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.

State health officials have said residents in 38 adult care homes in the state, including three in Charlotte, could be 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," said Lanier Cansler, secretary of the state Department of Health and Human Services.

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

For years, adult care home operators and advocates for mentally ill people 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.

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.

The law, which applies to centers that house more than 16 people, will affect 38 facilities in North Carolina that house about 1,200 residents. Those affected in the Charlotte area include Lee's Assisted Living in Charlotte, Hunter Village Assisted Living in Huntersville and Crown Colony Assisted Living in Mooresville.

Lou Wilson, a lobbyist for the adult care industry, sent a letter to legislators recently saying 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.

Her group supported legislation, just passed, that requires each resident who leaves an adult care home to get assistance in finding a new home from a team that includes facility staff, family members and social workers.

Wilson said the federal government has set Sept. 1 as the deadline for the state to comply with the law or it will stop receiving Medicaid payments for the mentally ill residents in assisted living.

Amy Hart, administrator of Hunter Village and Crown Colony, said mentally ill residents require medication management, health care monitoring and supervision that they won't get if they're discharged.

"If we are forced to discharge half of our residents, we may not be able to remain in operation at all," she wrote in an email to advocates. "If we are lucky enough to be able to remain in operation, with losing between a quarter to a third of our residents from each facility, it is not just our industry that's going to be affected. Our vendors, utility providers, and county government are going to be affected when we are unable to pay our bills and taxes. Our staff may also be in jeopardy of losing their jobs, as will many assisted living facility employees throughout the state." Observer staff writer Karen Garloch contributed.