospitals)

Industry Snapshot

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. U.S. Census Bureau figures revealed the total number of psychiatric hospitals in the United States peaked by 1992, with 919 establishments in operation—an increase of nearly 17 percent over the 1987 figure. Between 1984 and 1991 individual hospital admissions rose by 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 desinstitutionalization took over in the late 1990s and early 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, in 1995 there were 433 psychiatric hospitals compared to 315 in 1999. The number of beds shrank from 43,497 in 1995 to 29,937 in 1999. As nursing homes took over a bigger role in the delivery of mental health services, controversy arose as to the appropriateness of care for 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 being targeted for cuts statewide. 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 were closing and private hospitals were filing for bankruptcy protection in mid-2002. 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 outof-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.

Organization and Structure

Psychiatric hospitals fall into one of two categories: nonprofit or profit making. Nonprofit entities include government-administered facilities and charitable institutions. In the mid-1990s, nearly one-half of the nation's psychiatric hospitals were either nonprofit or government entities. In keeping with this configuration, the standards and revenues of the industry are largely shaped by government legislation.

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.

The development of 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. In the 1920s, 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 used toxic chemicals, which often produced dangerous side effects. Shock treatment soon became commonly used at psychiatric hospitals in the United States.

It was also during the 1930s that psychosurgery became a popular technique for altering behavior. The first lobotomy was performed in 1935; however, 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, a move that shifted outpatient care toward more group-oriented psychotherapy programs, either with family or other individuals. Psychiatric hospital care shifted 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 its 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. Over 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.

Most prevalent among the outpatient services offered at psychiatric hospitals was substance abuse treatment, or dependency outpatient clinics, with over 40 percent of all psychiatric hospitals having such clinics. Also, by the 1990s 67 percent of psychiatric hospitals in America 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; 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; during the peak facility year of 1992, psychiatric hospitals performed less 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 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 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 America 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 strived to meet the needs of the growing number of AIDS victims with special psychiatric ailments. By 1992, nearly 13 percent of psychiatric hospitals in America offered special in-patient services for AIDS patients.

Industry Setback from Fraud. In the early 1990s eight insurance companies sued National Medical Enterprises, Inc. (NME; now a part of Tenet Health Care) for providing unnecessary hospitalization and costly treatments. In additionm, 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 further collecting $600,000 to $900,000 a year on nonexistent or bogus treatments. Additional charges held that the industry employed "patient brokers" who accepted finder's fees—payments as high as $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. According to Gary Null, Ph.D., an investigative reporter and author of several books, "Last year[1995], $411 million was paid to the government in fines and penalties for health care fraud and 90 percent of that was paid by psychiatrists or psychiatric institutions."

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 American public.

In 1999 the U.S. Surgeon General released a report wherein it directed criticism toward the private insurance sector for its failure to provide adequate coverage for inpatient care at psychiatric hospitals. The Washington Post in reporting the matter refuted the charges and chastised instead the government bureaucracy for its own latent failure to provide hospitalization benefits for psychiatric disorders under the Medicaid system. The Post cited the hundreds of thousands of mentally ill people in the United States who fall within the jurisdiction of the Medicaid system for reasons of incarceration or home-lessness yet fail 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 HCFA undertook the implementation of 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 by 5 percent in 1996 but fell by 6.7 percent in 1997. In 1998 the rise of 0.5 percent was low in comparison to 1.3 percent for general medical and surgical hospitals and 2.3 percent for other specialty hospitals. Ellen Paris in Forbes suggested that future cost controls for psychiatric hospitals might focus on inpatient services, where the highest profit margins endured.

In conformance with a prevailing trend among many types of hospitals during the 1990s, psychiatric hospitals reduced inpatient facilities and increased outpatient services in their stead. 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 by 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.

Current Conditions

With so many psychiatric patients uninsured and unable to pay, Congress was being 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 House in March 2002 to pass the Mental Health Equitable Treatment Act, which was previously passed by the Senate. Currently, 34 states have 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 by former President Clinton. State lawmakers also began focusing on Medicaid, which plays 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, 28 states attempted to find more resources to improve access to residential facilities; 28 states prioritized strengthening mental health services for children; 28 states were making an effort to implement treatment programs over jail; and 23 states were considering 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, instead 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. Charity care and bad debt rose to 10.7 percent in 1999, from 7.6 percent in 1997. 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 sunk 6.5 percent for inpatient care, decreased 6.4 percent for residential treatment, and decreased 10.9 percent for partial hospitalization over the same time period. 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 in-patient psychiatric hospitals have been coed 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.

Industry Leaders

In 1999, according to Service Industries USA , the two leading providers of psychiatric hospital services in the United States were publicly traded companies: HCA Inc. (formerly HCA-The Healthcare Company) and Tenet Healthcare Corporation, respectively. The third largest, Intermountain Health Care, Inc., was a not-for-profit establishment.

HCA Inc. HCA Inc., headquartered in Nashville, Tennessee, was listed at number 69 among the Fortune 500 in 1999. 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, with operations in the United States, Switzerland, and the United Kingdom, reported sales revenues of $19.7 billion for a revenue growth of 9.9 percent in 2002. The corporation operated a total of 260 hospitals and freestanding surgery centers in 2002.

Tenet Healthcare. As the second-largest hospital chain in the United States, Tenet Healthcare Corporation of Santa Barbara, California, operates about 115 hospitals and offers general hospital, psychiatric, surgery, and neonatal services. Tenet's subsidiaries and holdings include home health care centers, a health maintenance organization, and a managed care insurance company. The Tenet employee count in 2002 totaled 113,877 workers, an increase of 6.5 percent for the year. Tenet reported sales of $8.74 billion in 2002.

Intermountain Health Care. Intermountain Health Care of Salt Lake City, Utah, ranked third in size in 1999. Intermountain is a not-for-profit organization established in 1975 as the result of donations to local communities on behalf of the Mormon Church. The organization serviced over 425,000 members in the western states of Utah, Idaho, and Wyoming and reported total patient services and nonpatient activities of nearly $2.85 billion in 2002, up from $2.65 billion in 2001.

Further Reading

Anderson, Rachel L., John S. Lyons, and Courtney West. "The Prediction of Mental Health Service Use in Residential Care." Community Mental Health Journal, August 2001.

"CMHS Releases Biennial Report on Mental Health Data." Mental Health, 19 April 1999.

Darnay, Arsen J., ed. Service Industries USA. 4th ed. Farmington Hills, MI: Gale Group, 1999.

Davia, Joy. "After Medicaid." Sunday Gazette-Mail, 4 November 2001.

Galloro, Vince. "Behavioral Health Outpatient Figures Up." Modern Healthcare, 6 November 2000.

Haugh, Richard. "Nowhere Else to Turn." H&HN, April 2002.

Jaffe, D. J., and Mary Zdanowicz. "Federal Neglect of the Mentally Ill." Washington Post, 30 December 1999.

Rosenberg, Merri. "For Women Only." New York Times, 26 January 2003.



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