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Subacute mental health bed numbers at the hospital would be halved under a Southern District Health Board proposal.
The Otago Daily Times reported that Dunedin North MP David Clark and the Public Service Association had warned clients would have less access to highly-skilled staff such as registered nurses.
Both suggested the board was cutting costs, and would not funnel the $250,000 annual savings to community-based providers.
Pact chief executive Louise Carr said she was disappointed with what she believed was a negative portrayal of the situation.
All staff were professionally trained for their roles at a range of skill levels.
''For anyone to say community staff aren't qualified is not only incorrect, it's insulting to the people we employ.''
At present, hospital stays were longer than they needed to be because of a lack of community beds.
She was confident the board would accept the necessity of beefing up community services.
''The fact is that people are often ready to move into the community, but stay in hospital for longer than they need to because there are no beds in the community. We welcome a more flexible model.
''There's nothing magic about having someone in hospital. They can just as easily access psychiatrists or psychologists while living in the community in their own environment.
''That's particularly important for people living in the regions who would otherwise have to travel to Dunedin.''
However, Dunedin mental health advocate and Royal Australian and New Zealand College of Psychiatrists community member Graham Roper said the cost-cutting criticism levelled by Dr Clark and the union was ''spot on''.
Mental health suffered since the mandatory ring-fencing around funds was relaxed by the Ministry of Health a couple of years ago, he said.
Mr Roper said he would support the move if savings were funnelled into the community to improve services and support.
The board has said it will listen to feedback before deciding what additional support is needed in the community.