Medicaid and Medicare Reform

Several federal reimbursement policies unjustly restrict the use of federal funding for mental health treatment and contribute to service shortages for people with SMI, including:

1. The Institution for Mental Disease (IMD) exclusion, which prohibits Medicaid reimbursement in facilities with more than 16 beds that are “primarily engaged in providing diagnosis, treatment, or care of persons with mental diseases, including medical attention, nursing care, and related services.” The federal government does not prohibit the use of Medicaid funds in any other type of treatment facility.
2. The Medicare 190-day limit, which bars Medicare reimbursement for more than 6.2 months of care in a psychiatric hospital during a person’s lifetime. This limit does not apply to psychiatric units in medical hospitals, nor does it apply to non-psychiatric conditions. In January 2024, more than 49,000 people enrolled in Medicare had exceeded or were within 15 days of 190-day limit, with 80% of those people estimated to have a schizophrenia spectrum disorder.

Like other chronic health conditions, SMI often requires ongoing treatment, which may include hospital-level care, to avoid severe adverse outcomes. This federal policy contradicts common sense in building an adequate infrastructure to serve people when and where they need inpatient care, contributing instead to a severe national inpatient psychiatric bed shortage.

Consequences of the bed shortage include:

• Criminalization of SMI when a person experiencing severe symptoms cannot access the state hospital through the civil commitment system due to a shortage of beds allocated for that purpose and instead must be charged with a crime to possibly access a state bed. This is especially true for 22 states in which a majority of state hospital beds were occupied by “forensic patients,” those admitted through a criminal legal process, in 2023.
• More than 5,000 people with SMI experiencing unconstitutional detentions in jail for days, weeks, or months to receive competency restoration services due to a shortage of forensic beds.
• Emergency department boarding, which has been associated with worsening symptoms and mortality.

By limiting the number of days a person with Medicare insurance can receive coverage for inpatient treatment, the 190-day limit also provides a financial disincentive for psychiatric hospitals to admit patients with SMI. Instead, many facilities refuse to admit or quickly discharge patients with SMI who have exceeded their limit of covered days. This is especially important as a lack of comprehensive discharge planning can be deadly for people with SMI.

No other severe, chronic health conditions are handled this way, revealing unjust federal discrimination. While policies like The Mental Health Parity and Addiction Equity Act are intended to ensure reimbursement equity for physical and mental health conditions to some extent, the IMD exclusion and 190-day coverage limit must be repealed or reformed to ensure people with SMI can access an appropriate level of care at every stage of their recovery journey.

This exclusion prohibits the use of federal Medicaid funds for inmates in jails and prisons across the United States. In an attempt to mitigate this barrier, some states have applied for and received “reentry waivers” that permit coverage for select services up to three months before an inmate is released. As of June 2026, 19 states had received these section 1115 reentry waivers. Federal law additionally changed in 2026 to require states to suspend, rather than terminate Medicaid coverage upon incarceration. While this change in law is important for promoting coverage access, implementation has been inconsistent across the U.S. Many inmates struggle without insurance upon release because there are too few consequences for systemic noncompliance and funding is inadequate for the infrastructure needed to automate coverage reinstatement.

New federal work requirements mandate that Medicaid recipients spend at least 80 hours per month participating in work, job training, educational programs, community service, or some combination of those activities or risk losing coverage. Severe SMI symptoms can restrict a person’s ability to complete these requirements, a reality recognized by the Department of Health and Human Services (HHS), which permits exemptions for work requirements to some people with “disabling mental disorders.”

However, the details of what documentation will be required to qualify for exemptions have not been specified by HHS. As of June 2026, HHS declined to define “disabling mental disorder,” making it difficult for families, individuals, and states to determine how best to apply for work exemptions when warranted.

TAC supports full repeal of the IMD exclusion to ensure individuals with SMI have access to the full continuum of medically necessary behavioral health services with no reimbursement limits for inpatient psychiatric treatment or bed limits that constrain facility capacity. Expanded Medicaid funding should be paired with appropriate quality oversight and adverse event reporting requirements to protect patient safety and promote high-quality care.

TAC supports Medicare reform to eliminate the 190-day-lifetime limit on Medicare for inpatient psychiatric treatment. While a full repeal is needed to ensure that people with SMI remain able to access and afford hospital-level care for their condition as needed, TAC also supports reforms that extend the number of covered inpatient psychiatric care days, especially for individuals whose first hospitalization occurs in young adulthood.

To ensure that all those who qualify for exemptions from Medicaid work requirements can have those requirements waived, the Department of Health and Human Services should clarify documentation requirements for determining if an individual has a “disabling medical condition,” such that they are unable to fulfill work requirements.

All states should apply for Section 1115 reentry waivers to promote continuity of care for incarcerated individuals with SMI post-release. TAC also supports federal legislative initiatives to permit Medicaid coverage of services prior to release. States should additionally consider implementing policies that require a suspension of coverage, rather than a full suspension of eligibility, for easier reinstatement of coverage following incarceration. Also needed are investments in infrastructure to facilitate coverage of jail in-reach services and to automate coverage reinstatement so that individuals with SMI, their families, or case managers are not required to notify local health authorities about a person’s release from incarceration.