The term Institution for Mental Diseases (IMD) is a regulatory designation defined in federal law that profoundly shapes mental health care access and funding across the United States. This designation is central to understanding how the Medicaid program, a major payer for health care for low-income Americans, covers psychiatric and substance use disorder treatment services. The IMD label is a structural classification that triggers a specific exclusion from federal funding, not a reflection of the quality of care provided. This long-standing exclusion creates significant financial barriers for states attempting to provide a full continuum of behavioral health care to their adult populations.
Defining the Designation
The regulatory definition of an IMD is precise, focusing on a combination of size and purpose. A facility is designated an IMD if it is a hospital, nursing facility, or other institution that possesses more than 16 beds. The second criterion is that the facility must be “primarily engaged” in providing diagnosis, treatment, or care for people with mental diseases, including substance use disorders.
The determination of whether a facility is “primarily engaged” in this care is based on its overall character, not just its name or license. This is established if the facility is licensed as a psychiatric facility, is under the jurisdiction of the state’s mental health authority, or if over 50% of its patients require institutionalization due to a mental disease. The 16-bed threshold is a bright line rule: a facility with 17 beds that meets the primary engagement criteria is an IMD, while an identical facility with 16 beds is not. This classification applies to various settings, including psychiatric hospitals, residential treatment centers, and some skilled nursing facilities.
The Purpose of the Exclusion
The IMD exclusion was established as part of the original Medicaid law in 1965. The primary intent was to ensure that states, rather than the federal Medicaid program, maintained financial responsibility for long-term inpatient psychiatric services. At the time, states managed a vast network of large, often poorly run, public psychiatric hospitals.
By excluding federal financial participation (FFP) for care in IMDs, the policy prevented states from shifting the substantial cost of these institutions onto the federal government. The exclusion was also intended to encourage the movement away from institutional care toward community-based services, a process known as deinstitutionalization. This policy made federal Medicaid dollars unavailable for services provided to adults aged 21 through 64 who are patients in an IMD.
The exclusion does not apply to individuals under age 21 or those age 65 and older, whose care can be covered by Medicaid in an IMD under certain conditions. This restriction on federal funding for the working-age adult population is a fiscal mechanism, not a judgment on the clinical need for the care provided. The rule is a major factor in state mental health budgeting, forcing states to use 100% state-only funds for the care of excluded adults in IMD settings.
Impact on Patient Access and Care
The IMD exclusion creates significant gaps in the continuum of care, particularly for residential and intermediate-term treatment for adults with serious mental illness or substance use disorders. Because the federal match is unavailable, states are disincentivized from investing in or expanding psychiatric facilities with more than 16 beds. This results in a nationwide shortage of inpatient psychiatric beds, despite the need for such services.
The lack of available intermediate and long-term beds forces many patients into inappropriate settings. Individuals experiencing a psychiatric crisis often end up in general hospital emergency departments, held for extended periods waiting for a suitable psychiatric bed. This practice, known as “psychiatric boarding,” is costly, uses emergency resources inappropriately, and delays access to specialized mental health treatment.
The exclusion also complicates the treatment of complex co-occurring mental health and substance use disorders, which often require residential care beyond the capacity of small facilities. Since Medicaid will not cover care in larger residential centers, a medically necessary level of care may be financially unavailable to patients. The policy limits the ability of states to build comprehensive behavioral health systems that include necessary inpatient and residential options.
Modern Efforts to Navigate the Restriction
In response to the behavioral health crisis, states have sought ways to mitigate the financial constraints of the IMD exclusion. The most prominent strategy involves applying for Section 1115 demonstration waivers from the Centers for Medicare & Medicaid Services (CMS). These waivers grant states temporary authority to use federal Medicaid funds for services provided to adults in IMDs.
CMS has offered guidance for states to seek these waivers, initially focusing on substance use disorder (SUD) treatment and later expanding to include serious mental illness (SMI). The waivers are conditioned on states limiting the length of stay in the IMD, often to 15, 30, or 60 days per episode of care. States must also demonstrate that they are building a full continuum of community-based services to prevent unnecessary institutionalization, and the waiver must be budget-neutral for the federal government.
While the waivers provide some fiscal relief and expand access to short-term residential care, they are state-specific and do not represent a permanent change to the underlying federal law. The national debate includes proposals for full or partial repeal of the IMD exclusion, with opponents arguing the rule is outdated and discriminates against the seriously mentally ill. Proponents of the exclusion caution that outright repeal could lead to a resurgence of long-term institutionalization and significant, unplanned federal costs.