The federal government can — and should — help the mentally ill

Last week, the Congressional Budget Office (CBO) released a range of cost estimates for the repeal of an archaic federal policy known as the Institutions for Mental Diseases (IMD) Exclusion. The rule has led to a shortage of psychiatric hospital beds nationwide, seen in tandem with hundreds of thousands of mentally ill now in jails or on the streets. Even the highest cost that CBO estimates for repeal of the IMD Exclusion is justifiable. The federal government should finally put this outdated policy to bed.

Enacted as part of Medicaid in 1965, the IMD Exclusion largely prohibits federal Medicaid dollars from funding treatment provided by IMDs — IMDs generally meaning psychiatric hospitals with more than 16 beds. The rule was intended to prevent states from shifting the financial burden of their mental health systems — which were, then, asylums — to the federal government. While states must foot the bill for IMD-based care, their costs are shared with the federal government for services delivered elsewhere.

The IMD Exclusion catalyzed the deinstitutionalization of psychiatric patients from hospitals to the community. Still in place, it continues to create a financial disincentive for state investment in bed capacity, preventing a full continuum of mental health care.

The consequences of too few inpatient beds are plain to see. Psychiatric patients who need intensive, acute medical services are instead boarded in emergency departments, or cycled through multiple hospital releases without stabilization. Estimates suggest nearly 218,000 homeless are either severely mentally ill or have chronic substance abuse, and those in prisons and jails are three to five times more likely than in the general population to have serious mental illness. This all notwithstanding a nearly 1,500 percent increase in spending on community mental health services between 1981 to 2015.

A senior policy analyst for Kaiser Family Foundation diagnosed the circumstances well in a comment: “There’s been an understanding in the past several years that this lack of federal funding contributes to high levels of unmet need.” Unmet need is not surprising given a 95 percent decline in bed capacity — which is still shrinking — since peak levels around 1955. Recognizing the ramifications, lawmakers across both parties have chipped away at the rule through various exceptions since its creation.

The new CBO cost analysis comes ahead of the September expiration for one such exception: through the 2018 enacted SUPPORT Act, states can amend their Medicaid plans and receive federal matching funds for enrollees with substance use disorders treated in IMDs; the impetus being to expand treatment access for opioid addiction. CBO presents federal cost estimates for two primary policy options: permanently extending this expiring “state plan option,” and repealing the IMD Exclusion. Cost estimates for variations of each policy are also presented.

The highest cost option, for full repeal of the IMD Exclusion, initially may look pricey: $38.4 billion over 10 years. But the analytical approach delivering this estimate makes that first impression misleading for three primary reasons.

First, CBO acknowledges that under current law, states can seek exemptions from the IMD Exclusion through various channels, such as federal waivers. As more states adopt exemptions, the increase in associated federal outlays would make up some of the dollars within the cost estimate for repeal. Said differently, the federal government will end up paying a portion of this amount even if they do nothing and current law remains as is.

How much of the cost will be paid regardless? CBO does not specify, qualifying that it depends in part on effects that will differ among states with different laws, and on possible mental health service use adjustments. However, CBO does expect that by 2033, 80 percent of Medicaid enrollees would live in states with waivers for the IMD Exclusion that make treatment for both substance use disorders and serious mental illnesses eligible for federal matching dollars when provided in IMDs.

Second, while the estimate incorporates offsets to cost from anticipated decreases in emergency department use (a welcome addition not included in a prior estimate), CBO does not comprehensively incorporate the cost savings undoubtedly to be had in other systems put under strain by continued deinstitutionalization, such as criminal justice and homeless services.

In one salient example, as my colleague Stephen Eide documents for New York, between fiscal years 2014 to 2018, New York City added six new homeless shelters — from a base of 22 — specifically dedicated as mental health shelters. The total number of beds in the city’s mental health shelters is more than the combined total of adult beds in state psychiatric hospitals across New York State and psychiatric beds in NYC Health + Hospitals facilities.

Finally, CBO’s estimate is based in part on analysis of the effects of current state waivers, finding that federal spending for Medicaid enrollees increased in states with waivers. This was because more IMD stays were reimbursed (expectedly), more providers accepted Medicaid payment, and more of these services were used. What’s more, visits to emergency departments were reduced. In other words, exactly what we might hope to happen did: unmet need was met, and unnecessary hospitalizations in ERs were fewer. These are increases in spending that are expected, intended and beneficial. And in all, the full estimated increase in outlays for repeal would represent less than 0.5 percent of projected federal Medicaid spending in the year 2033.

Given the above, full repeal is the most sensible of CBO’s proposed policy options. It’s true that exemptions to the IMD Exclusion are currently available for states who seek them and meet their requirements. In some respects, these requirements may serve as a mechanism to prevent unnecessary spending. But states have finite resources for adopting new programs and systems; nor has availability of these exemptions, at scale, appeared to have addressed inadequate care and access to it.

CBO includes separate estimates for variations of repeal that exempt from the IMD Exclusion either individuals with substance use disorder or serious mental illness. In short terms, exemption for one group and not the other, on no given basis or rationale other than cost, would be discriminatory. The IMD Exclusion itself is discriminatory policy — against individuals for whom treatment is most appropriately provided in a hospital setting. Reimbursement for enrollees’ health care services should be based on medical necessity, not diagnosis or location. 

While CBO’s estimates are conservative and likely exclude many offsets to cost, an effective mental health system that provides the seriously mentally ill with high-quality services — both inpatient and outpatient — will not come free. Benefits associated with the costs, though, are realized both by the mentally ill and by society at large, through safer streets and cities, and more efficient public systems and services.

Carolyn D. Gorman is an adjunct fellow at the Manhattan Institute, where her research examines how policy changes in the U.S. health and judicial systems impact individuals with serious mental illness.