New York State is taking a significant step toward reshaping its state-managed behavioral health care system by attempting to bypass the longstanding institution for mental disease (IMD) exclusion. This exclusion, embedded in Medicaid since 1965, has historically prevented federal funds from covering treatment in facilities with 16 or more beds dedicated to adults aged 21 to 64 with serious mental illness (SMI), substance use disorder (SUD), or serious emotional disturbance (SED). By pursuing a Section 1115 Medicaid waiver, New York hopes to secure federal matching funds to expand access to critical inpatient and residential behavioral health services for both adults and children. This latest effort, commonly referred to as the IMD waiver New York, aims to strengthen care transitions and improve outcomes for patients with chronic behavioral health conditions.
The state’s proposal specifically seeks federal funding to reimburse short-term inpatient care, residential treatment, and other essential services provided by IMDs. Additionally, New York is requesting support for transitional care, allowing patients in state psychiatric facilities to begin reintegrating into the community up to 30 days before their discharge. According to the waiver amendment proposal, the ultimate objective of the IMD waiver New York is to “transform the role of some state psychiatric inpatient facilities and SUD residential treatment facilities, improve care transitions and access to community-based treatment and support services, and improve health and behavioral health outcomes in individuals with chronic and/or SMIs by transforming selected state-run psychiatric hospitals, facilities, and campuses from long-term care institutions to community-based enhanced service delivery systems.”
The IMD Exclusion: History and Purpose
The IMD exclusion was established as part of the Social Security Act to prevent states from shifting the financial burden of long-term psychiatric care onto the federal government. Facilities with 16 or more behavioral health beds for non-elderly adults were explicitly excluded from federal Medicaid reimbursement. This policy was also tied to a broader political and social movement known as deinstitutionalization.
Deinstitutionalization, championed by President John F. Kennedy and other advocates in the 1960s, aimed to move mental health care away from large, institutional settings and toward community-based services. While this shift reflected evolving attitudes about humane care for individuals with mental illness, it also contributed to ongoing shortages in psychiatric beds and gaps in care for those with serious behavioral health conditions. Many experts argue that the exclusion, while well-intentioned, has had unintended consequences by limiting federal funding for critical inpatient services, perpetuating unmet needs, and putting pressure on state systems.
Madeline Guth, senior policy analyst at the Kaiser Family Foundation (KFF), observed, “There’s been an understanding in the past several years that this lack of federal funding contributes to high levels of unmet need. The federal government has been providing some new mechanisms in the past few years for states to get an exception to this exclusion and get some federal financing for IMD services for non-elderly adults.” These mechanisms include the IMD waiver New York, which is part of a broader effort to experiment with Medicaid funding for innovative behavioral health care.
Medicaid 1115 Waivers: A Tool for Behavioral Health Innovation
Medicaid 1115 waivers give states flexibility to experiment with different approaches to delivering Medicaid benefits. In the context of behavioral health, these waivers have become a key mechanism for states seeking to address gaps in inpatient, residential, and community-based treatment for SMI, SUD, and SED.
According to KFF tracking, 34 states have received approval for IMD exclusion exemptions specifically for SUD treatment. Ten states have secured exemptions for mental health treatment, and 23 states have other exemptions for community-based behavioral health services. These waivers allow states to implement innovative approaches while maintaining compliance with federal Medicaid rules. The IMD waiver New York is part of this national trend, reflecting a growing recognition that federal rules should adapt to meet contemporary behavioral health needs.
Recent administrations have increasingly enabled states to work around the IMD exclusion through these waivers. In 2015, the Obama administration allowed 1115 waivers to support a “full continuum of care” for individuals with SUD, including coverage for short-term residential services that were otherwise excluded. In 2019, the Trump administration approved the first 1115 waiver targeting IMD exclusion for SMI and SED treatment for adults and children.
Legislative Considerations and Policy Context
Addressing the IMD exclusion also appeared during legislative discussions surrounding the sweeping 2022 behavioral health omnibus funding bill. While some proposed reforms to ease IMD restrictions, they were ultimately not included in the final law signed on December 29, 2022. Nevertheless, the issue has remained a priority for states seeking to expand access to behavioral health services.
New York’s current 1115 waiver application is significant in that it seeks dual exemptions for both SMI and SUD funding. This comprehensive approach signals recognition that behavioral health challenges are often interrelated, and that effective treatment systems must integrate care across mental health and substance use domains. The IMD waiver New York represents a major step toward modernizing the state’s behavioral health infrastructure.
Implications for Behavioral Health Care in New York
If approved, New York’s waiver could dramatically alter the state’s behavioral health landscape. By providing federal matching funds to cover services in IMDs, the state could expand short-term inpatient and residential capacity, improve care transitions from psychiatric facilities to community settings, and reduce gaps in treatment for individuals with complex behavioral health needs.
This initiative also underscores the evolving role of Medicaid as the largest payer of mental health services in the U.S. With IMD exclusion waivers, states are increasingly able to experiment with models that enhance care access, integrate services, and improve outcomes for individuals with chronic SMI, SED, and SUD. The IMD waiver New York is an example of how states are leveraging federal funding to innovate and improve behavioral health care.
New York’s efforts reflect a broader national trend: regardless of political affiliation, states are using Medicaid flexibility to innovate behavioral health care delivery. As the IMD waiver landscape evolves, New York could become a model for how federal-state collaboration can expand access to inpatient, residential, and community-based behavioral health services, ultimately addressing longstanding gaps in the system.
