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OBJECTIVE: To examine differences between the general medical and mental health specialty sectors in the expenditure and treatment patterns of aged and disabled Medicare beneficiaries with a physician diagnosis of psychiatric disorder. DATA SOURCES: Based on 1991-1993 Medicare Current Beneficiary Survey data, linked to the beneficiary's claims and area-level data on provider supply from the Area Resources File and the American Psychological Association. STUDY DESIGN: Outcomes examined included the number of psychiatric services received, psychiatric and total Medicare expenditures, the type of services received, whether or not the patient was hospitalized for a psychiatric disorder, the length of the psychiatric care episode, the intensity of service use, and satisfaction with care. We compared these outcomes for beneficiaries who did and did not receive mental health specialty services during the episode, using multiple regression analyses to adjust for observable population differences. We also performed sensitivity analyses using instrumental variables techniques to reduce the potential bias arising from unmeasured differences in patient case mix across sectors. PRINCIPAL FINDINGS: Relative to beneficiaries treated only in the general medical sector, those seen by a mental health specialist had longer episodes of care, were more likely to receive services specific to psychiatry, and had greater psychiatric and total expenditures. Among the elderly persons, the higher costs were due to a combination of longer episodes and greater intensity; among the persons who were disabled, they were due primarily to longer episodes. Some evidence was also found of higher satisfaction with care among the disabled individuals treated in the specialty sector. However, evidence of differences in psychiatric hospitalization rates was weaker. CONCLUSIONS: Mental health care provided to Medicare beneficiaries in the general medical sector does not appear to substitute perfectly for care provided in the specialty sector. Our study suggests that the treatment patterns in the specialty sector may be preferred by some patients; further, earlier findings indicate geographic barriers to obtaining specialty care. Thus, the matching of service use to clinical need among this vulnerable population may be inappropriate. The need for further research on outcomes is indicated.