So how does the new scheme differ from the state hospitals of 40 years ago?

The efficacy of government to provide social services. Presumably we have sufficiently improved understanding of the proper treatment of folks with mental illness, and won't go around lobotomizing them or giving them EST any more.

That's a little tongue-in-cheek, since forced institutionalization is going to be a bad experience for anyone involved. The shift in approach isn't so much a belief that these institutions are suddenly going to be a walk in the park, but a recognition that leaving people alone to just face the horrors of the street and die with untreated mental issues isn't much of a compassionate alternative.

And, what of the people, like the Michigan Congressman, who are perfectly fine, work like a dog, but are paid so little they can't afford a permanent home?

This is always an obstacle to having the government provide services for the needy. "Why should ____ get a free house when I have to work like a dog to pay for mine?" Especially if _____ is homeless for a reason like drug addiction. It can engender some bitter feelings, which jeopardizes both the political fortunes of the party who advocates for it and the long-term viability of the program.