State Options for Medicaid Coverage of Inpatient Behavioral Health Services

Since Medicaid’s inception, federal law has generally prohibited states from using Medicaid funds for services provided to nonelderly adults in “institutions for mental disease” (IMDs).1 The IMD payment exclusion was intended to leave states with the primary responsibility for financing inpatient behavioral health services.2 However, the lack of federal funding may limit access to needed inpatient services and contribute to high levels of unmet need. In recent years, the federal government has provided new mechanisms for states to finance IMD services for nonelderly adults through Medicaid in certain situations. There are now four options for states to cover these services: Section 1115 demonstration waivers, managed care “in lieu of” authority, disproportionate share hospital payments, and the SUPPORT Act state plan option.

This report provides new data to understand current patterns of Medicaid enrollees’ use of inpatient and outpatient substance use disorder (SUD) and mental health treatment services; explains the options for states to access federal Medicaid funds for enrollees receiving IMD services; analyzes current waiver activity; and draws on interviews with policymakers in two states and one county using IMD waivers to examine successes and challenges. Appendix Tables contain state-level data. Key findings include:

  • Many nonelderly Medicaid adults with a behavioral health condition report unmet treatment needs. Though Medicaid adults with behavioral health needs are more likely than those privately insured to have used services in the past year, treatment rates are low across all payers, including payers not subject to the IMD payment exclusion. Most Medicaid adults who receive behavioral health treatment do so as outpatients.
  • Twenty-six states have a Section 1115 waiver to use Medicaid funds for IMD SUD services, as of November 2019. Vermont is the only state with an IMD mental health waiver to date.
  • Interviews with policymakers in two states and one county using IMD waivers reveal that all devoted substantial time and resources to expanding and strengthening available community-based SUD treatment services in addition to IMD services. All three report overall positive experiences with their waivers, along with some implementation challenges that had to be resolved.
  • Early waiver evaluation results in the case study areas show more Medicaid enrollees using SUD services and increased provider participation since allowing IMD payment. Policymakers also described some constraints of the IMD waivers, particularly around the length of stay limits.

As states continue to seek Medicaid IMD payments, key issues to watch include capacity and utilization of treatment services across the care continuum, IMD day limits, discharge planning and care transitions, and the continued evolution of evidence-based best practices for SUD and mental health treatment.


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