IMD Exclusion functions as a structural barrier that limits Medicaid-funded inpatient psychiatric care for adults between the ages of 21 and 64.

Created decades ago, the policy shapes the access to mental health treatment during a period marked by:

• Rising psychiatric needs
• Persistent inpatient bed shortages
• New efforts by states to strengthen behavioral health systems

Many policymakers, clinicians, and hospital leaders now highlight its role in current system pressures and point to its impact on treatment availability across multiple care settings.

That is why it is important to have a complete understanding of IMD Exclusion.

What Is the IMD Exclusion?

IMD Exclusion operates as a federal financing limit shaped during the 1960s and still influential today.

Many stakeholders view it as a rule designed for a treatment environment that no longer resembles current psychiatric care systems.

A foundational idea behind the exclusion relied on shifting responsibility for large psychiatric institutions toward states while promoting growth in community programs. Modern practice has moved far past that original structure, yet the federal rule remains active.

IMD Exclusion refers to a Medicaid restriction tied to Social Security Act §1905(i). Under that provision, an Institution for Mental Diseases is any hospital, nursing facility, or institution with more than sixteen beds that primarily treats individuals with mental disorders.

Medicaid cannot provide Federal Financial Participation for adults aged 21 through 64 receiving care inside such facilities.

The original intent in 1965 aimed to move large numbers of individuals out of state psychiatric hospitals and encourage a new wave of community-based services.

Care delivery has changed significantly since that decade, with expanded outpatient capabilities, crisis intervention programs, and medical advances in psychiatric treatment, yet the statutory framework remains intact.

Who Is Affected by the IMD Exclusion?

Adults aged 21 through 64 who require inpatient psychiatric services experience direct effects. This especially affects those needing specialized or extended care, such as individuals seeking bipolar disorder treatment Chicago facilities provide.

Private psychiatric hospitals, crisis stabilization centers, and long-term psychiatric facilities are excluded without exception for clinical need.

Financial pressure grows for these institutions because Medicaid represents a large share of coverage among adults with serious mental illness.

General hospitals try to avoid IMD classification by holding psychiatric admissions below 50% of total cases, which limits expansion of psychiatric units even when demand is high.

System-level effects reach far into:

• Emergency departments
• Law enforcement agencies
• Outpatient clinicians
• Community programs

Capacity shortages stretch personnel resources thin and create ongoing bottlenecks in the continuum of care.

Analysts have observed that private psychiatric hospitals face chronic financial strain due to lost Medicaid reimbursement.

The groups affected by ripple effects are:

• Emergency departments that manage prolonged psychiatric holds.
• Police are responding repeatedly to mental health crises during long waits for inpatient care.
• Community programs are facing increased pressure as inpatient access becomes more restricted.

Consequences of the IMD Exclusion

Significant disruption occurs across the behavioral health system once inpatient capacity erodes.

Rising demand for psychiatric care, ongoing workforce shortages, and the financial consequences of exclusion combine to create persistent access barriers.

Severe shortages of psychiatric inpatient beds exist in many states, including New York, where individuals may wait multiple days in emergency departments for placement.

Strain moves through multiple layers of care:

• Emergency rooms absorb long boarding times
• Police intervene in repeated crises
• General hospitals avoid expanding psychiatric units due to financial risks associated with non-reimbursable Medicaid admissions

Downstream outcomes include fewer private psychiatric hospitals remaining in operation, shortened stays in general hospitals under pressure to clear beds, and patient displacement as individuals travel far to obtain available treatment.

Many facilities report ongoing financial pressure when serving adults aged 21 through 64, since Medicaid support does not extend to IMD stays for that age group.

Resulting instability influences staffing, service availability, and capacity planning.

Exceptions and Workarounds

Practical efforts to navigate the exclusion reflect attempts by states and managed care plans to fill long-standing gaps.

Several mechanisms exist, though each comes with limits that prevent full resolution of the access problem.

Age-Based Exceptions

Medicaid covers inpatient psychiatric services in IMDs for individuals under 21 through EPSDT requirements.

People over 65 may receive Medicaid reimbursement for IMD care under state plans.

These exceptions leave a significant middle range of adults without straightforward access to covered inpatient treatment.

Section 1115 Waivers

States may request Section 1115 waivers that permit temporary federal funding for adults receiving SUD or mental health treatment in IMDs.

By 2020, nearly half of the states had obtained waivers focused on SUD treatment, yet only one had secured approval for psychiatric treatment for adults.

Waivers function as demonstration projects and must show cost-effectiveness and measurable improvements, creating administrative hurdles.

In Lieu Of Services in Managed Care

CMS guidance issued in 2016 allows Medicaid Managed Care Organizations to authorize IMD stays as substitutes for inpatient services when stays do not exceed fifteen days in a month.

Stays must be medically appropriate and cost-effective, and states must reimburse IMD care at rates aligned with comparable non-IMD inpatient services rather than actual IMD costs.

Analysts characterize this structure as one part of broader efforts to expand behavioral health capacity, though limits on duration and reimbursement continue to restrict impact.

A few operational constraints tied to these workarounds:

• Fifteen-day limit reduces feasibility for patients requiring longer stabilization.
• Rates tied to non-IMD care often fail to cover actual IMD operating costs.
• Administrative conditions placed on waivers delay implementation in high-need states.

Recent Policy Developments and Innovations

Growing public concern about psychiatric access has led legislative leaders, governors, and advocacy groups to propose new strategies.

Some efforts focus on rapid capacity building while others attempt to modify or repeal federal restrictions.

New York State Actions

Gov. Kathy Hochul advanced a plan intended to rebuild psychiatric capacity in response to widespread shortages by investing $30 million.

The plan calls for adding one thousand inpatient beds, creating thirty-five hundred residential units, enforcing requirements for general hospitals that maintain off-site psychiatric beds, and expanding outpatient and crisis intervention programs.

These measures reflect a strong push to reverse long-standing declines in psychiatric infrastructure, tied in part to Medicaid financing restrictions.

The Michelle Alyssa Go Act

Proposed federal legislation known as the Michelle Alyssa Go Act seeks to amend the IMD Exclusion so Medicaid can fund inpatient psychiatric care for adults with serious mental illness.

Growing public attention after several high-profile tragedies has increased support for reform.

Advocates argue that modern psychiatric systems offer broad treatment options and that current restrictions prevent patients from receiving timely and necessary care.

Changing Context

Outpatient services during the mid-1960s held a limited role, and policymakers designed the IMD rule in an era centered around downsizing large state hospitals.

Contemporary behavioral health systems include:

• Crisis centers
• Outpatient clinics
• Mobile treatment teams
• Residential programs
• Integrated medical and psychiatric care

Despite these advances, access to inpatient services remains pressured, particularly for adults in acute distress.

Closing Thoughts

IMD Exclusion initially aimed to accelerate deinstitutionalization, yet its continued presence restricts access to essential psychiatric care for adults who experience acute or severe mental illness.

Private psychiatric hospitals have continued to decline, general hospitals manage constant strain, and patients often encounter long delays or limited treatment options.

Policy adjustments through waivers and managed care substitutions offer partial relief but do not resolve core structural barriers.

Broader legislative reform is widely viewed as necessary to achieve parity between mental health services and other forms of medical care, along with sustainable access to inpatient treatment when needed.