So cutting funding is increasing regulation how?

I'm pretty sure what's being presented is the opposite situation, where private companies have an industry taken away, rather than handed to them.

That said, I'm not entirely sure how increased regulation makes it impossible to manage as long as the rest of the market is allowed to work. It's fairly obvious that both capitalism and socialism have very real downsides when unfettered. It's a balancing act.

I don't think you'd like to live in an unregulated, for-profit, mental institution where being discharged would mean one less revenue source.

Don't know why you're being downvoted. You astutely point out that just as defunding can cause a move toward privatization (or the belief that only private enterprise can solve a given problem), so too can overregulation lead toward nationalization (or even at state/local levels, the belief that only government can solve it).

Because some people feel that businesses being strangled by regulation is a favorite straw man those in favor of deregulation trot out to protect their interests. The original scenario, at least in the opinions of some people, is a nice summary of the abuses of privatization while the down voted scenario is a right wing bogeyman meant to scare the ignorant into voting against their own interests. (In some people's opinion)

I won't downvote it if anyone can show an example of it actually ever happening.