Melissa Bailey, commissioner of the Department of Mental Health, is shown testifying before a House committee. File photo by Erin Mansfield/VTDigger

WASHINGTON — The nationwide opioid crisis has propelled scrutiny in Congress of a longstanding federal rule that restricts the use of Medicaid at large-scale residential treatment facilities.

The same law limits Medicaid payments for inpatient mental health treatment at some types of facilities — a regulation Vermont has sidestepped for decades through a waiver.

But the waiver is set to expire over the next few years. When the money disappears, it will leave a $23 million hole in the state’s mental health budget. That’s because once the waiver is lifted, the state will no longer be able to use Medicaid money to fund facilities with more than 16 beds.

The Vermont Psychiatric Care Hospital, for example, a stand-alone facility in Berlin that treats patients with acute mental illness, has 25 beds. Without the waiver, the hospital could only provide treatment for 16 patients at a time.

While there has been mounting interest in changing the federal policy for inpatient drug addiction treatment, the considerations around the rule as it relates to inpatient mental health treatment are more complex.

Some experts advocate lifting the restriction from using federal money in large facilities for mental health care, saying it will increase much-needed psychiatric treatment capacity. Others are wary, saying the policy is moving the country toward a better system of mental health treatment.

The regulation restricting the use of federal money at large residential treatment institutions has been in place since the Medicaid program was launched in the 1960s.

It bars Medicaid money from paying for services at standalone institutions for mental disease, or IMDs, which are defined as facilities with more than 16 beds. Facilities that offer multiple types of services are considered an IMD if mental health beds make up more than half of the total number of beds in the hospital.

The limit on beds was put in place when the federal government decided that state mental institutions should be a state-level financial obligation, according to Marybeth Musumeci of the Kaiser Family Foundation.

Others say the rule was rooted in a desire to shift the country away from a model of mental health that relied heavily on institutionalization.

Over the last half century, clinical standards for mental health treatment have evolved. Laws like the Americans with Disabilities Act and key court decisions have propelled a transformation of the nation’s mental health system from institutional care to one based on services in the community, according to Musumeci.

Vermont has skirted restrictions on larger institutions for decades because of a waiver that has allowed Medicaid to pay for stand-alone patient services at facilities including the psychiatric hospital in Berlin and the private Brattleboro Retreat.

However, the feds decided in 2016 that the exclusion for Vermont would be eliminated. Beginning in 2021, the amount of Medicaid funding for those institutions will gradually decrease through 2026. Based on the current number of people who use Medicaid for care at those facilities, the state will lose about $23 million in federal funding, according to state officials.

​Rep. ​Anne Donahue, R-Northfield. File photo by Erin Mansfield/VTDigger

Both facilities are integral to the state’s system of care for mentally ill patients, and the Medicaid reduction looms over Vermont lawmakers and state officials as they seek to reform a system that is woefully inadequate to meet the needs of an estimated 52 acute care patients a day.

There is currently so little capacity in the state’s system of care, which relies heavily on the Retreat and the Vermont Psychiatric Care Hospital, that severely mentally ill patients end up in hospital emergency rooms for days and sometimes weeks at a time, according to Rep. Anne Donahue, R-Northfield, a longtime mental health advocate.

Melissa Bailey, commissioner of the Department of Mental Health, says the state submitted a document making the case to the federal government for why Vermont should be able to bill Medicaid for services at institutions for mental disease earlier this month. Regardless of the result of that request, the state must put together a plan for managing the phase-out of Medicaid funding at those facilities by the end of the year.

Vermont lawmakers and regulators are moving ahead with a plan to expand the state’s mental health treatment system, which would involve building a new inpatient psychiatric facility at the Central Vermont Medical Center. Because it is a general services hospital, as many as 69 psychiatric beds could be added and services there would qualify for Medicaid. That far exceeds the number of beds the state and UVM Health Network plan — or need — to add.

Bailey said rules concerning Medicaid eligibility at larger institutions has incentivized the shift toward a community based system. However, she said, that system has not been as effective as it could be.

Bailey said one of the challenges for the mental health system in Vermont has been limitations on what funding can be used for, when things like housing, transportation and job services are key parts of a community-based system.

Federal level changes

In Washington, lawmakers are scrutinizing rules limiting Medicaid payments for inpatient treatment, particularly in the face of the opioid addiction epidemic, which has sharply driven up demand for substance use disorder treatment across the country.

When Gov. Phil Scott and members of his administration were on Capitol Hill earlier this year testifying on the opioid crisis, they recommended that Congress consider a law change to lift the bed-count restrictions for inpatient substance abuse treatment.

Al Gobeille, secretary of the Agency of Human Services. Photo by Anne Galloway/VTDigger

Vermont is currently seeking a waiver to lift the restrictions on facilities for substance abuse treatment, according to Human Services Secretary Al Gobeille. However, they advocated making a change to policy so states would not have to negotiate to get around those restrictions — a shift they said would help states expand addiction treatment systems at a time when services are in high demand.

Rep. Peter Welch, D-Vt., is a sponsor of a measure that would remove the caps for inpatient substance abuse treatment, so that Medicaid-covered patients could go to any accredited facility.

Similar proposals have been pitched as the Senate and House work on legislative packages to address the opioid crisis, though none have advanced so far.

However, the limits for using Medicaid funds for psychiatric treatment in larger facilities has not been widely discussed recently.

Sen. Patrick Leahy, D-Vt., “welcomes” consideration of regulations for institutions for mental disease and other measures that would ease Medicaid funding pressures on states, according to David Carle, the senator’s spokesperson. However, he emphasized a need to support treatment services in communities.

“Repealing or partially repealing the IMD exclusion will not replace the need for community-based services to ensure that those who need ongoing treatment can receive it,” Carle said.

Changing IMD restrictions

The pending loss of the waiver in Vermont would have a significant impact on the state’s current system for inpatient mental health care, according to people involved.

Brattleboro Retreat CEO Louis Josephson said the end of the institutions for mental disease exclusion “means a complete transformation of who we are.”

About 70 percent of the Retreat’s inpatient service is paid for by Medicaid, so losing the ability to be eligible for those funds would have a huge financial impact, according to Josephson.

Louis Josephson, CEO of the Brattleboro Retreat. File photo by Mike Faher/VTDigger

He estimates the facility would lose between 50 and 60 of its inpatient adult psychiatric beds if the exclusion expires. The rule does not apply to beds for children or geriatric patients, but Josephson said that he is unsure how those services would be affected.

“It is pretty much of an existential dilemma for us,” Josephson said.

The 112-bed private mental health facility currently faces a shortfall of more than $500,000 and Josephson has asked the state for an increase in Medicaid funding, according to a recent report in Seven Days.

Mark Covall of the National Association for Behavioral Health Care said the organization has been urging changes to the federal bed limit.

When the law was put in place, patients were held in state hospitals for long periods of time. Now, he said, that practice is no longer used. But the rule remains and is barring people from accessing short-term care when they need it.

“It is harming patients because it is an arbitrary barrier to getting the care that they need,” he said.

The group advocates loosening restrictions for some facilities, like the Brattleboro Retreat, which he said could increase treatment capacity and help reduce the bottlenecking of people who need psychiatric care in hospital emergency departments.

Other groups have suggested changing the federal restrictions to allow Medicaid to be used for short-term stays in institutions that currently are barred from payments under the program because they are classified as too large.

Many people are wary of loosening the regulation, saying that it has, perhaps inadvertently, supported a shift toward fully integrating mental health treatment into general health systems.

Donahue said that mental health conditions like depression often occur with other medical conditions, like heart issues. Patients should be treated in environments that can address the full spectrum of medical needs.

“We learned a long time ago there’s no such thing as separate but equal,” Donahue said.

Donahue does have concerns that losing the IMD waiver could mean a decline in treatment capacity in Vermont, and said that there is a need to grandfather some institutions into the system in the short term, despite their providing an “antiquated model of care.”

“Even though in my mind the Retreat cannot meet best clinical practices in its current configuration,” she said. “that does mean it can’t provide good clinical care and it’s not essential to our current clinical system.”

She can see reasons to consider lifting the restrictions for substance use disorder treatment to increase access to rehab services — those programs tend to be clinically different from hospitalization.

However, when it comes to mental health treatment, Donahue fears that decisions are driven by financial concerns, “rather than looking at what is really the clinically best care.”

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Pending loss of Medicaid waiver concerns mental health advocates