Prepared By

John Fergus Edwards, J.D., LL.M.

May 1997

John Edwards is a health care attorney who practices law with the Federal Government.  John has previous work experience as an attorney with the National Alliance for the Mentally Ill (NAMI), and he continues to have an on-going interest in the area of psychiatric/mental health and disabilities law.  This paper was written in his private capacity as a mental health advocate.
a.  Importance Of Medicaid For Persons With Serious Mental Illness And The IMD Exclusion
b.  Rationale For The IMD Exclusion And An Overview Of Why It Should Now Be Repealed
a.  Statutory Issues Governing Medicaid  And The IMD Exclusion
b.  Legislative History Behind The Medicaid IMD Exclusion
c.  Covered and Exempt Facilities Under The IMD Exclusion
d.  Judicial Challenges To The IMD Exclusion
a.  Historical Perspective On The IMD Exclusion
b.  Consequences Of The Medicaid IMD Exclusion, Viewed In Conjunction With Federal Funding Incentives Promoting The Utilization Of Community Mental Health Services
c.  Budgetary Costs Associated With Lifting the IMD Exclusion Versus Substitution of Benefits Argument

FOLLOWING IS PART 1. Download PDF of Complete IMD Study



Importance Of Medicaid For Persons With Serious Mental Illness And The IMD Exclusion

Approximately five million persons in the United States, or about 2.8 percent of the adult population and 3.2 percent of children, suffer from severe and persistent mental illnesses, or “serious mental illnesses”,[1] consisting of schizophrenia,[2] bipolar disorder (formerly called “manic-depressive illness”),[3] major depression, obsessive compulsive disorder, and panic disorder.  These illnesses can have a significant and a devastating impact on the individuals’ lives and their families.  Fortunately, treatment is now available which allows the majority of persons affected by these disorders to be treated on an outpatient basis, allowing these individuals to participate more fully in society and become more productive at work, at home, and in the community.[4]

Due to financial barriers limiting access to private health insurance coverage, the federal program entitled “Grants to States for Medical Assistance Programs” (commonly called “Medicaid”)[5] has evolved into an important source of funding for treatment of mental illness.[6]  Medicaid does not impose any special or additional requirements that persons with mental illnesses must meet in order to be eligible for covered services.[7]  Thus, Medicaid has increased accessibility to mental health and psychiatric care services for mentally ill persons in general hospitals and nursing facility settings, as well as individuals who receive outpatient mental health services in their communities.[8]  Since the early 1980s, Medicaid has been recognized as “the largest single mental health program in the country”,[9] and it is estimated that fifteen percent of total Medicaid dollars are spent on care and treatment of persons with mental illnesses.[10]

The majority of persons with serious mental illnesses can now be treated on an outpatient basis with psychotropic medications which have been developed over the past four decades.  Medications such as clozapine, risperidone and lithium, used by themselves or in combination with other medications and nonpharmacologic therapies, are being used successfully to treat the majority of persons (approximately 80 percent) with serious mental illnesses, such as schizophrenia and bipolar disorder, allowing these individuals to reside and remain in their communities.[11]  State Medicaid agencies are required to cover psychotropic medications if the state Medicaid plan incorporates a prescription drug benefit.[12]  Maintaining successful long-term outpatient psychiatric treatment, however, depends upon several other factors such as the patient’s compliance with medications and the availability of good community mental health and rehabilitative care programs.

Unfortunately, not all individuals who suffer from these disorders are able to receive satisfactory benefits from psychotropic medications.  Persons whose symptoms and disease processes are exceedingly severe and who do not respond to medications and nonpharmacologic therapies may require extended hospitalization(s) or long-term institutional / residential psychiatric care.[13]  Because of the nature of these illnesses, it is difficult to ascertain at any given time a firm estimate of the number of such persons, often referred to as “the forgotten population”,[14] who are unable to receive satisfactory benefits from medications and need long-term institutional or residential psychiatric care.  Conservative estimates indicate that ten percent of individuals with schizophrenia are treatment-resistant and require long-term (often life-long) institutional care, even in communities with the best outpatient psychiatric care and mental health service programs.[15]  Additionally, a greater number of persons with bipolar disorder and schizophrenia (approximately 20 percent)[16] respond only minimally to standard psychotropic medications and would be better served through inpatient hospitalization or residential treatment programs than through outpatient community mental health services available in many communities in the United States today.[17]  A significant number of persons suffering from these disorders tend to be treatment-resistant to standard psychotropic medications at the onset of their illness and initial intervention and need extended psychiatric hospitalization(s), before they are stabilized on the appropriate treatment regimen and can be discharged.  Repeated psychiatric hospitalizations are often necessary for persons whose conditions relapse after they are discharged.[18]

State psychiatric institutions and freestanding psychiatric hospitals are generally better suited to provide this type of care than psychiatric units in a general hospital.  Psychiatrists on the medical staff at psychiatric hospitals generally maintain their offices on site rather than in the community, which allows for more interaction with the patients and a closer working relationship with the nursing staff.  These on-site physicians are better situated to evaluate and/or modify treatment programs if the patient fails to respond to the prescribed treatment plan.  Psychiatric hospitals offer more specialized services, such as individual and group therapy sessions, art therapy programs, and other beneficial psychosocial activities tailored to the individual patient’s condition and level of functioning.  Furthermore, psychiatric hospitals are able to provide a continuum of psychiatric care services with transitions, supervised by the same medical and mental health professionals, from inpatient psychiatric care to partial hospitalization services and/or outpatient-based services and, if need be, residential psychiatric care.  These inherent advantages of psychiatric hospitals promote a greater continuity of care for patients than can be received through inpatient psychiatric care in general hospitals and separate aftercare services furnished by other organizations or agencies in the community.[19]

Nevertheless, the federal Medicaid statute specifically excludes federal payment for services provided to otherwise-qualified individuals, twenty-two to sixty-four years of age, in institutions for mental diseases (IMDs).[20]  The term “institution for mental diseases” was statutorily defined in 1988 as “a hospital, nursing facility or other institution of more than sixteen beds, that is primarily engaged in providing diagnosis, treatment or care of persons with mental diseases, including medical attention, nursing care, and related services.”[21]  This statutory definition, therefore, denies federal payment for services furnished to otherwise Medicaid-eligible recipients in traditional state mental hospitals and in more modern freestanding psychiatric hospitals and other facilities with more than sixteen beds which specialize in or are primarily engaged in the care and treatment of persons with psychiatric disorders (other than mental retardation and related conditions).[22]

  b.  IMD Exclusion: Rationale and Overview Of Why It Should Now Be Repealed

The IMD exclusion was originally premised upon the notion in the Social Security Act and other federal social welfare programs dating back to 1950[23] and before[24] that the care of persons in state mental institutions [and tuberculosis (TB) hospitals][25] was considered to be a traditional responsibility of the States.[26]  By the 1960s, however, the Federal Government has wanted to promote the use of outpatient community mental health services in the belief that with the development of new treatment techniques, namely more effective psychotropic drugs and an increased number of psychiatric beds in general hospitals, community mental health services would ultimately replace the often maligned state mental institutions.[27]

With this in mind, President Kennedy and Congress worked together to enact the Community Mental Health Centers Act (CMHCA)[28] as part of the Mental Retardation Facilities and Community Mental Health Centers Construction Act of 1963.[29]  The enactment of the Community Mental Health Centers Act started a dynamic shift in public funding for mental health services from the States to the Federal Government and promoted the utilization of outpatient-based community mental health services and discouraged the use of institutional psychiatric care.[30]

The same rationale underlying the CMHCA was used to allow States to provide generous coverage of outpatient community mental health services under state Medicaid plans, while at the same time excluding federal financial participation[31] or federal medical assistance for services furnished to individuals under sixty-five years of age in IMDs.[32]  The legislative history of the Social Security Amendments of 1965, pertaining to the federal public assistance provisions[33] as well as the Medicaid amendments, states that it is anticipated that this legislation would give States further encouragement to continue the trend of discharging patients from mental hospitals in an effort to serve them through alternative settings, such as in nursing homes, foster homes, community mental health centers, and short-term treatment in general hospitals.[34]

Consequently, federal Medicaid coverage of alternatives to institutional psychiatric care, used in conjunction with CMHC programs[35] and other federal entitlement programs available to eligible individuals residing in the community,[36] provided considerable financial inducements for States to discharge patients from state mental institutions.  Collectively, these federal funding incentives have been the principal catalysts behind the “deinstitutionalization” movement in the United States from the 1960s and beyond.[37]

To illustrate the magnitude of deinstitutionalization in America, at the height of institutionalization (1955), an estimated 559,000 persons were in public psychiatric hospitals (IMDs).[38]  Today, there are fewer than 90,000 individuals in the United States remaining in public psychiatric hospitals.[39]

With the advent of psychotropic medications, deinstitutional-ization has provided greater opportunities for many mentally ill persons who would have otherwise been unable to participate in or experience these freedoms by virtue of being confined to a psychiatric hospital.  At the same time, however, deinstitutional-ization has contributed to or exacerbated problems for a significant portion of individuals with chronic and severe forms of schizophrenia and other mental illnesses who continue to be treatment-resistant and need extended inpatient hospitalization or long-term residential or institutional psychiatric care.[40]  Instead of being able to make a successful adjustment or transition to life in the community, a significant number of severely mentally ill individuals find themselves caught up in a perpetual cycle of homelessness, living in shelters, revolving door hospitalizations, and confinement in jails and prisons.[41]  At best, severely mentally ill, treatment-resistant individuals often end up or reside in nursing facilities or smaller board and care facilities or group homes with sixteen or fewer beds, thus preserving their eligibility to receive Medicaid services.[42]  These individuals require ongoing treatment and need a highly structured living environment and would be better served through institutions and residential facilities which specialize in the care and treatment of persons with psychiatric disorders.[43]

The Federal Government, through its administration of public mental health funding policies, is partly responsible for the problems resulting from deinstitutionalization and the deficiencies in the public mental health systems in the United States today.  Early federal mental health policies were developed based upon a fundamental misunderstanding of the nature and causes of serious mental illnesses.[44]  Federal policymakers during the 1950s and 1960s were slow to recognize the fact that schizophrenia and other serious mental illnesses are neurobiological disorders of the brain.[45]  There continues to be a lack of appreciation on the part of federal policymakers that, even with today’s advanced medications and the best available outpatient treatment services, a small but significant number of persons with these psychiatric illnesses are treatment-resistant and require residential or institutional psychiatric care.  Consequently, federal funding incentives emphasizing the use of community-based mental health services, while at the same time denying federal Medicaid payment for services provided in institutions and freestanding psychiatric hospitals, have led to uncoordinated psychiatric care services for the most severe patients and a disjointed public mental health system in many localities in the United States today.

Therefore, this analysis adopts the position that the Medicaid program should no longer deny federal medical assistance for medical necessary care and services furnished to individuals between the ages of twenty-two and sixty-four in institutions or facilities which specialize in the care and treatment of psychiatric disorders (IMDs).  No other institutional exclusions involving other types of specialized hospital services or long-term care are imposed under Title XIX of the Social Security Act (the Medicaid statute) altering the provision of care and treatment services for patients with other medical conditions.[46]

As will be discussed in greater detail in part II of this analysis,[47] Section 1902(a)(19) of Title XIX states that a State  plan for medical assistance must “provide such safeguards as may be necessary to assure that … care and services … will be provided in … the best interests of the recipients”.[48]  The Medicaid Regulations build upon this principle by providing that State Medicaid agencies may not arbitrarily deny or reduce the amount, duration, or scope of a required service to an otherwise eligible recipient solely because of the diagnosis, type of illness, or condition.[49]  These customary coverage requirements should be applied equally across the board for all medical or biological disorders.  Therefore, if a physician determines that an otherwise-eligible Medicaid patient (between the ages of twenty-two and sixty-four) with a severe case of schizophrenia or other biologically-based mental illness is in need of specialized psychiatric care provided through a psychiatric hospital or a state psychiatric institution, this professional judgment should be respected and accorded federal Medicaid reimbursement.

As will be discussed in part II of this analysis,[50] judicial challenges to strike down the IMD exclusion brought under the Equal Protection Clause of the Fourteenth Amendment to the Constitution[51] have so far been unsuccessful.  If reviewed today, it is unlikely that the Supreme Court would abolish this Medicaid exclusion.

To rectify the consequences of this policy, Congress should take it upon itself to reexamine and repeal the Medicaid IMD exclusion and cover all “medically necessary” care and services furnished to all otherwise Medicaid-eligible individuals who require inpatient hospitalization in psychiatric hospitals and/or residential treatment in specialized psychiatric institutions, due to a serious mental illness or other neurobiological disorder of the brain.

In spite of the modern medical understanding of serious mental illnesses as neurobiological disorders of the brain and the unintended consequences and problems resulting from the Medicaid IMD exclusion, the primary rationale today for maintaining this exclusion appears to be economic considerations regarding fears of a cost explosion if this exclusion is lifted, especially in a time of tight budgetary constraints on the federal Medicaid program.[52]  To address these budgetary concerns, reasonable nondiscriminatory proposals to contain federal Medicaid expenditures for inpatient psychiatric hospital services and residential psychiatric care are set forth in part III.C of this analysis, if the IMD exclusion were to be abolished.[53]  These cost containment proposals are comparable to federal Medicaid coverage and payment restrictions for inpatient hospital services, nursing facility services, inpatient psychiatric hospitalization services for persons under twenty-one years of age, and services provided in intermediate care facilities for persons with mental retardation.

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