Legislative Analyst's Office

Analysis of the 2001-02 Budget Bill

Department of Mental Health (4440)

The Department of Mental Health (DMH) directs and coordinates statewide efforts for the treatment of mental disabilities. The department's primary responsibilities are to (1) administer the Bronzan-McCorquodale and Lanterman-Petris-Short Acts, which provide for the delivery of mental health services through a state-county partnership and for involuntary treatment of the mentally disabled; (2) operate four state hospitals; (3) manage state prison treatment services at the California Medical Facility at Vacaville and, beginning next year, at Salinas Valley State Prison; and (4) administer nine community programs directed at specific populations.

The state hospitals provide inpatient treatment services for mentally disabled county clients, judicially committed clients, clients civilly committed as sexually violent predators, and mentally disordered offenders and mentally disabled clients transferred from the California Department of Corrections.

The budget proposes $2 billion from all funds for support of DMH programs in 2001-02, which is an increase of almost 12 percent above estimated current-year expenditures. The budget proposes $953 million from the General Fund, which is an increase of $75 million, or 8.6 percent, above estimated current-year expenditures. Reimbursements that would be received by DMH—largely Medi-Cal funding passed through to community mental health programs—would increase $135 million or about 15 percent.

The overall increase in DMH expenditures is primarily due to (1) the expansion of the Early and Periodic Screening, Diagnosis, and Treatment program (EPSDT) for children with emotional problems; (2) increases in caseload and provider rate increases for managed care plans providing community mental health treatment; and (3) special repairs, new alarm systems, and projects for Americans with Disabilities Act (ADA) compliance at state hospitals.

The EPSDT Program Costs Still Soaring

The costs for providing mental health services under the Early and Periodic Screening, Diagnosis, and Treatment program (EPSDT) for emotionally disturbed children are growing by 28 percent per year. This situation has resulted in a request in the Medi-Cal budget for a $126 million budget increase for the program in 2001-02 (about $61 million General Fund and $64 million federal funds). Despite the projection by the Department of Mental Health that this rapid growth rate will continue for at least several more years, state officials overseeing the program have not assessed whether the services being provided by counties to individual EPSDT clients are appropriate given the relative severity of their mental conditions. We recommend approval of the funding request. However, we further recommend that the Legislature initiate field audits to better understand the reasons why costs are escalating and consider options to help ensure that the program operates in the future with appropriate incentives for providing necessary services and controlling costs.


The EPSDT program was established as a mandatory Medicaid service in 1967, and expanded by federal law in 1989. Under EPSDT, states are required to provide a broad range of screening, diagnostic, and medically necessary treatment services to Medi-Cal beneficiaries under age 21, even if the treatment is an optional service under a state's Medicaid plan. The requirements apply to mental as well as physical health care and are intended to correct or improve conditions that could be more expensive to treat later in life. About 120,000 clients per year received EPSDT services in 1998-99, the most recent year for which complete DMH data were available. In this analysis, we focus exclusively on EPSDT mental health services.

Budget Proposal. Under the Governor's 2001-02 budget proposal, total spending on basic EPSDT services would reach $563 million in the budget year. Of that sum, counties would contribute about $128 million of their available mental health funding for EPSDT services. The federal government and the state General Fund would, respectively, provide an additional $224 million and $212 million through the Department of Health Services (DHS) Medi-Cal budget to support the program. (State and federal support for EPSDT are displayed as reimbursements within the DMH budget.)

In addition to the $563 million provided for basic EPSDT services, the 2001-02 budget proposes a $12 million augmentation (consisting of the reimbursement of about $5.9 million General Fund and $6.2 million federal funds from the DHS Medi-Cal budget) to provide therapeutic behavioral services under the EPSDT program. This separate budget request is intended to provide for state compliance with a federal court order mandating the provision of these more intensive outpatient services for certain at-risk youth.

Rising EPSDT Costs a Continuing Concern

State Costs Could Double in Three Years. In our Analysis of the 1999-00 Budget Bill, we voiced concern about the rapid escalation of costs in basic EPSDT mental health services. We remain concerned due to the continued growth in program costs since that time. If the 2001-02 budget for basic EPSDT services is approved as proposed, annual state expenditures on the program will have increased by almost $200 million within seven years. As indicated in Figure 1, the state's contribution to the program will have increased 15 times over since 1995-96, when it was providing about $13 million annually to support the program. If this expenditure trend were to continue, state costs for the program could more than double within the next three years to almost $525 million annually.

County support for the program has grown more modestly due primarily to a 1995-96 interagency agreement between DMH and DHS that provides state matching funds for most of the nonfederal growth in EPSDT program costs. The counties' contribution to support of the EPSDT program—often referred to as the county baseline—is periodically adjusted for inflation and other cost factors. During 2001-02, state costs for EPSDT are projected to increase about $57 million, or 37 percent, compared to estimated current-year expenditures. County expenditures would go up about $4.3 million, or 3.5 percent.

The expansion of EPSDT mental health services initially came as the result of the settlement of federal litigation. The DMH has indicated that overall EPSDT costs have risen dramatically since that time because of a number of factors, including (1) growing participation by counties in the program, (2) growing caseloads within those participating counties, (3) increases in the services provided for clients, and (4) increased costs for providing those client services due to provider rate increases.

Inadequate Fiscal Incentives for Cost Control. The current cost-sharing arrangement between the state and counties was initially meant to be a short-term agreement until EPSDT program costs stabilized. We are concerned, as we noted in our 1999-00 Analysis of the Budget Bill, that this cost-sharing arrangement does not provide counties with the fiscal incentive to use EPSDT funds in the most cost-effective manner, such as by implementing a rigorous utilization review of the services provided. Under the present arrangement, the entities primarily responsible for the administration of EPSDT programs—county mental health systems—bear relatively little of the responsibility for increases in program costs.

Our concern is based, in part, on DMH data indicating the costs and caseloads of EPSDT programs within individual counties. That data show significant increases in EPSDT costs and clients over time. For example, the average annual payment per EPSDT client increased about 40 percent between 1994-95 and 1998-99. During the same period the number of clients almost doubled to about 120,000. The data also show that the cost-per-Medi-Cal eligible for EPSDT tripled over five years.

The data also document some significant disparities among counties in their average expenditures for the program even within the same regions of the state. For example, the data indicate that one coastal Southern California county, Santa Barbara, spent an average of $5,200 per EPSDT client in 1998-99, more than three times as much as the $1,700 per client spent in San Diego County.

There may be appropriate reasons for these disparities, such as variations in client needs among mental health systems. But these disparities in spending amounts could indicate that some counties might be using EPSDT resources inappropriately, such as by providing more intensive services than needed for children with less serious mental health treatment needs.

Unfortunately, DMH has not yet gathered data that would allow it to determine whether the services being provided by counties to individual EPSDT clients are appropriate given their mental health treatment needs. As a result, the state does not know whether more intensive and more expensive services than medically necessary are being provided to some EPSDT clients. Without such information, the Legislature cannot determine whether the 28 percent average annual increases in the budget for basic EPSDT services are warranted.

State Could Take Steps to Address Rapid Growth in Program Costs

Analyst's Recommendation. Given the legal mandates facing the state for the provision of such services, we recommend that the Legislature approve the 2001-02 budget request for additional funding for basic EPSDT services, as well as the additional request for funding for EPSDT therapeutic behavioral services. We further recommend that the Legislature initiate field audits of county EPSDT programs to better understand why EPSDT costs have grown so significantly and why these costs vary so widely among counties. For this purpose, the Legislature could direct that either DMH, DHS (as the state agency primarily responsible for the Medi-Cal program), or the Bureau of State Audits review samples of EPDST cases in selected counties to verify that only medically necessary services are being provided to clients in a cost-effective manner. The audit findings would be reported to the Legislature.

Because of our concern over the continuing escalation in EPSDT program costs, we further recommend that the Legislature consider options that we believe would help ensure that county mental health systems have appropriate fiscal incentives for management of the $563 million EPSDT program. We discuss these options below.

Counties Could Share Cost of Growth. One approach the state could take to address the concern over the rapid escalation of EPSDT costs would be to change the way the state and counties share in the cost of providing these services. As we noted earlier, while counties contribute substantial baseline funding for support of the EPSDT program, they collectively contribute a relatively small share of the costs resulting from program growth and thus, have little fiscal incentive to control increases in cost. One remedy might be to modify the interagency agreement between DMH and DHS to require that counties pay a larger share of any growth in EPSDT program costs, thereby giving them greater incentive to carefully manage these expenditures.

Requiring the local mental health systems to pay a larger share of the cost of EPSDT program growth does raise the concern that a financial hardship might be imposed upon counties. This concern could be addressed, however, by offsetting the projected increase in county costs for the upcoming fiscal year with an equivalent reduction in the county baseline contribution to the EPSDT program. For example, the state and counties might agree that the counties would pay a 20 percent share of the nonfederal increase in EPSDT program costs during 2001-02—now projected to be about $12 million—with the understanding that the counties would receive an offsetting $12 million reduction in their baseline contribution to the EPSDT program.

Our analysis indicates that, under such an approach, counties would have a greater fiscal incentive to manage EPSDT expenditures more effectively. That is because they would be able to shift any net savings achieved in their mental health systems through better management of these costs to other community mental health programs that were a local priority. To return to our prior example, if improved fiscal management meant that counties only needed to spend $8 million of their $12 million allocation for the program on EPSDT services, they would be able to use the remaining $4 million at their discretion for other mental health programs.

The overall amount the state would otherwise spend on EPSDT services would not change substantially during the first year of the new arrangement. The savings to the state from county acceptance of a greater share of the costs of EPSDT growth would be spent to offset a commensurate reduction in county baseline expenditures. However, in subsequent fiscal years, the state could achieve significant net savings potentially amounting to tens of millions of dollars to the extent that tighter county management of the program slowed the trend of dramatic increases in EPSDT expenditures. One further option for the Legislature would be to test such an arrangement with one or several counties as a pilot project to examine the impact, if any, of such a change on EPSDT program expenditures.

Realignment Options. In our analysis of the state-county realignment (in The 2001-02 Budget: Perspectives and Issues), we offer another option for the Legislature to address the rapid growth in the cost of EPSDT mental health services. Specifically, we propose that the counties accept additional fiscal responsibility for EPSDT in trade for receiving additional state tax revenues to support community mental health programs.

Under this option, county mental health systems would (similar to the proposal outlined earlier) be required to accept a greater share of the cost of growth in the EPSDT program. Rather than adjust county baseline contributions to EPSDT, however, the realignment option would allocate additional state tax revenues to county mental health programs. These additional tax revenues would be allocated each year automatically by statute and would not be subject to the annual state appropriations process, much the same way realignment revenues are currently distributed. In order for this approach to work, the additional tax revenues shifted to counties would have to equal or exceed the EPSDT costs that would be shifted to county mental health systems.

We believe this option, as well, would provide counties with a fiscal incentive to manage EPSDT expenditures more effectively. This is because any county savings achieved from improved management of the EPSDT program would not reduce a county's future realignment tax allocation from the state. Thus, any savings could be shifted to other mental health programs that were deemed to be a local priority.

Incorporate Into Managed Care Allocations. At some point in the future, when EPSDT expenditures are no longer growing so rapidly, the Legislature may wish to consider incorporating EPSDT funding into the allocations that are now provided separately to counties for mental health managed care programs. This approach would effectively treat EPSDT like other Medi-Cal mental health services that are provided by counties under a managed-care approach in which they are paid by the state at a capitated rate. We believe that such an approach could encourage counties to more carefully monitor the utilization of EPSDT services. This approach may not be feasible at present, however, because of concerns that the consolidated managed care and EPSDT allocations would be insufficient to keep pace with the dramatic growth in the EPSDT program.


In considering the options we have offered in this analysis, the Legislature should bear in mind that some of these proposals represent alternative courses of action that do not work in combination with each other. For example, if counties accepted a greater share of the cost of growth in the EPSDT mental health services as part of a revised realignment effort, the Legislature would probably not pursue the alternative approach of reducing county baseline funding for the program.

Other proposals may complement each other. We believe there would be no conflict, for example, between adopting our recommendation to initiate field audits of EPSDT programs and making other changes in the state-county partnership for the provision of EPSDT mental health services.

Community Services Program Issues

Realignment Revisited—An Evaluation of the 1991 Experiment in State-County Relations

In 1991, the state enacted a major change in the state and local government relationship, known as realignment, which affected a variety of health and social services programs, including significant changes in the provision of mental health services. Our review of realignment ten years later found that it has largely been a successful experiment in the state-county relationship, with some areas for improvement. We recommend a number of proposed changes to strengthen realignment, including changes that would affect community services for the mentally ill.

Please see "Part IV" of The 2001-02 Budget: Perspectives and Issues, for our discussion of realignment and our recommendations to strengthen this ten-year-old experiment in the operation of health, social services, and mental health programs.

Report on Treatment Resources for Out-of-Home Placements Overdue

We recommend that the Legislature require the Department of Mental Health to report at budget hearings on the status of its findings regarding the availability of resources to assess and treat children in, or at risk of, out-of-home placement, as required by 1998 state legislation.

Background. Chapter 311, Statutes of 1998 (SB 933, Thompson), instituted significant reforms of the foster care system. Among these reforms, it expanded county mental health agencies' target populations to include children in, or at-risk of, foster care placement to the extent resources were available. It also required that DMH develop an estimate of the extent to which resources were available to provide mental health assessment and treatment to children in, or at-risk of, foster care placement. Chapter 311 required that the estimate be developed by June 1, 1999, and include an identification of specific resource gaps in the delivery of mental health services to this population.

Analyst's Recommendation. The estimate required by Chapter 311 is necessary to determine the adequacy of existing resources to meet this target population expansion. As a result, we recommend that the Legislature require DMH to report at budget hearings on the status of these estimates so that the Legislature can determine the extent to which available resources are adequate to implement the assessment and treatment objectives set forth in Chapter 311.

Institutions for Mental Diseases (IMDs) Project Could Be Funded With Federal Grant

We recommend that funding for Institutions for Mental Diseases transition pilot projects be reduced by $333,000 General Fund, with a corresponding increase in federal funds by $333,000, due to the availability of federal grant funds for such projects.

Institutions for mental diseases are institutions providing long-term nursing and psychiatric care that are operated and funded primarily by counties under state-local realignment. The DMH budget includes a request for $1 million from the General Fund in 2001-02 and the two subsequent fiscal years to seek community placement for individuals now in IMDs. We discuss the proposal, as well as our recommendation to seek federal grant funding to help reduce the General Fund cost of the projects, in the "Crosscutting Issues" section of this chapter of the Analysis. We propose a $333,000 reduction from the General Fund and a corresponding increase in federal funds for the projects.

State Hospital Issues

Other Funding Available for ADA Projects

We recommend the deletion of $7.6 million from the General Fund requested in the budget year for Americans with Disabilities Act (ADA) compliance projects at Metropolitan State Hospital because insufficient information has been provided to the Legislature to justify the funding request and because funding for such ADA projects has already been set aside in the current fiscal year. (Reduce Item 4440-011-0001 by $7.6 million.)

Budget Proposal. The budget proposes a one-time General Fund allocation of $20 million in the support budget of DMH for various special repair projects, as well as projects to bring facilities into compliance with the ADA. Of that total proposed funding, about $12.4 million would be provided to address a backlog of special repair projects at each of the four state hospitals, with the remaining $7.6 million spent on projects to bring Metropolitan State Hospital facilities into ADA compliance. The ADA projects include widening doors; installing ramps and handrails; and modifying drinking fountains, showers, and restrooms.

Insufficient Information on ADA Request. We do not have any concerns at this time with the proposal for $12.4 million for special repair funding. We are concerned, however, that the information provided by DMH in support of the ADA compliance projects is insufficient to justify the $7.6 million budget request. A detailed cost summary for the Metropolitan State Hospital projects, dated June 15, 2000, indicated that the ADA projects would cost about $6.1 million, or about $1.5 million less than is now requested in the budget.

In response to questions about this discrepancy, DMH has provided our office with a revised project estimate indicating that the full cost will be the budgeted amount. However, the revised cost estimate does not provide updated cost information for the specific projects that are proposed or indicate how their overall cost has escalated about 25 percent in six months. Without such information, the Legislature cannot determine whether the funding level requested is appropriate.

Other Funding Available for ADA Compliance. We are also concerned that the DMH budget request does not appear to take into account the availability in the current year of other state funds for such projects. Item 9906 of the 2000-01 Budget Act provided a total of $60 million, including $20 million from the General Fund, to ensure that state buildings are accessible to the disabled. At the time this analysis was prepared, we were advised that the funding had not been allocated by the Department of Finance (DOF) for any specific projects. Thus, this funding would appear to be available for the ADA compliance efforts at the Metropolitan State Hospital, making any budget-year appropriation to DMH unnecessary.

Analyst's Recommendation. Because of the concerns discussed above, we recommend approval of the $12.4 million requested for special repair projects but deletion of the $7.6 million for ADA compliance efforts at Metropolitan State Hospital.

Our recommendation need not delay these projects, and could in fact expedite their completion, by making funding available at an earlier date. If, as the administration indicates, these ADA projects are a high priority for the state, they should be supported from the $20 million General Fund amount already appropriated for such projects in the current year. In applying for these funds to the DOF, DMH should provide justification for the $7.6 million requested, including updated cost information for the specific projects that are proposed and an explanation of how their overall cost has escalated about 25 percent in six months.

Security and Alarm Proposal

We withhold recommendation on $7.6 million requested in the support budget to install personal security alarm systems at various institutions because it is not clear how the request is related to various capital outlay requests. The department should report to the Legislature at the time of budget hearings with a complete security plan which identifies the coordination among projects and how each will be implemented.

Budget Proposal. The budget includes a total of about $7.6 million to install and upgrade the personal alarm systems at Atascadero, Metropolitan, and Patton State Hospitals. Personal alarms are devices that a staff member can activate to ensure that other staff provide assistance in dangerous or potentially life-threatening situations to protect themselves, patients, or visitors. An additional $901,000 is also requested under the department's capital outlay program (Item 4440-301-0001) to install personal alarms at the same three institutions. Thus, the budget includes a total of over $8.5 million to change the personal alarm systems at three hospitals.

Coordination of Projects Needed. While it is important to have appropriate security systems at these facilities, DMH has not identified how the separate proposals will be coordinated, or to what extent the proposals address the department's overall security needs. In order for the systems to work properly within each institution, the projects need to be properly planned and coordinated to ensure the resulting security system addresses the institutions' needs. To accomplish this, the work should be planned, designed, and installed as a single project at each institution. The fragmented proposals in the budget do not give the Legislature the information it needs to assess the separate requests.

Analyst's Recommendation. As we further discuss in the "Capital Outlay" chapter of this Analysis, we recommend that prior to budget hearings DMH provide clarifying information to the Legislature. This information should include at least the following for each institution:

Pending receipt and review of this information, we withhold recommendation on the $7.6 million requested under Item 4440-001-0001.

Administrative Issues

Health Insurance Portability and Accountability Act (HIPAA)

We recommend that $2.4 million ($1.2 million General Fund and $1.2 million in reimbursements) requested to implement federal regulations issued under the Health Insurance Portability and Accountability Act (HIPAA) be deleted from the Department of Mental Health (DMH) budget but funded instead from a special budget item to further legislative oversight of HIPAA compliance activities. We further recommend approval within the DMH budget of the nine staff positions requested to implement the federal regulations.

We discuss the HIPAA compliance proposal, as well as our recommendation for shifting the funding for this new activity to Item 9909 of the 2001-02 Budget Bill, in the Crosscutting Issues section of this chapter of the Analysis.

Return to Health and Social Services Table of Contents, 2001-02 Budget Analysis