The IMD Exclusion

    Beginning in the 1960’s, the United States instituted a massive public policy change focused on eliminating what had been the primary system of care and treatment of the seriously mentally ill: psychiatric hospitals, which at that time often took the form of “asylums.” This massive transformation is referred to as “deinstitutionalization.”  [For a more thorough discussion of the developments during this period, including the philosophy, law and politics behind it, see additional material on this site at: Mental Health Law video | Need for Facilities]

    A number of laws were enacted with the intent to further deinstitutionalization and minimize the number of psychiatric facilities. Programs like Medicare and Medicaid, which were established in 1960, were amended to include specific provisions with precisely such a purpose. The most problematic provision, which affects the availability of beds for seriously mentally ill patients, applies to funding and reimbursement from the federal government through the Medicaid (Medi-Cal in California) program.

   That provision – known as “the IMD Exclusion” – prohibits the federal government from paying or reimbursing costs of care or services for adults under 65 who are in psychiatric hospitals or other residential treatment facilities (“Institution for Mental Diseases”) that have more than 16 beds. [fn1]


    This is the only part of federal Medicaid law that prohibits payment for the cost of providing medically necessary care because of the type of illness being treated. This discriminatory exclusion has resulted in unequal coverage of mental health care. It is a leading cause of our psychiatric hospital bed shortage and directly contributes to a host of negative consequences for those with SMI.  It has left the states and counties providing care to the SMI responsible for the entire expense.  Not everyone has private insurance and private hospitals are often reluctant to take seriously ill psychiatric patients. Thus, many SMI patients are completely dependent on Medicaid, which is crucial to the survival of any hospital that serves the public and accepts patients without private insurance. Hospital treatment for severe mental illness can mean the difference between life and death but, because of this law, such treatment is specifically denied to the people who need it most.


    In recent years, states were given the option to cover short-term stays by applying for a waiver from the federal government. California’s statewide program – CalAIM – is currently applying for such a waiver, but that involves a lengthy process that will take several years (see DHCS link below).


    So, while this option shows progress, we need to permanently remove the IMD exclusion. People with mental health conditions – just like people with any medical condition – need a range of care options from outpatient services to hospital care. Also, this only covers “short-term stays.” We need the federal government to repeal the IMD exclusion altogether.

FASMI, The Treatment Advocacy Center [fn2], NAMI [fn3] and many other organizations support repeal. You can support its repeal by writing letters to your federal senator and representative and encouraging him/her to propose a bill to repeal the IMD exclusion or become a co-sponsor of such a bill. 



[1] Section 1905(a)(B) of the Social Security Act prohibits “payments with respect to care or services for any individual … [between age 21-64] who is a patient in an Institution of Mental Diseases.” NOTE:  Medicare also discriminatorily limits payments to 190 days per person in his/her lifetime for care in inpatient psychiatric hospitals.  The problem, of course, is that people suffering from SMI may easily go over that limit, especially if they start Medicare coverage at a younger age, because they typically require ongoing treatment and multiple hospitalizations over the course of a lifetime. See:



The federal government can — & should — help the mentally ill, by Carolyn D. Gorman, Opinion Contributor, 4/21/23,

The National Institutes of Health estimates that more than one in five U.S. adults live with a mental illness, or roughly 57.8 million in 2021. Mental illnesses include conditions of varying severity, from mild to severe.

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, & those in prisons & 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 & 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,” & 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 & 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, & 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 & 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 & 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 & 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, & 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, & unnecessary hospitalizations in ERs were fewer. These are increases in spending that are expected, intended & 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 & 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 & systems; nor has availability of these exemptions, at scale, appeared to have addressed inadequate care & 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 & 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 & likely exclude many offsets to cost, an effective mental health system that provides the seriously mentally ill with high-quality services — both inpatient & outpatient — will not come free. Benefits associated with the costs, though, are realized both by the mentally ill & by society at large, through safer streets & cities, & more efficient public systems & services.


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