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Standalone mental health facilities gain Medicaid reimbursement options

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Facilities specializing in treating mental illness and substance abuse disorders (SUDs) could gain greater access to Medicaid dollars under a pair of CMS demonstration project opportunities. The demonstrations could expand Medicaid reimbursement for inpatient and residential care in so-called “institutions for mental diseases,” or IMDs, reduce visits to hospital emergency departments and lead to a greater focus on community care options.

Outlined in letters to state Medicaid directors, CMS’ demonstration project opportunities invite states to apply for Section 1115 waivers allowing them to receive federal Medicaid dollars for coverage of short-term, acute-care stays in IMDs for adults with serious mental illness and residential treatment services in IMDs for adults with substance abuse disorder. Adult Medicaid patients presenting in emergency departments with immediate mental health or substance abuse needs could be more easily connected to a qualified inpatient facility. Instead of being treated in the emergency department, discharged without an identified referral or managed in an outpatient setting where care needs may not be able to be adequately met, patients could be connected to facilities with the training and resources to provide better care for longer periods of time. Patients presenting with substance use or abuse disorders could be more easily connected to resources to manage withdrawal, rather than relying on outpatient or emergency departments. These connections would in turn mean providers delivering substance abuse or mental health services are more assured of coverage for care provided. 

The Social Security Act’s “IMD exclusion” prohibits use of federal Medicaid dollars for care provided to patients in facilities primarily engaged in mental health or substance abuse treatment that have more than 16 beds.

Expanded coverage for IMDs may expand capacity

In 2014, the most recent year data are available, more than 1.6 million people in the US were admitted to a care facility for substance abuse services, according to the Substance Abuse and Mental Health Services Administration (SAMHSA). Nearly 12 percent of Medicaid beneficiaries over the age of 18 have a substance abuse disorder and more than 6,700 people seek treatment for misuse or abuse of drugs in emergency departments each day, according to CMS.

Despite the prevalence of mental health diagnoses, expanding services for these patients often ranks low on provider priority lists, according to a survey of provider executives conducted by HRI in 2018. In a 2018 survey of 500 healthcare provider executives, respondents told HRI they are currently more likely to focus on chronic and complex chronic populations for care. Patients with mental health diagnoses were a low priority for most of these executives.

More mental health services in inpatient facilities could reduce spending in other locations

According to an analysis of Medical Expenditure Panel Survey (MEPS) data by HRI, spending on mental health services has increased in recent years, particularly for office-based medical providers. Spending on office-based services, inpatient care and emergency room services is trending up. Expanding Medicaid coverage to IMDs could reduce traffic to hospital ERs while also increasing spending on inpatient stays and, if states support greater community-based care as they are requested to by the demonstrations, outpatient office-based provider services.

Increased inpatient coverage for mental health care could shift spending from emergency services to inpatient and outpatient services


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CMS’ guidance letter makes it clear that the benefits for IMDs not only will be more expansive, but also will come without taking resources away from community-based resources, such as crisis stabilization services. Nevertheless, the current supply of inpatient services is limited, even for private pay, and will need to be expanded in order for gains to be fully realized.

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Emergency services could benefit from having more options

Emergency departments might have less need to house mental health and substance abuse patients in the department while they wait for extended treatment elsewhere or simply discharge those patients without connecting them to further treatment. Fewer limitations on Medicaid patients could also reduce the need for extended boarding throughout emergency and community facilities for mental health and substance abuse patients. Community hospitals also may lack the expertise or facilities for mental health or substance abuse inpatient treatment, and where they do have those resources, they may cost more than at an IMD.

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Expansion by traditional and new healthcare firms could grow

Nontraditional healthcare companies could eventually find that as Medicaid dollars flow into states opening up IMDs, the increased coverage makes opening or expanding them more attractive. For private equity firms, which are quickening their pace of investment in healthcare, more ensured reimbursement could make IMDs attractive. Health systems looking to expand operations by acquiring inpatient treatment facilities should carefully evaluate CMS guidelines to determine whether an institution is an IMD, based on licensing, accreditation, patient population and if the facility specializes in providing psychiatric or psychological care and treatment.


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