Using Medicaid to Support Working Age Adults with Serious Mental Illnesses in the Community: A Handbook. Overview of Medicaid Coverages


As previously noted, federal Medicaid law does not specifically spell out a predefined set of community mental health services that a state may offer. States cover community mental health services under broad Medicaid coverage categories, none of which are reserved exclusively for community mental health services. Many types of services fit under these broad coverage categories. Table 4-1 on the following page links mental health and related services that states furnish to adults with serious mental illnesses to their typical Medicaid coverage categories.

It is useful to keep in mind that, in the Medicaid program (as with most types of health insurance), general practice physicians and other health care professionals frequently address the mental health care needs of beneficiaries apart from the “mental health system.” This care is not insignificant and plays an important role in addressing mental illnesses; however, it is not the primary focus of this Handbook. Basic coverages, such as psychiatrist services under the mandatory “physician services” category and psychologist services under the “other practitioners” category, can play an important role in supporting individuals with serious mental illnesses (e.g., medication management that requires the services of a health care professional). In the following sections, attention focuses on coverages that are most relevant in supporting working age adults with serious mental illnesses in the community: the rehab and clinic options, case management, prescribed drugs, inpatient hospital, and personal assistance. Substance abuse treatment services (for persons with co-occurring disorders) are discussed in detail in Chapter 5.

Not included in the list are institutional services. Federal law specifically prohibits Medicaid payment for ser-vices to individuals age 22 to 64 who reside in large mental health treatment facilities (labeled “Institutions for Mental Diseases” or IMDs) regardless of their length of stay in such settings. The “IMD exclusion” is described in more detail on the following page.

Medicaid will pay for services for individuals age 21 or younger who are served in psychiatric hospitals or psychiatric residential treatment facil-ities.

Many individuals with serious mental illnesses reside in nursing facilities, and there are federal regulations concerning the services that must be furnished to them. These are discussed in Chapter 7.

Dual Eligibles: Medicare/Medicaid Coverage

A significant number of Medicaid beneficiaries are dually eligible for Medicare. Though Medicare and Medicaid are distinct programs, they intersect in their coverage of certain benefits for dual eligibles. In some instances, both Medicare and Medicaid cover the same services, but Medicare does not cover mental health services furnished outside a hospital, clinic or practitioner’s office and does not cover rehabilitative or case management services.

TABLE 4-1: Mental Health Servcies and Medicaid Coverage Categories
Service Coverage Category Mandatory Optional
Psychiatrist Physician Services X  
Psychologist Other Practitioners' Services   X
Clinical Social Work Other Practitioners' Services   X
(Under age 65 with specific exceptions)
Inpatient Hospital X  
Medications Prescribed Drugs   X
Personal Assistance Personal Care   X
Diagnosis Diagnostic, screening, rehabilitative and preventive services   X
Outpatient Mental Health Services Outpatient hospital services   X
Clinic Services ("Clinic option")
Community Support Services Diagnostic, screening, rehabilitative and preventive services ("Rehab option")   X
Substance abuse treatment Clinic Services   X
Diagnostic, screening, rehabilitative and preventive services
Service Coordination/Case Management Targeted case management   X

Medicare mental health benefits have not been updated for a considerable period of time and cover only limited mental health services, which are described below.

  • Inpatient Psychiatric Hospital Services. Medicare (Part A) covers inpatient psychiatric hospital services. A lifetime cap of 190 days applies to these services.
  • Outpatient Services. Medicare (Part B) also covers mental health outpatient services furnished in clinics, hospital outpatient departments or practitioners’ offices, including individual and group psychotherapy, family counseling, partial hospitalization2 and other services. Recognized practitioners include psychiatrists, clinical psychologists, social workers, nurse specialists; nurse practitioners; and, physician’s assistants.

Medicare beneficiaries who are not eligible for Medicaid are subject to Part A deductible and co-insurance requirements for inpatient services.

For Medicare outpatient mental health services, beneficiaries must pay a co-insurance of 50 percent (as opposed to the 20 percent co-insurance that applies to all other Part B benefits). Medicaid pays the deductibles and co-insurance for dual eligibles -- those Medicare beneficiaries who are also eligible for Medicaid.

Under Medicaid’s third-party liability requirements, Medicare certified providers are obligated to seek Medicare payment for services furnished to dual eligibles when the service is covered by Medicare. The amount that Medicare does not reimburse may then be billed to Medicaid. It is advantageous for states to secure Medicare payment for mental health services for dual eligibles because it lowers their costs. However, it causes problems for providers because of the length of time it takes to be reimbursed for their charges by both programs.

The IMD Exclusion3
When the Medicaid program was launched in 1965, Congress intentionally excluded federal payment for services furnished to residents of large mental health facilities (termed "Institutions for Mental Disease" - IMDs), except, at state option, individuals age 65 and older with mental disorders.4 An IMD is defined as a hospital, nursing facility or other institution that is primarily engaged in providing diagnosis, treatment, or care of persons with "mental diseases," including medical attention, nursing care, and related services.5 The "IMD exclusion" stemmed from the longstanding view that the states - rather than the federal government - should have principal responsibility for the funding of specialized mental health hospital services.6 Congress also was concerned that permitting states to capture Medicaid dollars to underwrite the costs of their mental health facilities would lead immediately to higher federal Medicaid outlays.7

In 1972, federal law was changed to permit states to cover inpatient psychiatric hospital services (including residential treatment facilities) for children and youth under age 21.8 In 1988, federal law was again modified to define an IMD as a facility that had more than 16 beds.9 This change permitted individuals with mental illnesses who reside in smaller specialized mental health facilities and residences to receive Medicaid services, including mental health services.

In sum, federal law does not allow Medicaid payment for services of any type furnished to any individual under age 65 who resides in an IMD, except for persons under age 21 who are served in a psychiatric hospital or private residential treatment facility. The IMD exclusion applies not only to the mental health services rendered by the IMD but also all other Medicaid services (including health care) for which individuals would be eligible if they were not in an IMD. The classification of a facility as an IMD includes assessing the character and purpose of the facility, its size and the make-up of its resident population. A facility (including a nursing facility) is deemed to be an IMD if more than 50 percent of its residents have mental disorders.10

While federal law prohibits Medicaid payment for the direct services furnished to IMD patients, states may make Medicaid disproportionate share hospital (DSH) payments to IMDs. These are lump sum payments rather than payments for services rendered to specific IMD residents. Between 1997 and 2002, DSH payments to IMDs averaged approximately $3.3 billion annually.11 These payments are subject to federal ceilings and flow principally to public (state and local) IMDs. In the past, CMS permitted states to purchase services from IMDs through Medicaid managed care waiver programs. However, CMS now is requiring these states to end such payments when these waiver programs are renewed because of the IMD exclusion.

The IMD exclusion has several implications over and above removing IMDs as a setting where Medicaid reimbursable services may be furnished. One effect is that Medicaid payments for the hospitalization of working age adults are limited to short-stay acute care services furnished in inpatient psychiatric units of general hospitals, so long as such units themselves are not IMDs. Larger state or locally-operated mental health facilities cannot receive Medicaid payment when they furnish similar services to individuals because of the IMD exclusion.

Of possibly greater importance is that the IMD exclusion limits states' ability to make use of the Medicaid 1915(c) HCBS waiver authority as a means of underwriting services and supports for working age adults with serious mental illnesses. The §1915(c) waiver authority permits a state to offer home and community services to persons who otherwise would qualify for services in a Medicaid-covered institutional setting (a nursing facility, ICF/MR, or hospital). As a consequence of the IMD exclusion, it is not possible for a state to operate an HCBS waiver program to serve as an alternative to mental health institutional services for working age adults with serious mental illnesses. As discussed in Chapter 6, the use of the HCBS waiver authority can be employed to support adults with serious mental illnesses who meet nursing facility level of care criteria. The HCBS waiver authority has been used more extensively to furnish home and community services to children and youth with severe emotional disturbances12 because Medicaid payment is allowable for services furnished to children and youth in inpatient psychiatric hospitals.

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