Rethinking Cost Containment in Publicly Funded Psychiatric Drug Budgets


Given my experience as a state level administrator several years ago, I have continued an interest in the way which public expenditures for mental health reflect a variety of interests — usually in an attempt to limit expenditures from the state coffers.  One of the areas of greatest concern to state legislators each session is the cost of participating in the Medicaid program.  A significant portion of state mental health budgets, especially for community mental health programs, is in this pot of money.  And psychiatric drugs are a major expense in state Medicaid program.   As I will point out, however, there are major advocacy groups who want to expand, not limit access to these drugs.

The federal government has a major fiscal investment in Medicaid because it pays approximately 60% of the costs of health services under the program.  So in 2003, the Office of the Inspector General in August 2003 produced a report on how states could become better purchasers of psychiatric drugs.   Even 10 years ago, a total of $20 billion was spent on drugs by Medicaid programs of which $4 billion of that was for psychiatric drugs–and this excluded antianxiety and sleep meds.  At that time already, in some states the cost of psychiatric drugs alone had surpassed the costs for high blood pressure, respiratory problems and diabetes (OIG report).

The OIG report studied the 10 largest states and showed that the cost of psychiatric drugs for their Medicaid programs were significantly higher than the rates paid by the Big Four federal agencies (Department of Defense, Veterans Administration, Public Health Service and the Coast Guard).  The OIG estimated that these 10 large states only (which represented about 58% of total Medicaid expenditures for the US) could have saved $256 million each year had they simply used the federal purchasing standards.  Smarter purchasing practices would be one way to save millions of dollars.  However, given the size of total expenditures for psychiatric drugs, this would have provided only marginal budgetary relief for the federal and state governments.

So, most states have made fairly feeble attempts to rein in the cost of these drugs through other methods.  These are all controversial but include requirements for “prior authorization,” “formularies,” “fail first requirements,” “use of generics,” “limiting the number of prescriptions filled,” and others.  One reason they’re controversial is that prescribers almost universally object to any and all restrictions on their practice and authority.

Various advocacy organizations have also jumped into the discussion in support of the professional objections to cost containment activities.  The Bazelon Center for Mental Health Law has been one of these and authored an article entitled, “Medicaid Policies to Contain Psychiatric Drug Costs,” in the respected journal Health Affairs in March, 2005.  The authors, Koyanagi, Forquer, Alfano, studied Medicaid policies that restrict access to psychiatric drugs by surveying 47 of the 50 US states.

Revealing one of many unspoken assumptions that the drugs are underused and effective, they worried that psychiatric drugs were not being protected in the haste to save money.  Consequently, they believed that restricting drugs would actually increase costs in the long term.  They lamented that in 2003 forty-six states made changes to reduce the costs of their Medicaid outpatient drug benefits.

As evidence of this concern, the article refers to a study in New Hampshire in 1990 that showed when psychiatric drugs were reduced, there was a “large increase” in the use of emergency mental health services and partial hospitalization for people with schizophrenia — but, and here is where I will begin to raise questions about advocacy efforts to keep drugs flowing freely — they ignore the increasingly clear evidence that reducing drugs without great care almost always leads to “rebound psychosis” which is the result of the drugs themselves causing super-sensitivity.  This kind of conclusion avoids the critical question of whether it was the decrease in drugs or the way in which they were decreased.

Tempering the authors’ concerns, they admit that there were “a large number of exemptions for those policies…”   And they cite Oregon as an example where the state allows practitioners much greater discretion than most other states.  In other words, the formulary in this case is voluntary and “practitioners are allowed to prescribe any drug that they indicate is medically necessary and the most effective available.”  There are 20 states, including Oregon, who have made this psychiatric drug “carve out.”

Shifting to a focus on children and youth, an April 2014 report, “The Five Most Costly Children’s Conditions, 2011: Estimates for U.S. Civilian Noninstitutionalized Children, Ages 0-17” (Statistical Report #434) from The Agency for Healthcare Research and Quality shows that the total US expenditure for all health services to children (private and public funds) in 2011 was $117.6 billion.  Of this, mental health conditions come in as the largest expenditure at $13.8 billion.  The cost of psychiatric drugs is 41.4% of this total mental health cost or $5.7 billion.  Medicaid picks up the tab for about half this cost; in a very small state like Oregon alone, this Medicaid bill comes close to $30 million every year!

In the face of threats to Medicaid budgets because of these clearly astronomical costs, the Bazelon article worries about the effects of “limitations on stimulants to children and youth with attention deficit disorder (ADHD), while others [children and youth] may be harmed by restrictions on barbiturates or anticonvulsants, which are often prescribed as supplements to other medications.”  In other words, Bazelon was implicitly encouraging the practice of polypharmacy for children and youth!  They go on in a similar vein to express approval of polypharmacy for adults with “serious mental illnesses, many of whom require treatment with multiple psychiatric medications.”  They correctly point out that many of these people have chronic physical disorders such as diabetes—but they seem unaware that these problems were nearly always a result of the use of antipsychotic medications themselves.

Just one more example of the confusion about using extremely expensive drugs appears in a 2012 article in Schizophrenia Bulletin, “Comparative Effectiveness of Second-Generation Antipsychotic Medications in Early-Onset Schizophrenia” by Olfson et al in which the primary author and most other co-authors acknowledge financial or advisory ties to pharmaceutical companies.

They compared short-term outcomes and physical health problems between first- and second-generation antipsychotics for young people.  Three quarters of young people discontinued their psychiatric drugs in first 6 months, many were experiencing weight gain and there was no difference in outcomes between those prescribed 2nd vs 1st generation antipsychotics.  It is curious that in this article there was no attempt to connect the dots — young people don’t want to gain weight and probably object to the other many side effects of antipsychotic medications, 1st generation or 2nd.

There are at least three main arguments that swirl around cost containment in public expenditures for psychiatric drugs.  The first is simply that limitations of any kind deny resources that are life-preserving and cost-saving to people labeled with “Serious Mental Illness” — they cite studies that show an increase in hospitalizations, homelessness and incarceration.  Never mind that there are many other possible explanations for these outcomes such as rebound psychosis, alcohol/drug use, poverty and discrimination.  As an example, this argument is made in visually attractive formats like that sponsored by Harvard Law School’s Health Law and Policy Clinic — and Bristol-Myer Squibb — not exactly a disinterested economic partner.  A corollary is that by gaining some modest savings, even more Medicaid enrollees can get even more access to the drugs.  This is one of the points made in the OIG report mentioned early in this blog and is echoed repeatedly in other drug-induced advocacy efforts.

There are Big Pharma lobbyists in every state capitol working the back offices to eliminate any and all restrictions on the use of their products.  Barring that, they will work to neutralize any kinds of cost containment barriers and keep the gate as wide open as possible — always arguing (despite evidence from unbiased research) that drugs are cost effective in both short and long term.

A second public policy discussion revolves around that idea that costs have to be reduced and there are reasonable though controversial methods already available to do this.  They simply need to be strengthened.   But then too, this argument is a piece of the conversation behind the scenes in state capitols and the pharmaceutical lobby has a powerful say in carving up the exceptions so that their highly profitable business sustains and augments itself.  Even more people end up taking their drugs.

The third argument is one that I would endorse.  Let’s pay attention to unbiased research that shows convincingly that we’ve overdone it with psychiatric medications.   For example, the so-called atypicals are expensive but no better — and in some instances worse because of their role in causing metabolic syndrome.  And how many “relapses” are actually caused by rebound psychosis from poor medication withdrawal practices?

We could reduce costs, get better results in both long term mental health outcomes, and furthermore lower costs in physical health care and mortality.  This argument leads in the direction of transferring savings from drugs to improving community services, peer supports and health care, and training more staff and aspiring mental health workers to understand the relationship between poor outcomes and over-use of drugs.  I believe we could both save money and augment recovery-oriented programs.  Would this be such a bad business deal?


Mad in America hosts blogs by a diverse group of writers. These posts are designed to serve as a public forum for a discussion—broadly speaking—of psychiatry and its treatments. The opinions expressed are the writers’ own.


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  1. Very interesting, coming from someone who was a high level administrator in the Oregon “mental health” system. What he says shouldn’t surprise anyone who reads MIA regularly. But I would hope what he says could reach other government officials, those who want to see at least some real help given to people with emotional problems.

    I think this would be a good article to encourage such people to read. Thank you for writing it.

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  2. Excellent analysis Bob and thanks much for the in depth examination of these issues. I have long felt that the sheer expense of the medical/disease model of “mental illness” is the Achilles heel that will eventually cause it to have to radically change. The cost of not only employing high priced doctors and nurses in acute and outpatient settings, but also paying for very expensive pharmaceutical drugs, is becoming untenable in many counties and states.

    You mention the cost/effectiveness of antipsychotics. There seems to be a push towards using the older “typicals” such as Haldol and Prolixin, not only because they are much cheaper than most atypicals, but because some research is saying they are just as “effective.” Of course this ignores the severe extra pyramidal side effects and potential for long term neurological disorders of the older antipsychotics. So will we trade more expensive drugs such as seroquel and zyprexa with their known metabolic side effects, for older antipsychotics that cause Parkinson like symptoms?

    How about what we do what you suggest…shift monies to much more effective and cheaper ways of helping people… Community and peer supports with increased available housing?

    Thanks for your words Bob.

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    • Bob,
      Thanks for this post.
      Jonathan- I think the extra pyramidal side effects can be mitigated by conservative dosing. I am not convinced that there is any true difference between haloperidol and risperidone. When risperidone was first marketed doses of 2- 16 mg were compared to haloperidol 20 mg. the recommended doses were 3-6 mg and nowadays most people think 2-4 mg is most optimal. We now believe these drugs are dose equivalent. If equivalent doses of haloperidol were used, I doubt risperidone would ever gotten FDA approval.
      I worked n a study in the early 1990’s which showed that most people respond to haloperidol 3.5 mg and the dose was even lower for people experiencing a first episode of psychosis.
      Most of these drugs are now generic (although their costs remain high). So now there is a push for lurasidone (Latuda) as being weight neutral or effective for depression.
      But Bob is correct. VT had a “carve out” that was pushed through by lobbyists, NAMI-VT and physicians who were on the drug companies’ speaker bureaus.

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      • Sandra interesting about effectiveness range being around 3.5 mg. I regularly see people in the community and in my practice who are prescribed at least 20 mg of haloperidol a day and a few times as much as 40 mg. The effect is very noticeable with muscle rigidity, akathisia, anhedonia, tics, etc. Horrible. I have almost never seen someone prescribed less than 5 a day, and it is often paired with other antipsychotics.

        so yes, conservative dosing and much less poly pharmacy would go a long way to mitigating extra pyramidal side effects. That would be wonderful to see.

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        • That study was published in 1991.

          At that time, academic leaders in this field were emphasizing low dose use of these drugs. All of this got washed away in the tsunami of marketing accompanying the newer antipsychotics. They were promoted -by some of these same academic psychiatrists – as being so much safer that people did not need to worry about dose and that whole message got lost. Residents do not even learn any of this these days.
          This was a well done study by two giants in the field (I had a bit part and they were gracious to add me as an author).

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          • Interesting- I have always wondered about the thinking of psychiatrists for prescribing multiple meds in such large doses. I will give an example of someone from a while back who was receiving 800 mg of seroquel, 2 mg twice a day of xanax, and 120 mg of celexa. This is for someone diagnosed with depression- no psychosis. She says the seroquel was for sleep.

            I have always wondered how doctors simply pick and choose meds- subjective preference, research, etc?…and what leads them to high dose polypharmacy. Is there literature that supports it?

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          • Jonathan,

            “I have always wondered how doctors simply pick and choose meds- subjective preference, research, etc?…and what leads them to high dose polypharmacy. Is there literature that supports it?”

            I don’t think doctors or psychiatrists generally think much about such issues as how different drugs they prescribe function pharmacologically. Some may be interested in psycho-pharmacology, and know more about it, but that certainly is not the rule. In your example, the patient was given 800 Seroquel, among other drugs, for sleep, or so she said. A very small dose of Seroquel, such as 25-50 mg is very sedating and may help in sleep, because it’s a strong antihistamine at those doses. It works well at first, then after some time it no longer works. Doctor thinks, the patient responded well to a low dose of Seroquel, let’s increase it. They may in this process increase the dose of Seroquel up to 800 mg just for sleep, but the increases won’t work anymore for sleep in the same way it worked in 25-50 mg.

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          • I’ve also seen “data sheets” that come with the drugs, that have “target doses” for each drugs, etc. For instance, Abilify for bipolar, target dose is 15 mg. Then these some information on how quick to increase the dosage to reach the target dose, etc.

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      • Haloperidol is a very potent drug on dopamine receptors and it’s easy to get lots of dopamine blocking with it, unless you stay in low doses. If you block dopamine receptors very effectively, you also get side effects. In comparison, for instance quetiapine binds much more weakly to dopamine, so that at 600-800 mg you get some dopamine antagonism that may be used in psychosis and you can’t really get to the max. dopamine antagonism that haloperidol can give. In that sense, it’s harder to give too much dopamine blocking with quetiapine than haloperidol. However, many other older neuroleptics are also weaker on dopamine receptor and stronger on other receptors compared to haloperidol, etc.

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      • An interesting article from Mental Elf:

        I think that drugs such as “first generation” haloperidol, which have much affinity on dopamine receptors, easily have many adverse effects related to them antagonising dopamine receptors very effectively. Haloperidol and some other older generation drugs block dopamine very effectively. Using smaller doses of haloperidol will cause smaller amounts of dopamine blocked, measured by receptor occupancy, etc. However, there are many other “first generation” drugs that don’t have so great affinity for dopamine receptors.

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    • Are the second generation neuroleptics “better” than the first generation drugs? I think it would be best to forget the distinction about first and second generation drugs. The idea that the second generation drugs are much more effective, and have less side effects, has lead to doctors prescribing them for even more variety of patients. They’re now prescribed as a first-line treatment for insomnia, for instance. Sure, Seroquel is very sedating at 25-100 mg, because of the histamine effect, maybe some effect on other receptors as well. Doctor thinks, hmm, Seroquel was useful for this patient. When the same patient comes to doctor and complains she can no longer sleep, the doctor ups the dose of Seroquel, hoping it will give the same sedating effect. But it will not, that original sedating effect will not increase from that point on, and we end up with people asking help for sleep eating Seroquel in “dopamine blocking antipsychotic doses”.

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  3. The states have a vested interest in containing Medicaid costs, because states have to balance their budgets. The federal government (with its 18 trillion dollar debt), not so much. It can borrow or print money (although, not for much longer).

    I don’t understand why state legislators don’t stand up to these drug makers. The state Attorney Generals seem to be the ones taking up that role – with billions in lawsuits against the pharmaceutical companies.

    The pharmaceutical companies are involved in fraud – criminal behavior. But pharma cannot *force* people to take drugs, or *force* people to pay for them. Only the government can do those things. Pharmaceutical companies do not issue court orders, or impose taxes.


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  4. ya Duane…some of these drugs are indeed very expensive…Abilify I think is the most but so is Geodon and other newer “atypicals.”. Big Pharma has made a fortune marketing these drugs as wonder meds that are far more safe and effective than older antipsychotics such as Haldol and Thorazine. But of course we are now learning about severe metabolic problems, weight gain, diabetes, heart disease, etc, associated with the newer drugs.

    So some say the answer is to return to those cheaper older neuroleptics that were horrifically damaging. Like you say Duane, hopefully the sheer cost of drugging enormous swaths of population will force the hands of those who manage State Budgets to rethink this approach to mental health.

    If longitudinal studies showing poor outcomes and long term health effects doesn’t change the debate, perhaps financial budgetary burdens will convince people to make significant changes to reduce drug based treatment strategies.

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    • The “atypical” drugs are or have been very expensive because of their patents. However, the patents of these drugs have now expired or they will expire soon, which will result in cheaper generics coming to market. Just look at it, next we’ll see psychiatrists promoting for depot or injection forms of these same neuroleptics, which new forms have new patents.

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  5. Bob,

    Thanks for stating so clearly what would save money, respect scientific knowledge and promote healing and recovery. I am so troubled by the influence of Big Pharma in our mental health system…it is robbing people of their lives…children too…thank you for stating what should be clearly apparent to a system apparently blinded by the influence of Big
    Pharma’s deep pockets…

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  6. Locally, one needs only look at the contracted services budget for our community mental health centers and it is not surprising that medication trumps any other modality. The popular message is reach out and receive treatment; however, the impact of limited resources on the nature, timing and extent of the treatment provided in the face of ever expanding service demand is ignored. Consequently, the emphasis is strictly on access and process (the McDonald’s numbers: “How many did you serve?”). The priority is serving the most individuals at the lowest possible cost so the dominate modality is medication management at the cost of a quarterly fifteen minute visit. The actual cost of medication is irrelevant as it typically covered by Medicaid, Medicare Part D, or private insurance.

    Until outcomes and as well as all costs associated with failing to provide people with the help they need and want when they require it are considered significant nothing will change. The growth in the number of individuals on disability by mental illnesses strongly suggests that the current medication paradigm simply isn’t working long into the Era of Wellness & Recovery.

    Oh, not too long ago I attended a presentation at our largest community mental health center which serves 20,000 annually. One slide said so much, “Medication is the Foundation for Recovery.”

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