by Anna Scanlon December 2002 Click here to view this document in Adobe Acrobat (PDF)!
In 1995, the estimated social cost of substance abuse in the United States was $276 billion.(1) These costs significantly affect state budgets because states spend billions each year on alcohol and substance abuse treatment programs. States are responsible for a greater proportion of substance abuse costs than overall health costs, and the amount of money available to fund substance abuse treatment is shrinking. As budgets tighten, states will find it more difficult to fund substance abuse treatment programs. Need for Treatment Substance abuse treatment is widely considered a cost effective approach to combating the problems associated with substance abuse. According to the California Drug and Alcohol Treatment Assessment (CALDATA), every $1 invested in substance abuse treatment has a return of $7 in cost savings from reduced health costs, crime, lost productivity, etc.(2) Studies have found that the per capita cost of treatment is significantly less than the cost of incarceration. According to the Institute of Medicine, the cost of incarceration is about $40,000 per year compared to $12,500 and $3,100 for residential and outpatient treatments, respectively.(3) Despite the cost effectiveness of substance abuse treatment programs, a substantial gap exists between the number of people who need treatment and the number who receive treatment. According to the National Household Survey on Drug Abuse, the number of people in the United States over age 12 who abused alcohol or illicit drugs in 2001 grew to 16.6 million. Only 3.1 million people reported receiving some kind of treatment for substance abuse in 2001.(4) Public Payers The treatment gap is due at least in part to the difficulty states have in financing substance abuse treatment programs. Substance abuse treatment programs are not financed in the same way as other health programs. Unlike other health expenditures, the majority of mental health and substance abuse treatment programs are financed with public funds. Public and private insurers pay for most health care in the country; however, drug treatment programs often are not covered by these plans. Medicaid and Medicare offer limited coverage options, and many private plans simply do not cover substance abuse treatment. Researchers examined trends in mental health and substance abuse spending from 1987-1997. Treatment spending during this period went primarily to mental health treatments, which accounted for 86 percent of total spending. Only $11.4 billion-14 percent-went to substance abuse treatment. Private insurance plans, out-of-pocket expenditures, and charity groups pay about 35 percent of substance abuse treatment costs, while the public pays approximately 65 percent. In contrast, the public funds only 46 percent of all other health care costs, with private payers covering the majority of the costs. (5) Most substance abuse expenditures between 1987 and 1997 went to hospitals and specialty substance abuse centers. Hospital spending declined overall, but residential and outpatient treatment increased substantially for the same period. More than 70 percent of the money went to specialty providers; the remaining 30 percent went to retail drugs, insurance administration, and general providers.(6) Average Annual Growth in Spending
between 1987 and 1997 
Source: SAMHSA CSAT/CMHS Spending Estimates 1987-1997.
Burden on States Since both public and private insurers do not cover substance abuse treatment at the same level as other health programs, states are left to fill in the gaps. State and local governments are forced to finance a greater proportion of substance abuse treatment costs than of other health care costs. Mental health and substance abuse treatment expenditures added up to $82.2 billion in 1997 with Medicaid and Medicare support at less than one-third of those costs. Although state and local governments funded only 13 percent of all health care services, they funded 28 percent of all mental health and substance abuse expenditures. When only public funding of mental health and substance abuse services is considered, states funded nearly 70 percent of all publicly funded mental health and substance abuse services. Medicaid and state and local governments each paid about 35 percent of all public expenditures on mental health and substance abuse. Medicaid alone supported 31 percent of substance abuse services in 1997.(7) How Do States Pay for Substance Abuse Treatment? The federal government shares the responsibility for funding substance abuse programs through Medicaid and the Substance Abuse Prevention and Treatment Block Grant. States also have allocated funds for substance abuse from Temporary Assistance for Needy Families (TANF) and the State Children's Health Insurance Plan (SCHIP). Other spending on alcohol and drug treatment in the states comes from state and county government general revenues, earmarked taxes, fines and fees, and other revenues. Source of Public Mental Health and
Substance Abuse Spending, 1997 
Source: SAMHSA CSAT/CMHS Spending Estimates, 1997.
Medicaid/Medicare Medicaid and Medicare pay substantial portions of the substance abuse treatment expenditures. However, the proportion these programs spend on substance abuse is significantly lower than that spent on other health expenditures. Under federal guidelines, states are required to provide only a limited amount of mental health services and can provide most substance abuse treatment services under Medicaid at their discretion. The Medicaid program pays approximately one-third of mental health and substance abuse treatment expenditures. Medicaid supported about 20 percent of all substance abuse treatment costs in 1997 and covered about 30 percent of the public substance abuse treatment costs. Similarly, Medicare finances a smaller proportion of substance abuse services than of other health care costs. Medicare funds 21 percent of substance abuse services compared to 44 percent of all health care.(8) Substance Abuse Prevention and Treatment Block Grant (SAPT) Each year, Congress appropriates funds for states to use in treating substance abuse under this grant. The Center for Substance Abuse Treatment (CSAT) administers the block grant, which totaled $1.1 billion in 1997. According to the center, funds from the SAPT block grant went to support nearly 10,000 community-based treatment and prevention service providers in all 50 states. Approximately 40 percent of the public funds spent on treatment and prevention in the states come from this grant.(9) States that receive money from this block grant may use the funds only for alcohol and other drug prevention and treatment. The federal government also places various restrictions and mandates on grant spending.(10) Temporary Assistance to Needy Families (TANF) The federal government requires that TANF funds be restricted to non-medical services. Since many substance abuse services are actually qualified as non-medical, states can use TANF funds to finance substance abuse services. Screening and assessment, treatment by non-medical professionals, and residential child care costs all are considered non-medical. More than 40 states have taken advantage of the rules to allocate TANF funds for substance abuse treatment services.(11) State and Local Governments The largest portion of spending on substance abuse services comes from state and local governments. State and local governments paid 35 percent of the costs for mental health and substance abuse services in 1997. They provided 20 percent of substance abuse spending, which was slightly more than Medicaid payments provided.(12) Source of Health Spending by Type, 1997 
Source: SAMHSA, CSAT/CMHS Spending Estimates, 1997
Trends in Substance Abuse Expenditures Although the treatment gap is growing, the annual growth rate in expenditures for mental health and substance abuse treatment is lower than the annual growth rate for all health care expenditures. An article in the July/August 2000 Health Affairs reported that the growth in substance abuse and mental health expenditures was 6.8 percent between 1987 and 1997, compared to 8.2 percent for all health expenditures. During this time period, there was a 10 percent decrease in hospital expenditures and a 5 percent decrease in nursing home expenditures. The drop in inpatient treatment may be indicative of managed care cost saving efforts.(13) Between 1987 and 1997, substance abuse spending increased very slowly, at a rate of 2.5 percent compared to 4 percent for mental health and 5 percent for all health spending. Other health benefits increased at a faster rate than mental health benefits in private health insurance plans. The responsibility of funding substance abuse treatment noticeably shifted to public payers between 1987 and 1997. According to a study published in Health Affairs, public funding of substance abuse services increased from 50 percent to more than 60 percent in the 10-year period.(14) Private insurance spending for substance abuse spending actually declined during the same period at a rate of 0.6 annually. In contrast private insurance spending on substance abuse increased only 1.9 percent annually. The Medicare and Medicaid share of spending increased rapidly compared to private payers with annual growth rates of 10 percent and 11 percent, respectively, for substance abuse treatment. However, the spending increases in Medicaid declined overall for substance abuse spending.(15) Percentages of Persons Aged 12 or Older Needing but Not Receiving
Treatment for an Illicit Drug Problem in the Past Year, by State: 2000 
Source: SAMHSA, Office of Applied Studies, National Household Survey on Drug Abuse (Washington, D.C.: 2000).
Although it is important for states to finance substance abuse treatment and help close the treatment gap, trends in health care spending are challenging state efforts. Trends show marked discrepancies in the financing of health services. Substance abuse treatment spending has not increased at the rate of other health expenditures, and the burden is increasingly placed on public payers to fund substance abuse treatment. As budgets tighten and health care costs increase, states will be increasingly challenged to find ways to fund substance abuse treatment services.
Notes 1 Substance Abuse and Mental Health Services Administration, National Estimates of Expenditures for Substance Abuse Treatment, 1997 (Rockville, Md.: SAMHSA, 1997). 2 Tracy Delaney, Anne Gable, and Nicole Kendell, Treatment of Alcoholism and Drug Addiction: What Legislators Need to Know (Washington, D.C.: National Conference of State Legislatures, 2000). 3 Schneider Institute for Health Policy, Substance Abuse: The Nation's Number One Health Problem (Princeton, N.J.: Robert Wood Johnson Foundation, 2001). 4 Substance Abuse and Mental Health Services Administration, Results From the 2001 National Household Survey on Drug Abuse: Volume I. Summary of National Findings (Rockville, Md.: SAMHSA, 2002). 5 Substance Abuse and Mental Health Services Administration, Heath Care Spending: National Expenditures for Mental Health and Substance Abuse Treatment, 1997 (Rockville, Md.: SAMHSA, 2000). 6 Ibid. 7 Ibid. 8 Ibid. 9 Center for Substance Abuse Treatment, Substance Abuse Treatment Block Grant, Programs in Brief, (Washington, D.C.: CSAT, 2000). 10 Tracy Delaney, Anne Gable, and Nicole Kendell, Treatment of Alcoholism and Drug Addiction: What Legislators Need to Know. 11 Ibid. 12 Substance Abuse and Mental Health Services Administration, Heath Care Spending: National Expenditures for Mental Health and Substance Abuse Treatment, 1997. 13 Mark, Tami, et al, "Spending on Mental Health and Substance Abuse Treatment, 1987-1997," Health Affairs (July/August 2000). 14 Ibid. 15 Substance Abuse and Mental Health Services Administration: Heath Care Spending: National Expenditures for Mental Health and Substance Abuse Treatment, 1997. Click here to view this document in Adobe Acrobat (PDF)! |