State Medicaid programs across the U.S. are making behavioral health a top priority in 2025, reflecting a growing recognition of the need for expanded Medicaid mental health services and substance use disorder (SUD) services. According to a new survey by the Kaiser Family Foundation (KFF), many state leaders are focused on broadening the continuum of care, developing new reimbursement models, and integrating behavioral and physical health services to create a more holistic approach to treatment.
This renewed focus on Medicaid mental health services comes as state Medicaid leaders grapple with ongoing challenges, including workforce shortages, a lack of accessible services, and gaps in care—especially for children and youth. Medicaid officials also continue to face difficulties in aligning available behavioral health funding sources, further complicating efforts to expand services.
Expanding Behavioral Health Services Amid Challenges
The KFF survey found that 21 states enhanced their mental health and SUD services in 2024, and the same number plan to do so in 2025. Some states fall into both categories, reflecting a continued commitment to improving Medicaid mental health services. Additionally, reimbursement for behavioral health services is on the rise. In 2024, 34 states increased Medicaid funding for outpatient mental health services, and 26 states have adopted further reimbursement increases for 2025.
These expansions are happening despite financial uncertainties. The federal government has ended the increased Medicaid funding that was put in place during the COVID-19 pandemic to help states expand and sustain Medicaid coverage. Without that extra support, state Medicaid programs may be more vulnerable to changes in economic conditions and budget constraints. Medicaid directors expressed concerns that, without sufficient investment, access to services—especially psychiatric care—could remain limited. Strengthening Medicaid mental health services will be essential in mitigating these issues.
Another significant challenge is Medicaid redetermination, which has led to enrollment declines as states tighten eligibility requirements. As of June 2024, Medicaid enrollment was down 14% from the previous year. Medicaid directors expect enrollment to decrease by another 4.4% in 2025. This reduction in coverage is already impacting major behavioral health providers, such as Universal Health Services (NYSE: UHS), one of the nation’s largest psychiatric hospital operators, which reported fewer patient days due in part to Medicaid redetermination.
Crisis Care and Service Integration Take Center Stage
Beyond increasing reimbursement, many states are working to improve crisis services. In 2024, seven states enhanced mobile crisis response programs, while three states expanded crisis services for youth. These initiatives align with broader state efforts to implement and strengthen the 988 Suicide and Crisis Lifeline, ensuring that people in crisis have immediate access to support. Expanding Medicaid mental health services is key to supporting these efforts, particularly for those experiencing crisis situations.
Efforts to integrate behavioral and physical health care are also gaining traction. Nine states have taken steps to better coordinate these services by adding benefits that support the Collaborative Care Model (CoCM) or implementing reimbursement codes for interprofessional consultation in behavioral health. This movement acknowledges that treating mental health conditions and substance use disorders in isolation is less effective than an integrated approach that considers overall health and well-being. These efforts reflect the growing emphasis on Medicaid mental health services as a central part of overall healthcare.
The Role of Contingency Management and Digital Health
One of the more innovative approaches gaining attention is contingency management, a behavioral therapy technique that provides incentives—sometimes cash rewards—for actions that promote recovery. Despite its effectiveness, the practice remains rare in Medicaid mental health services programs. Only four states currently offer it as a benefit, and in 2024, Delaware received federal clearance to implement it. Hawaii, Michigan, Rhode Island, and West Virginia are awaiting federal approval to introduce contingency management into their Medicaid programs.
Meanwhile, digital health solutions are playing a larger role in behavioral health care. Virtual addiction treatment providers like Pelago have begun developing contingency management programs, while PursueCare recently secured $20 million in funding and acquired software from Pear Therapeutics, a now-defunct digital health startup. These advancements indicate a growing willingness to incorporate technology into Medicaid mental health services, providing new ways for patients to access care remotely.
The Future of Medicaid’s Behavioral Health Strategy
Medicaid’s commitment to Medicaid mental health services in 2025 reflects a broader shift toward expanding mental health and substance use disorder services. However, the success of these initiatives will depend on sustained investment, strategic policy decisions, and the ability to navigate financial and logistical challenges.
With Medicaid enrollment declining and funding constraints posing potential risks, states must find ways to maintain and build upon recent progress. Expanding crisis services, improving access to care, increasing reimbursement rates, and integrating behavioral and physical health care will be critical in ensuring that Medicaid enrollees receive the comprehensive support they need.
As 2025 approaches, Medicaid leaders will continue working to close service gaps and address the growing demand for Medicaid mental health services. Their efforts will shape the future of mental health and substance use treatment in the U.S., influencing not only Medicaid beneficiaries but also the broader healthcare system.
