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


Medicaid plays an especially important role in supporting low-income people with disabilities, including working-age adults with serious mental illnesses. There are about seven to eight million Medicaid beneficiaries with disabilities (about 19 percent of all beneficiaries). An estimated 30 percent of children with chronic conditions and 15 percent of adults with chronic disabilities are Medicaid beneficiaries.20 In 2002, Medicaid beneficiaries with disabilities accounted for an estimated 43 percent of all Medicaid outlays. As a group, people with disabilities account for the largest proportion of Medicaid expenditures; in contrast, children comprise about 50 percent of beneficiaries but account for only 18 percent of total outlays.

Essential Features of Medicaid

Medicaid has several essential, fundamental features. These features are described here briefly in the context of the “basic” Medicaid program. Some of these features may be altered by waivers of federal Medicaid law that states may obtain. The final section of this chapter briefly describes the three waiver authorities that are included in federal law and their effect on the features described here.

Federal-State Relationship

Medicaid was originally structured as and remains a cooperative federal-state venture through which the federal government financially assists states in providing medical assistance, rehabilitative and other services to eligible low-income individuals and families. Within broad national guidelines contained in federal law, regulations and other policies, states obtain federal financial participation in their costs of furnishing services to low-income individuals and families. This federal-state relationship is a cornerstone of Medicaid. Federal policy dictates that states observe fundamental guidelines but in large part allows them to determine the scope of their programs.

Medicaid is very much a state-shaped program. Therefore, each Medicaid program looks and operates very differently. The design of a Medicaid program is based on each state’s demographics, health policy goals, objectives, needs, and financial capabilities. States are responsible for: (1) establishing eligibility standards within federal parameters; (2) setting the type, amount, duration, and scope of services; (3) determining payments for Medicaid services; and (4) administering the program.

Each state spells out its Medicaid program in a Medicaid state plan.21 The state plan specifies the eligibility groups that the state serves, the benefits provided, and other aspects of how the state operates its program. Each state’s plan (and amendments to the plan) must be approved by the federal Centers for Medicare and Medicaid Services (CMS; formerly, HCFA -- Health Care Financing Administration) at the U.S. Department of Health and Human Services. The CMS Center for Medicaid and State Operations (CMSO) has lead federal responsibility for Medicaid. There are ten CMS Regional Offices located around the country, which are responsible for reviewing and approving most proposed changes in each state’s Medicaid program, and assuring that they operate in compliance with the approved state plan, applicable federal regulations, and other CMS program guidance.22

Federal law dictates that each state designate a single state Medicaid agency (SSMA) that is responsible for the administration of its program. The SSMA has responsibility for the implementation of the state plan. The SSMA may not delegate its responsibilities to another state agency, although it may enter into cooperative agreements with other state agencies to administer certain aspects of the program under the supervision of the SSMA. This topic is discussed in Chapter 7.

Federal law concerning the Medicaid program is in Title XIX of the Social Security Act.23 Federal regulations governing the program are located in Parts 430 et seq. of Title 42 of the Code of Federal Regulations (CFR).24 Additional federal guidance concerning the operation of Medicaid programs is contained in the State Medicaid Manual25 as well as letters, memoranda and technical assistance guides issued by CMS from time-to-time.26

Federal Payments to States

The amount of money that each state receives for Medicaid services is determined by the Federal Medical Assistance Percentage (FMAP). This percentage is applied to state expenditures for services that are furnished to eligible individuals. The resulting federal payment to a state is termed federal financial participation. The FMAP is calculated each year by comparing a state’s average per capita income level with the national average. The higher a state’s per capita income, the lower its FMAP. However, the minimum FMAP is 50 percent and the maximum is 83 percent.27 The average FMAP across all states is about 57 percent, meaning that for every dollar spent on Medicaid services, the states provide 43 cents.

Because Medicaid is an entitlement program, federal financial participation in the cost of Medicaid services is contributed on an open-ended basis -- i.e., there is no cap on federal payments to states for Medicaid.28 States manage their Medicaid expenditures by selecting covered benefits, eligibility parameters, payments, and other methods.

States must provide matching dollars from their own public funds or a combination of their own funds and local tax dollars.29 In some states (e.g., New York), counties are required to provide a portion of the state’s matching fund obligation.

Under federal law, Medicaid is termed a “payor of last resort.” With a few exceptions, Medicaid payment is only available if no other funding sources are able to pay for a service provided to a beneficiary. If, for example, a beneficiary also has employer health insurance, Medicaid payment is only available to the extent that the service is not covered by that health insurance. States are required to seek “third-party” payments whenever feasible.

States can also claim matching federal dollars for the costs associated with the administration of the Medicaid program. Functions that are eligible for such funding include day-to-day program administration and the costs of processing and paying claims submitted by providers for services furnished to beneficiaries. The base rate of federal financial participation in state Medicaid administrative costs is 50 percent. However, higher rates are available for certain activities, including the development and operation of automated Medicaid claims processing systems. Chapter 7 discusses how federal financial participation in administrative costs can be used to strengthen the provision of Medicaid services to working-age adults with serious mental illnesses.

Eligibility Groups

Federal Medicaid law includes more than fifty distinct eligibility groups to which states may offer Medicaid services -- some mandatory and most optional. These groups are defined by income and resource tests and, in some cases, disability or other tests. Eligibility groups are also classified as “categorically needy” or “medically needy.” The latter comprises persons whose income is too high to qualify for Medicaid but, at state option, can spend down their excess income to become eligible.

An individual qualifies for Medicaid by being a member of a federally-recognized eligibility group that a state includes in its plan and by meeting the income and resource tests associated with the group, as spelled out by the state. Being a low-income person does not automatically translate into Medicaid eligibility. For example, low-income childless adults without disabilities cannot qualify for Medicaid unless the state operates a waiver program covering this population. As seen in Figure 2-1 on the following page,30 children comprised about one-half of all Medicaid beneficiaries in 2003, with older adults and people with disabilities together making up only about 30 percent of beneficiaries.31Chapter 3 discusses Medicaid eligibility in greater detail and how it relates to adults with serious mental illnesses.

Beneficiary Cost Sharing

Depending on how they are eligible for Medicaid and the particular state in which they live, categorically eligible beneficiaries may be required to pay nominal deductibles, coinsurance or co-payments in order to receive services. States have some discretion to decide who will pay for services and how much they must pay. However, some groups are exempt from cost sharing requirements. These include: pregnant women and children under 18 at or below 100 percent of the Federal Poverty Level (FPL). Nursing home residents must make contributions toward the cost of their institutional care if they have income in excess of their personal needs allowance. In addition, states are prohibited from imposing cost sharing for family planning or emergency services. Medically needy beneficiaries also must make out-of-pocket payments for health services in order to qualify for Medicaid. Workers with disabilities who qualify under “buy-in” options also may be required to pay premiums if their income exceeds certain levels. Individuals and families who receive Medicaid services through a waiver, but would not otherwise qualify for Medicaid, also may be required to make premium payments.


Just as states are required to cover certain mandatory populations in their Medicaid programs, the same is true about the scope of benefits that states offer. Under federal law, every state must offer fourteen basic mandatory services to all categorically needy eligibility groups. Above and beyond the mandatory services, a state may elect to include other optional benefits in its program. If a state elects to include an optional benefit, it is subject to the same standards regarding amount, duration and scope (discussed later) as mandatory benefits when provided to categorically needy individuals. Table 2-1 and Table 2-2 on the following page list the mandatory and optional Medicaid benefits.

With respect to many of these optional benefits, it is important to point out that states have considerable latitude in defining the specific services they offer within an optional coverage category. For example, states that employ the rehabilitative services option to support individuals with serious mental illnesses include different mixes of services under their coverages.

Except for institutional services for children and youth under age 22 and older persons age 65 and above, federal law does not delineate a distinct set of mental health benefits. Such benefits are furnished under the broader mandatory and optional coverage categories. For example, medications fall under the prescribed drugs category. States provide mental health services to working age adults with serious mental illnesses under the clinic or rehabilitative services categories; but neither category is reserved exclusively to mental health services. Medicaid coverages that are especially pertinent in supporting working age adults with serious mental illnesses are discussed in greater detail in Chapter 4 and further illustrated in Chapter 5.

In the case of medically needy individuals, federal requirements regarding benefits are less prescriptive than those for the categorically needy. Just as states are required to cover certain populations to get federal matching payments for services provided under the medically needy option, they also must cover certain benefits such as prenatal and delivery care for pregnant women and ambulatory care for children. However, they are not required to provide mandatory and optional benefits to medically needy individuals at the same level as for categorically eligible individuals.

The statutory distinction between mandatory and optional services is long-standing. However, it is worth noting that about two-thirds of Medicaid spending nationwide goes toward the purchase of optional services. Some optional services (e.g., prescribed drugs) are offered by every state. About 83 percent of spending on optional services is for services for people with disabilities and older persons.32

TABLE 2-1: Mandatory Medicaid Benefits
  • Inpatient hospital services
  • Outpatient hospital services
  • Prenatal care
  • Physician services
  • Nursing facility services for persons age 21 or older
  • Home health services
  • Federally qualified health-center (FQHC) services, and FQHC ambulatory services otherwise covered by Medicaid in other settings.
  • Rural health clinic services.
  • Laboratory and x-ray services
  • Nurse-midwife services
  • Vaccines for children
  • Family planning services and supplies
  • Pediatric and family nurse practitioner services
  • Early and periodic screening, diagnostic, and treatment (EPSDT) services for children under age 21

TABLE 2-2: Optional Medicaid Services
  • Diagnostic services
  • Clinic services
  • Intermediate care facilities for the mentally retarded (ICFs/MR).
  • Nursing facility services for children under age 21
  • Rehabilitative services
  • Physical and occupational therapy
  • Speech pathology and audiology services
  • Dental services and dentures
  • Inpatient mental health services for individuals age 65 or over
  • Hospice care
  • Case management
  • Other medical or remedial care furnished by licensed practitioners under state law
  • Durable medical equipment
  • Transportation services
  • Optometrist services and eyeglasses
  • Home and community-based services as an alternative to institutionalization
  • Prescribed drugs and prosthetic devices
  • Chiropractic services
  • Private duty nursing services
  • Screening and preventive services
  • TB-related services for TB infected individuals
  • Inpatient psychiatric facility for people under age 22
  • Program of All-inclusive Care for the Elderly (PACE)
  • Personal care/assistance
  • Respiratory care for ventilator-dependent individuals
  • Prosthetic devices

Medical Necessity

In the Medicaid program, states are responsible for developing their own medical necessity criteria. Often these criteria are embedded in states' limitations on the amount, duration, and scope of services. Medicaid beneficiaries are entitled to covered services that are medically necessary to meet the person's needs. A state may deny payment for a service that is not considered medically necessary even if it arguably falls under a state benefit. Depending on a state's definition, this could occur if an individual's diagnosis does not warrant such an intense level of treatment (even if the treatment is generally covered by the state). For example, states often limit the provision of Medicaid mental health rehabilitative services to individuals whose mental illness has resulted in substantial life limitations. States may also require prior authorization before a service is furnished to a beneficiary in order to determine its necessity. States also engage in utilization review and management to ensure that services furnished to beneficiaries are medically necessary.

Amount, Duration, and Scope of Services

Within broad federal guidelines and certain limitations, states may establish limits on the amount, duration, and scope of the services offered in their Medicaid plan. For example, states may limit the number of outpatient mental health visits covered in a year or limit the number of hours of community support furnished each month. However, the limitations must be crafted so that each covered benefit is "sufficient in amount, duration, and scope to reasonably achieve its purpose."33 To illustrate, a state that has chosen to offer intensive day treatment under the rehabilitation option cannot limit that to two sessions per year, as that would obviously be insufficient to achieve the intended effect of the treatment.

Also, a state may not arbitrarily deny or reduce the amount, duration, or scope of a service based on a beneficiary's diagnosis, type of illness, or condition.34 This restriction is relevant for all categorically needy individuals, even those whose eligibility depends upon a specific diagnosis, such as women in need of treatment for breast or cervical cancer.

The amount, duration, and scope limitation must uniformly apply to all categorically needy beneficiaries in a state's plan, regardless of whether they are mandatory or optional beneficiaries. However, it does not apply to groups of medically needy beneficiaries. States have more flexibility in restricting benefits to this group of beneficiaries. There is one benefit on which states are not permitted to place limitations of amount, duration, and scope: EPSDT services for children under 21.


Any Medicaid benefit offered to a categorically eligible individual must be offered to all categorically eligible individuals,35 except when federal law itself creates an exception (e.g., as in the case of ICF/MR services which may only be furnished to persons with mental retardation and other related conditions). A state cannot alter the benefit package so that, for example, dental services are available to SSI recipients but not other categorically eligible adults. Contingent on any amount, duration, and scope limitations, dental services must also be available in the same quantity to all categorically needy beneficiaries. An exception to the comparability requirement is "targeted case management." Under the provisions of Section 1915(g) of the Social Security Act, states may "target" case management services to specific subpopulations of Medicaid beneficiaries, such as persons with serious mental illness or pregnant women under age 21.


States are required to offer the services in their Medicaid benefit package to all eligible recipients without regard to geographic location.36 For example, a state cannot offer services under the clinic option to persons in urban areas but exclude access to these same services to people living in rural areas. Again, the exception to this rule is targeted case management. Not only can a state target its case management option to a specific population, it can also limit its availability to one or more specific areas of the state.

Free Choice of Provider

Medicaid law (Section 1902(a)(23) of the Social Security Act) provides that beneficiaries must be free to choose a provider from among all qualified participating providers, except as specifically provided by law.37 The principal exception to this fundamental and longstanding requirement is when a state has secured federal approval to employ a managed care service delivery model or employ a physician case management model.

Provider Requirements

States have latitude in establishing the requirements that Medicaid providers must meet. Providers, of course, must possess any licenses or meet other requirements specified in state law that pertain to the provision of a service. In the case of a few services (e.g., nursing facility or ICF/MR), providers are required to meet very detailed standards that are spelled out in federal law and/or regulations. Once a state has established its requirements, then the state must offer a provider agreement to any willing provider that meets the state's requirements, agrees to accept Medicaid payment, and abide by other fundamental requirements. The main exception to the open enrollment of qualified providers again arises in managed care service delivery models.

Beneficiary Protections

Federal Medicaid law provides certain basic protections for all beneficiaries.38 Specifically, each state must make the Medicaid Fair Hearing appeal process available to any individual who has been denied eligibility, who has been denied a service, whose services would be reduced or terminated, or who faces loss of eligibility. The state must notify beneficiaries in advance before an "adverse action" affecting Medicaid coverage takes effect and include an explanation of their rights regarding the Fair Hearing process, including the right to an evidentiary hearing conducted by an impartial, uninvolved official (e.g., an administrative law judge). As long as an individual requests a hearing on a timely basis, services must be continued through the duration of the hearing process. In pursuing an appeal, beneficiaries have the right to enlist other individuals to assist them in pursuing the appeal (e.g., peers, friends, families, advocates, attorneys).

Payments for Services

Except in the case of capitated managed care arrangements, Medicaid operates in a "fee-for-service" framework. Providers are paid for each distinct service they furnish to a specific Medicaid beneficiary. Payments are "unit" based -- e.g., a provider is paid for a "visit," an hour or partial hour of service or, in the case of institutional services, a "day." Medicaid payments are made after the provider submits a "claim" for services that specifies the service rendered, the date of service and the beneficiary to whom the service was provided. In the fee-for-service framework, advance payments for services may not be made. Provider claims for services are processed through claims processing systems. These systems verify the beneficiary's eligibility and check other elements of the claim. With some exceptions, federal Medicaid law requires that payments to providers be made directly by the state to the provider. In short, Medicaid does not operate as a "grant" program but instead is structured to pay for discrete services furnished to beneficiaries. Payments are discussed in more depth in Chapter 7.

States have latitude in establishing payment amounts for services and units of reimbursement. Federal law (Section 1902(a)(30) of the Social Security Act) directs states to assure that "payments are consistent with efficiency, economy, and quality of care, and are sufficient to enlist enough providers so that care and services are available under the plan." In general, providers cannot charge Medicaid more than they charge other payers for the same service. In addition, providers may not charge beneficiaries an additional amount over and above the amount that they receive from Medicaid because the Medicaid payment is considered "payment in full."

Under a managed care arrangement, a state may make capitated prepayments to managed care organizations to furnish the full range of contracted services to enrolled beneficiaries. The amount of such payments must be based on data concerning the costs of serving beneficiaries under a fee-for-service arrangement.

Waiver Authorities

Federal Medicaid law allows the Secretary of Health and Human Services (HHS) to grant waivers of various statutory provisions that normally govern the operation of a state's Medicaid program. Since the early 1990s, the use of these waiver authorities has increased, including their use to provide services for individuals with serious mental illnesses. Waivers allow states to receive federal financial participation for covering individuals and/or services in ways that would not ordinarily be permitted. Depending on the type of waiver, a state can "waive" requirements such as comparability and statewideness to provide a targeted benefit package to individuals with a specific medical condition or who live in a certain geographic area. Chapter 6 has an indepth discussion of the use of waiver authorities in serving individuals with serious mental illnesses. Here, the three main types of waivers -- Section 1115, Section 1915(b) and Section 1915(c) -- are outlined.39

1115 Demonstration Waivers

Under Section 1115 of the Social Security Act, states may gain permission from the Secretary of HHS to use federal Medicaid dollars to cover groups of individuals and/or services not otherwise matchable, or to demonstrate alternative approaches to furnishing services to beneficiaries. The 1115 demonstration authority is relatively broad, allowing the waiver of a wide range of statutory requirements. In order to obtain federal approval of an 1115 demonstration, a state must demonstrate "budget neutrality," meaning that federal spending will not be more than what it would have been in the absence of the demonstration.

The 1115 waiver authority requires a research and demonstration component. States must arrange for an independent evaluation of the waiver to determine how successful they were at achieving their goal(s). States have employed 1115 demonstrations to expand Medicaid services to include uninsured individuals and families who could not otherwise be covered. The authority also has been used on a more targeted basis to test different ways of serving Medicaid beneficiaries. Once an 1115 demonstration is approved, it usually expires after five years. As discussed in Chapter 6, some 1115 waiver programs include mental health services.

1915(b) Waivers

A 1915(b) waiver is commonly referred to as a "freedom of choice" waiver (because it permits a state to waive the free choice of provider requirement). It also provides for waivers of comparability of services and statewideness requirements. Originally, 1915(b) waivers were most commonly used by states to implement managed care programs by restricting beneficiaries' choice of providers. However, the 1997 Balanced Budget Act allowed states to employ managed care for certain Medicaid beneficiaries through a state plan amendment rather than a waiver. Still, the 1915(b) waiver authority can be used to create a "carve out" system of managed care delivery for specialized services such as mental health services, as well as target certain services to a particular region or segment of the population.

Unlike the 1115 demonstration waiver authority, a state cannot use a 1915(b) waiver to expand eligibility. By law, 1915(b) waivers are approved for an initial two-year period and may be renewed for additional two-year periods. By statute, a 1915(b) waiver program must be "cost effective" -- i.e., the per-beneficiary costs must be no greater than the costs of serving individuals in the absence of a waiver program. As discussed in Chapter 6, several states furnish mental health services through Section 1915(b) waiver programs.

1915(c) Home and Community-Based Services Waivers

The 1915(c) waiver authority permits states to provide services (e.g., personal care, respite, habilitation, case management) to individuals who would otherwise require and be eligible for institutional services in a hospital, nursing home facility or ICF/MR. States must demonstrate that the average per person costs of furnishing home and community services does not exceed the average per person cost of institutional services to persons in the target group. Section 1915(c) permits states to obtain a waiver of Medicaid's comparability and statewideness requirements as well as extend institutional financial eligibility rules to people in the community. The waiver of comparability permits a state to target services to specific groups of beneficiaries (e.g., individuals with developmental disabilities). In addition, a state may limit the number of individuals who participate in a program. Many of the benefits that a state may offer through an HCBS waiver cannot ordinarily be offered under the Medicaid state plan. As discussed in Chapter 6, this waiver authority has not been used frequently to support working age adults with serious mental illnesses.

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