On November 6, 2019, the Centers for Medicare and Medicaid Services (CMS) approved Washington, DC’s Behavioral Health Transformation Demonstration, which waives the institution for mental diseases (IMD) exclusion1 for short-term stays in IMDs for mental health and substance use disorder (SUD) treatment. While Washington, DC is the 27th Medicaid program to obtain a waiver of the IMD exclusion for SUD treatment, CMS’s approval of the waiver for mental health treatment is precedent setting.2 Washington, DC’s Medicaid program is the first to obtain such a waiver under a November 2018 State Medicaid Director Letter (SMDL) permitting demonstrations targeted toward serious mental illness (SMI) and serious emotional disturbance (SED).

Background on the IMD Exclusion

The IMD exclusion prohibits the use of federal Medicaid funds to pay for treatment delivered to individuals ages 21 through 64 residing in qualifying institutions with more than 16 beds. Part of the Medicaid program since its creation in 1965, the IMD exclusion was originally intended to ensure that states maintained primary financial responsibility for inpatient psychiatric care and to avoid cost-shifting to the federal government.3 The landmark Supreme Court decision in Olmstead v. L.C. in 1999 and the broader movement toward community-based, instead of institutional, mental health care has served over the years to reinforce the IMD exclusion policy imperative.

Yet stakeholders have been split over whether it should continue. Some policymakers and advocates have expressed concern that the IMD exclusion has restricted access to necessary inpatient and residential behavioral health services, particularly for individuals in acute psychiatric distress; deprived states of federal funding for critical services; and undermined mental health parity by treating mental health differently than physical health. In addition, they have argued that the IMD exclusion has created shortages of psychiatric beds and disincentives to states to create additional options to treat individuals in acute psychiatric distress, which in turn can lead to these individuals boarding in emergency departments (ED), being held in jails, and/or being discharged from these settings without appropriate linkages to community-based care. Stakeholders have also noted that it may be difficult for psychiatric facilities with fewer than 17 beds to be financially viable.

Other stakeholders have cautioned against repeal of the IMD exclusion due to concerns that it would lead to increased institutionalization of and discrimination against individuals with SMI and decreased investments in community-based services. Advocates have argued that shortages of inpatient beds reflect gaps in community-based supports, such as crisis services and supportive housing, which can divert individuals from EDs and reduce the need for inpatient care. Furthermore, they posit that the IMD exclusion prevents discrimination by bolstering the Olmstead decision and encouraging the treatment of individuals with mental illness in general hospital settings where individuals without mental illness also receive treatment.

Changes in Federal Policy Regarding Medicaid Reimbursement for IMDs

In recent years, CMS has eased the restrictions on Medicaid reimbursement for services delivered in IMDs. In 2016, the Obama administration updated the Medicaid managed care regulations to allow managed care plans to use “in lieu of” authority to pay for services provided to Medicaid enrollees during short-term stays in IMDs, defined as stays of up to 15 days per month.4 In response to the growing opioid crisis, CMS issued an SMDL in July 2015, replaced by an updated letter in November 2017, providing states with the opportunity to apply for SUD-focused demonstrations that permitted them to waive the IMD exclusion for individuals obtaining treatment for SUD. These waivers are contingent on states meeting a series of conditions, including providing access to a full continuum of SUD services, ensuring that Medicaid enrollees have access to high-quality SUD treatment providers, and requiring states and providers to institute evidence-based practices to meet the needs of individuals with SUD, such as the American Society for Addiction Medicine (ASAM) criteria.

The November 2018 demonstration opportunity for SMI and SED builds on CMS’s guidelines for SUD demonstrations and includes additional protections to prevent institutionalization of individuals with SMI and SED, such as requirements for states to maintain their current funding for outpatient community-based mental health services and increase access to community-based support. To understand how access to mental health services changes over the life of the demonstration, CMS requires states to submit as part of the initial waiver application an assessment of the current availability of mental health services and update this assessment annually. Similar to the requirements for SUD demonstrations, states must obtain approval of an implementation plan describing how they intend to meet and monitor their progress against the following milestones:

  • Ensuring quality of care in psychiatric hospitals and residential settings;
  • Improving care coordination and transitions to community-based care;
  • Increasing access to the continuum of care, including crisis stabilization services; and
  • Earlier identification and engagement in treatment, including through increased integration.

As part of the implementation plan, states must include a financing plan detailing how they will expand the availability of community-based services and nonhospital, nonresidential crisis stabilization services. States must report quarterly according to a standardized monitoring protocol and submit independent interim and final evaluations that assess the impact of the demonstration.

Key Mental Health-Related Features of Washington, DC’s Waiver

In June 2019, Washington, DC submitted its initial waiver application targeted toward addressing gaps in its Medicaid service array, increasing capacity and access to inpatient and residential behavioral health services, and improving the integrated delivery of mental health and substance use services by expanding treatment options for SMI/SED and SUD. The closure of one of the District’s major providers of inpatient psychiatric care in 2017 strained the District’s already limited capacity to treat individuals who have severe behavioral health conditions.

With the November approval of Washington, DC’s waiver, states and other stakeholders obtained a first view into the Special Terms and Conditions (STCs) that CMS will require in order for states to obtain an IMD exclusion waiver for mental health treatment.5 As noted above, as a condition of obtaining this waiver, Washington, DC must improve access to and coordination of mental health services across the continuum of care. Washington, DC currently offers a range of mental health services under its State Plan, and under the demonstration, obtains temporary expenditure authority for 24 months to cover additional community-based and residential mental health services, including mobile crisis intervention and outreach services, psychiatric residential crisis stabilization services, trauma-informed services, and supported employment. To cover supported employment, Washington, DC must comply with additional home- and community-based services requirements, including quality monitoring and beneficiary protections such as person-centered planning. After the 24-month period, CMS will work with Washington, DC to transition coverage for these services to the State Plan. CMS did not approve Washington, DC’s request for expenditure authority under the demonstration to cover transition planning services for incarcerated beneficiaries.

Notably, the STCs impose tighter conditions for Medicaid reimbursement for mental health treatment delivered to individuals residing in an IMD as compared to SUD treatment. While for both mental health and SUD, states may claim federal Medicaid matching funds only for short-term stays and must maintain a 30-day statewide average length of stay in inpatient and residential treatment, CMS will not reimburse for stays for mental health treatment that are longer than 60 days. CMS does not establish a comparable limit for SUD treatment. In addition, if the District exceeds the 30-day average length of stay for mental health treatment, CMS will lower the threshold for reimbursement to 45 days until the average drops below 30 days.

Moving Forward

With CMS’s approval of Washington, DC’s demonstration, the pace of SMI and SED waiver submissions and approvals is likely to increase in the coming months. Most immediately, Indiana and Vermont have pending requests under the November 2018 SMDL. In addition, over the past few years, while approving states’ waivers of the IMD exclusion for SUD, CMS declined to approve many states’ requests for their waivers to also apply to mental health treatment, and it is likely that these states will revisit their requests.6 Stakeholders will be closely watching how states leverage these waivers to improve access to community-based, residential, and inpatient mental health services, while ensuring that such waivers do not result in shifts in care from community-based to inpatient or residential settings.