For many years, federal rules restricted Medicaid from reimbursing the costs of inpatient psychiatric care for patients in facilities with more than 16 beds, which are referred to as Institutions for Mental Diseases (IMDs). This exclusion, known as the “IMD exclusion,” has had a profound impact on the availability and access to psychiatric care for individuals with severe mental health conditions. However, recent developments have created a potential shift in this long-standing policy, opening up new avenues for reimbursement and care for Medicaid beneficiaries with serious mental illness (SMI) and serious emotional disturbance (SED).
In the last few years, the Centers for Medicare & Medicaid Services (CMS) has allowed states to bypass the IMD exclusion by submitting Section 1115 Medicaid waivers. If approved, these waivers enable states to pay for patients with SMI and SED to stay in IMDs—something that was not previously allowed. While this new development has sparked excitement for many in the behavioral health field, there are also concerns about whether the effort required to implement these waivers is worth the potential benefits.
The IMD Exclusion: A Barrier to Access
Institutions for Mental Diseases (IMDs) are large inpatient psychiatric treatment facilities designed to care for individuals with severe mental health conditions. These facilities have historically been excluded from Medicaid reimbursement under the IMD exclusion rule. The reasoning behind this exclusion was twofold: to prevent the institutionalization of individuals with mental illnesses and to encourage the development of community-based mental health care that would allow individuals to receive treatment in less restrictive, more supportive environments.
For years, the IMD exclusion has posed significant challenges for states and providers trying to address the complex needs of individuals with serious mental health conditions. Without the ability to access Medicaid funding for treatment in IMDs, many states have had to rely on alternative care models, often turning to state psychiatric hospitals or crisis intervention services. However, these alternatives have not always been sufficient to address the rising demand for inpatient psychiatric services.
The IMD Waiver: A Potential Game-Changer
In a significant shift in policy, CMS introduced Section 1115 Medicaid waivers, which allow states to bypass the IMD exclusion in certain circumstances. Initially, these waivers were used to fund substance use disorder (SUD) treatment services in IMDs. However, in 2023, CMS extended the waivers to include treatment for individuals with serious mental illness (SMI) and serious emotional disturbance (SED), allowing Medicaid to reimburse inpatient care for this population in larger IMDs.
This change is seen by many as a breakthrough for the behavioral health industry. The waivers provide an opportunity to enhance treatment options for individuals with SMI and SED, particularly those who require a higher level of care than can be provided in community settings. With the new policy, states now have a chance to increase access to inpatient psychiatric treatment for individuals who might otherwise not receive the care they need.
States that receive approval for these waivers must meet certain requirements outlined by CMS. Among these requirements is the need to achieve a statewide average length of stay of 30 days for SMI/SED patients in IMDs. Additionally, states must commit to a series of steps to strengthen community-based mental health care services, ensuring that inpatient care is integrated with more sustainable, outpatient options.
The Concerns: Too Much Work for Too Little Reward?
While the introduction of IMD waivers has generated excitement in some parts of the behavioral health industry, there are also concerns about the challenges these waivers present for states. Many state mental health directors have voiced skepticism about whether the effort required to implement the waivers is worth the benefits they may offer.
Stuart Gordon, director of policy and communications for the National Association of State Mental Health Program Directors (NASMHPD), expressed these concerns during a panel discussion at the Payer’s Behavioral Health Management and Policy Summit in Washington, D.C. Gordon noted that the requirements attached to the IMD waivers for mental health treatment are much more detailed and complex than those for substance use disorder treatment waivers. These requirements, which include achieving a specific length of stay and making significant improvements in community-based care, may prove to be a significant burden for states.
“We’re hearing from our mental health directors that the juice may not be worth the squeeze for the new SMI/SED waiver,” Gordon said. The extensive conditions and expectations associated with the waivers may make it challenging for states to justify the cost and effort involved in pursuing approval for these programs.
A Shift Toward Community-Based Care
Another significant factor in the debate over IMD waivers is the growing emphasis on community-based mental health care. In recent years, there has been a concerted push to shift away from institutionalized care and focus on building up community resources that can provide treatment and support in less restrictive environments. This shift is based on the belief that individuals with mental health conditions can thrive in community-based settings with the right resources and support.
Kody Kinsley, deputy secretary for behavioral health and intellectual and developmental disabilities at the North Carolina Department of Health and Human Services, shared his concerns during the same conference. Kinsley explained that expanding Medicaid reimbursement for inpatient psychiatric stays could send the wrong message and push states in the wrong direction. He argued that what is truly needed is more investment in community-based services that can help individuals manage their mental health conditions before they require inpatient care.
“What we really need is more community-based restoration, more community-based upstream prevention,” Kinsley said. “If we got a few more days for the people that need it, that would be good, but I’m not sure that’s going to swing it where we need to swing it.”
For Kinsley and other state leaders, the priority is ensuring that individuals with mental health conditions receive the right care at the right time. The focus on expanding inpatient care options may be seen as a step backward in a broader effort to invest in community-based mental health services and preventative care.
Medicaid Expansion: A Bigger Priority
In states like North Carolina, which has not expanded Medicaid, there is a larger concern about the lack of access to insurance for a significant portion of the population. North Carolina is home to one of the largest uninsured populations in the country, and Kinsley pointed out that the focus should be on expanding Medicaid coverage to include those who currently have no access to insurance. The issue of the uninsured population in North Carolina is far more pressing than the specifics of the IMD exclusion, Kinsley argued.
“I have a million people without insurance in North Carolina, so my problem is that I need one million people with insurance,” Kinsley said. In this context, expanding inpatient psychiatric care through the IMD waiver may not be the most effective solution to address the larger challenges facing the state’s mental health system.
A Changing Landscape: The Future of the IMD Waiver
The IMD waiver has the potential to reshape the landscape of mental health care for Medicaid beneficiaries. It offers an opportunity to increase access to inpatient psychiatric care for individuals with SMI and SED, a population that has long struggled to find appropriate care. However, the complexity of the waiver requirements and the growing emphasis on community-based care have led some state mental health officials to question whether the benefits of the waiver will outweigh the work required to implement it.
As more states consider pursuing IMD waivers, the decision will likely depend on how well states can balance the need for inpatient care with the broader goal of creating a more integrated, community-based mental health care system. With a shift in focus toward prevention, early intervention, and community-based services, it remains to be seen whether the IMD waiver will be a central part of the solution or if states will continue to prioritize other approaches to addressing the mental health crisis.
