Manhattan Institute Issues Report Entitled 'Medicaid's IMD Exclusion – The Case for Repeal'

WASHINGTON, Feb. 25 -- The Manhattan Institute has issued a 18-page report dated February 2021 entitled: "Medicaid's IMD Exclusion - The Case for Repeal".

The report was co-authored by Stephen Eide, senior fellow, and Carolyn D. Gorman, policy analyst.

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Contents

Executive Summary ... 4

Introduction ... 5

Background ... 5

Problems with the Status Quo ... 6

Recent Developments ... 9

Conclusion: The Case for Repeal ... 10

Acknowledgments and Endnotes ... 13

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Executive Summary

Inpatient psychiatric care forms a crucial part of America's mental health system. Though most mental health services are provided on an outpatient basis, treating some serious mental illnesses requires a hospital setting.

Inpatient treatment may be provided in a general hospital unit or a specialized psychiatric hospital. Within the context of Medicaid, specialized psychiatric hospitals are known as "Institutions for Mental Diseases," or IMDs. Federal law generally prohibits IMDs from billing Medicaid for care given to adults between the ages of 21 and 64 at a facility with more than 16 beds. This "IMD Exclusion" has been in place, in some fashion, since Medicaid was enacted in 1965. The intent was to prevent states from transferring their mental health costs to the federal government and to encourage investments in community services. The IMD Exclusion achieved its desired effect by contributing heavily to what's popularly called "deinstitutionalization," the transformation of public mental health care from an inpatient-oriented to an outpatient-oriented system.

This report argues that the IMD Exclusion has outlived its usefulness and should be repealed. It discourages states from investing in inpatient care, hampering access to a necessary form of treatment for some seriously mentally ill individuals. As a result, these individuals end up repeatedly in the emergency departments of general hospitals, "boarded" for lack of access to available beds, and overrepresented among the homeless and incarcerated populations. More broadly, the exclusion discriminates, through fiscal policy, against the seriously mentally ill.

Concerns that repealing the IMD Exclusion would lead to a mass re-institutionalization of the mentally ill are overblown. The population of public psychiatric hospitals today stands at about 5% of what it was before deinstitutionalization. Individuals in need of mental health care have access to a much greater diversity of programs and public services than existed before the 1960s, when institutional care was often the sole option. Strong legal regulations also now exist that did not exist when Medicaid was first passed--most notably, the "integration mandate" of the Supreme Court's Olmstead ruling, which requires mentally ill individuals to be provided services in the community when those services are appropriate, are not of objection to patients, and can be reasonably accommodated.

Interest in repealing the IMD Exclusion has increased recently in response to a concern over bed shortages for the seriously mentally ill and persistent challenges with mental illness-related homelessness and incarceration.

There have also been signs of bipartisan interest in a full and clear repeal. Under the Biden administration, mental health-care reform, beginning with the repeal of the IMD Exclusion, may present an opportunity for substantive bipartisan policy reform.

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Conclusion: The Case for Repeal

Medicaid's IMD Exclusion was crafted for an entirely different era. During the last half-century, America built a system of community-based mental health services that did not exist in 1965. Income-support programs for the disabled, assertive community treatment, clubhouse programs, supportive housing, assisted outpatient treatment, supported employment, peer support services--these either did not exist in the 1950s, or they operated on a much smaller scale than now./75

Nevertheless, a small subset of severely mentally ill individuals still needs inpatient treatment on a short-term, intermediate-term, and long-term basis. The IMD Exclusion inhibits those individuals' access to medically appropriate care. As is implied even by supporters of the IMD Exclusion who argue that it prevents "needless hospitalizations,"/76 medical need, not financing, should primarily shape public mental health care.

The IMD Exclusion punishes states for their historical commitment to providing mental health care. The 19thcentury asylums, for all their faults, entailed significant expenditures at a time when tax bases were far weaker than they are now. Had state governments never made any special commitment to the mentally ill and left them consigned to jails and poorhouses, Congress may well not have felt the need to make an exception for IMD care when it enacted Medicaid in the 1960s.

Today, legal and economic restrictions against "needless hospitalization" exist that did not 50 years ago. Since Medicaid's passage, states across the nation adopted "dangerousness" (to oneself or others) as the standard criterion for civil commitment, and Congress passed the 1980 Civil Rights of Institutionalized Persons Act, which regulates the quality of inpatient care. Most important, the U.S. Supreme Court imposed an "integration mandate" through its decision in Olmstead v. L.C. (1999)./77

Olmstead held that unjustified segregation of disabled persons constitutes discrimination in violation of the Americans with Disabilities Act. As such, the ruling requires mentally ill individuals to be provided services in the community when those services are appropriate, are not of objection to a patient, and can be reasonably accommodated./78

The holding was a reflection of two judgments: placing individuals in an institutional setting who can manage and benefit from being in the community perpetuates unwarranted assumptions that persons so isolated are incapable of or unworthy of participating in community life; and confinement in an institution severely diminishes the everyday life activities of individuals, including family relations, social contacts, work options, economic independence, educational advancement, and cultural enrichment.

Nevertheless, Olmstead did not outlaw institutional-based care. Indeed, Justice Anthony Kennedy emphasized in his concurring opinion that "it would be a tragic event ... were the Americans with Disabilities Act of 1990 (ADA) to be interpreted so that States had some incentive, for fear of litigation, to drive those in need of medical care and treatment out of appropriate care and into settings with too little assistance and supervision."/79

The Olmstead standard requires the placement of disabled people into "the most integrated setting appropriate to their needs," and for some people, that will mean IMDs./80

Modern IMDs are not designed as isolation wards; on the contrary, they are open to the point where they've been characterized as "uniquely vulnerable" to spreading Covid-19 infections during the current pandemic./81

Policies on seclusion and restraint are drastically changed from the pre-deinstitutionalization era./82

"Snakepit"-type scandals associated with mentally ill people being held in poor-quality or brutal institutional settings have become more common among jails and prisons than mental hospitals./83

Instead of serving as further justification for the IMD Exclusion, as some assert,/84 Olmstead and related legal regulations are best seen as evidence that fiscal disincentives for institutional care are no longer justified in the way they may have been in 1965. The larger purpose of Olmstead is to prevent social discrimination against the mentally ill and other disabled Americans. An even more specific focus on preventing social discrimination against the mentally ill may be seen in parity regulations that require health plans to provide behavioral health benefits that are no more restrictive than coverage generally available for traditional medical and surgical benefits.85 If Medicaid's core function is to attend to the health-care needs of low-income Americans, and some of those needs must be met in an IMD, it does not seem consistent to carve out separate financing arrangements for those forms of care versus others. In any event, given the parity laws, laws restricting civil commitment, and court decisions, mass involuntary reinstitutionalization is simply not a realistic danger.

This is aside from the reality that fewer individuals would need to be institutionalized long-term based on diagnosis alone, given that many who constituted the institutionalized population previously now benefit from antipsychotic medications and other advances in modern medicine that make it possible to be treated in an outpatient capacity./86

Finally, the structure of today's Medicaid system-- which operates mainly in a managed-care environment, as opposed to the fee-for-service environment of previous decades, makes it irrational to think that cost-conscious insurance companies and managed-care organizations would allow for anything other than the minimum necessary inpatient stays, given the expense.

Today's Medicaid managed care (health insurance that is publicly funded but privately administered)/87 will pay for 15 days of treatment in an IMD./88

But even with no day limit, as would be the case were the IMD Exclusion repealed, Medicaid managed-care organizations would provide significant downward pressure on long-term psychiatric care out of cost concerns. For those who can be treated successfully outside an institutional setting, or within a short window of institutional care, managed-care organizations would play a "patient advocate" role similar to defense attorneys under the Olmstead-based legal regime.

Long-term psychiatric care will always be expensive. It may be necessary, were the IMD Exclusion repealed, to develop a funding program to assist public psychiatric hospitals similar to the "disproportionate share hospital payments" program for safety-net hospitals that states have in the past used to fund IMD care./89

But the first and most important step toward public mental health reform to take is to eliminate the IMD Exclusion. Defenders of the exclusion argue that it protects funding for community services that would otherwise be crowded out by increased spending on IMD-based care./90

However, crowd-out dynamics might just as well work the opposite way: federal fiscal relief for inpatient services could free up state funds, and capacity, to devote to mentally ill individuals for whom community services are most appropriate. According to one assessment of a Vermont demonstration program that used Medicaid funds for IMD care: "In Vermont's experience, providing institutional care for the most acute patients reserves community-based services for those who do not need institutional care."/91

IMD investments would relieve pressure on community programs that are ill-prepared to deal with mentally ill people in a state of crisis. Research examining the impact of Medicaid expansion through the Affordable Care Act finds that an overall increase in Medicaid spending did not lead to reductions in spending on other non-Medicaid categories, such as education or transportation./92

A more realistic assessment of crowd-out or tradeoff-type dynamics would focus less on the tension between hospitals and community services and more on the tension between different modes of community services. Supporters of the IMD Exclusion charge that focusing on IMD-based treatment represents a shortsighted focus on crisis. For them, substantive mental health reform requires expanding the network of services and programs available to stabilize people before and after they've entered a state of psychiatric crisis./93

But the real problem is that many publicly funded community services do not serve the seriously mentally ill in a crisis state. That problem goes back a long time. During the early years of deinstitutionalization, psychiatrists whose educations were funded by taxpayers went into private practice, and Community Mental Health Clinics focused their attention on individuals who would never have been considered for civil commitment./94

As the number of diagnoses has expanded--and the number of Americans diagnosed at some point in their lifetimes with a mental disorder has increased--the number of claimants on public mental health resources has increased./95

New York City's ThriveNYC and California's Mental Health Services Act are examples of extremely well-funded investments in community mental health services whose outcomes have been negligible because of a holistic approach as opposed to one targeted to the seriously mentally ill./96

Only community programs that "focus exclusively on people with serious mental illness"97 truly offer an alternative to hospitalization. Programs without that focus can't be said to be preventing hospitalization or serving as a safety net to stabilize people postcrisis.

Also antiquated are arguments that general hospitals can suffice for the mental health-care system's inpatient needs./98

General hospitals are, and will almost certainly remain, the preeminent provider of inpatient psychiatric care in the nation./99

There are 1,033 general hospitals with separate psychiatric units, compared with 214 public psychiatric hospitals./100

But general hospitals cannot be relied on to the extent that they used to. In past decades, general hospitals added beds while state mental hospitals were cutting theirs, thus relieving pressure on the system./101

But psychiatric beds in general hospitals have been declining since the 1990s./102

Private general hospitals have been cutting psychiatric beds to make more system capacity for more remunerative services. Ninety percent of all general hospitals with a separate psychiatric ward are run by a private (nonprofit or for-profit) organization./103

Bed reductions by nonprofit general hospitals have created pressures in other parts of the public mental health-care system,/104 and these pressures have increased during the Covid-19 pandemic./105

More basically, as specialized institutions, state IMDs provide a greater range of psychiatric services appropriate for more longer-term commitments than are available in general hospitals.

As for Section 1115 waivers, state officials report that the process is cumbersome, the terms can change between administrations and even during the same administration, and budget neutrality requirements focus only on cost savings within the Medicaid program itself./106

CMS has had a history of changing what is allowable in terms of how states can fund inpatient treatment. As noted above, while CMS released guidance in 2018 that encouraged states to seek Section 1115 waivers for behavioral health, it wasn't until after that letter was sent to state Medicaid directors that CMS stipulated that a 60-day total limit for an individual (as opposed to the presumed average 30-day limit for all stays) was required for waiver approval. As with the Medicaid managed-care regulation, the expanded waiver authority has weakened some of the IMD Exclusion-related perverse incentives and recognized the need for greater access to inpatient treatment as part of a full continuum of psychiatric care. Overall, though, these modifications are insufficient.

Repealing the IMD Exclusion would undoubtedly increase the cost of Medicaid, which is already expected to exceed $1 trillion in 2027./107

But the true cost is a matter of dispute. The Congressional Budget Office (CBO) estimated that a full repeal, when it was proposed in the 2015 Helping Families in Mental Health Crisis Act, would cost $40-$60 billion over 2015-26./108

But CBO allowed that its estimate was "highly uncertain." It has since become even more unreliable. CBO estimates how much it would cost the government to enact a new program or change an old one, relative to the existing "baseline" level of expenditure. However, Section 1115 waivers and the 15-days-of-care-per-month allotment for Medicaid managed care have changed the baseline of current Medicaid funding for IMD-based care. CBO's estimate also does not take into consideration the savings that other service systems could realize. To the extent that IMD repeal would encourage more IMD-based treatment for people otherwise confined to jails and shelters, there would be cost offsets in those systems.

When the Trump administration proposed an optional full repeal as part of its FY21 budget, it estimated the cost to be $5.4 billion over 10 years./109

The benefits of longer-term inpatient psychiatric care, measured in weeks or even months, include stabilizing difficult cases and keeping them and society safe. Under current law, Medicaid's reimbursable care for specialized psychiatric facilities is generally limited to facilities with 16 or fewer beds. That is economically impractical for a hospital that needs to hire psychiatrists, nurses, social workers, security staff, and other support staff. The 16-bed limit also applies to any residential program that cares for the mentally ill, including those that don't utilize locked wards to which people are committed involuntarily. States should be pursuing greater availability of longer-term inpatient psychiatric care for more severely mentally ill Americans. But intermediate-length and intermediate-level treatment would also be encouraged by IMD repeal.

IMDs serve as the safety net of the safety net. They care for and treat the mental illnesses of individuals who cannot be accommodated in general hospitals or community-based services./110

Repealing the IMD Exclusion would neither result in mass reinstitutionalization nor disrupt the community orientation of public mental health care. It would, however, remove the fiscal disincentive against providing more inpatient care, forestall further bed cuts, ease boarding-related strains in the health-care system, encourage investment in new service models, reduce social discrimination against the seriously mentally ill, and facilitate long-term care for those who need it. The chief beneficiaries would be the cohort of vulnerable seriously mentally ill individuals who are at extreme risk of incarceration and homelessness by their inability to thrive in a community setting.

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About the Authors

Stephen Eide is a senior fellow at the Manhattan Institute and contributing editor of City Journal.

He researches state and local finance and social policy questions such as homelessness and mental illness. He has written for many publications, including National Review, New York Daily News, New York Post, New York Times, Politico, and Wall Street Journal. He was previously a senior research associate at the Worcester Regional Research Bureau.

Eide holds a B.A. from St. John's College in Santa Fe, New Mexico, and a Ph.D. in political philosophy from Boston College.

Carolyn D. Gorman is a policy analyst on issues related to serious mental illness and has served as a board member of Mental Illness Policy Org., a nonprofit founded by the late DJ Jaffe. She was a senior project manager at the Manhattan Institute for mental illness policy and education policy. Gorman served on the U.S. Senate Committee on Health, Education, Labor and Pensions. Her writing has appeared in the Wall Street Journal, New York Daily News, New York Post, City Journal, National Review, and The Hill. Gorman holds a B.A. in psychology from Binghamton University and will graduate with an M.S. in public policy from the Robert F. Wagner Graduate School of Public Service at New York University in 2021.

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The full report, including footnotes, can be viewed at: https://media4.manhattan-institute.org/sites/default/files/medicaids-imd-exclusion-case-repeal-SE.pdf

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