The U.S. Court of Appeals for the D.C. Circuit recently held that federal Medicaid funding (FFP) is unavailable for any health care services, other than inpatient psychiatric services, provided to individuals under the age of 21 in a Psychiatric Residential Treatment Facility (PRTF). Virginia Dept. of Medical Assistance Services v. Sebelius, Nos. 11-5161 & 11-5242 (D.C. Cir. May 8, 2012). In reaching that conclusion, and tackling an area of health law with more than its fair share of acronyms, the Court rejected arguments by two state Medicaid programs that FFP should be broadly available for care in a PRTF. This is yet another turn in the long and winding PRTF saga.

PRTF Background. The rules governing Medicaid coverage of inpatient psychiatric services for children and adolescents have evolved over time, and remain controversial. As originally enacted in 1965, the Medicaid Statute made FFP unavailable for services provided to anyone under the age of 65 who was a patient in an Institution for Mental Disease (IMD). 42 U.S.C. § 1396d(a)(B). This is called the IMD exclusion. “IMD” is an umbrella term that encompasses various types of facilities, including psychiatric hospitals, PRTFs, and residential treatment centers. Id. at § 1396d(i) (defining an IMD as any institution of “more than 16 beds that is primarily engaged in providing diagnoses, treatment, or care of persons with mental diseases”). In 1972, Congress created an exception to the IMD exclusion that made FFP available for inpatient psychiatric services provided to individuals under 21 in a psychiatric hospital or a psychiatric unit of a general hospital. Id. at § 1396d(a)(16). Federal legislation in 1990 and CMS regulations in 2001 extended the scope of this “under-21 exception” to include PRTFs. A PRTF is a non-hospital facility that meets certain accreditation and treatment standards, and provides psychiatric services to children and adolescents on an inpatient basis. 42 C.F.R. § 483.352.

Virginia. The Virginia case resulted from CMS audits of Medicaid claims for services to IMD residents in several states. Based on the audits, CMS disallowed approximately $4 million in FFP each to the Virginia and Kansas Medicaid programs for services to residents of IMDs that also qualified as PRTFs, on the ground that the services did not constitute inpatient psychiatric services and thus did not fit within the under-21 exception to the IMD exclusion. The states challenged the disallowances in unsuccessful administrative proceedings, and then filed separate lawsuits. After the federal district court granted summary judgment to CMS in both cases, the states sought review by the D.C. Circuit, which consolidated the two appeals.

On appeal, the states argued that the under-21 exception should be construed to mean that FFP is available for any individuals receiving inpatient psychiatric care in a PRTF, not just for the inpatient psychiatric services in particular. Medicaid should therefore pay for the same scope of services for any eligible beneficiary, whether that beneficiary is being treated in a PRTF or elsewhere. In support of that position, the states cited to Medicaid’s comparability principle, which decrees that all eligible beneficiaries are entitled to the same level of coverage. They also relied on the legislative history of the Medicaid Statute and CMS Medicaid eligibility regulations, both of which are consistent with Medicaid covering a broader range of services to individuals in PRTFs, and not just inpatient psychiatric services. Finally, the states argued that failure to provide FFP for other health care services in PRTFs conflicts with other provisions of the Medicaid Statute itself, including that FFP must be available for early and periodic screening, diagnosis, and treatment (EPSDT) of individuals under 21.

The Court rejected each of these arguments in turn. First and foremost, it concluded that the statute’s terms clearly make FFP unavailable for any services provided to those under 65 in an IMD, with a carve out explicitly limited to “inpatient psychiatric services” for individuals under 21 in a psychiatric hospital, psychiatric unit, or PRTF. The Court also discounted the states’ argument that benefits to all eligible beneficiaries must be the same, noting again that despite the comparability principle, Congress defined the narrow scope of the under-21 exception in unambiguous terms. The legislative history of the Medicaid Statute and the other CMS Medicaid regulations on which the states relied, the Court found, likewise “shed[] little light on,” and did not in any way require, federal funding of all services rendered to PRTF residents. Finally, the Court concluded that the Medicaid Statute’s EPSDT requirements did not “negate” Congress’ explicit and longstanding IMD exclusion.

Criticism of IMD/PRTF Rules. The D.C. Circuit’s ruling in Virginia comes against a backdrop of ongoing criticism of the lack of federal funding for services to young people in IMDs. Advocacy and provider groups have called for eliminating the IMD exclusion completely for beneficiaries under 21. Like the states in Virginia, these groups argue that by making FFP unavailable for medical screening and treatment of children and adolescents, the exclusion violates the Medicaid Statute’s EPSDT requirements. They also contend that the exclusion is fundamentally flawed because it fails to take into account the many alternative settings – such as in homes, schools, group homes, and partial hospitalization programs – that have evolved to meet the behavioral health needs of young people.

Providers and critics have also pointed out inconsistencies in the basic regulatory schemes governing IMDs and PRTFs. The IMD exclusion, for example, apparently does not apply to private Medicaid managed care organizations, which serve an increasing number of Medicaid beneficiaries. Medicaid managed care, therefore, might well pay for non-psychiatric, medical services provided to an adolescent in a PRTF. Especially after the Virginia decision, by contrast, a Medicaid fee-for-service program almost certainly would not, because it would not receive any federal matching funds for doing so.

Whether a facility constitutes an IMD in the first place can be confusing as well. CMS relies on states to self-identify which of their licensed facilities are IMDs, using guidelines included in CMS’ State Medicaid Manual. See id. at § 4390(C) (listing factors such as whether “the facility specializes in providing psychiatric/psychological care and treatment” and that “the current need for institutionalization for more than 50 percent of all the patients in the facility results from mental diseases”). There are no instructions, however, as to how states should weigh or specifically assess the various factors listed in the guidelines. Nor does the manual identify the “other relevant factors” the guidelines say may also be considered in making the IMD determination.

Getting PRTF certification for IMDs that also meet the relevant PRTF standards is problematic, too. It’s up to the states to grant the PRTF certification, but fewer than half currently do so. As a result, CMS has considered allowing a facility located in a “State A,” which does not recognize PRTFs, to be certified by a “State B,” which does recognize PRTFs. That would enable State B to send its beneficiaries who need residential treatment in a PRTF to the State A facility, and get FFP for their care. So far, however, CMS has not issued such a rule allowing for inter-state PRTF certification.

In the end, the DC Circuit’s decision in Virginia confirms the limited scope of the under-21 exception to the IMD exclusion, but leaves many open questions about Medicaid funding for residential services for children and adolescents.