RALEIGH — As many as 1,200 North Carolina adults who are mentally ill could soon be put out of rest homes and assisted living centers, as federal Medicaid regulators start enforcing a long-standing law that prohibits housing too many such residents alongside elderly people.

When more than half of the residents of an adult care home have a primary diagnosis of mental illness, it becomes what federal regulators term an "institution of mental disease." By law, patients in such facilities don't qualify for the Medicaid benefits now paying for much of their care.

Lanier Cansler, secretary of the state Department of Health and Human Services, said Thursday that dozens of adult care homes in the state could be forced to close and their residents sent away with few options for a new place to stay.

"There's a lot of fear out there among people in these facilities that ... they are going be dumped out of the street," Cansler said.

Losing the Medicaid contribution to residents' housing would cost about $9 million a year. The state predicts beds won't be available for at least half of those to be discharged.

Though Cansler has described the looming crisis as a "perfect storm," advocates for the mentally ill and operators of adult care homes say they have long warned the state about the issue.

Vicki Smith, director of the advocacy group Disability Rights North Carolina, said the problem is a direct result of the failed 2001 effort to reform the state's mental health system by closing hundreds of beds in government-run psychiatric hospitals in favor of private outpatient services that in many cases have yet to materialize.

"They've been warned, but they deferred taking the hard steps needed to appropriately invest in the state's community-based infrastructure," Smith said. "And now it is going to come home in a really devastating way."

Federal Medicaid officials have given North Carolina two months to gauge the depth of the problem. Cansler said state mental health officials are working to lessen the consequences of the change by finding appropriate housing for some residents and lowering the number of residents at other facilities below the federal threshold.

40 facilities affected

The law, which applies to centers that house more than 16 people, will affect about 40 facilities in North Carolina that house about 1,200 residents.

"You are going to have a lot of facilities that have more residents than are allowed," said Mary Bethel, a state AARP lobbyist. "They are going to have to find other placement options for these individuals. And they aren't the kind of individual that facilities are clamoring to take."

For years, adult care home operators and advocates for the mentally ill have warned the state about the dangers of mixing older people with medical problems in the same facilities as younger people with such serious illnesses as bipolar disorder and schizophrenia.

But with a shortage of private psychiatric hospitals that will take Medicaid patients and long waiting lists for the remaining state mental hospitals, there are few remaining options for thousands of people with severe mental illnesses.

Last year, after four residents of adult care homes with mental illness were murdered in separate violent incidents, Disability Rights filed a complaint about substandard conditions in some of the facilities with the U.S. Justice Department. The resulting investigation is under way.

Options are limited

Lou Wilson, a lobbyist for the adult care industry, sent a letter to legislators this week saying the operators of the homes have been put in a tough spot.

"In spite of the state's lack of support, owners all across North Carolina have been good partners with the state and struggled to continue to provide quality services to people with mental illness because there are limited residential options available," Wilson wrote.

Under current state policy, when a resident leaves an adult care home, a team that includes facility staff, family members and social workers is supposed to collaborate to find the person a new home.

But legislation now moving through the General Assembly would relieve private facilities from finding a safe, secure new setting for residents being discharged. Supported by the industry, the measure passed the state House overwhelmingly Tuesday and will likely head to a vote in the Senate within the next week.

Smith said there is little doubt where many of the hundreds of people being discharged from the adult care homes will end up.

"The state isn't prepared for this, and there are few options," Smith said. "People will be sent home, if they have a home to go to. We'll see people ending up in emergency rooms. The state hospitals won't be able to handle the volume, and ultimately the jails will swell. It is a terrible crisis."

thomas.goldsmith@newsobserver.com or 919-829-8929