Using Medicaid to Support Working Age Adults with Serious Mental Illnesses in the Community: A Handbook. Medicaid Coverage Policies


“Coverage” refers to the services that a state includes in its Medicaid state plan. The federal Medicaid statute (principally in §1905) lists the services for which federal financial participation is available. When a state covers a service in its Medicaid state plan, it commits to making that service available to all beneficiaries who require it.

The extent of federal policies concerning the coverage of specific services varies. In the case of certain coverages, Congress has enacted detailed requirements. For example, federal statutory and regulatory requirements regarding nursing facility services are quite detailed. In other cases, however, Medicaid law describes relatively broad coverage parameters and, thereby, states have considerable latitude in fashioning the services that they offer under these coverage categories. This is especially the case with respect to rehabilitative services where federal law and regulations spell out the essential features of the coverage but otherwise do not prescribe their exact scope.

As discussed in Chapter 2, there are certain fundamental federal statutory requirements (e.g., comparability and statewideness) that apply to Medicaid state plan services, regardless of type. Unless a state is operating services under a waiver authority (see Chapter 6), its Medicaid coverage must comply with these requirements in order for the state to obtain federal financial participation for the costs of services it furnishes to beneficiaries. These requirements are discussed here.

Statutory Purpose

The federal Medicaid statute (along with federal regulations and, in some cases, additional CMS guidance) describes the intended purpose of each coverage. For example, in the case of targeted case management (TCM) services, the statute describes their purpose as “assist[ing] individuals eligible under the plan in gaining access to needed medical, social, educational, and other services.” In order for a state to gain CMS approval to offer TCM services, the specific services it intends to offer must comport with this expressed purpose. Because the TCM coverage is limited to assisting individuals to access various types of services, it may not be employed to furnish direct hands-on assistance to persons, conduct prior authorization activities, or determine eligibility. Such activities can be provided under other coverages or as a Medicaid administrative cost. Fundamentally, a state’s proposed coverage must align with the expressed statutory purpose. Sometimes, this causes a state to have to employ two or more coverages in order to furnish a desired array of services.

Coverage Content

When a state proposes a coverage, CMS expects that a state will spell out the services it intends to offer in reasonable detail in its Medicaid plan or related policies and procedures. This detail includes the specific services that will be furnished under the coverage, provider qualifications, and the criteria that a state will use in determining the medical necessity of the service. For example, a state may not simply indicate that it will cover rehabilitative services. Instead, the state must spell out the specific components of rehabilitative services that it will offer. These services must be defined in sufficient detail to make it clear what will be furnished to individuals and under what conditions.

CMS review of a proposed coverage is based on whether the coverage comports with federal law and regulations rather than on judgments concerning the appropriateness of the coverage. For example, some observers question the value of “day treatment” services as a means of supporting working-age adults with serious mental illnesses. However, as long as a state’s coverage of such services meets the essential requirements, CMS is obliged to approve the coverage.

CMS review of proposed coverages considers each state’s proposal on its own merits. In this vein, the coverages approved by CMS in other states may provide useful information when fashioning a coverage. However, CMS officials caution that replicating an existing coverage from another state will not necessarily expedite CMS review and approval. Nonetheless, CMS has expressed a strong interest in working with and assisting states in fashioning coverages that embrace the principles of recovery and reflect “what works” in effectively meeting the needs of beneficiaries, including working-age adults with serious mental illnesses.

It is important to keep in mind that Medicaid functions as a source of funding for services that meet federal statutory requirements rather than as a defined “program.” It is up to each state to determine what it will include in its coverage and the practice standards it will adopt. For example, a state has the latitude to establish “clinical pathways” in order to ensure that the correct mix and sequence of services are furnished to individuals based on their assessed needs. It is up to each state to craft its coverage in the context of its own programmatic goals and objectives for mental health services.

Medical Necessity

As previously discussed, Medicaid operates within a “medical necessity” framework. That is, services must be necessary to address a beneficiary’s health condition or fulfill a rehabilitative purpose. With respect to many Medicaid services, states have latitude to establish medical necessity criteria and institute processes for determining when such criteria are met. One way that states define medical necessity is to establish what are sometimes termed “service eligibility” criteria. For example, in the case of ACT (Assertive Community Treatment) services, service criteria often include a history of frequent psychiatric emergencies. For other mental health services, service eligibility criteria may include particular diagnoses, treatment history (e.g., frequent hospitalization), whether an individual’s assessed needs and level of functioning meet a predefined threshold level, and others. Service eligibility criteria are a means for states to assure that individuals receive appropriate services and to manage utilization.

In a somewhat similar vein, medical necessity criteria also may include what are termed “step-downs.” That is, an individual might be approved to receive especially intensive services for a limited period of time and then shift to a lesser intensity service once his or her condition is stabilized and/or improved.

A state also can establish various processes to determine medical necessity. These processes may include prior authorization and utilization review by the state itself or a contracted third party entity. In some cases, states permit a service to be furnished for a limited period of time or a fixed number of units without prior authorization, but require review for service continuation once the initial period is up or the unit limitation has been reached. In other cases, the provision of intensive services (e.g., those that constitute ACT) may be subjected to periodic review and reauthorization. Again, the rationale for these processes is to assure that individuals are receiving appropriate and necessary services.

Medical necessity is also frequently assessed in the context of the review and approval of an overall treatment plan developed by mental health professionals. In other words, the services that are furnished to the individual must be shown to address assessed needs identified during the treatment planning process.

Benefit Limits

Related to but distinct from medical necessity criteria are limits that a state may impose on the benefits that it offers. Federal law requires that each service that a state covers in its Medicaid program must be “sufficient in amount, duration and scope to reasonably achieve its purpose.” However, there is no specific federal standard defining this requirement. Some states impose limitations on the amount, duration and scope of services, including the number of times that a beneficiary can be seen by a physician in a month or the number of drugs that may be prescribed and paid for a person each month.

For mental health services, states often impose limits on the number of outpatient visits or how many units of a service a person may receive each month or over a more extended period. However, states must provide a mechanism for individuals to seek additional care when needed over and above any limits. The imposition of such limits has been the subject of considerable litigation over the years and often is controversial. Such limits frequently are used as cost-containment devices. Some argue they can be counterproductive when they prevent an individual from obtaining vital services and contribute to preventable hospitalization or other negative outcomes. Effective utilization review techniques usually are more effective methods for ensuring that services are cost-effective.

Direct Benefit

Medicaid is a beneficiary-centered program and the services that a state offers must be furnished for the direct benefit of the beneficiary. For example, Medicaid state plan personal assistance services cannot be furnished for the sole purpose of providing respite to family caregivers. While family caregivers might benefit when personal assistance is furnished, the provision of this assistance must be based on the beneficiary’s needs rather than those of the family caregivers. In mental health services, this requirement must be taken into account when a state offers family psychosocial education, as discussed in Chapter 5.


Finally, in proposing a coverage, a state must specify the providers of the service and their required qualifications. Especially with respect to rehabilitative services, states have substantial latitude in establishing provider qualifications.1 A state may require that providers possess and demonstrate critical competencies and capabilities by establishing provider standards and certification processes. Such standards obviously must comport with state law, and at the same time, be reasonably related to the requirements of the service itself, and must not arbitrarily disqualify otherwise qualified providers and individuals. For example, in the case of rehabilitative services, it is not permissible for a state to limit the providers of these services to community mental health centers or organizations that also receive funding from the state mental health authority. Any entity or individual who meets a state’s criteria and is willing to furnish Medicaid services must be allowed to become a provider.

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