The impact of risk shifting and contracting on mental health service costsin California

This paper identifies the impact of "program realignment," a 1991 Californi a state policy that significantly enhanced local governments' financial ris k and programmatic authority for public mental health services, on treatmen t costs per user, and on the mix of inpatient and outpatient service costs. The study employs a natural pre-realignment and post-realignment design us ing the 59 California local mental health authorities (LMHAs) as the unit o f analysis over a seven-year period spanning policy implementation. Total t reatment and inpatient cost per user decreases and outpatient cost per user increases after program realignment. Higher levels of contracting with pri vate providers tend to enhance this trend, while risk for institutional ser vices reduces user costs uniformly. Financial and programmatic decentraliza tion can enhance cost efficiency in treatment, while promoting substitution of outpatient services for inpatient services. Local conditions such as ri sk and contracting determine the extent of the policy response.