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OBJECTIVE: Little is known about how psychiatric disorders affect health care costs in Medicaid programs. The prevalence of psychiatric disorders and costs of care for members of a Medicaid health maintenance organization (HMO) who had psychiatric disorders were examined. METHODS: A cross-sectional, observational analysis of adult Medicaid beneficiaries over a 12-month period was conducted by using data from a health plan that has both an HMO and a behavioral health carve-out. Claims data were analyzed for 6,500 adults who were eligible for services in both plans and who received medical or behavioral health services during calendar year 2000. RESULTS: Thirty-nine percent of the 6,500 adults had a psychiatric diagnosis. Of this subset, 67.2 percent had received no specialty mental health care in the previous year. The presence of any psychiatric diagnosis significantly increased total health care costs by a factor of 2.24 ($6,995 compared with $3,121 for persons with no psychiatric diagnosis) and costs to the medical plan by a factor of 1.77 ($4,690 compared with $2,649). For beneficiaries with bipolar or psychotic diagnoses, higher health plan costs were due predominately to increases in pharmacy and specialty mental health costs. In contrast, higher costs for beneficiaries with depression, anxiety, or substance use diagnoses were attributable to greater use of general medical services. CONCLUSIONS: An analysis of claims data showed that adult Medicaid beneficiaries have exceptionally high rates of comorbid psychiatric conditions, which were associated with significantly higher medical and pharmaceutical costs. The high cost of these beneficiaries to the medical plan has policy implications in terms of the importance of addressing mental health issues in Medicaid general medical populations.