Summary of regulatory developments Updates for July 2022
We highlight the latest noteworthy items in the life insurance industry from various regulatory agencies for July 2022.
Federal financial participation (FFP) is not available for Medicaid services for individuals between the ages of 21 and 64 who are patients in an Institution for Mental Disease (IMD). This IMD exclusion is a long-standing component of Title XIX (Grants to States for Medical Assistance Programs) of the Social Security Act (Title XIX), which has recently come under scrutiny because of the combination of inpatient psychiatric capacity constraints and rapid enrollment growth of the Medicaid population. The final Medicaid managed care regulations (final rule) clarify the use of IMDs as an “in lieu of” service. In the near term, states will need to carefully weigh their options based on their specific needs for inpatient psychiatric and subacute psychiatric capacity. The risk is that adding too much inpatient capacity could induce utilization and drive members away from community-based alternatives. The managed care rule also contains some rate-setting differences for IMDs as an “in lieu of” service. Beyond the impact of the final rule, IMDs will continue to be a topic of interest to state policy makers as they bolster the continuum of behavioral health and substance use disorder services.
The Centers for Medicare and Medicaid Services (CMS) has had a policy in place since Medicaid began that does not provide FFP for any services for a member between the ages of 21 and 64 either inside or outside an IMD while that member is a patient in an IMD. This law, generally termed the “IMD exclusion,” has evolved over time but has largely remained unchanged. Outside of this age band, full FFP is provided as long as the service is included in the state plan for the over-65 population. The under-21 population is covered as an Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) service at the state’s regular match rate. The IMD exclusion applies to fee-for-service and managed care delivery systems.
This setting exclusion is defined in the Medicaid statute under 1905(a)(29). When Title XIX was passed by Congress in 1965, the treatment of mental illness was primarily performed in an institutional setting. States built and operated large mental institutions to house and feed people with mental illness. The IMD exclusion was included to ensure states would continue to be responsible for the costs of those large hospitals.2 Over time, a few limited mechanisms have been developed to pull down FFP for IMD utilization within the exclusion age corridor of 21 to 64 years of age. In some cases, states may have already utilized IMDs as an “in lieu of” service.3
An IMD is defined in federal statute as 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.4 CMS has published sub-regulatory guidance on the definition of an IMD, in the state Medicaid manual in section 4390.5 These additional guidelines speak to distinct components of larger organizations and whether a psychiatric “wing” is an IMD or simply a component of the larger organization. The Medicaid manual adds specificity on whether the “overall character of a facility is that of an IMD.” stating that “a facility’s IMD status depends on whether the evaluation of the information pertaining to the facility establishes that its overall character is that of a facility established and/or maintained primarily for the care and treatment of individuals with mental diseases.” To the extent any of the following guidelines are met, the manual states, “a thorough IMD assessment must be made:”
Most states publish lists of IMDs, as the IMD designation is made by the state.
The final rule should be considered a clarification of CMS’s policy on Medicaid funds covering IMD, rather than a significant shift in policy. As CMS notes in its fiscal estimate in the final rule, 17 states have claims experience in the IMD exclusion age corridor. Many states have already considered IMDs as an "in lieu of" service or they have other pilot programs or 1115 waivers to utilize this setting. As states continue to review their entire continuums of behavioral health services, additional 1115 waivers may be proposed to CMS to include the use of IMDs to alleviate capacity issues. In July 2015, CMS issued a State Medicaid Director letter regarding "New Service Delivery Opportunities for Individuals with a Substance Use Disorder."6 In this letter, CMS includes the use of IMDs if certain criteria are met.
Section 438.6(e) of the final rule clarifies that states can receive FFP and make a capitation payment on behalf of an enrollee that spends part of the month as a patient in an IMD if the following conditions are met:
1. The state determines that the alternative service or setting is a medically appropriate and cost-effective substitute for the covered service or setting under the state plan.
2. The enrollee is not required by the managed care organization (MCO), prepaid inpatient health plan (PIHP), or prepaid ambulatory health plan (PAHP) to use the alternative service or setting.
3. The services are authorized and identified in the MCO, PIHP, or PAHP contract, and will be offered to enrollees at the option of the MCO, PIHP, or PAHP.
4. The utilization and actual cost of "in lieu of" services is taken into account in developing the component of the capitation rates that represents the covered state plan services.
While FFP is being introduced for short-term IMD stays for adults of ages 21 to 64, changes in the usage of IMD is highly discretionary for both states and managed care entities (MCEs), given that the services must meet the conditions of an “in lieu of” service.
In the comments section of the final rule, CMS provides an explanation for granting FFP for adult IMD stays and limiting it to 15 days in a month:
The administration of the adult IMD provision in the final rule is also addressed in the comments section of the final rule:
This rule stipulates that this regulation is effective 60 days from publication, however CMS issued sub-regulatory guidance on compliance on July 1, 2016.7 The guidance was issued through an addendum to the 2016 Medicaid Managed Care Rate Development Guide.
The bulletin describes how CMS will handle compliance for provisions of the mega reg that are effective July 5, 2016. In short, there are three time spans described in the letter that will dictate how CMS will review rates relative to the new provisions. The IMD provisions fall under this guidance.
The final rule provides a state Medicaid program with a potential additional avenue to provide inpatient psychiatric and substance use disorder services. In order to determine if policy changes are warranted, states and other payers, including Medicaid MCEs, will need to understand the current supply and demand for inpatient psychiatric and substance use disorder services. Based on this capacity analysis, decisions can be made whether to offer IMDs as an “in lieu of” service. Any material increase in provider capacity should be done carefully to avoid utilization that is not medically appropriate.
Existing service capacity sufficient
If a state does not face capacity issues for inpatient services, it may not be inclined to include IMD as an “in lieu of” service in its managed care contracts. States may already provide inpatient psychiatric and substance use disorder services through the mechanisms previously discussed. If the state has been effective at alleviating capacity constraints, it may decide not to offer this service for fear of shifting the balance of enrollees served in the home and community-based setting to the institutional setting.
Existing service capacity constrained
If capacity in a region is constrained, calculations for pent-up demand may be needed for the geographic region to accurately estimate the utilization of newly available IMD services. Pent-up demand may be estimated by evaluating existing utilization of short-term acute behavioral health services in other states, or geographies within a state that do not have capacity constraints. A reliance on local jails or emergency rooms for “boarding” individuals with mental health or substance use disorder conditions may also be an indication of the need for additional service capacity.8 An analysis done by the Bureau of Justice Statistics indicated that more than 60% of local jail inmates had a mental health problem. Substance use disorders were reported to occur in 76% of local inmates with a mental health problem (relative to 53% of inmates without a mental health problem).9
Previous rate-setting guidance for “in lieu of” services published by CMS10 allowed actuaries to use the expected utilization and unit cost of “in lieu of” services as a proxy for the state plan services being replaced. While the final rule maintains this provision of other “in lieu of” services, it makes an exception for IMD services. For purposes of rate setting, the state’s actuary may use service utilization from an IMD stay, but the unit cost may not reflect that of the IMD. Rather, IMD utilization “must be priced consistent with the cost of the same services through providers included in the state plan.” This exception was made to preserve the intent of the law, which, in part, was not to shift costs from the state to the federal government. There is the possibility that an IMD’s unit could be lower than a benchmark that the state’s actuary might use. This is an area of the final rule that may require additional sub-regulatory guidance.
Actuaries are not required to use only IMD utilization and may also review other inpatient psychiatric stays on which to base their IMD utilization estimates. The utilization reflected in the rate development process may not include IMD stays that exceed 15 days per month (including the portion of the stay prior to the 15-day limitation). Possible unit cost data points to reflect “state plan unit cost” include per diem rates for members outside the IMD exclusion age band, rates for facilities with fewer than 16 beds, and commercial rates.
As required under Section 438.7(b), the incorporation of IMD utilization in the rate development process should be documented in a transparent fashion. A requirement of “in lieu of” services is that they be cost-effective relative to the substituted service. Because the service being substituted is simply the same service in a different setting, if the unit cost is at or lower than inpatient psychiatric in a non-IMD, this would be cost-effective. If possible, cost-effectiveness could also make assumptions about emergency room and acute inpatient bed avoidance. The state’s actuary may be called upon to demonstrate this cost-effectiveness as part of the rate review process.
Over the last few years there has been a groundswell of activity around the IMD exclusion. Most of the large state-run institutions that permeated the mental health treatment landscape have closed and the network of providers is very different from 1965. This rule was written in direct response to access concerns over inpatient and subacute psychiatric and substance use disorder services. These access concerns have increased significantly with Medicaid expansion and insurance coverage expansion through the marketplace. This rule is likely only the beginning of other changes to the IMD exclusion. It is important to remember that the rule is only applicable to managed care. The disabled population is most likely to use IMDs as an “in lieu of” service, and this group typically has the lowest managed care penetration. It is also important to note that behavioral health services are frequently carved out of managed care or are sometimes offered in a separate delivery system, such as a PIHP or PAHP.
In summary, allowing Medicaid MCEs to utilize IMDs as an “in lieu of” service is one component of a state’s overall efforts to bolster its continuum of behavioral health and substance use disorder treatment in the face of rapid enrollment increases and demand. There are likely some near-term analytical challenges in estimating demand and finding suitable unit cost proxies. The level of effort required to set rates is likely to vary by region, based on a state’s service delivery design.
Institution for Mental Disease (IMD) as an "in lieu of" service
Federal monies for Medicaid services are generally not available to individuals between the ages of 21 and 64 living in an Institution for Mental Disease (IMD), but a combination of inpatient psychiatric capacity constraints and rapid enrollment growth in Medicaid may be leading to changes in state and Medicaid policies regarding the use of IMDs as an "in lieu of" service.