DEPARTMENT OF HEALTH & HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, Maryland   21244-1850 
 
Center for Medicaid and CHIP Services 
 
CMCS Informational Bulletin 
 
 
DATE:  November 28, 2012 
 
FROM:  Cindy Mann, Director 
    Center for Medicaid and CHIP Services (CMCS) 
 
SUBJECT:  Inpatient Psychiatric Services for Individuals under age 21  
 
This Informational Bulletin clarifies that states may structure coverage and payment for the benefit 
category of inpatient psychiatric hospital or facility services for individuals under age 21(hereinafter 
referred to as inpatient psychiatric facility benefit) to ensure that children receiving this benefit obtain 
all services necessary to meet their medical, psychological, social, behavioral and developmental 
needs, as identified in a plan of care.  This clarification is intended to describe flexibility currently 
available to states to ensure the provision of medically necessary Medicaid services to children in 
inpatient psychiatric facilities.   
 
Background 
 
Under section 1905(a) of the Social Security Act (the Act), there is a general prohibition on Medicaid 
payment for any services provided to any individual who is under age 65 and who is residing in an 
Institution for Mental Diseases (IMD) unless the payment is for inpatient psychiatric hospital services 
for individuals under age 21 pursuant to section 1905(a)(16) of the Act, as defined in section 1905(h) 
of the Act.  Implementing regulations at 42 Code of Federal Regulation 440.160 and 441 Subpart D 
define these inpatient psychiatric hospital services as services furnished by a psychiatric hospital, a 
general hospital with a psychiatric program that meets the applicable conditions of participation, or 
an accredited psychiatric facility that meets certain requirements.  These requirements include that 
the services must be provided under the direction of a physician, pursuant to a certification of need 
and plan of care developed by an interdisciplinary team of professionals, and must involve active 
treatment designed to achieve the childs discharge from inpatient status at the earliest possible time. 
 
The Centers for Medicare and Medicaid Services (CMS) has historically prohibited states from 
claiming expenditures under the inpatient psychiatric facility benefit unless the expenditures were 
made to qualified providers of such services.  This had the effect of denying coverage for other 
medically necessary Medicaid items and services, such as prescription drugs or practitioner services 
that were not included by the state as part of the rate paid to the facility for care.  These items and 
services would be available under other benefit categories for individuals who did not reside in an 
IMD, such as the benefit for Early and Periodic Screening, Diagnostic and Treatment (EPSDT), and 
states had separate payment methodologies for such items and services.   
 
Recently, several Departmental Appeals Board decisions have clarified that other covered services 
can be furnished as part of the inpatient psychiatric facility benefit even when payment was made to 
an individual practitioner or supplier other than the inpatient psychiatric facility itself, when such 
services are furnished to a child residing in such a facility, authorized under the childs plan of care, 
and provided under an arrangement with the facility.   In essence, the Departmental Appeals Board 
indicated that payment for such services does not need to be bundled into a single per diem rate for  
 
  Page 2  Informational Bulletin 
 
the IMD facility, but could be authorized under the approved State plan to be paid directly to the 
treating practitioner.  In light of these decisions, CMS is currently applying this flexibility in the 
approval of State Plan amendments, and seeks to clarify the ability that states have in covering and 
paying for a more robust benefit for children receiving the inpatient psychiatric facility benefit. 
 
Services Provided under Arrangement 
 
The inpatient psychiatric facility benefit is defined in part to include a needs assessment and the 
development of a plan of care specific to meet each childs medical, psychological, social, behavioral 
and developmental needs. In some cases a psychiatric facility may wish to obtain services reflected in 
the plan of care under arrangement with qualified non-facility providers.  Such services would be 
components of the inpatient psychiatric facility benefit when included in the childs inpatient 
psychiatric plan of care and furnished by a qualified provider that has entered into a contract with the 
inpatient psychiatric facility to furnish the services to its inpatients.  To comply with the requirement 
that services be provided by a qualified psychiatric facility, the psychiatric facility must arrange for 
and oversee the provision of all services, must maintain all medical records of care furnished to the 
individual, and must ensure that all services are furnished under the direction of a physician. Services 
being furnished under arrangement do not need to be provided at the psychiatric facility itself if these 
conditions are met. 
 
Payment for Services Provided under Arrangement 
 
States have a number of options in electing a methodology in their Medicaid State plans to pay for 
the inpatient psychiatric facility benefit.  Traditionally, many states make a direct payment to the 
facility through either an all-inclusive per diem rate or a base per diem rate with add-on payments. 
Under this direct payment method, if the facility obtains services under arrangement with outside 
providers, the facility would be responsible for paying the providers of the arranged services.   
 
An option that may be more flexible, and has been approved in State Plan amendments, is to directly 
reimburse individual practitioners or suppliers of arranged services using payment methodologies that 
are applicable when the services are otherwise available under the State plan.  States electing this 
option would pay the same fees to such practitioners or suppliers as would otherwise be applicable 
when the services are furnished to Medicaid beneficiaries outside the inpatient psychiatric facility 
benefit.  This option would allow states greater ability to capture potential efficiencies, and monitor 
the quality of care, through the use of existing delivery and billing processes.  States electing to make 
separate payments under this option will need to assure there is no duplication of payment between 
the inpatient facility rate and the items paid for separately using existing State plan fees. It is 
important to note that while the state may directly reimburse individual providers, CMS will require 
expenditures for all services provided to individuals receiving services through the inpatient 
psychiatric facility benefit to be reported and claimed on the Mental Health Facility Services line 
item of the CMS 64 form, and not under the line item applicable to the furnished Medicaid service.   
 
We are ready to work with states to provide assistance in implementing this benefit, and we look 
forward to our continuing collaboration.  If you have questions, please contact Ms. Barbara Edwards, 
Director, Disabled and Elderly Health Programs Group, at 410-786-7089, or at 
Barbara.Edwards@cms.hhs.gov.