Since 1983, the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982 has determined payment for services in most psychiatry units located in general hospitals. This system provided reimbursement on a cost-per-discharge basis. In 1997, a Balanced Budget Act (BBA) was passed by Congress which has replaced the TEFRA system of 1982 (H.R 2015). As a result of this law, many general hospital psychiatry units, particularly those that address the needs of elderly patients with high levels of medical comorbidity, will experience a reduction in their reimbursement when compared with the old TEFRA system. This reduction will average 7.8% and affect up to 84% of health care organizations. Those with higher TEFRA target amounts, such as is found with most general hospital programs, will have proportionately greater reductions. This article summarizes legislation affecting Medicare reimbursement and suggests a service reorganization approach that would allow billing to both medical and psychiatric payers. Finally, it encourages active participation in psychiatric access and quality standards development and with legislation, such as The Medicare Psychiatric Hospital Prospective Payment System Act of 1999.