Medicaid cuts could add pressure to already-stressed psychiatric units

Federal Medicaid cuts could exact a heavy toll on psychiatric units at hospitals across the country, many of which are already struggling to keep their doors open but provide essential mental health care to people who need it.

Psychiatric units are costly and, like labor and delivery services, typically lose money for hospitals and tend to be reimbursed at lower rates than other health services. In contrast, some specialty units, such as cardiovascular care, are lucrative: Cardiologists can generate up to seven times their salaries for hospitals.

Between 2023 and 2024, 126 hospitals across the U.S. shut down their inpatient psychiatric units, according to data provided to Stateline by the American Hospital Association.

"(Psychiatric units) are often in the red, and, for lack of a better word, kind of subsidized by the rest of the health system," said Sarah Steverman of the National Association for Behavioral Healthcare. Steverman oversees regulatory affairs and is the liaison for a committee of hospital psychiatric unit administrators and clinicians.

The One Big Beautiful Bill Act that President Donald Trump signed into law last year will add to the strain, Steverman and other experts say.

The law is projected to cut federal Medicaid spending by an estimated $886.8 billion over the next decade, largely because new work requirements will push people off the rolls, according to estimates by the Congressional Budget Office. CBO estimates that it could increase the number of people without health insurance by 7.5 million in 2034.

Those cuts will have a significant effect on mental health care because Medicaid, jointly funded by the federal government and the states, covers more people with mental illness than any other public or private insurer — roughly 29% of the estimated 52 million nonelderly adults with mental illness, or about 15 million people, according to health research group KFF.

Behavior health policy experts say the Medicaid changes will force hospital psychiatric units to provide care to many more people who don't have insurance. Even before the law, Medicaid often didn't fully reimburse hospitals for the cost of mental health care, unit administrators said.

Along with increasing the number of people without insurance, the One Big Beautiful Bill Act places new limits on states' ability to maximize federal funding and reimburse providers.

The federal government allows states with contracted Medicaid managed care organizations running their Medicaid programs to direct them to pay providers more. But beginning in 2028, the One Big Beautiful Bill Act will cap these state-directed payments, forcing state Medicaid programs to reduce reimbursement rates by 10 percentage points each year until they reach either 100% or 110% of what Medicare pays.

The federal law also caps provider taxes, a strategy states have used to boost the Medicaid dollars they get from the federal government.

As a result, states will face the choice of replacing the lost federal money with state dollars, scaling back services or providing coverage to fewer people.

Conservatives who have backed the Medicaid cuts say such tools are accounting tricks that states have used to draw down more federal money. Some have even called the provider taxes a "money laundering" scheme. Eliminating them, they say, will force states to be more accountable for their Medicaid spending.

"States are gaming the system — creating complex tax schemes that shift their responsibility to invest in Medicaid and rob federal taxpayers," Dr. Mehmet Oz, the administrator of the federal Centers for Medicare & Medicaid Services, said in a news release last year.

But Angela Kimball, chief advocacy officer at Inseparable, a mental health advocacy organization, said the tools are essential, and that the cuts will be detrimental.

"For the mental health system, and particularly for facility-based care, it (Medicaid) is the financial foundation. And when you simultaneously reduce who's covered, what providers get paid, and limit the tools states have to make up the difference, you're not just trimming around the edges; you're undermining the whole structure," Kimball said.

The mental health field is also struggling with workforce shortages across states, especially in rural areas. As of December 2024, more than 122 million Americans lived in designated mental health professional shortage areas.

Dr. Arpan Waghray, a psychiatrist and CEO of Providence's Well Being Trust, serves as a member of the American Psychiatric Association's Council on Healthcare Systems and Financing. Providence has 16 psychiatric units across Alaska, California, Oregon and Washington state, and Medicaid and Medicaid HMOs account for 42% of patients across those units. That number increased as the states expanded eligibility under Obamacare.

In contrast, Medicaid pays for roughly 13% of oncology inpatients and about 10% of cardiology inpatients across the hospital systems.

"Inpatient psychiatric units, especially when they're part of larger hospitals and academic centers, like our community hospitals … they generally tend to operate on a loss," Waghray said. "We are no exception to that."

He noted that estimates show psychiatric units have a negative operating income of about 37%.

"We don't want to make a profit on psychiatric units," he said, adding the goal is to at least "break even."

Waghray said if more units are forced to shutter, that will lead to more crowding in emergency rooms and jails. Often, jails and prisons — facilities with inadequate care — end up being mental health care providers for people who lacked access to care. People in crisis also may be forced to wait for a psychiatric bed to open up elsewhere.

"It has this cascading effect that touches everyone's lives," Waghray said. "The two places where people get care if they don't get care in the right setting is the inpatient (psychiatric) unit, and you cut that, then essentially you have emergency departments that are overcrowded or jails that are overcrowded."

Health economist John McConnell, director of the Center for Health Systems Effectiveness at Oregon Health and Sciences University, said "the whole mental health system is really going to get hit with a shock here."

"Crisis care funding is all over the place, and there's not really a consistent way of funding it, and it's often underfunded," he said. "You had a fragile system … made more fragile with a lot of the executive orders from the Trump administration — and then (the new federal law) has sort of further chipped away at it."

Steverman said that people with severe mental health emergencies — such as acute psychosis, mania or suicidality — who need urgent treatment after emergency room intake often require multiple clinical staff and observation.

Gretchen Clark Bower, senior director of Behavioral Health Services at Providence Regional Medical Center Everett, in Washington state, said the hospital's inpatient psychiatric unit, which opened about five years ago, relies heavily on Medicaid: Roughly 80% of psychiatric inpatients are covered by Medicaid, and many have severe illnesses.

"It has been a stretch financially for a long time," Bower said. "The costs of providing care are far more than what we're getting reimbursed. And that is extremely challenging."

Everett's average psychiatric hospitalization is about 16 days. But sometimes, insurers will only cover up to a certain number of hospitalization days for mental health, Bower said. That leaves the hospital to absorb the rest of the costs.

"We want to make sure that we are discharging people when they are safe to discharge — not just when their insurance stops paying," Bower said.

Bower said she is concerned the cuts will destabilize people if their care gets interrupted after losing coverage, putting more pressure and costs on the health system.

"It worries me a lot," she said. "How do we continue to take care of our community into the future, and how do we sustain ourselves financially as we do that? It's an incredibly difficult task."

A report from the American Psychiatric Association found that states that had expanded Medicaid eligibility saw smaller increases in suicide compared with non-expansion states: Medicaid expansion was associated with about 0.4 fewer suicides per 100,000 people yearly.

"Combined with workforce shortages and long-standing insufficient reimbursement for psychiatric services, further reductions in Medicaid will increase pressure on already struggling facilities," said Ben Teicher, spokesperson for the American Hospital Association. "Our members have been worried about their psych units for a long time, and any further erosion of what Medicaid pays for would make it even worse."