Area hospitals are responding to financial losses created by a new Medicaid system of paying for psychiatric care by reducing the number of available beds and by releasing patients as soon as possible, according to members of the Mental Health Coalition.

Last July, amid protests from mental health care providers and consumers, the Division of Health Care Financing, which administers Medicaid, adopted a diagnostic related group system of payment for psychiatric treatment.Under the system, payment is made based on a diagnostic category. The most common type of adult psychiatric treatment, for example, allows an average of nine days for treatment. Whether a hospital treats a patient for three days or 20, it is paid for nine. Exceptions can kick in to cover costs with pre-approval if longer-term care is necessary.

"There are several problems coming down," said Jan Harding of the Alliance for the Mentally Ill, "and the (diagnostic related groups) are putting a tremendous amount of pressure on the (mental health) system. People are being let out of the hospital too soon and we are seeing repercussions."

Dr. Richard C. Ferre estimated that Primary Children's Medical Center loses an average of $100,000 a month under the system, while doctors at University Hospital said it "loses significant amounts of money and is getting only about 28 percent of its bill charges."

The University Hospital is the primary source for inpatient psychiatric care and is being forced to respond by reducing the number of beds available to Medicaid patients.

Ron Hunt of Pioneer Valley Hospital, chairman of a committee that studied the issue, said some hospitals "appear to have become so frustrated with Medicaid reimbursement rates . . . that they have not spent additional staff time tracking statistics. The monthly profit and loss statement, or contractual adjustment, as Medicaid calls it, is the only bad news they can stand."

Because eligibility requirements are stringent, he said, those who are admitted tend to need a "significantly higher level of treatment," creating what he called a double bind.

"It's hard to meet admission criteria to begin with, then the length of stay is reduced, when need is actually increased."

The bottom line, everyone agreed, is funding. Utah ranks 49th nationally in the amount of money the state puts into mental health, and hospitals are cutting back on the number of beds available just to survive.

"Admittedly, we have funding problems," said F. Roy Dunn, a spokesman for the Division of Health Care Financing. He said that in 1982 Utah spent $1.5 million for inpatient psychiatric care of Medicaid patients. By 1988 the amount had increased to around $7 million, "without any specific funding for that type of increase. The fastest-growing area of Medicaid is mental health."

Psychiatric care providers cautioned that the situation is getting worse.

Ferre said patients are released "the minute it looks like a person is sort of stable." With too-early discharge, "there's an increased risk the patient will regress. We recognize there are limits to what's reasonable, but the present rate borders on malpractice."

Doctors agreed that they are in a bad position, since "if we admit someone, we may not get paid, but on the other hand, if we turn them away or discharge too early and they attempt or commit suicide, we could be sued."

Although he said he is sympathetic, Dunn said it isn't "fair to place all the blame on Medicaid. Although we may not be doing very well or as well as needs to be done, I think we're doing better than private insurers."

Several members of the coalition and Medicaid will meet to try and find a solution that can be presented during the next legislative session, which begins in January.