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What a Section 1115 waiver actually unlocks for a treatment center operator
Section 1115 of the Social Security Act lets the Secretary of HHS approve state Medicaid demonstrations that waive standard federal rules, and for behavioral health operators that authority is the single largest federal lever opening reimbursement for SUD residential care above 16 beds, pre-release reentry services, contingency management, and health-related social needs. The expansion opportunity sits in states with recently approved SUD, SMI/SED, Reentry, or HRSN waivers where operators can build service lines Medicaid historically would not fund.
The scale is not theoretical. Medicaid covers around one-fifth of adults with an SUD and an even greater share (40 percent) of youth and adults younger than age 65 with OUD, and Medicaid is the single largest payer in the United States for behavioral health services, including mental health and substance use services, accounting for 26 percent of all behavioral health spending. If your pro forma assumes commercial payer mix carries the facility, you are leaving the biggest buyer in the room at the door.
Four waiver families matter right now: SUD IMD (SMD #17-003), SMI/SED (SMD #18-011), Reentry (SMD #23-003), and the Biden-era HRSN framework. Each one creates a different revenue line, a different compliance obligation, and a different MCO contracting conversation. Confusing them is where operators burn capex.
The SUD IMD waiver: who has it, what it pays for, what CMS will audit
The IMD exclusion has blocked federal Medicaid payment for residential SUD care in facilities over 16 beds since 1965. The SUD 1115 pathway rewrites that. As of April 2026, 38 states, including D.C. Had approved SUD IMD waivers, three more had applications pending, and at least 20 had received Centers for Medicare and Medicaid Services (CMS) approval for five-year extensions.
If you operate residential SUD in Pennsylvania, New Jersey, Virginia, Massachusetts, or any of the other approved states, that waiver is why your 32-bed facility can bill Medicaid at all. But approval at the state level is not the same as revenue at the facility level. CMS attached a list of milestones to every SUD waiver: use of ASAM Criteria for admission and continued stay, state-level residential provider qualifications aligned to ASAM levels, OUD medication requirements, care coordination, and strategies to improve community-based SUD provider capacity. If your clinical team is still documenting dimensional assessments against an outdated framework, you are out of alignment with your state’s STCs and your MCO will find it on audit.
Three operator realities I would flag:
- Your utilization management workflow has to match ASAM Criteria 4th Edition language. Not legacy terminology. Not whatever your EMR template defaulted to in 2019.
- Residential withdrawal management is a distinct level of care with its own documentation requirements. Operators who conflate it with lower-intensity residential lose claims.
- Length-of-stay patterns that cleanly cleared commercial UM will get denied under SUD waiver medical-necessity reviews. Rebuild the UM playbook before you grow census.
Reentry and HRSN: the newest revenue lines, and why most operators are not ready to bill
On April 17, 2023, CMS released a State Medicaid Director Letter (SMDL) that describes a section 1115 demonstration opportunity to support community reentry and improve care transitions for justice-involved populations. That letter, SMD #23-003, is the opening for behavioral health operators to be reimbursed for care delivered inside correctional facilities in the 90 days before release.
As of August 19, 2024, CMS has approved Section 1115 reentry waiver requests from 11 states, while 13 additional reentry waivers remain pending. Arizona, Colorado, Hawaii, Maryland, Michigan, Pennsylvania, Utah, and Vermont are among the most recent approvals. For an operator with an existing MAT program or SUD outpatient footprint, the reentry waiver is a direct contract pathway with the state Medicaid agency and county correctional partners. It is not plug-and-play. The minimum covered services, the data-exchange requirements with jails and prisons, and the warm-handoff documentation standards are specific, and most behavioral health operators have no infrastructure for billing a Medicaid claim for a service delivered inside a county jail.
HRSN waivers run on a parallel track. States with approved HRSN authority can pay, under specific caps, for rent and temporary housing up to six months, utilities, and nutrition supports. CMS authorized $650 million in Medicaid funding for North Carolina’s Healthy Opportunities Pilots, which remains the clearest existing model. For a behavioral health operator running recovery housing, PHP, or IOP, HRSN waivers in states like Arizona, Oregon, Washington, Massachusetts, Arkansas, and New Jersey can convert previously unfunded wraparound services into billable encounters, but only through contracted community-based organization networks and only when the operator can produce the referral, service, and outcome data the STCs require.
The operator decision framework: which waiver justifies which capex
Competitors publish “what is a 1115 waiver” explainers. That is not the decision an operator has to make at 7 a.m. Before a board call. The real decision is: given my state’s current waiver portfolio, which service line do I build, how much capital does it require, and what compliance infrastructure do I have to stand up before I can bill a single claim?
A working map:
- SUD IMD waiver in your state → residential SUD expansion, residential withdrawal management, inpatient-adjacent levels of care. Capex-heavy. Requires licensure under state residential rules, accreditation (CARF or Joint Commission), ASAM-aligned clinical documentation, and MCO contracts that recognize the waiver rate schedule.
- SMI/SED waiver in your state → psychiatric residential, crisis stabilization, mobile crisis build-outs. Requires crisis workforce and 24/7 clinical leadership that most SUD-first operators do not have on day one.
- Reentry waiver approved or pending → MAT in jails, pre-release care coordination, 30/60/90-day transition contracts with county sheriffs and state DOCs. Low capex, high operational complexity, requires HIPAA and 42 CFR Part 2 data flows the correctional IT system was never built for.
- HRSN waiver approved → recovery housing, supportive housing navigation, nutrition and transportation lines added to existing outpatient programs. Requires CBO contracting, HRSN-specific claims coding, and outcome reporting on the STCs’ terms.
Then the compliance layer underneath all of it: a utilization management function that speaks ASAM Criteria 4th Edition, a payer-readiness file that matches each MCO’s SIU audit standards, and an EMR configuration that captures the data elements CMS requires for the state’s monitoring protocol. There are 67 Section 1115 Medicaid demonstration waivers approved in 48 states, as of May 2023. No two STC packages read the same. The compliance program is state-specific, waiver-specific, and MCO-specific, and the operators who treat it as generic lose on their first SIU audit.
As Kinda Serafi, Patricia Boozang, and Gini Morgan of Manatt Health framed the reentry opportunity, “The SMDL outlines the opportunity for states to waive the inmate exclusion and receive federal financial participation (FFP) for expenditures for certain pre-release healthcare services.” The authority exists. Whether an operator captures the revenue depends on the operational backbone they build before the first claim goes out the door.
Frequently asked questions
Which states currently have approved 1115 waivers covering SUD residential treatment?
As of April 2026, 38 states, including D.C. Had approved SUD IMD waivers, three more had applications pending, and at least 20 had received Centers for Medicare and Medicaid Services (CMS) approval for five-year extensions. The KFF Section 1115 tracker maintains the current state-by-state list. Confirm against the state Medicaid agency’s STCs before building a pro forma, because the waiver’s effective date and any pending amendments control what you can actually bill.
How does an 1115 IMD exclusion waiver change reimbursement for a residential SUD facility over 16 beds?
Without the waiver, federal Medicaid will not match state spending on SUD services delivered in a facility over 16 beds classified as an Institution for Mental Diseases. With an approved SUD 1115 waiver, that match flows, which is what makes Medicaid-paying residential SUD a viable service line in approved states. The waiver does not change your license, your accreditation, or your clinical model on its own. It changes who pays, and the state’s STCs define the rate, the length-of-stay parameters, and the ASAM-level documentation required to keep paying.
What are the CMS milestones operators must meet to bill under a SUD 1115 waiver?
CMS attaches six milestones to SUD waivers, including access to critical levels of care (with ASAM Criteria governing admission and continued stay), widespread use of evidence-based patient placement criteria, use of nationally recognized SUD-specific program standards, sufficient provider capacity across the continuum, implementation of comprehensive treatment and prevention strategies for OUD, and improved care coordination. Operators meet those milestones through clinical documentation, provider enrollment, and state-level reporting, not through policies on paper.
Can behavioral health operators bill for re-entry services under the new 1115 reentry demonstration?
Yes, in states with an approved reentry waiver and only through the service model the state’s STCs authorize. This new guidance, published in April 2023, allowed for a new opportunity for states to provide reimbursement for certain Medicaid services for up to 90 days before release for people who are incarcerated. Operators typically contract with the state Medicaid agency or a contracted MCO, build data-sharing agreements with the correctional facility, and bill under reentry-specific service codes defined in the state’s demonstration.
How do HRSN 1115 waivers create revenue opportunities for recovery housing and supportive services?
HRSN waivers let state Medicaid programs pay, within approved caps, for services Medicaid historically excluded, including short-term rent and temporary housing, utilities, nutrition supports, and housing navigation. For a behavioral health operator running recovery housing or outpatient programming, HRSN authority in your state can convert wraparound services into reimbursable encounters, delivered through the state’s CBO network and billed against HRSN-specific codes with outcome reporting the STCs require.
References
- KFF: A Look at 1115 Waiver Evaluations for Medicaid Payments to Institutions of Mental Disease (IMD) for Substance Use Disorder
- CMS State Medicaid Director Letter #23-003: Opportunities to Test Transition-Related Strategies to Support Community Reentry (April 17, 2023)
- KFF Section 1115 Waiver Watch: Medicaid Pre-Release Services for People Who Are Incarcerated
- KFF: Section 1115 Medicaid Waiver Watch on Health-Related Social Needs Approvals
- MACPAC: Behavioral Health in Medicaid and the State Children’s Health Insurance Program
- NASHP: Update on Medicaid Section 1115 Waivers (January 2025)
- State Health and Value Strategies (Manatt Health): CMS Guidance on Section 1115 Reentry Demonstration