The Rockefeller Institute of Government has recently detailed a number of significant legislative and administrative changes affecting the state’s healthcare economy. Many of these changes reduce the availability of federal funding for New York, New Yorkers, and providers. The loss of federal funding more broadly is relevant to health-related providers, including those serving persons with mental health issues, substance-use disorder, or physical disabilities. This is also particularly relevant for inpatient hospitals with inpatient psychiatric units. This blog focuses on key considerations in the mental health sector related to inpatient psychiatric care and explores how the state could mitigate some of the previously described negative potential impacts of the One Big Beautiful Bill Act (OBBBA) and related actions with respect to the broader health economy, while making improvements in the mental healthcare continuum.
The mental healthcare continuum includes an array of services designed to promote prevention, treatment, and recovery for individuals based on the level of intervention needed to treat a mental health diagnosis. In many severe situations, a crisis intervention is required, which could include an inpatient psychiatric stay. Acute hospitalizations are often managed by voluntary hospitals, rather than state-operated facilities, with some variation.
Given the important distinction between state-operated and voluntary hospital inpatient psychiatric care, this piece further focuses on the latter.1 In doing so, we outline one way the state might finance the continued expansion or preservation of existing inpatient psychiatric capacity in voluntary hospitals.
Bed Capacity Trends
“Bed capacity” generally refers to the number of beds (or spots) that are available to patients at a given facility or across certain types of settings. Here, references to bed capacity refer to the number of available beds in inpatient psychiatric settings.
According to a 2025 report by the Manhattan Institute, a New York-based think tank, between 2014 and 2021, “New York lost more than 700 state psychiatric hospital beds. Since [Governor] Hochul took office, the state has gained back about 300 beds.” The prior reduction was generally a reflection of a broader policy preference to shift care out of institutional settings and into community settings. In 2014, the Office of Mental Health (OMH) framed the reduction in inpatient psychiatric capacity as a policy imperative, stating, “OMH must shift resources to improve the overall health of populations served, improve the outcomes of care, and reduce the per-person costs of care. By doing so, OMH can better support the needs of the majority of people in the community—where they do, will, or should reside.” This sentiment was consistent with a general trend in healthcare at the time to shift care into community settings, rather than institutional settings, based on the belief that greater access to community care would avoid the need for institutionalization.
There have been multiple waves of policy discussions concerning balancing community care and institutional settings. The introduction of community care, and its framing with respect to averting the need for institutional care settings, predates even Medicaid. Community care settings, dating back to the Community Mental Health Centers Act of 1963, were popularized following a 1961 Report of the Joint Commission on Mental Health.2 Such community settings were then authorized under the Social Security Act of 1965, alongside the establishment of Medicaid. Accordingly, the reimbursement structure of Medicaid emphasized (and continues to emphasize) community-based care. The use of inpatient psychiatric services in general hospitals, rather than state psychiatric centers, became even more prevalent in the 1980s while the “social control” function of inpatient psychiatric care, where courts could involuntarily confine persons with mental health diagnoses, diminished with the introduction of the dangerousness standard, following O’Conner v. Donaldson (1975),3 and “more restrictive criteria for involuntary state hospitalization.”4 As referenced above, in the early 2000s, a continued emphasis was placed on alternatives to institutionalization following the Supreme Court ruling in Olmstead v. L.C. (1999), which required states to provide care in the least restrictive setting possible.5
Consequently, as detailed in the Palgrave Handbook of American Mental Health Policy, “the landscape of public mental health services system has undergone profound changes in the past several decades from a highly centralized, state mental hospital system to a highly decentralized and diversified mosaic of public and private providers, purchasers and payers.”6 These profound changes were also driven by a belief that “community crisis alternatives, which offer a cheaper alternative to inpatient admission, as well as a potentially less frightening, stigmatizing and socially dislocating experience, have a positive role to play in sustaining deinstitutionalization.”7
However, the availability of and need for psychiatric care in an inpatient or community setting does not appear to be a direct inverse relationship. As research in recent years of cross-national data from the World Health Organization has found, while previously many may have “presumed that expanding the supply of these services hinges on reducing the supply of hospital-based care […] community and hospital psychiatry appear to be complements, not substitutes.”
The Manhattan Institute report also noted additional policy intersections at play during the period of bed decline in New York that appeared to shape decision-making. These included COVID-19, subway safety, prison capacity, housing and homeless shelter policies, and the inter-dynamics of city-state financing. The report further concluded that there’s a need to continue to replenish inpatient psychiatric bed capacity in line with the Hochul administration’s existing investments in mental healthcare.
As research… from the World Health Organization has found… “community and hospital psychiatry appear to be complements, not substitutes.”
Over the past several years, mental health investments have been an important element of the final state budget agreement. In 2023, Medicaid fee-for-service inpatient psychiatric care rates were increased, and two new 25-bed units at state psychiatric care centers were added. A $1 billion investment was announced in 2024. This included over $900 million in capital funding, $18 million of which was for additional funding to open 150 new state-operated inpatient beds. The following two years included major investments in the state budget on top of the previous expansions. The 2025 state budget added $273 million to expand capacity system-wide, including 200 new inpatient psychiatric beds (15 for children, 85 for adults, 25 forensic, and 75 transition-to-home) and a rate increase for mental health providers. And, most recently, the 2026 state budget added another $196 million to strengthen mental healthcare. The investment included $160 million in capital funding to create 100 new forensic inpatient psychiatric beds and a modification to the standard for involuntary commitment.
With these commitments, in 2025, New York moved from number four to number one among states in overall mental healthcare, according to The State of Mental Health Care in America report.
Policy Options
Fiscal and social responsibilities are sometimes put at odds, but there are occasionally opportunities to move the needle favorably for both. This is even more valuable now, given the pressures on the state’s finances, as a result of federal funding reductions enacted in OBBBA. Voluntary hospital psychiatric capacity may be just such a place to improve both outcomes and efficiency.
The Centers for Medicare and Medicaid Services (CMS) released guidance in September 2025 that state-directed payments, which allow states to direct managed care expenditures in connection with implementing delivery system and provider payment initiatives, will be limited to 100 percent of what Medicare will reimburse for the equivalent service at a given provider. As detailed in prior writings, a Biden administration rule allowed such payments to be reimbursed up to the average commercial rate, but the September 2025 Trump administration guidance reversed the Biden administration policy.
Despite the Trump administration change, and because commercial rates are anecdotally viewed as not the highest rate threshold8 for inpatient psychiatric care, unlike in other services, there still may be opportunities to explore a directed payment template (DPT) for inpatient psychiatric care, as happened in Michigan, where CMS recently approved a 2025 inpatient psychiatric care DPT.9
DPTs allow a state to direct managed care plans, a type of health insurance structured to manage the costs and quality of service through contracting with particular providers or facilities, to increase rates to certain providers (through a specified payment arrangement) to achieve an objective such as improving outcomes. Payment arrangements for a class of providers, such as general hospitals or, more narrowly, inpatient psychiatric hospitals, can be in the form of:
A minimum fee schedule—a benchmark rate for a certain set of services.
Quality payments—payments for meeting a pre-identified metric often related to patient outcomes or care delivery.
Value-based arrangements—such payments can take many forms, but frequently reflect a set payment for a particular set of services (episode) at predefined outcome (quality), with the goal of reducing the overall efficiency and or cost of care.
Appendix A in CMS’s state-directed payment materials provides examples of the various types of arrangements that are possible, which may be entirely rate-based or include a performance-based component.
More specifically, one potential opportunity to leverage federal financial participation and enhance the availability of services to New Yorkers is through a DPT that provides an increased rate (established by the New York State Department of Health—the single state Medicaid agency—in consultation with the New York State Office of Mental Health) for inpatient psychiatric hospital stays at safety net hospitals (as defined PHL 2825-i(2)) in receipt of extraordinary financial assistance. In other words, the state could increase federal funding to the hospitals it is deficit-funding with a subsidy of approximately $3 billion annually, through an inpatient psychiatric care-specific DPT.
A portion of the $3 billion is currently paid through a safety-net hospital DPT, but the current payment amounts exceed 100 percent of Medicare reimbursement by approximately 30 percent, so the state will eventually lose federal funding for this class of providers. We previously estimated that New York State could lose up to $600 million in DPT funding, following full implementation of the recently issued guidance. Moreover, for safety-net hospitals that are deficit-funded, other federal reductions could further reduce funding to such facilities. Accordingly, a secondary inpatient psychiatric care specific DPT could help the state maximize available federal funding, while at the same time improving outcomes.
On average, it is estimated that Medicaid pays 81 percent of psychiatric care reimbursed by Medicare in general, but in the case of inpatient care specifically, there is not a readily identifiable metric for inpatient psychiatric care. Anecdotally, industry experts have suggested the Medicare rate is higher than the current Medicaid reimbursement in New York.
As the state and providers brace for the impact of federal funding reductions, the overlap between distressed providers and inpatient psychiatric capacity is a critical component to consider.
In addition, our analysis of the voluntary non-state operated hospitals with inpatient psychiatric capacity compared to those participating in the state’s financial assistance programs for hospitals experiencing fiscal distress suggests there is significant overlap.10 In fact, One Brooklyn Health, Maimonides Medical Center, Montefiore Medical Center, Jamaica Hospital, St. Barnabas Hospital, St. John’s Episcopal Hospital, and various other upstate hospitals account for a significant portion of both the distressed hospital funding and voluntary inpatient psychiatric capacity. As the state and providers brace for the impact of federal funding reductions, the overlap between distressed providers and inpatient psychiatric capacity is a critical component to consider.
A directed payment template could facilitate the targeting of resources to the state’s safety net providers that provide inpatient psychiatric care in lieu of state-only payments, backfilling lost federal resources.
Mental healthcare is a sensitive topic, and there are complicated histories regarding increasing institutional capacity. However, there may be opportunities to identify creative financial arrangements that avoid unintended consequences associated with the impact of the OBBBA, which significantly reduces federal funding to New York, and related federal guidance and rulemaking, including the reduction in available federal funding for safety net hospitals through the state’s current DPT arrangement. The state will be looking for ways to mitigate impacts from recent federal cuts, and as the Rockefeller Institute of Government continues to monitor developments at the federal level impacting New York’s $300 billion healthcare economy, it will also seek to identify opportunities to think creatively about the financing of the state’s healthcare delivery system.
Glossary
Voluntary Hospitals: Voluntary hospitals are “nonprofit, nonpolitical institutions.”
State-Operated Hospitals: State-operated hospitals are facilities funded and run by the state.
Safety Net Hospitals: Safety net hospitals can (a) be either a public hospital, a rural emergency hospital, a critical access hospital, or a sole community hospital; (b) have at least 30 percent of their inpatient discharges made up of medical assistance program eligible individuals, uninsured individuals or medical assistance program dually eligible individuals and at least 35 percent of its outpatient visits made up of medical assistance program eligible individuals, uninsured individuals or medical assistance program dually-eligible individuals; (c) serve at least 30 percent of the residents of a county or a multi-county area who are medical assistance program eligible individuals, uninsured individuals, or medical assistance program dually-eligible individuals; or (d) in the discretion of the commissioner, serve a significant population of medical assistance program eligible individuals, uninsured individuals, or medical assistance program dually-eligible individuals.
ABOUT THE AUTHOR(S)
Jillian Kirby Bronner is a special advisor to the New York State Budget Director and a guest author at the Rockefeller Institute of Government.
[1] See, for example, the Capitol Pressroom “Is it Time to Close More Hospitals?,” September 2025.
[2] The Palgrave Handbook of American Mental Health Policy, 2020.
[3] O’Connor v. Donaldson, 422 U.S. 563 (1975): If an individual is not posing a danger to self or others and is capable of living without state supervision, the state has no right to commit the individual to a facility against his or her will.
[4] The Palgrave Handbook of American Mental Health Policy, 2020.
[5] Olmstead v. L.C., 527 U.S. 581 (1999): under Title II of the ADA, States are required to place persons with mental disabilities in community settings rather than in institutions when the state’s treatment professionals have determined that community placement is appropriate, the transfer from institutional care to a less restrictive setting is not opposed by the affected individual, and the placement can be reasonably accommodated, taking into account the resources available to the state and the needs of others with mental disabilities.
[6] The Palgrave Handbook of American Mental Health Policy, 2020.
[7] Evans, et al. “Community alternatives to inpatient admissions in psychiatry,” 2019.
[8] In some cases, absent a benchmark requirement, Commercial rates are below those of Medicaid for psychiatric services. See, for example, the 2025 New York State policy to require commercial insurers to reimburse a minimum of the Medicaid rate for outpatient psychiatric services.
[9] See Michigan 2025 Inpatient Psychiatric Rate State Directed Payment Template Request.
[10] See, for example, “Inpatient Bed Capacity,” New York State Office of Mental Health and “Safety Net/Financially Distressed Hospital Outpatient Rate Add-Ons,” New York State Department of Health.