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Medicaid rule puts IMD exclusion in better context

June 7, 2016
by Alison Knopf
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In late April, the federal government issued its long-awaited final rule on managed care in Medicaid and the Children’s Health Insurance Program (CHIP). The rule overhauls the programs for the first time in more than 10 years.

For behavioral health providers, the most significant provision allows—for the first time ever—for Medicaid to pay for inpatient treatment in a facility with more than 16 beds, by tempering the often bemoaned Institutions for Mental Diseases (IMD) exclusion. The IMD exclusion has not changed in fee-for-service Medicaid.

Most states employ managed care Medicaid, which is delivered under contract through commercial insurance companies, although behavioral health is carved out in many of these arrangements.

Goals of the rule

According to the federal Department of Health and Human Services (HHS), which oversees Medicaid and Medicare, the final rule has four goals:

  1. Supporting states in their efforts to improve quality of care;
  2. Strengthening consumers’ experience of care;
  3. Improving accountability and transparency; and
  4. Aligning rules across health insurance plans.

The document is 1,425 pages long. Generally, it allows states to enter into contracts that promote delivery system reform, such as pay-for-quality models. In the IMD changes, it allows plans to cover 15-day inpatient mental health and addiction services. The rule also sets network adequacy standards but leaves flexibility for states. Additionally, it establishes what is known as a “medical loss ratio,” which will demand that insurance companies spend 85% of their premium dollars on care rather than profits or general administration.

IMD Exclusion

“For the first time, the federal government has said in official rulemaking that IMDs for short-term inpatient care can be paid by managed care organizations under Medicaid,” says Mark J. Covall, president and CEO of the National Association of Psychiatric Health Systems (NAPHS).

Covall estimates that more than 50% of Medicaid enrollees will be affected by the change. The rule is specific to the type of managed care in which the health plan is at risk—getting a per-member, per-month fee in exchange for being responsible for all of the care of enrollees.

Many agree the IMD change is huge. The last time there was any change involving IMD providers was in 1972 when Congress allowed states the option of using Medicaid to pay for inpatient mental healthcare for people under age 21, says Covall.

“The adult population—ages 21 to 64—has never been able to access IMDs, from the beginning of Medicaid,” he says.

And “IMD” is used quite broadly. The statute defines it as any facility with more than 16 beds that is primarily engaged in the delivery of psychiatric care, which includes substance use disorders (SUDs). Most psychiatric hospitals have more than 16 beds, so they qualify as IMDs. Residential treatment facilities, for SUD as well as mental illness, are considered IMDs as well, if they have more than 16 beds.

Recent trends demonstrate that one type of IMD—the state mental hospital—has become scarce, as have units within hospitals for psychiatric care. This has created a bed shortage and has left patients without needed services, says Covall.

“Demand for inpatient psychiatric treatment has grown, and there are fewer beds, and a backlog in emergency departments,” he says. “[The IMD change] will have a positive impact on getting patients into treatment who are waiting for a bed in a general hospital. Patients could also go to freestanding psychiatric hospitals in the community.”

It’s important to note that the HHS rule only allows Medicaid managed care to pay for 15 days per month in inpatient psychiatric treatment, says Covall. There’s an allowance for crisis residential care, but because the rule emphasizes short-term care, there is no provider incentive for the “warehousing” of patients in IMDs.

However, NAPHS had recommended that the day limit be based on the average length of stay per facility, not on the individual beneficiary.

“We recommended 25 days or less,” Covall says, noting that under Medicare, long-term hospitals are defined has having lengths of stay of more than 25 days on average.

HHS came up with the 15 day benchmark by looking at the IMD demonstration project that showed the average length of stay was just over eight days. Authors nearly doubled the average to arrive at 15 days.

Ironically, the day limit would be inconsistent with prevailing parity laws. For example, a patient with Medicaid coverage who is admitted for cancer treatment would not have a 15-day limit on inpatient treatment.

Chuck Ingoglia, vice president of public policy for the National Council for Behavioral Health, says parity should still apply, regardless of how the plan is set up.

“No matter how many contractors you have, how many kinds of plans, you have to look holistically at the plan and make sure parity applies,” he says.

Under the Medicaid managed care final rule, insurance companies have to provide mental health and SUD treatment at parity, but enforcement will remain the challenge, as it is in other applications of parity rules.


Ingoglia also says the substantial change is clearly placing the stress on integration of behavioral and physical health.