Privatization Can Transform the Delivery of State Psychiatric Services

Innovative policymakers increasingly turning to privatization to dramatically improve the quality of mental health services while holding down costs

Governor Kaine’s newly-unveiled package of budget cuts includes proposals that may foster a paradigm shift in how the Commonwealth delivers mental health services. Calling Virginia a “dinosaur,” Gov. Kaine noted how other states have embraced the advice of many in the mental health profession by transitioning most psychiatric patients out of state institutions and into community-based care centers closer to family members and social and economic opportunities.

To this end, the Governor’s budget cutting plan includes proposals to close both the Commonwealth’s Center for Children and Adolescents (a juvenile psychiatric home in Staunton) and the Southeastern Virginia Training Center (an adult psychiatric facility in Chesapeake), shifting those facilities’ patients to community care and reducing the number of institutionalized Virginians by almost one-third.

Gov. Kaine’s proposals are a sensible approach. But the state operates over a dozen other psychiatric facilities, so there’s an opportunity to go much further in transforming the way the state delivers services to psychiatric patients. As one innovative project in Williamsburg-plus others in Florida, Georgia, and elsewhere-demonstrate, innovative policymakers around the country are increasingly turning to privatization to dramatically improve the quality of mental health services while holding down costs.

The Virginia Department of Mental Health, Mental Retardation and Substance Abuse Services currently operates sixteen mental health and other residential treatment facilities, including Williamsburg’s Eastern State Hospital (ESH)-the nation’s first public psychiatric hospital dating back to 1773. By the late 1990s, conditions at ESH had deteriorated to the point that it became the subject of a U.S. Justice Department lawsuit to rectify substandard care and living conditions. In addition, the combined challenges of a decreasing patient population, obsolete facilities on a sprawling 500-acre campus, noncompliance with industry accreditation standards, and the potential loss of Medicare/Medicaid reimbursement dollars prompted policymakers to look to private sector solutions.

To turn things around, the Department embarked on a large-scale ESH modernization project facilitated by an innovative public-private partnership. This multi-phase project involves partnering with a private contractor to consolidate 26 buildings into six; deliver new, state-of-the-art geriatric and adult mental health facilities; and develop a strategic plan for the 400 surplus acres generated as a result of the initiative. The first phase of the project-the new Hancock Geriatric Treatment Center-opened in April 2008 and recently won an innovation award from the National Council of Public-Private Partnerships. The next phase of the ESH modernization-a new adult mental health treatment center-is set to open in 2010.

One of the more notable aspects of the ESH modernization is that the initiative did not come from within, but was received as an unsolicited, private sector proposal for turnkey development submitted under the state’s Public-Private Education Facilities and Infrastructure Act (PPEA). The contractor is not only delivering the new facilities on an accelerated schedule, but the efficiencies incorporated into the design will deliver tremendous future cost savings through dramatically reduced life-cycle maintenance costs. And because of the more efficient use of space on the campus and the patient-centric design of the new facilities, the partnership will deliver where it really counts-improving patient care, outcomes, and safety.

Quite literally, it’s accurate to say that the private sector is rescuing Eastern State Hospital from a steady slide into decrepitude.

While this project demonstrates a significant advance in Virginia, the potential for further innovation in service delivery is now prominently on the horizon. Though state mental health agencies routinely partner with private contractors to provide food, janitorial, laundry, maintenance and other services, there’s an increasing amount of interest in outsourcing the full scope of operations of publicly-managed psychiatric facilities to private sector operators in order to reduce costs while improving the quality of care.

In October 2008, the District of Columbia’s Department of Mental Health announced that it would be closing all of its mental health centers and replacing them with privately-run facilities, expanding the number of patients treated while generating tens of millions in cost savings.

Georgia is pursuing a similar initiative on a much larger scale. Like many states, Georgia faces rapidly escalating costs to maintain its aging mental health facilities, along with likely budget cuts to help close the state’s billion-plus-dollar budget shortfall. At the same time, the state has also become the focus of a U.S. Justice Department investigation into civil rights violations after the Atlanta Journal-Constitution exposed appalling conditions in Georgia’s state-run mental hospitals. Since 2002, the paper found that over 130 patients have died from neglect, abuse or poor medical care in the state-run facilities, and there have been nearly 200 cases of patient abuse.

To clean up its act and avoid a federal civil rights lawsuit, Georgia’s Department of Human Resources has recently taken the first steps in an initiative to privatize the operations and management of all of its state psychiatric hospitals. The initiative would involve a massive consolidation, closing all seven of its existing state hospitals and replacing them with three new, privately-financed, privately-operated facilities-all by 2012. The central goal of the privatization initiative is to completely reshape the way the state provides services, dramatically improving service quality and patient outcomes while lowering spending from current levels.

The Georgia case should dispel any notion whatsoever that providing care to psychiatric patients is somehow an “inherently governmental” function so delicate that it demands the creation and preservation of government monopolies to fulfill it. That system has broken down completely in Georgia, and they’re not alone; similar Justice Department investigations are ongoing in North Carolina, Oregon, and California right now. Experienced private companies and nonprofits can bring their resources to bear to turn things around quickly and improve patient living standards and quality of care-not to mention accountability, which can be woefully lacking in government operation.

Just look at Florida, which has been the state leader in mental health services privatization. Since the mid-1990’s, the state has contracted with the private sector to operate several of its psychiatric facilities-ranging from large state hospitals to forensic psychiatric treatment centers to its civil commitment center for sexually violent predators.

Florida’s efforts began in November 1998 when it contracted with a private company to operate South Florida State Hospital, an aging facility which had never been accredited in its history and which was facing a major class action lawsuit concerning patient abuse and poor conditions. Within two years, the private operator was able to achieve accreditation for the existing facility (removing the lawsuit), while at the same time financing and building a new, modern facility to replace it. No capital dollars were involved and the state will own the new facility when the debt is retired.

The results speak for themselves-after privatization, the hospital reached some significant operational milestones, such as eliminated waiting lists for patient admissions, reducing the average patient stay from eight years to less than one year, and nearly eliminating the use of seclusion and restraints to manage patient behavior. Noting these improvements, the Florida Statewide Advocacy Council-a state watchdog group-unanimously passed a resolution in 2003 supporting further privatization of Florida’s psychiatric facilities.

Cost savings in Florida have also been impressive. The state’s Department of Children and Families reported to a legislative committee in 2007 that the average cost per bed in the privately operated facilities was as much as 15 percent lower than at the state-run hospitals.

Virginia’s success with the Eastern State Hospital project is a great stepping stone to a larger transformation of psychiatric services delivery. That project has proven that private sector innovation can deliver high-quality psychiatric facilities; the next step for the Commonwealth is to extend that model further into operations, along the lines of Florida and Georgia.

In this sort of arrangement, the state would negotiate a performance-based contract that would establish care standards and performance mandates (with appropriate financial penalties for non-compliance) to ensure a higher level of service than achieved under state operation. The state’s role then shifts to contract monitoring and holding the operator accountable for results. In Florida’s contracts, the state retains the ability to terminate the contract without cause with a mere 30 days notice, a provision clearly aimed at ensuring contractor accountability. Further, Florida has also negotiated fixed-cost contracts that effectively hold facility budgets flat over multiple budget cycles, a far cry from the budget variability typically seen under state operation.

At a time when it’s more critical than ever to do more with less, Virginia policymakers need to ask a critical question: does the obligation to deliver high-quality psychiatric services necessarily require the Commonwealth to be in the business of running hospitals, or could it achieve better outcomes at a lower cost through contracting for performance with experienced private sector operators? The experience in Florida and elsewhere strongly suggests the latter approach may be the best answer in Virginia.