CMS and states jointly finance and administer the Medicaid program, which finances health care, including behavioral health services, for low- income individuals and families. In fiscal year 2016, Medicaid provided health coverage to an estimated 72.2 million people and had $575.9 billion in estimated outlays, of which $363.4 billion was financed by the federal government and $212.5 billion by the states. States have flexibility within broad federal parameters for designing and implementing their Medicaid programs. States must cover certain mandatory services, including inpatient hospital, outpatient hospital, and physician services and states may elect to cover additional optional services, such as physical and occupational therapies for adults. States may deliver health care services to certain Medicaid beneficiaries through fee-for-service payments to participating providers or through Medicaid managed care, through which states typically contract with Medicaid managed care plans to provide a specific set of Medicaid-covered services to beneficiaries. Under Medicaid managed care, states pay the plans a set amount per beneficiary per month—referred to as capitation payments—to provide those services. In addition, the Secretary of HHS may use discretion to waive certain federal Medicaid requirements and allow costs not otherwise eligible for federal funds for experimental, pilot, or other demonstrations that are likely to assist in promoting Medicaid objectives. Medicaid beneficiaries have higher rates of serious mental health conditions than the general population. Serious mental health conditions are defined as behavioral health conditions that substantially interfere with, or limit one or more major life activities. Specifically, nearly 8 percent of adults aged 22-64 enrolled in Medicaid reported having a serious mental health condition compared to the nearly 4 percent of those with another type of insurance and almost 5 percent of those who are uninsured. (See fig. 1) Adult Medicaid beneficiaries had similar rates of substance use conditions as those who were uninsured, 11 percent as compared to 13 percent among the uninsured. The rate of substance use conditions among those with another type of insurance was about 8 percent. The Medicaid IMD exclusion, which we refer to as the “exclusion” for purposes of this report, has been in effect since the program was established in 1965. The exclusion prohibits federal payments to states for services provided to most adult Medicaid beneficiaries who are residents of IMDs, whether services are provided inside or outside the IMD. Currently the exclusion applies only to Medicaid beneficiaries aged 21-64; the Social Security Act Amendments of 1965 and 1972 allowed Medicaid beneficiaries age 65 and older and under age 21, respectively, to receive services in IMDs. In addition to encouraging treatment in small community-based group living arrangements, the exclusion was intended to ensure that states, and not the federal government, are primarily responsible for funding inpatient and residential behavioral health services. According to CMS officials, state Medicaid officials are responsible for ensuring that they do not claim federal Medicaid payments for services provided to IMD residents between the ages of 21 and 64, and for applying the IMD statutory and regulatory requirements. Per the statutory definition, an IMD is “a hospital, nursing facility, or other institution of more than 16 beds that is primarily engaged in providing diagnosis, treatment, or care of persons with mental diseases, including medical attention, nursing care, and related services.” CMS’s guidance on how to determine when the IMD exclusion applies is included in its State Medicaid Manual, which contains criteria for determining whether a facility is an IMD. Also, according to CMS officials, if needed, CMS is available to provide technical assistance so states can make IMD determinations. The State Medicaid Manual lays out IMD criteria that include an assessment of the type of licensure or accreditation the facility or group of facilities holds; an assessment of the patient population; and whether the facility or group of facilities was established primarily for the care and treatment of individuals with behavioral health conditions. Understanding which facilities are subject to the exclusion also requires an understanding of what constitutes a “facility.” In determining if states have applied the exclusion correctly, CMS also takes into consideration whether a group of facilities has a common owner or governing body. If one owner operates multiple facilities in a state and together the facilities have more than 16 beds, the facilities jointly may qualify as an IMD and would therefore be subject to the exclusion. In 2015, Congress considered, but did not pass, legislation to fully lift the IMD exclusion. The Congressional Budget Office (CBO) estimated that this legislation would cost the federal government $40 to 60 billion over 10 years (2016-2025). CBO stated that its estimate was highly uncertain and based on limited data. CBO officials said that they did not take into account existing or recently available options states have to finance Medicaid services for adult Medicaid IMD residents, such as Medicaid disproportionate share hospital (DSH) payments to IMDs, demonstrations, or care provided by managed care plans. They also did not account for any offsets, such as those for potential decreases in ED use, which could happen if the IMD exclusion were lifted. Capacity for inpatient or residential mental health services for the adult population increased from 2010 to 2014, as measured by numbers of facilities providing services, the number of beds designated for these services, and the number of beds per 100,000 adults, according to N- MHSS data from those years. Between 2010 to 2014 The total number of mental health treatment facilities increased by about 19 percent, from 2,888 to 3,427. The number of beds designated for adult mental health inpatient or residential services increased by 17 percent between April 30, 2010, and April 30, 2014, from 119,527 to 139,885 beds. By 2014, there were about equal numbers of facilities that provided either inpatient or residential mental health services (see fig. 2). There was greater growth in the number of mental health treatment facilities that offered residential services than those facilities that offered inpatient services. From 2010 to 2014, the number of facilities offering residential mental health services increased by 33 percent, compared to an increase of 7 percent in facilities offering inpatient mental health services. On April 30, 2010, and April 30, 2014, more than two-thirds of residential mental health treatment facilities had a bed utilization rate, the percentage of a facility’s beds occupied on a given day of the year, of more than 90 percent. The national number of beds per 100,000 adults designated for mental health inpatient or residential services increased from 61.1 to 69.5 from 2010 to 2014. The number of residential beds per 100,000 adults increased from 2010 to 2014, but the number of inpatient beds decreased slightly during the same time period, even though inpatient beds were more common in both years. In 2010 the number of beds designated for inpatient mental health services per 100,000 adults was 48.6 compared to the rate of 12.5 beds per 100,000 adults designated for residential mental health services. By 2014, inpatient beds had decreased to 47.9 per 100,000 adults and residential beds increased to 21.6 per 100,000 adults. Significant variation exists in the number of beds designated for mental health services per 100,000 adults across states, as illustrated in figure 3. In 2014, for example, the number of beds per 100,000 adults was 43.8 in Colorado, 73.5 in Maryland and 114.2 in Missouri. Significant change also occurred during the time period within some states. For example, the number of beds designated for mental health services per 100,000 adults in Hawaii increased from 59.4 in 2010 to 107.6 in 2014, but the number of mental health treatment facilities decreased by 1. Comparatively, the number of beds designated for mental health services per 100,000 adults in Wyoming decreased from 150.2 in 2010 to 100.5 in 2014, though the number of facilities that provided inpatient services remained constant and there was one additional facility that offered residential services. Bed utilization for inpatient and residential mental health services increased between 2010 and 2014. The percentage of inpatient mental health treatment facilities with a bed utilization rate greater than 90 percent increased from nearly 34 to 41 percent in that time period. The percentage of residential mental health treatment facilities with a bed utilization rate greater than 90 percent increased from about 65 percent to 67 percent. The overall capacity for mental health inpatient and residential services may not have increased for Medicaid beneficiaries between 2010 and 2014. This is because we estimate that approximately one-quarter of the inpatient and residential mental health treatment facilities may have been IMDs in 2010, and this increased to about a third in 2014, and federal Medicaid reimbursement for services provided by these facilities would be unavailable for adult Medicaid patients of these facilities due to the IMD exclusion. More information on the facilities that offered inpatient and residential mental health services based on data from N-MHSS is in appendix III. The capacity of facilities that offered inpatient or residential services for adult substance use treatment had little change between 2010 and 2015, according to the N-SSATs data. The total number of facilities that offered services to adults decreased slightly, about 2 percent, from 4,026 to 3,931. More than 80 percent of the total inpatient or residential substance use treatment facilities offered residential services in both years. The total number of beds designated for inpatient or residential substance use services increased by 4 percent between March 31, 2010, and March 31, 2015, from 115,336 to 119,600. The number of beds designated for inpatient or residential substance use services per 100,000 adults increased slightly, from 57 to 58.4 between 2010 and 2015. As a result of a larger number of substance use treatment facilities offering residential services, as opposed to inpatient services, in 2010, the number of beds designated for residential substance use services per 100,000 adults nationwide was 50.7, significantly higher than the 6.3 beds designated for inpatient substance use services. In 2015, the number of residential beds per 100,000 adults remained at 50.7 and there were 7.7 inpatient beds for every 100,000 adults. There was significant variation across states as shown in figure 4.