Counties eye potential Medicaid reimbursement remedies

Key Takeaways

The problems San Joaquin County, Calif. faces in meeting residents’ behavioral health care needs have been brewing for 60 years. 

Supervisor Steven Ding has spent years pushing to reform a rule, known as the Medicaid Institutions for Mental Diseases (IMD) exclusion, that he says leaves residents without care, overwhelms first responders and strains county budgets. And he’s finally seeing some potential for improvement.

“You work on this day after day after day after day, and nobody knows what you’re talking about,” Ding said. “Then finally, you find an opening.”

The IMD exclusion, written into law in 1965, prohibits federal Medicaid funds from being used to reimburse care in mental health or substance use disorder treatment facilities with more than 16 beds. The rule was created during the deinstitution­alization movement to shift responsibility for large psychiatric hospitals away from the federal government and toward states and local governments. The regulations governing it have not been revised since 1988.

The intent may have made sense at the time, but its effects today do not. Medicaid is the single largest payer of behavioral health services in the country, accounting for roughly 24 percent of all spending on both mental health and substance use disorder treatment. When a county-run facility exceeds 16 beds, it loses access to Medicaid reimbursements entirely, regardless of how well the facility is run or the number of people needing treatment. 

Some larger counties have found workarounds, building multiple small, separate facilities on the same campus to stay under the federal bed cap. But doing so comes at a steep price — significantly higher construction, staffing and operational costs that most counties simply cannot afford. For most, the choice is a stark one: Shrink to fit the cap or go without Medicaid reimbursement.

San Joaquin County was left with no choice but to shrink. For years, the county operated a 40-bed psychiatric health facility before the fiscal reality caught up. To qualify for the much-needed Medicaid reimbursement, the county reconfigured the facility down to 16 beds in 2023, from 40. 

“You either have the money to pay for it, or you don’t. And so, it was a decision made fiscally, and with our brain,” Ding said, “but definitely not with our heart.”

Reducing beds did not reduce the need for care. Ding described what plays out routinely in San Joaquin County when someone in behavioral health crisis can’t access one of the now-limited beds. A first responder is called to a local business where a person in mental health crisis hasn’t broken any laws and has nowhere to go. The officer’s options are limited. The person is taken to a local emergency room not designed to provide sustained behavioral health treatment, where the officer must stay — often for hours — until a temporary bed is found. Without grounds for a legal hold, the person is eventually released, and the cycle starts over.

“If you’re that 25-year-old officer, why even try?” Ding said. “They know there’s nowhere to take them…They know the system is broken.”

The alternative is the street, where untreated mental illness and substance use disorders worsen over time, creating challenges not just for the individuals involved but for the surrounding community as well. 

“There is nothing humane about leaving people on the street,” Ding said. And the costs, he argues, are not just moral ones. When counties can’t provide treatment, they pay anyway, through uncompensated health care costs, jails and law enforcement, cleanup operations and lost economic activity. 

“If you figure out how much money we’ve spent per individual in the state of California — hundreds of thousands of dollars — with no results,” Ding said, “we haven’t fixed a thing.” 

He also laid out what enacting IMD reform could mean for county and federal budgets. “We have a process here that, if allowed to be fixed, we know what our set costs would be,” he said. “On paper, it’s a no-brainer. The impacts on hospitals, probation departments and general funds — the list goes on and on.”

Congress has several proposals on the table. Ding and the San Joaquin County Board of Supervisors adopted a position in unanimous support of H.R. 1201, the Increasing Behavioral Health Treatment Act, when it was introduced in 2023. This legislation, which would eliminate the IMD exclusion for adults with severe mental illness entirely, was reintroduced in 2025 as H.R. 4022 for the 119th Congress. 

Another option, the Michelle Alyssa Go Act (H.R. 5462), would raise the reimbursable bed cap to 36 from 16. For San Joaquin County, even that incremental change would allow the county’s Stockton Children’s Home — which serves individuals up to the age of 24 — to double its capacity. It would also enable the county to complete its approved $261 million BeWell behavioral health campus without having to find workarounds for federal restrictions. 

“It literally would double the impact,” Ding said.

Ding’s message to county officials who haven’t yet engaged on this issue is simple: Start now and stay involved.

“When I was going office to office on the IMD exclusion — after we had the NACo [IMD] resolution pass — most of them had no idea still what I was talking about,” he said. “Which means we’re not talking about it enough. Your participation in NACo doesn’t end when the conference ends. That’s the starting point.”

As counties across the country mark Mental Health Awareness Month this May, Ding hopes the moment serves as more than a symbolic occasion. For residents in counties like San Joaquin, the path to meaningful behavioral health care hinges on reforming federal barriers like the IMD exclusion — and the county officials working to change them.