Behavioral health underpayments are among the highest across hospital services, highlighting the financial drag health systems face when providing these services.

Across all payers, inpatient behavioral health services are reimbursed at an average of 34.3% less than the cost to provide them. Behavioral health services effectively tie inpatient nephrology in terms of underpayment. On average, those services have a net loss of 34.1%, according to a new report by the American Hospital Association (AHA).

“Hospitals often play the critical — and sometimes only — role in providing access to essential health care services, such as emergency care and behavioral health, which are necessary for the health and well-being of the communities they serve,” the report states.

On the outpatient side, hospital behavioral health services are reimbursed an average of 31.7% of cost across all payers. Medicare, on average, reimburses outpatient behavioral health services at 28.9%, the report states.

Across the board, the AHA report highlights the fundamental financial challenge many hospitals and other health care providers face — ever-more-powerful cost drivers via workforce challenges, inflation, elevated drug prices, stagnant payer reimbursement increases, and increased administrative costs.

The cumulative underpayment from Medicare and Medicaid, the nation’s safety-net health plans, increased by 39% during the five-year spans ending in 2017 ($375 billion) and 2022 ($522 billion).

The report also points to practices by commercial health plans as increasing the need for health systems and hospitals to spend more on administrative functions, diverting dollars from health care services. Specifically, the AHA calls out “inappropriate practices,” including raising premiums at a rate twice as high as the increase in hospital prices and “time-consuming and labor-intensive practices like automatic claim denials and onerous prior authorization requirements.”

The report cites research by McKinsey & Co. that finds hospitals spend $10 billion dealing with prior authorizations and by Premier Inc. that finds $19.7 billion appealing denials and adjudicating claims. 

“Though these issues are often felt most acutely with MA and Medicaid managed care plans, it also is true for other commercial payers, where claims denials increased by 20.2% in 2023,” the report states. “Moreover, the time taken by commercial payers to process and pay hospital claims from the date of submission increased by 19.7% in 2023, according to data from the Vitality Index.”

These trends leave little room for innovation or investment in information technology systems that help protect against cyberattacks such as the Change Healthcare hack, which crippled a swath of the health care industry.

Behavioral health providers have told Behavioral Health Business about several similar challenges across the industry’s various segments. The American hospital industry most frequently intersects with behavioral health at psychiatric hospitals and similar inpatient facilities. The trends highlighted in the AHA report and others have led systems to deprioritize behavioral health generally and psychiatric hospitals and units specifically. However, this is opening the door for some behavioral health providers to share the risk of these services with hospital systems.

Whatever difference private psychiatric hospitals are cutting back on is not likely to be picked up by state hospitals. Recent research finds that the already limited number of state hospital psychiatric beds has decreased by 8%.

Still, entrepreneurs and financial institutions see an opportunity to do business in the space. For example, New York City-based psychiatric hospital company US HealthVest recently refinanced its debt with Capital One’s Commercial Bank to the tune of $130 million.