Improving Employment Outcomes for People with Psychiatric Disorders and Other Disabilities. B. Medicaid Funding for Employment-Related Services and Supports for Individuals with Psychiatric Disorders and Other Disabilities


Medicaid provides several opportunities for funding employment services for people with psychiatric disorders and other disabilities; the specific eligibility requirements for each vary. In this section, we provide information on the various options, including waivers, State Plan Options, demonstrations, and the Medicaid Buy-In.

1. Medicaid 1915(c) HCBS Waiver

Section 1915(c) of the Social Security Act authorizes a waiver program that allows states to provide home and community-based services (HCBS) to persons who, but for the provision of HCBS, would require an institutional level of care. Although these funds can be used for people with mental illness, they typically are not. Programs funded through 1915(c) waivers are required to be budget neutral (Karakus et al. 2011), meaning that HCBS costs must offset Medicaid institutional costs that would have been incurred if the person had been institutionalized. Medicaid reimbursement is currently denied for individuals ages 21-64 if they reside in institutions for mental disease (IMDs), making Medicaid cost-neutrality difficult to achieve (Bazelon Center 2012b).

Although 1915(c) waiver funding cannot be used for vocational services that are delivered in "facility-based or sheltered work settings," it can be used for pre-vocational services, including "vocational/job-related discovery or assessment, person-centered employment planning, job placement, job development, negotiation with prospective employers, job analysis, job carving, training and systematic instruction, job coaching, benefits support, training and planning, transportation, asset-development and career advancement services, and other workplace support services, including services not specifically related to job skill training that enable the waiver participant to be successful in integrating into the job setting" (HHS 2011).

2. Medicaid 1915(i) HCBS State Plan Option

Added to the Social Security Act by the Deficit Reduction Act (DRA) of 2005, section 1915(i) is a state-plan option that can be used to provide services similar to those available through 1915(c) waivers. Unlike with 1915(c) however, states must demonstrate that the needs-based criteria for receiving 1915(i) services are less stringent than the criteria for meeting an institutional level of care. The 1915(c) cost-neutrality requirement does not exist with this option (Bazelon Center 2012b), and that expands the opportunity for states to fund employment-related services, including SE, for people with psychiatric disabilities. Elements of supported education that are integrated into SE and provided directly to the individual, as opposed to general outreach to educational institutions, can be funded under Section 1915(i). States can cover these services through a state plan amendment, which may also be less burdensome for states to obtain than a waiver.15, 16

3. Medicaid 1915(b)(3) Managed Care Delivery System Waiver

Under the 1915(b)(3) waiver, states can enroll eligible individuals into Medicaid managed care plans. This waiver permits states to use the cost savings achieved through managed care to provide additional services--known as "reinvestment services"--to Medicaid recipients (Fields n.d.). Reinvestment services can include all components of SE. In Washington, for example, funds gained through the waiver are used for a range of SE services, including an individual assessment of skills, training, and education; resume development and interview preparation; creation of individualized job and career-development plans; assistance in locating employment opportunities; and outreach/job coaching at a worksite. Waiver funds can also be used to supplement other funding streams. For example, funds to provide VR services through Title I of the Rehabilitation Act (described in Chapter III) may be used to provide SE until an individual reaches the 18-month limit, at which point 1915(b)(3) waiver funds can be used to continue services (Karakus et al. 2011).

4. Medicaid Rehabilitation Services Option--Section 1905(a)(13)

The Medicaid Rehabilitation Option (Rehab Option) is available to cover services that help individuals with daily living, interpersonal, and communication skills (Smith et al. 2005). It allows states to cover "diagnostic, screening, preventive, and rehabilitative services (provided in a facility, a home, or other setting) recommended by a physician or other licensed practitioner…for the maximum reduction of physical or mental disability and restoration of an individual to the best possible functional level."17 States use the Rehab Option to offer a number of services to individuals with SMI (Fields n.d.; Karakus et al. 2011). Although states vary in the scope of services they offer under the Rehab Option, a 2005 handbook issued by HHS states that "a full-featured, comprehensive coverage of rehabilitative services for individuals with SMI will include: …peer support, life skills training and support across a variety of community living dimensions…and SE" (Smith et al. 2005).

The statutory and regulatory provisions surrounding the Rehab Option are brief and somewhat vague. One directive that is clearly stated, however, is that "habilitative" services cannot be funded using this option, but "rehabilitative" can. Rehabilitative services are designed to be restorative or remedial services provided to an individual who has a condition that has resulted in a loss of functioning; habilitative services help individuals to initially acquire new skills (Smith et al. 2005). To be funded under the Rehab Option, states must ensure that SE services for people with SMI and other disabilities meet the definition of "rehabilitative" services.

In 1992, the Health Care Financing Administration (now CMS) issued guidance to states on how to use the Rehab Option for those with SMI (Health Care Financing Administration 1992). The letter stated that "while it is not always possible to determine whether a specific service is rehabilitative by scrutinizing the service itself, it is more meaningful to consider the goal of the treatment. Services necessary for the treatment of mental illness may be coverable as rehabilitative services." However, the same letter also gave examples of services that did not fall under the definition of rehabilitation, one of which was "vocational training: job training, vocational, and education services." In its analysis of this letter, the 2005 HHS handbook notes that "this prohibition does not preclude the provision of services that might assist individuals to function in the workplace, provided that the services furnished are not directly associated with specific job performance" (Smith et al. 2005). Therefore, funds from the Rehab Option may be used to pay for parts of SE programs, such as peer support, training in social skills, or counseling. However, certain vocational services (such as teaching particular skills needed for a specific job, or assistance with a job search) are excluded under this option (Fields n.d.). The Rehab Option can also be used to cover assertive community treatment (Smith et al. 2005), which, in its full fidelity evidence-based model, includes an employment specialist and may provide full fidelity evidence-based SE.

5. Medicaid Targeted Case Management State Plan Amendment

Targeted case management (TCM) is used by states to provide case management to targeted groups of Medicaid-eligible individuals (Binder 2008), which could include individuals with disabilities. TCM can be used to help the targeted group gain access to medical, education, and other services, regardless of whether the services in question are covered by Medicaid (Fields n.d.). Case managers can conduct activities to help individuals gain employment, including assessment of the individual to determine needs for social, medical, or other services; developing a treatment plan that outlines case management goals and an action plan to respond to the individual's needs; referrals and other similar activities to help the person access the service in his or her plan (or other services that will further the achievement of personal goals, including employment services); and monitoring the care plan to ensure that it is effectively implemented and that needs are addressed (Karakus et al. 2011; Smith et al. 2005). TCM funds could, therefore, be used to pay for parts of SE programs.

6. Money Follows the Person Demonstration

Through the CMS Money Follows the Person (MFP) Demonstration, 44 states have received federal grants to transition Medicaid beneficiaries from institutions to home or community settings. Originally enacted in 2006, the demonstration program offers state Medicaid programs an enhanced federal match for each enrollee who successfully transitions out of an institutional setting. In recent years, 24 states have taken steps to increase the number of individuals with SMI and other disabilities who transition out of institutions under the MFP demonstration (O'Malley Watts 2011).

The MFP demonstration is intended to shift Medicaid funding from institutions to community-based settings, remaining cost-neutral in the process. Because Medicaid prohibits spending on care for individuals ages 21-64 with mental illness residing in IMDs, cost-neutrality is harder to demonstrate with this population. Some states (including Delaware and Pennsylvania), therefore, have not included individuals with mental illness in this age range in their MFP demonstrations. However, states are able to include costs of care for individuals with mental illnesses who reside in nursing homes and psychiatric units in general hospitals as potential cost offsets to demonstrate cost-neutrality. Connecticut administers a MFP behavioral health initiative that combines MFP funds with a 1915(c) waiver. Through this program, the state offers a range of services to adults 22 years old and older who are Medicaid-eligible; meet Medicaid State Plan criteria for nursing home level of care; have a diagnosis of SMI; and are either a resident of a nursing facility, an MFP participant, or have a psychiatric history, impairment, and service needs. SE is included in the services provided to MFP participants. However, any services under MFP to those with mental illness can be provided only to individuals transitioning out of nursing homes, not to those in IMDs, thereby inherently limiting the usefulness of this source of funding for this population (Prewitt et al. 2011; Connecticut Department of Mental Health & Addiction Services 2012).18

7. Continued Medicaid Eligibility Work Incentive--Section 1619(b) of the Social Security Act--and the Medicaid Buy-In

Two options enable workers to retain Medicaid coverage as their earnings increase. Although they do not fund SE and employment services, they do enable beneficiaries to retain valuable medical coverage as their earnings rise. Section 1619(b) of the Social Security Act provides for continued Medicaid eligibility for employed SSI beneficiaries to provide an incentive to work (SSA n.d.). To remain eligible for Medicaid while working, an individual must have been eligible for an SSI payment for at least one month; still meet the disability requirement and all other SSI requirements; demonstrate that he or she needs Medicaid benefits to continue to work; and have gross earnings that are too low to replace SSI, Medicaid, and any publicly funded personal care services the individual receives. The Medicaid Buy-In program, authorized by the Balanced Budget Act of 1997 and the Ticket to Work and Work Incentives Improvement Act (Ticket Act) of 1999, provides another opportunity for employed adults with disabilities to maintain Medicaid coverage and earn more than the income limits. Individuals may "buy in" to the program by paying premiums that are determined by their income. Both programs may be attractive to individuals with disabilities who meet the SSA definition of disability but who have high enough earnings that they would otherwise be ineligible for Medicaid.

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