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Institutions for Mental Disease (IMD) Exclusion

114th Congress

The Problem

Medicaid funds are not available to certain alcohol and drug addiction community-based residential treatment facilities for services provided to individuals between the ages of 22 and 64 for facilities of 17 beds or more. Specifically, Title XIX of the Social Security Act restricts Medicaid reimbursements to Institutions for Mental Diseases (IMD) [42USC 1396d].

Residential treatment facilities are unintentionally impacted by the 1965 IMD Exclusion because substance abuse treatment services are not distinguished from mental health services in statute or regulation. The Centers for Medicaid and Medicare Services (CMS) has linked substance abuse with mental health, categorizing addictive disorders as mental disorders under the International Classification of Diseases, 10th Edition (ICD-10). CMS also interprets “institution” within the IMD statute to include community-based substance abuse non-hospital residential treatment facilities. This rule originated in 1965 during the move to de-institutionalize mental health patients. Instead, it encourages resources to be directed instead towards community-based treatments. Residential treatment facilities are located mostly in the neighborhoods and communities in which their clients live and work. TCA does not believe the Congressional intent was to adversely impact the treatment of those with drug and alcohol addictions, yet the IMD Exclusion jeopardizes these essential services.

Ironically, just as Medicaid has expanded to provide millions of Americans with access to health insurance coverage for the first time, and as the demand for treatment has escalated amid an epidemic of addiction related to heroin and prescription drug misuse, the IMD Exclusion prevents low-income citizens in need from receiving community-based care through residential treatment facilities.

The Consequence to Americans and a Cost-Effective Medicaid Reform

The IMD Exclusion is a significant barrier to many who seek appropriate and effective substance abuse treatment. Those with substance use disorders must have the full range of treatment options available to them, including the valuable services offered through residential treatment. The IMD Exclusion runs counter to the tenets of choice, access, parity, appropriateness of care and overall efficacy. The exclusion limits the ability of Medicaid eligible Americans from receiving either no care at all, or less cost-effective and appropriate care for their addiction.

If the IMD Exclusion were corrected, many Americans already enfranchised in the public health, social service, and criminal justice systems could be identified and treated for the disease of substance abuse, which may be their greatest barrier to self-sufficiency.

Reconciling MH/SUD Parity and the Medicaid IMD Exclusion

CMS has concluded that both MH/SUD Parity and the Medicaid IMD Exclusion apply to Medicaid expansion plans. According to the CMS final rule, the Mental Health Parity and Addiction Equity Act (MHPAEA) affects benefit design; by contrast, the Medicaid IMD Exclusion is a payment exclusion. So even as parity of coverage is required, no federal financial participation is available to help defray the cost of treating persons who are considered residents of inpatients for mental diseases. This means that although beneficiaries may receive mental health or addiction treatment as inpatients, another (non-Medicaid) source of funding will have to pay these costs.

Result: The IMD Exclusion will perpetuate and grow an access barrier for the Medicaid expansion population receiving coverage through the expansion as well as those in traditional Medicaid. The simultaneous application of both parity and the IMD Exclusion in the same rule underscores the many paradoxes that arise when a longstanding program such as Medicaid is re-tooled for the modern era.

Research to Support Eliminating the IMD Exclusion for Therapeutic Community Treatment

Numerous studies from NIH and State sponsored research has shown the cost effectiveness of residential non-hospital treatment for substance abuse. Some examples:

Washington State Supplemental Security Income Cost Offset Pilot Project (2002)

  • “Providing treatment to substance abusing pregnant mothers reduces health care cost of their exposed infants. Average Medicaid costs for an infant’s medical care during the first two years of life was 1.4 times greater for mothers with untreated substance abuse.”
  • There were two factors associated with lower medical costs: ending a treatment episode with successful completed status and remaining for longer continuous periods. Medical costs were the lowest when a client stayed in treatment over 90 days.
  • In a study of chemically dependent individuals with co-occurring disorders, overall Medicaid paid medical and psychiatric services decreased by 44% from almost $5 million in the year before treatment to $2.8 million in the year after treatment.

Woodward, Albert and Annie Lo, “An Evaluation of Freestanding Alcoholism Treatment for Medicare,” Addiction (1993) 88, 53-68.

  • A research report on a HCFA and NIAAA funded study to expand Medicare and Medicaid coverage to include free standing treatment facilities showed it is less costly and “leads to lower subsequent health care utilization then treatment in hospitals.

Evaluation of the Implementation of Pennsylvania’s Act 152, expanding drug and alcohol treatment to Medicaid recipients. (1988- 1993) A five year study by Villanova University.

  • “Long- Term Non-Hospital Residential Rehabilitation is most commonly statistically associated with positive changes in client outcomes, including reductions in overall arrests and…crimes. And this modality is also associated with increases in employment and wages earned, as well as a reduction in relapse and the need for subsequent and alcohol treatment.”

Treatment Communities

Treatment Communities are multi-faceted community based residential substance abuse treatment programs that provide substance abuse services to clients and those with a diversity of special needs, including HIV/AIDS, mothers with children, criminal justice both incarcerated and through alternative to jail programs, co-occurring adults including individuals with chronic and persistent mental illness, the homeless, and adolescents.

Treatment communities provide a continuum of care including assessment services, detoxification, residential care, case management, outpatient, transitional housing, education, vocational, primary medical services, family counseling, family unification, and continuing care.

Because residential treatment facilities need a census to form a “community” as part of the therapeutic modality, they cannot meet the defined 16-bed limit and need a larger population. Medicaid eligible clients receiving substance abuse treatment in an IMD are not eligible for any medical benefits – even emergency care, despite the fact that if the client were not in an IMD, they would be eligible for their Medicaid benefits.


For the purposes of the IMD Exclusion, CMS has recognized exceptions to the ICD-10 classification, including mental retardation and organic brain syndrome. It is appropriate to make the same exception for substance use disorder.

Possible Congressional Action>

  • Repeal the IMD Exclusion for residential treatment of SUD; Congressman Alcee Hastings (D-FL) is developing legislation that would exempt residential treatment from the IMD Exclusion.
  • Fully repeal the IMD Exclusion
  • Change the definition of an institution to allow for residential treatment in community-based settings
  • Raise the bed limit above 16 to a number that would allow larger facilities to fall outside of the scope of the IMD Exclusion; the Medicaid CARE Act, S. 2605 introduced by Sen. Dick Durbin (D-IL) / H.R. 5287 introduced by Rep. Bill Foster (D-IL), would increase the bed limits to 40 and allow for reimbursement of 60 days of residential treatment in most cases and for longer periods for pregnant and parenting women.

Range of Policy Options Available to CMS

TCA encourages CMS to consider alternatives to the IMD exclusion that would ensure access to a broader continuum of treatment for Medicaid-eligible persons ages 21-64. These alternatives include:

  • Exclude SUD from the definition of mental disease for the purposes of determining if a treatment facility is an IMD
  • Revise governance structure criteria to allow for residential treatment in community-based settings
  • Allow states to use section 1115 waivers to draw down Medicaid FFP for services provided in IMDs