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Key Questions about Medicaid Payment for Services in “Institutions for Mental Disease”

With the opioid epidemic continuing, state interest in expanding access to substance use disorder (SUD) treatment services remains high. Medicaid plays a key role in financing behavioral health care, paying for 21% of SUD services and 25% of mental health services as of 2014. Additionally, Medicaid Section 1115 waivers related to behavioral health currently are the most frequently sought type of waiver by states. In recent years, most states seeking behavioral health waivers request authority to use federal Medicaid funds for services provided in “institutions for mental disease” (IMDs, an antiquated term in the statute). Since the creation of the Medicaid program, Congress has prohibited states from using Medicaid funds to pay for IMD services for non-elderly adults (ages 19-64). This brief answers key questions about the nature and history of the Medicaid IMD payment exclusion and identifies current administrative and legislative issues to watch.

What is the #IMDexclusion in #Medicaid and what modifications to it are being discussed in Congress?

Key Questions

1.  What Is the IMD Payment Exclusion?

Federal law bars states from receiving “any such [federal Medicaid] payments with respect to care or services for any individual who has not attained 65 years of age and who is a patient in an [IMD].”1 An IMD is a “hospital, nursing facility, or other institution of more than 16 beds, that is primarily engaged in providing diagnosis, treatment, or care of persons with mental diseases, including medical attention, nursing care, and related services.”2 Before Congress created Medicaid, inpatient behavioral health services were funded by states, and the IMD payment exclusion was aimed at preserving this financing3 and preventing states from shifting mental health services provided by states onto the federal budget through Medicaid, a strategy known as “Medicaid maximization.”

2.  How Do States Use Medicaid Funds for IMD Services, Despite the Payment Exclusion?

Despite the general prohibition in federal law, there are three main ways that states can receive federal Medicaid funds for IMD services for nonelderly adults:  Section 1115 demonstration waivers, Medicaid managed care “in lieu of” authority, and disproportionate share hospital (DSH) payments.

Section 1115 Waivers

As of April, 2018, there are 11 approved and 12 pending Section 1115 waivers related to IMD payment in 21 states.4 These waivers distinguish between payments for SUD services and mental health services. Of the 11 states with approved IMD waivers to date, 10 (California, Indiana, Kentucky, Louisiana, Maryland, Massachusetts, New Jersey, Utah, Virginia, and West Virginia) have authority to use federal Medicaid funds to pay for IMD SUD services. One (Vermont) has waiver authority for IMD mental health services,5 although those payments must be phased out between 2021 and 20256 (Figure 1).

A dozen states (Alaska, Arizona, Illinois, Kansas, Massachusetts, Michigan, North Carolina, New Mexico, Pennsylvania, Vermont, Washington, and Wisconsin) presently have IMD payment waivers pending with CMS. All are seeking authority to pay for IMD SUD services, and six (Illinois, Kansas, Massachusetts, North Carolina, New Mexico, and Vermont) also are seeking IMD mental health authority. Ten of the pending requests are for new IMD waivers, and two (Massachusetts and Vermont) are seeking to expand existing waiver authority (Figure 1).

Figure 1: Approved and Pending Section 1115 IMD Payment Waivers, April 9, 2018

Managed Care “In Lieu of” Authority

Of the 39 states using comprehensive risk-based managed care organizations, 26 use Medicaid managed care “in lieu of” authority to cover IMD SUD and/or mental health services in FY 2017 and/or FY 2018.7 This authority is included in the federal Medicaid managed care regulations, which permit states to use federal Medicaid funds for capitation payments to managed care plans that cover IMD inpatient or crisis residential services for non-elderly adults “in lieu of” other services covered under the state plan.8 Under this regulation, federal payments for IMD services are limited to 15 days per month.9 In addition, IMD services must be medically appropriate and cost-effective, and enrollees cannot be required to accept IMD services instead of those that are covered under the Medicaid state plan. This regulation took effect in July, 2016, and codified pre-existing long-standing federal sub-regulatory guidance that allowed federal Medicaid payments for IMD services without a day limit.

Disproportionate Share Hospital payments

States must make Medicaid DSH payments to offset uncompensated care costs incurred by hospitals that serve a disproportionate number of low-income patients, and federal law allows states to spend some of their DSH funds on IMD services.10

3.  How Have Section 1115 IMD Payment Waivers Changed Under Recent CMS Guidance?

Most of the recent IMD payment waiver activity has been in response to CMS guidance issued by the Obama Administration in July, 2015,11 and revised by the Trump Administration in November, 2017.12  Both state Medicaid director letters set out parameters for states to obtain Section 1115 waivers to test using federal Medicaid funds to provide short-term inpatient and residential SUD treatment services in IMDs. Neither letter addresses the use of federal Medicaid funds for IMD mental health services.

IMD SUD payment waivers approved under the Trump Administration differ from those approved under the Obama Administration in some ways. For example, waivers approved under the Obama guidance specified numeric day limits on IMD stays eligible for federal Medicaid funds:  Maryland’s waiver allows two 30-day stays, while California has approval for two 90-day states for adults and two 30-day stays for adolescents.13 By contrast, waivers approved under the Trump Administration, such as Indiana, Kentucky, Louisiana, New Jersey, Utah, Virginia, and West Virginia, do not have an explicit day limit.14 In addition, waivers approved under the 2015 guidance were contingent on states covering community-based services15 along with short-term institutional services that “supplement and coordinate with, but do not supplant, community-based services.”16 While the 2017 guidance notes that “states should indicate how inpatient and residential care will supplement and coordinate with community-based care in a robust continuum of care in the state” and directs states to “demonstrate how they are implementing evidence-based treatment guidelines,”17 those waivers generally do not detail the state’s coverage of SUD services across the care continuum as the earlier waivers do.

4.  What Modifications to the IMD Payment Exclusion is Congress Considering?

In April 2018, the House Energy and Commerce Health Subcommittee will consider a bill to authorize federal Medicaid payments for IMD SUD services for nonelderly adults up to 90 days.18 This proposal could be included in a larger legislative package targeted to addressing the opioid epidemic that Congress is expected to consider this spring.19 How to address the bill’s projected cost is yet to be determined. The Congressional Budget Office previously estimated that a full IMD exclusion repeal (for both mental health and SUD services and without day limits) would cost up to $60 billion over 10 years.20 Two of the larger Affordable Care Act repeal and replace bills that failed in Congress last year (the Better Care Reconciliation Act and the Graham-Cassidy-Heller-Johnson Amendment) included a state option to cover IMD services for nonelderly adults up to 30 consecutive days and up to 90 days in a calendar year.21

5.  How Does Increasing IMD Services Interact with States’ Community Integration Obligation Under the Americans with Disabilities Act?

Waiving the IMD payment exclusion and expanding institutional services without also ensuring adequate access to community-based services could have implications for states’ community integration obligations under the Americans with Disabilities Act (ADA) if people with disabilities are inappropriately institutionalized.22 The Supreme Court’s Olmstead decision found that the unjustified institutionalization of people with disabilities violates the ADA. The ADA’s community integration mandate is separate from federal Medicaid law, although states rely on Medicaid funding to help meet their ADA obligations, because Medicaid is the primary payer for long-term services and supports, including home and community-based services.23 Waiver or legislative provisions regarding IMD day limits, community-based service expansions, delivery system reforms, performance measures, and evaluation results will be key issues to watch in this area.

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Filling the need for trusted information on national health issues, the Kaiser Family Foundation is a nonprofit organization based in Menlo Park, California.