North Carolina's mental health system is under increasing financial stress as the state struggles to provide care for those with severe mental illness. Cutbacks in mental health services have increased the strain on other parts of the system, including psychiatric hospitals.

At Dorothea Dix, Raleigh's 500-bed state hospital, the lack of funding has resulted in serious nursing shortfalls on frequently overcrowded admissions wards. This funding-driven quality of care issue has jeopardized $41.5 million in federal funds the hospital receives.

[Following a federal inspection last week, officials said that if Dix can prove in coming months that it will cure its chronic staffing shortages and fix other problems, it will keep the federal aid. On Thursday, a state auditor's report recommended reforms in the mental health system that include the eventual closing of Dix.]

The primary blame for the problems at Dorothea Dix lies not in Raleigh, however, but in Washington. Because their illness prevents them from obtaining private insurance through employment, many persons with severe mental illness rely on Medicaid to pay for their treatment. For every dollar North Carolina spends on Medicaid the federal government reimburses over 62 cents -- unless the patient is between the ages of 21 and 65, suffering from a mental illness and treatment is in a psychiatric hospital or other "Institution for Mental Disease" (IMD).

The "IMD Exclusion" to Medicaid unfairly discriminates against patients solely on the basis of their diagnosed psychiatric disorder and prevents the state from recouping federal funds that could be used to help pay for improved nursing care in its hospitals.

States like North Carolina fill the funding gap created by the IMD Exclusion by relying on Medicaid's "Disproportionate Share Hospitals" (DSH) payments for hospitals providing care to a "disproportionate share" of poor or indigent patients. But Congress and the president have trimmed North Carolina's DSH payments by some $42 million per year between 1998 and 2002.

Not surprisingly, as North Carolina is forced to shoulder more of the burden of treating the mentally ill in hospitals, other treatment programs are downsized or terminated. This creates a greater burden on the hospitals as demand for services increases. Situations like those at Dorothea Dix will continue to result as the state attempts to do too much with too few dollars.

The IMD Exclusion created an incentive for North Carolina and other states to empty their psychiatric hospitals and provide "treatment" in general hospitals to save money. While care of the severely mentally ill in general hospitals costs as much as $300 per day more than in state psychiatric hospitals, it costs less to the state because treatment is reimbursable with federal Medicaid dollars. Largely as a result, North Carolina lost over 80 percent of its state psychiatric hospital beds by 1996.

Unfortunately, general hospitals are ill-equipped to provide long-term treatment for severe mental illnesses. And having fewer beds available to treat those who are acutely ill means that the psychiatrically ill are quickly released to the streets where many fall through the cracks and receive no treatment whatsoever. In the United States 40 percent of persons with severe mental illness are not receiving treatment for their illness. This lack of treatment ultimately costs society more, not less.

Today, a person in North Carolina with severe mental illness is nearly three times more likely to be behind bars than receiving treatment in a state psychiatric hospital. Based on national statistics, it's estimated that there are at least 5,185 inmates in North Carolina's jails and prisons who are mentally ill.

Nationwide, there are an estimated 150,000 to 200,000 mentally ill homeless, three times the number who are receiving treatment in state psychiatric hospitals.

Medical research has established that severe mental illnesses like schizophrenia and manic-depression are physical diseases of the brain.

They are no more the fault of the sufferer than is Alzheimer's disease, Parkinson's disease or multiple sclerosis -- yet federal Medicaid does not accord them the same level of care.