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Prevarian 101 Series: Understanding Inpatient Behavioral Health Reimbursement

abrown819

Updated: Jan 25

For healthcare real estate developers looking into Behavioral Health Hospitals, knowing how your prospective tenants receive payment is crucial.

In this Prevarian 101 Series, Inpatient Behavioral Health Reimbursement is discussed.

At Prevarian, we’re committed to expanding Behavioral Health services and developing specialized Behavioral Health Hospitals. While many in the industry see inpatient acute psychiatric services as risky due to reimbursement challenges, we believe it’s worth a closer look.


Navigating the reimbursement landscape in inpatient behavioral health can feel like a maze. Between Medicare, Medicaid, and commercial insurance, the payment structures are complex—but we’re here to break it down for you.


Medicare: Daily Rates with Adjustments


Medicare Part A reimburses inpatient behavioral health facilities through a daily (per diem) rate. This system, known as the Inpatient Psychiatric Facility Prospective Payment System (IPF PPS), adjusts payments based on several factors:


  • Geography: Rates are higher in urban, high-cost areas, using a wage index.

  • Patient Factors: Age, comorbidities, and diagnoses can impact rates. For example, older patients typically result in higher reimbursement.

  • Length of Stay: The first few days of a stay are reimbursed at a higher rate, with the rate decreasing over time.


It’s also important to note that Medicare imposes a 190-day lifetime limit for standalone psychiatric hospitals, but this limit doesn’t apply to psychiatric units within general hospitals.


Medicaid: The Wild West of Reimbursement


Medicaid reimbursement is known for its variability, as each state runs its own program. This means rates for inpatient behavioral health services can differ dramatically:


  • Geographic Differences: California might pay over $1,200 per day, while Mississippi’s rates can be as low as $300 per day.

  • Payment Models:

    • Fee-for-Service (FFS): Providers are paid for each service rendered. About 11 states use this model.

    • Managed Care: Around 22 states utilize Managed Care Organizations (MCOs), offering a flat rate to manage a patient’s care. Though often more restrictive, MCOs provide payment consistency.

    • Supplemental Payments: Some states provide additional funds to facilities treating a high volume of Medicaid patients.


Commercial Insurance: Negotiation is Key


Private insurers like UnitedHealthcare and Anthem negotiate rates directly with facilities, leading to a diverse range of reimbursement structures:


  • Per Diem Rates: Insurers pay a daily rate based on the intensity of services provided.

  • Bundled Payments: Some insurers prefer a single rate for an entire inpatient stay, regardless of its duration.


However, commercial insurers tend to be stricter about length-of-stay limits and often require prior authorization for coverage.


The Big Picture: Rate Variability and Trends


Reimbursement rates vary widely, influenced by geography, patient demographics, and state policies. Market selection is key—understanding your target market can significantly impact viability. Telehealth is emerging as a hybrid option in inpatient care, while value-based payment models, where reimbursement is tied to outcomes like reduced readmissions, are gaining popularity.


Some Key Takeaways:


  • Medicaid accounts for 50-60% of payments in the inpatient behavioral health sector, with Medicare at 20-25%, commercial insurance at 15-20%, and self-pay/uninsured making up 5-10%.

  • Medicaid expansion has allowed 41 states to extend eligibility to individuals with incomes up to 138% of the federal poverty level (FPL), with the federal government covering most costs. However, rates still vary by state.

  • States like Alaska and California offer the highest average Medicaid reimbursement rates, while Arkansas and Mississippi are among the lowest. Factors like cost of living and urban versus rural populations contribute to these differences.


What Have We Learned?


Inpatient behavioral health reimbursement is complex but manageable. Rates depend on payer type and location, with Medicaid often being the largest payer yet offering lower rates in certain states. Understanding your operator-tenant’s business model and target payer mix is crucial—it directly influences market selection and long-term viability. Some operators thrive with a high-Medicaid mix, while others minimize their Medicaid exposure or avoid it altogether, especially those offering specialized services.


So, while the reimbursement landscape can be challenging, there’s potential for success, especially with positive trends like mental health parity and the growing integration of Behavioral Health services across the care continuum. There’s also increased interest in joint venture partnerships with acute care providers.


Interested in Learning More?


I’m always open to discussing opportunities in the Behavioral Health sector. Feel free to reach out to me at abrown@prevarian.com.






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