Using Medicaid to Support Working Age Adults with Serious Mental Illnesses in the Community: A Handbook. Medicaid and Publicly-Funded Mental Health Services


Publicly-funded mental health services play a linchpin role in supporting individuals with serious mental illnesses. In the United States, public funds account for almost $3 of every $5 spent on mental health services.8 The organization and management of public mental health systems is a state responsibility. States and localities underwrite a substantial share of national mental health expenditures. At one time, public mental health systems revolved around the operation of large public institutions. Today, these systems principally focus on assisting individuals in the community. State/local mental health systems are often described as the “safety net” because they are called upon to support individuals who experience especially challenging psychiatric disabilities.

The federal role in supporting individuals with serious mental illnesses includes making grants-in-aid to states, underwriting basic mental health research, and promoting the development and implementation of effective support strategies that can be applied in both the public and private sectors. These federal efforts are vital in improving the quality and effectiveness of mental health services for persons of all ages with serious mental illnesses.

Medicaid is a multi-faceted, complex federal-state program that underwrites the costs of health care, primarily for low-income persons and individuals with disabilities, including adults with severe mental illnesses in community settings.

The joint federal-state Medicaid program is the single largest source of funding for public mental health services.9 In the future, Medicaid is expected to account for a growing proportion of the resources that underwrite state-administered mental health services.10 No single source of public funding -- including Medicaid -- is sufficient in its amount or purpose to fully support effective community mental health services. Many funding sources must be tapped to support individuals. However, Medicaid can play a pivotal role in underwriting vital services and supports for low-income individuals with serious mental illnesses.

In some states, Medicaid underwrites services for more than 60 percent of the individuals served in the public mental health system.11

States have considerable latitude in shaping their Medicaid programs. While each state’s Medicaid program must meet mandatory federal requirements, including covering essential health services (e.g., inpatient hospital) and serving core eligibility groups, federal law and regulations give states many options. These options include extending Medicaid eligibility to additional low-income groups beyond those mandated, offering additional optional services, and configuring services and their delivery in innovative ways by obtaining waivers of federal law.

State mental health systems face financial and other pressures. There is broad agreement that the “mental health services system does not adequately serve millions of people who need care.”12 Against this backdrop, the effective use of Medicaid can aid states in strengthening services for individuals with serious mental illnesses.

More individuals could recover from even the most serious mental illnesses if they had access in their communities to treatment and supports that are tailored to their needs.

The President’s New Freedom Commission on Mental Health13

Through Medicaid, states can obtain federal financial participation (FFP) in the costs of a variety of community mental health services. Individuals who experience major disability as a result of their mental illness frequently qualify for Medicaid services. While there are limitations in using Medicaid to serve people with serious mental illnesses, the program offers significant, critical opportunities for states in advancing their mental health policy goals.

All states offer some mental health services in their Medicaid programs. Federal Medicaid law does not contain explicit provisions concerning the exact types of mental health services and supports that a state must offer. Community mental health services may be furnished under certain optional service coverage categories, principally as rehabilitative services or under the “clinic option.” Over the years there has been relatively little formal federal guidance to states concerning Medicaid-funded community mental health services. Because of the great flexibility afforded states in program design, there are essentially 51 unique state Medicaid programs.

The many changes in federal law and regulations since Medicaid was created in 1965 have enhanced the program, but have also added to its complexity. In the arena of community mental health services, Medicaid’s potential role in supporting individuals with serious mental illnesses can be confusing for policymakers, state officials, service providers, advocates, and consumers alike.

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