Get off [public transportation] at San Francisco's Powell Street station and you enter an open-air asylum. A woman crouches on the sidewalk, screaming obscenities. A man stumbles in circles, haunted by demonic voices. Hands reach out and rattle cups for spare change; voices curse those who pass by. For more than three decades, California has turned its back on those who suffer from severe mental illness, treating them as unfortunate fixtures in our urban landscape rather than as human beings who desperately need medication, treatment and housing in order to cope with their illnesses.1
California is not alone in turning its back on the severely mentally ill. Because of financial incentives from the federal government, every state continues to close state-run psychiatric hospitals,2 leaving those who are poor and severely mentally ill with no treatment or care. Many cities have areas similar to San Francisco where the mentally ill suffer in public3 because it is cheaper to abandon the mentally ill to an open-air asylum than it is to build and fund psychiatric hospitals.
In the decades following World War II, media reports of the horrifying conditions of psychiatric hospitals shocked and embarrassed most of the United States.4 As a result, various groups advocated reform of the overall system of treatment for the mentally ill and particularly attacked the practice of placing the mentally ill in over-crowded, filthy, warehouse-like institutions.5 Popular culture depicted psychiatric hospitals as places in which the government and sadistic doctors and nurses tortured society's non-conformists and free thinkers.6 Theories such as psychiatric hospitalization producing mental illness or resulting in psychosis were appropriate reactions to an insane world that gained widespread acceptance.7
Almost simultaneously, medical research discovered that certain medications could effectively reduce or eliminate the most debilitating symptoms of serious mental illness. These antipsychotic medications "controlled the symptoms of certain psychoses sufficiently to allow many patients to function outside a hospital."8 Belief that such medications would enable previously severely disabled individuals to function independently in the community encouraged the widespread release of the mentally ill from state hospitals.9
Thus, deinstitutionalization has mainly been described as the result of one or more of the combination of the following: disgust with the condition of psychiatric hospitals;10 theorizing that mental illness didn't exist, so that if removed from the hospitals, patients would recover;" belief that many institutionalized individuals could function well outside the hospital if community care options were provided;12 and the development of effective medications that could alleviate the most devastating symptoms of mental illness.13 Yet, almost completely absent from the scholarly literature is an examination of the federal government's Medicaid policies in accelerating the abandonment of the mentally ill.14
While debates continue in Congress over "parity" in healthcare coverage of mental illness by private insurance companies,15 there is no audible debate about the federal government's responsibility for the plight of the indigent mentally ill.16 By excluding from Medicaid reimbursement the majority of mentally ill individuals who need long-term psychiatric care in a hospital, yet permitting payment for "treatment" received elsewhere, the federal government has contributed to the provision of substandard care, as well as to the failure to provide the mentally ill with any care at all. Since many of the most severely mentally ill are also extremely poor,17 forcing private insurance to cover psychiatric illnesses18 does nothing to assist those who cannot afford insurance in the first place.
This Article will first describe the history of Medicaid, the federal program designed to assist the extremely poor by reimbursing states for medical costs. …