The ‘IMD Exclusion’: A Looming Clash Between Medicaid and Child Welfare Reform

The U.S. Capitol Building in Washington, D.C.

Last month, we mentioned that an answer given by the federal Administration for Children and Families (ACF) to a question posed by Kentucky’s child welfare agency carried big implications for how other states implement the Family First Prevention Services Act. Click here to read that piece, which pertains to whether Medicaid-funded services can count toward compliance with the new law.

Turns out Kentucky is quite the canary in the coal mine when it comes to Family First, because it got another Medicaid-related answer earlier in the summer that is also of great significance in how the law plays out. Kentucky was told that it could not bill Medicaid for any services within its Qualified Residential Treatment Programs (QRTP), a new classification of group care under Family First.

The decision confirmed what some mental health and child welfare advocates fear: This new class of group settings, meant to ensure treatment-oriented services for foster youth, threatens to upend the common use of Medicaid to pay for such treatment. A recent memorandum issued by the federal Centers for Medicare and Medicaid Services (CMS) has confirmed that the agency is not currently planning on making any exceptions for the new QRTP designation.

Big plot twist there: Using Medicaid in many foster care group settings could already be improper. Federal law walls off support for most health services administered in group settings with more than 16 beds, a description that would include many of the country’s group settings for foster youths. And the federal agency in charge of Medicaid knows it’s happening, as evidenced by a recent exchange at a children’s behavioral health conference.

The new QRTP structure thus threatens to spark an immediate funding crisis in some states, and force a broader debate about how congregate care health services are paid for in general.

It’s a pretty complicated scenario, full of acronyms, so Youth Services Insider will try to break it down, piece by piece. Here goes …


In the early 1900s, America’s response to people with mental illness was often to throw people in locked facilities, sometimes for the rest of their lives. The quality of the treatment was often low, and there was little to no due process involved.

Even before Medicaid was created in the 1960s, legislators knew that federal health programs should not pay for expensive, punitive housing of the mentally ill. So in the 1950s, they established the term “Institution for Mental Diseases (IMD)” to describe a class of facilities that could not be funded with federal health funds.

In general, facilities qualify as IMDs if there are more than 16 beds, and more than half of its residents have a diagnosis that appears in the Diagnostic and Statistical Manual of Mental Disorders (DSM). If a place fits that description, it’s an IMD and you cannot bill Medicaid for health services at it.

This includes all health costs, not just mental health services. So if an otherwise Medicaid-eligible person is in an IMD, and breaks their leg, Medicaid cannot be used to pay for treating it.

There are exceptions to the IMD exclusion, the biggest one being nursing homes for seniors.  Another big exception is what’s called the “Psych Under-21 Benefit,” which permits Medicaid money to flow for three places that serve young people with mental health challenges:

  • Psychiatric hospitals
  • Psychiatric wings at regular hospitals
  • Psychiatric Residential Treatment Facilities (PRTFs)

That last category, PRTF, includes residential facilities that are accredited and meet strict federal standards of care, like round-the-clock nursing, and an active care plan being overseen by a physician. It’s a difficult classification to attain, and not all states have them. Stick a pin in all this for a moment.

Limiting Congregate Care

Let’s shift from Medicaid to another entitlement: the ACF-managed Title IV-E, the biggest distributor of federal dollars for child welfare. There is currently no time limit on the use of IV-E dollars for placing a child in congregate care, but under Family First, that will soon change. By no later than 2021, all states will be limited to two weeks of federal funding for mostcongregate care placements.

The reason for this shift is not unlike the one that prompted the Medicaid ban on institutions in the 1960s. The general consensus among child welfare policymakers on Capitol Hill was that child welfare systems leaned too heavily on putting kids in group care for long periods of time, and Family First was a signal that they did not want federal money to endorse that strategy anymore.

But just as the Medicaid IMD exclusion includes some exceptions, so too does Family First when it comes to IV-E funds for congregate care. And the chief exception is for a newly created category of service called Qualified Residential Treatment Program (QRTP).

A QRTP must, among other things:

  • Be accredited to provide a trauma-informed treatment model
  • Have a nursing staff
  • Provide discharge planning in tandem with the child’s family

Sound familiar? It is a lot like the idea of the PRTF described earlier, though it is far less stringent about clinical staff and secure settings. Pretty much any PRTF could be classified as a QRTP, but the inverse is not true.

The idea in creating QRTP was to acknowledge that most youth in care should be in a family setting whenever possible, butsome youths have problems acute enough that they need to be in group settings for longer than two weeks. And QRTPs are the answer offered up under Family First for that need.

Medicaid Grey Area

Title IV-E does not pay for the actual administration of treatment in congregate care settings now, and it will not under the new QRTP rules of Family First. IV-E just pays for the room and board.

As discussed, Medicaid shouldn’t be used to pay for health services administered in group settings under current law. So health services at most congregate care providers – minus those considered PRTFs – should not be Medicaid billable. Right?

In truth, Medicaid flows to pay for health and mental health services for children in congregate care all over the country. This, despite that fact that many such programs include more than 16 beds, and research shows that the prevalence of DSM diagnoses among youth placed in congregate care is high.

The Kentucky Department for Community-Based Services (DCBS) acknowledged its own use of Medicaid in congregate care when asked by Youth Services Insider.

“DCBS makes a Medicaid claim for every child in residential/congregate care,” said Anya Weber, in an e-mail to YSI. “That amount ranges between 40-50 percent of total cost based on child and need.”

The National Association for Children’s Behavioral Health (NACBH), whose membership includes mental health providers from around the country, recently held a conference in Washington. The organization’s policy director, Pat Johnston, broached the potentially improper Medicaid billing with Kirsten Beronio, a policy adviser for the Centers for Medicare and Medicaid Services (CMS).

CMS is a notoriously overwhelmed corner of the federal Department of Health and Human Services, with a small staff tasked with oversight of two huge federal health care programs. And on this day, Beronio conceded that its enforcement of Medicaid rules with congregate care is basically nonexistent.

“We’re aware,” Beronio said in response to Johnston’s description of the flouted rules on Medicaid in IMD. “But we can’t make policy based on deficiencies in our oversight.”

“I wasn’t surprised,” Johnston said of Beronio’s comments. “NACBH has certainly raised the issue many times over the years, with CMS, with the Congressional committees that have jurisdiction over child welfare and Medicaid … and [with] colleague national advocacy organizations.”

The status quo of Medicaid in IV-E funded group settings is an awkward “look the other way” situation. The blurriness of the rules is easier to grasp when you consider that there has never been any formal association of group settings in foster care with mental health treatment.

“CMS has never clearly and unambiguously defined how it rates something an IMD,” Johnston said. That includes any position on group settings in foster care.

“If kids in congregate care institutions are licensed and overseen by child welfare systems, those kids residing in those facilities are invisible to CMS,” Johnston said. “[States] claim IV-E to pay room and board. Then they bill Medicaid for services. Those probably look like outpatient claims [to CMS].”

NACBH once hired a former Congressional staffer to try and assess the amount of Medicaid funding that was spent on health services in congregate care.

“We gave her a down payment retainer, sat down with her, explained the situation, said, ‘This is where we think you should look,’” Johnston said. “A month later she told us, ‘This is impenetrable.’”

And here is where the two entitlements, and their respective rules, collide.

Forcing the Issue

The dawn of the QRTP brings this opaque funding question into sharp relief. Because now, there is an actual treatment-focused classification of congregate care setting for foster youths.

“Today, the definition of our residential facilities is as a child welfare center,” said Michelle Sanborn, president of Kentucky’s Children’s Alliance. “Kids don’t have to come through our front door with a diagnosis,” even though many do.

But under the new rules of Family First, a QRTP “is defined as a treatment facility,” she said. “So no longer can our kids come in and notqualify clinically.”

And as Kentucky learned over the summer, states will not be allowed to bill Medicaid for services at these facilities. When it asked if QRTPs would be exempted from the IMD rules of Medicaid, YSIreceived the following response over email:

“CMS has reviewed the [Family First] definition of a QRTP. We believe that QRTPs that are over 16 beds and do not qualify as an exception to the IMD exclusion under the inpatient psychiatric services for individuals under 21 … as a PRTF would be IMDs.”

Is There a Fix?

As far as QRTPs go, the straightest line to a “fix” for them would be if the group was added to the list of allowable exceptions in the Psych-Under 21 Benefit. This would shield them from the IMD exclusion, and allow Medicaid funds to flow for health services in these programs.

Exempting QRTPs is the policy championed by the National Organization of State Associations for Children (NOSAC), of which Sanborn’s Kentucky’s Children’s Alliance is a member. NOSAC has been pushing for CMS to make that change, although it isn’t totally clear that could happen without new legislation.

“Congress needs to work with officials at the CMS and the Administration for Children and Families to issue guidance clarifying that QRTPs are not IMDs and that the IMD exclusion does not apply to QRTPs,” said a letter circulated to members by NOSAC.

Johnston said she favors a broader step that would require legislation: the entire elimination of the IMD exclusion for Medicaid-eligible people younger than 21. In her view, a slew of laws and policies enacted since the 1960s safeguards against the prospect of a backslide into the overuse of institutions.

“Everything has changed – screening, assessment and diagnostic tools; pharmaceutical and non-pharmaceutical therapies and clinical protocols; professional training; wraparound services; consumers’ rights; federal and state mental health parity laws,” she said. “As a society, we have a vastly different understanding of mental and addictive disorders than we did in the 1960s, and different expectations for how they will be treated.”

But rollback of the IMD exclusion would surely raise objections from some mental health and child welfare advocates wary of a backslide toward over-institutionalization. The Bazelon Center for Mental Health Law is currently suing the District of Columbia for its alleged failure to provide community-based mental health options. For most of the early millennium, California was embroiled in a lawsuit called Katie A. v Bonta, which centered on the state’s overuse of psychiatric facilities to treat youth who were in or at risk of entering foster care.

Richard Wexler, executive director of the National Coalition for Child Protection Reform, has argued that the specific safeguards put in place on QRTP settings are not stringent enough to preclude agencies from over-relying on them.

“The Family First Act goes on for paragraphs about how an independent ‘qualified individual’ will determine if a child needs to be institutionalized; unless, that is, the public child welfare agency gives its solemn word that someone associated with the institution itself can do the evaluation and still be objective,” said Richard Wexler, in a column published by The Chronicle of Social Change. “Then, the independence requirement can be ‘waived’ by the Department of Health and Human Services. In short, the Family First Act institutionalizes the process of institutionalization.”

Thus far, there is no indication that either a change to or elimination of the IMD exclusion is moving on Capitol Hill. So with Family First set to take effect next month, the QRTP rules are poised to create some interesting discussions on how states pay for the health and mental health care of some foster youths.

“My hope is that ACF and CMS are working together to make sure that states understand the financing they can access for this significant reform,” Johnston said.

A recent technical assistance memorandum from CMS suggests that it has no intention of making an exception to the IMD rules for congregate foster care settings.

The September 20 memo begins as though there might be a policy shift:

“CMS has not made a determination that all QRTPs will be IMDs; rather, there are several options for states to consider regarding QRTPs.”

But it goes on mostly to outline that Qualified Residential Treatment Programs can avoid being considered an IMD by including less than 16 beds, or by attaining licensure as a Psychiatric Residential Treatment Facility (PRTF).

In other words: a QRTP can be exempted by meeting one of the already existing exemptions.

The memo also makes clear that states will be allowed to seek approval for using Medicaid in a QRTP setting under what’s called a 1115 Waiver, which allows states more flexible use of waivers. But use of Medicaid under a waiver would be contingent on maintaining an average length of stay of 30 days or less, and rules on the use of seclusions and restraints that Johnston said would likely require a round-the-clock nursing staff.

Johnston said the memo “is helpful in terms of finally establishing CMS’ position,” she said. “So it’s back to Congress to deal with.”

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John Kelly, Editor in Chief, The Chronicle of Social Change
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John Kelly is editor-in-chief of The Chronicle of Social Change. Reach him at