States use Medicaid funding to foot the bill for mental health and substance use disorder treatment at institutions for mental disease even though federal law prohibits it, according to a report from the Medicaid and CHIP Payment and Access Commission on Monday.

The so-called “IMD exclusion” was created by Congress in 1965 to make sure that states, not the federal government, paid for inpatient psychiatric care. Under the rule, Medicaid can’t pay for the treatment of adults less than 65 years of age at psychiatric residential facilities if they have more than16 beds. But the commission found that states have provided mental health and SUD services by leveraging other Medicaid authorities like state innovation waivers, in-lieu-of services through managed care plans, and exclusions for people over the age of 65 or under 21.

States have also taken advantage of the federal Substance Use Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act, which allows them to pay IMDs for SUD services for Medicaid beneficiaries.

“Despite the exclusion, we found most states are using multiple legal authorities to pay for residential and inpatient behavioral health treatment with Medicaid funds,” MACPAC chair Melanie Bella said.

Patient advocates and healthcare experts have spent years debating the extent to which the IMD exclusion curbs the availability of mental health and SUD services for Medicaid beneficiaries. People enrolled in the program are more like to suffer from behavioral health issues than the population at large, so increasing the availability of mental health and SUD services to them could have an outsized impact.

MACPAC’s report shows that states have been creative in their attempts to bypass the limits on reimbursement. In 2018, 32 states used Medicaid disproportionate share hospital payments to fund IMDs, including two states that used all their DSH funds to support IMDs, according to the Congressional Research Service. That allows them to use Medicaid dollars to help IMDs deliver services without running into reimbursement problems.

“Findings from this report will be especially valuable as we grapple with how best to direct vital mental health and SUD treatment resources to people in need,” Bella said.

A 2019 report from the centrist Bipartisan Policy Center recommended getting rid of the IMD exception as part of a broader set of policy options for increasing access to behavioral health services. Nearly one in five—about 47 million—U.S. adults live with a mental illness, according to the National Institute of Mental Health.

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MACPAC: States bypassing Medicaid limits on behavioral health –