Close up of a male doctor holding an application form while consulting patient
CNN  — 

The Centers for Medicare and Medicaid Services may now allow for states to pursue Medicaid reimbursements for short-term inpatient treatment in mental health facilities despite a decades-old exclusion, Health and Human Services Secretary Alex Azar announced Tuesday.

In a letter to state Medicaid directors, CMS detailed a new Medicaid waiver opportunity through which states may bypass longstanding reimbursement restrictions on inpatient psychiatric treatment, which apply to mental health facilities with more than 16 beds. Azar said the original policy has posed a “significant barrier” to people getting the treatments they need.

“There are so many stories of Americans with serious mental illness, and their families, that end in tragic outcomes because treatment options are not available or not paid for,” Azar told the National Association of Medicaid Directors on Tuesday. “More treatment options are needed, and that includes more inpatient and residential options that can help stabilize Americans with serious mental illness.”

In order to receive a waiver, states must guarantee that their efforts are budget-neutral to the federal government. They must also ensure that this doesn’t come at the expense of community-based mental health care, and are taking steps to improve the long-term needs of people with severe mental illness after their release from a treatment facility.

“Inpatient treatment is just one part of what needs to be a complete continuum of care, and participating states will be expected to take action to improve community-based mental health care,” Azar said

The reason why Medicaid has not historically covered this treatment, Azar said, is to “discourage states, which traditionally provided mental health care, from offloading these responsibilities onto the Medicaid program.” But by the time Medicaid was signed into law in 1965, states were curbing their investments in mental health treatment, he said.

Policy analyst Aaron Glickman said the policy comes from a time before medication-assisted treatments were widely used, when state-run mental institutions were known to “warehouse” patients in poor conditions.

“These are the psychiatric hospitals you read about in horror stories,” said Glickman, a policy analyst for the University of Pennsylvania’s Department of Medical Ethics and Health Policy and its Leonard Davis Institute of Health Economics.

Back then, there was a concern that the availability of federal funds would cause states to “warehouse people further and shirk any responsibility to provide the least coercive possible treatment in the community,” Glickman said.

The modern-day result of the policy is that residential psychiatric treatment, though not necessarily appropriate for all patients, has now become “unnecessarily restricted,” Azar said.

CMS has described how Medicaid patients with “acute psychiatric needs, such as those expressing suicidal or homicidal thoughts,” are often redirected to hospital ERs that cannot provide comprehensive care for these patients. And this can delay patients from getting services they need, the agency says.

Tuesday’s announcement is the latest in a series of moves to relax the restriction through waivers. Both the Obama and Trump administrations have granted waivers in recent years, largely focusing on opioids and substance use disorder.

“There was clearly a sudden spike in need in the last 10 years,” Glickman said.

CMS has granted waivers for projects in 17 states that target substance use disorders, and 12 states have expressed interest in pursuing the new waiver, the agency said Tuesday.

According to CMS, over 10 million American adults had severe mental illness in 2016, and just under two-thirds of them received mental health services. About 26% of adults with a serious mental illness are covered by Medicaid, according to the Kaiser Family Foundation.

The Medicaid policy against financing treatment in “institutions for mental diseases” – or IMDs, as they are referred to by federal agencies – has been contentious among policy experts and mental health advocates.

“Although our mental health systems are in crisis, neither the IMD rule nor insufficient hospital beds are the primary problem,” Jennifer Mathis, director of policy and legal advocacy at the Bazelon Center for Mental Health Law, wrote in a policy debate this year.

“The primary problem is the failure to implement an effective system of intensive community-based services, which have been shown to prevent or shorten hospitalizations,” Mathis wrote. “Repealing the IMD rule would do little to alleviate the true crises in our public mental health systems and would likely deepen those crises.”

In an email to CNN, Mathis added that CMS’s announcement “ignores all of the findings of the IMD demonstration that has already been done, which showed that expanding federal reimbursement for short-term IMD stays had none of the beneficial effects that were hypothesized.”

Get CNN Health's weekly newsletter

Sign up here to get The Results Are In with Dr. Sanjay Gupta every Tuesday from the CNN Health team.

But Glickman disagreed: “In my view, ethically speaking, we should not have this carve-out of limitations for funding for mental health services.”

He described the new move as just one part of a longer “battle over mental health parity in the United States” and said the new waiver process could be a necessary step toward dismantling the Medicaid restriction altogether by proving that it enhances care in the states that pursue it.

“Showing the sky did not fall is a good thing,” Glickman said.