For decades, the federal government has restricted Medicaid from covering the cost of inpatient psychiatric care for patients in facilities with more than 16 beds. These facilities, known as Institutions for Mental Diseases (IMDs), have long been excluded from Medicaid reimbursement, a rule that has been a significant barrier to accessing appropriate psychiatric treatment for many individuals. However, in recent years, there has been a shift in policy that could have a profound impact on the behavioral health sector.
The Centers for Medicare & Medicaid Services (CMS) has recently allowed states to submit Section 1115 Medicaid waivers, which could enable Medicaid reimbursement for certain patients receiving care in IMDs. This policy change, which began with substance use disorder (SUD) treatment and was expanded in 2023 to include individuals with serious mental illness (SMI) and serious emotional disturbance (SED), has generated excitement and apprehension in equal measure.
While many view this as an opportunity to expand access to care, especially for individuals with complex mental health needs, others question whether the benefits of the new policy outweigh the requirements it imposes on states. These challenges have led some state mental health officials to express skepticism about the potential effectiveness of the new waivers.
What Are IMDs and Why Are They Excluded?
Institutions for Mental Diseases (IMDs) are large inpatient psychiatric treatment facilities designed to care for individuals with severe mental illnesses. Historically, Medicaid has excluded payment for services rendered in these facilities, largely due to concerns that they were contributing to the institutionalization of individuals with mental health conditions rather than promoting community-based treatment. This exclusion, known as the IMD exclusion, was intended to encourage the development of community-based mental health services that would allow individuals to receive care in less restrictive settings.
The exclusion has long been a source of frustration for behavioral health providers, as it limits access to inpatient psychiatric care for many individuals who require a higher level of care. For years, many states were unable to cover the cost of treatment in IMDs, forcing them to rely on other, often less suitable, options, such as state psychiatric hospitals.
The IMD Waiver: A Potential Game-Changer
In an effort to address this gap in coverage, CMS introduced Section 1115 Medicaid waivers, which allow states to bypass the IMD exclusion in specific circumstances. Initially, these waivers were limited to substance use disorder (SUD) treatment facilities. However, in 2023, CMS extended this option to include facilities providing care for individuals with serious mental illness (SMI) and serious emotional disturbance (SED), sparking hope that the policy change could improve access to psychiatric care for Medicaid beneficiaries.
The waivers, if approved by CMS, allow states to receive Medicaid reimbursement for individuals receiving care in IMDs, thus increasing access to inpatient psychiatric treatment for a vulnerable population. States that are granted waivers are required to meet certain conditions, such as providing community-based services and achieving a statewide average length of stay of 30 days for patients in IMDs. These requirements aim to balance the use of inpatient care with the need for more sustainable, community-based mental health services.
Concerns from State Mental Health Leaders
Despite the potential benefits of the IMD waivers, many state mental health directors are skeptical about the impact of this policy change. Stuart Gordon, director of policy and communications for the National Association of State Mental Health Program Directors (NASMHPD), has voiced concerns that the administrative burden required to implement these waivers may outweigh the benefits.
Gordon explained that mental health directors are worried about the extensive requirements that accompany the waivers, which could make them difficult to implement. For example, states must commit to meeting specific goals related to community-based care and achieve a statewide average length of stay of 30 days for SMI/SED patients. These requirements, which are more stringent than those attached to waivers for substance use disorder treatment, have caused some states to question whether the benefits of the waiver will justify the effort required to meet these conditions.
“The juice may not be worth the squeeze,” Gordon said, referencing the administrative complexities and requirements that states must navigate to secure approval for these waivers.
The Focus on Community-Based Care
In addition to the administrative challenges, some states are concerned that the IMD waiver could reinforce a system that prioritizes inpatient care over community-based treatment. Kody Kinsley, deputy secretary for behavioral health and intellectual and developmental disabilities at the North Carolina Department of Health and Human Services, voiced concerns that expanding Medicaid reimbursement for inpatient psychiatric stays could divert resources away from community-based care.
Kinsley explained that, in North Carolina, the priority is to invest in community-based mental health services, such as outpatient treatment and prevention programs, rather than expanding inpatient capacity. The state is not a Medicaid expansion state, meaning that there is a significant uninsured population in North Carolina. Kinsley emphasized that Medicaid dollars should be focused on expanding coverage for individuals who are uninsured rather than increasing the number of days Medicaid will cover for patients in IMDs.
“What we really need is more community-based restoration, more community-based upstream prevention,” Kinsley said. “I have a million people without insurance in North Carolina. Medicaid paying more for the people who have Medicaid won’t change that game.”
Kinsley’s comments highlight a broader concern among state officials who are focused on strengthening community-based care systems and reducing reliance on institutional settings. For many states, the ultimate goal is to provide individuals with mental health conditions the support they need in their communities, rather than placing them in institutional settings.
The Impact of State Psychiatric Hospital Closures
Another issue that makes the IMD waiver less attractive to some states is the ongoing reduction in the number of state psychiatric hospitals. Many states have closed or downsized their public psychiatric hospitals over the years due to budget constraints, and those that remain often serve patients who are involved in the criminal justice system rather than those with severe mental health conditions.
As a result, there is less emphasis on the need for additional inpatient psychiatric beds. Instead, states are increasingly focused on improving access to crisis services and providing alternatives to inpatient care. “There has been a focus in our industry on making sure folks are receiving the crisis services they need and diversion from inpatient for a while now,” Gordon explained.
With fewer psychiatric beds available and a growing emphasis on community-based care, the push for more IMD reimbursement options may not align with the priorities of many states.
Moving Forward: The Future of the IMD Waiver
While the IMD waiver presents an exciting opportunity to expand access to inpatient psychiatric care for individuals with SMI and SED, its implementation faces several hurdles. The waiver’s extensive requirements, combined with the push toward community-based care, have led some states to question whether it is the right solution for their needs.
As more states grapple with these challenges, it remains to be seen whether the IMD waiver will be fully embraced or whether states will continue to prioritize community-based care over institutional settings. Ultimately, the decision will depend on how well states can balance the need for inpatient psychiatric care with the broader goal of creating a more sustainable, community-based mental health system.
