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Answer first: your Medicaid dollars are conditional
If you run a residential SUD facility with more than 16 beds and any share of your revenue is Medicaid, your reimbursement depends on your state’s Section 1115 SUD IMD-exclusion waiver. Federal financial participation (FFP) flows only while your state maintains the ASAM continuum, holds statewide length-of-stay averages in residential and inpatient IMD settings, keeps community transitions intact, and demonstrates access to medications for opioid use disorder.
The policy backdrop is not subtle. KFF’s April 2026 review of state summative evaluations shows this authority is now widely used. 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 CMS approval for five-year extensions. Six states (California, Indiana, New Hampshire, Utah, Washington, and Massachusetts) have completed summative evaluations. AHS does not operate in California, so we lean on the other five when we brief operator boards.
Reprice risk on every residential asset that leans on IMD-waiver Medicaid. The exposure is not theoretical. Medicaid is the payer of record for a huge share of this population. KFF reports that Medicaid covered 47% of nonelderly adults with opioid use disorder in 2023, and 56% of those receiving medication for opioid use disorder. Brookings pegs Medicaid OUD treatment spending at roughly $29 billion in 2023. If the waiver breaks, the revenue model breaks with it.
What the waiver actually requires, in operator terms
The framework starts with CMS State Medicaid Director Letter #17-003, which replaced the 2015 guidance and set the milestones states must meet to keep the federal match flowing to IMD residential care. The letter is blunt: “FFP for services in IMDs may be withheld if states are not making adequate progress on meeting the milestones and goals.” Read that twice. CMS reviewers can shut off the federal match mid-demonstration.
MACPAC restates the same rule in plainer language. FFP for services in IMDs is contingent on CMS approval of the state’s implementation plan and may be withheld if states do not make adequate progress toward meeting the milestones and goals.
Two conditions bite hardest at the facility level:
- Statewide length-of-stay averages. CBO notes that federal guidance directs states adopting Section 1115 SUD waivers to aim for a 30-day statewide average length of stay for residential treatment. State Medicaid agencies enforce that ceiling downstream through prior authorization, concurrent review, and rate structure.
- ASAM continuum fidelity and MOUD access. KFF describes the demonstration components as residential treatment provider qualifications and capacity, opioid prescribing guidelines, access to naloxone, prescription drug monitoring programs, and care coordination between residential and community settings. If your utilization management team cannot document step-down to outpatient withdrawal management or a lower residential level within a defined window, expect denials and audit exposure.
A note on level naming. Under the ASAM Criteria 4th Edition, residential withdrawal management is Level 3.7. Many state STCs still cite 3rd-edition Roman numeral levels (III.1, III.5, III.7). Do not conflate the two in the same document. And remember: partial hospitalization (PHP, ASAM Level 2.5) is an outpatient level of care, not residential. STC crosswalks that muddle that point create audit findings.
State renewal risk is the number buyers keep missing
Waivers are five-year demonstrations. KFF notes that Section 1115 IMD waiver demonstrations typically last five years and require states to meet specified goals, milestones, and evaluation requirements. The KFF Medicaid Waiver Tracker is where operators should confirm status for any state where they hold assets.
KFF analysts are careful to call the findings directional, not causal. They describe the summative evaluation results as “directional signals within an emerging evidence base rather than isolated estimates of waiver impact.” CMS reviewers read the same caveat. That latitude cuts both ways at renewal.
Colorado is a live example. CMS originally approved Colorado’s Expanding the Substance Use Disorder Continuum of Care Section 1115 demonstration effective January 1, 2021 through December 31, 2025, and on March 24, 2026 formally approved a temporary 90-day extension through June 30, 2026. Any Colorado operator is in an active renewal window right now.
Corrective action exposure matters too. Per SMD #17-003, CMS may require states to provide corrective action plans if a state fails to meet the required annual triggers. A state-level CAP becomes a rate or utilization squeeze at the facility level, usually within two quarters.
Then the macro overlay. Under the 2025 reconciliation law, states must condition Medicaid eligibility for adults in the ACA expansion group on meeting work requirements starting January 1, 2027. Nebraska is the first state to begin enforcing federal work requirements early through a state plan amendment, starting May 1, 2026, with Montana following July 1, 2026 and Iowa December 1, 2026. Any pro forma that carries residential Medicaid revenue at flat rates for five years is out of step with what Congress signaled.
AHS recently supported a five-facility, three-state accreditation cycle across three levels of care where the operator wanted The Joint Commission stamp before its Medicaid MCO recontracting window. All five earned three-year accreditation on the same survey cycle. Renewal risk is not abstract for those teams. Their leaders are building the evidence file now.
The pro forma stress test we run at AHS
Explainer shops will tell you the waiver exists. That does not protect your revenue. Here is the operator-side checklist AHS uses when we pressure-test a residential SUD pro forma or diligence a target for a PE buyer.
- Map every Medicaid dollar to a waiver authority. Is it Section 1115 IMD waiver, SUPPORT Act 1915(l) state plan option, managed care in-lieu-of, or non-IMD state plan? Each authority has a different renewal risk profile. Per the Congressional Research Service, states may make managed care payments for IMD enrollees aged 21 through 64 as long as the length of stay is no more than 15 days during the month of the payment. That is a much tighter box than a typical 1115 STC.
- Pull the facility’s actual ALOS by level of care for the last 8 quarters. Compare against the state’s reported statewide average from the CMS mid-point assessment. If the facility runs materially above the state’s number, model a payer-driven LOS haircut of 5 to 10 days per admission on residential revenue.
- Score MOUD access on-site. If the target contracts MOUD out without warm-handoff records, that is a diligence flag worth 2 to 4 turns on multiple. Remember that Medicaid covers 56% of adults receiving medication for opioid use disorder. That payer will drive utilization review on your facility.
- Test transitions of care. Percent of residential discharges with a documented outpatient appointment within seven days is the metric MCOs are starting to trend. Below 70% and you have a story to tell auditors.
- Model a downside where the waiver renews with tighter STCs. Rerun EBITDA assuming 20% to 30% of Medicaid residential revenue reverts to a 30-day-or-less cap. Assume a per-admission net revenue drop in the range of $3,000 to $6,000 on stays that used to run 45 days and now run 30. That is your realistic worst case, not zero.
What to put in front of your board this quarter
Three items belong on the board deck before the next CMS mid-point assessment lands.
One. A state-by-state matrix. Map every facility to its Medicaid revenue mix, its waiver authority, and the expiration date pulled directly from Medicaid.gov. Read your own state’s STCs the same way. Colorado, Missouri, Florida, Virginia, Nevada. Pick your state, then read the STCs. The specific expiration date and the specific milestone language belong in the board deck, not a generic summary of the program.
Two. A short memo on federal exposure. KFF reports that Medicaid covers 47% of all nonelderly adults with OUD and is the primary coverage source among those receiving treatment services. Congress’s Medicaid restrictions in the 2025 reconciliation law sit on top of that base. Your CFO should model both.
Three. A documentation plan. CMS reviewers use the word “directional” for a reason. Operators who keep their revenue at renewal are the ones who built the evidence file quarter by quarter. Not the ones scrambling in the 90 days before submission. Minnesota’s approved STCs warn that up to $5,000,000 in FFP for services in IMDs may be deferred if the state is not making adequate progress on meeting the milestones as evidenced by reporting on the milestones in the Annual Monitoring Report. That number focuses a state Medicaid agency. Which then focuses on you.
Frequently asked questions
Which states currently have approved Section 1115 SUD IMD-exclusion waivers?
As of April 2026, KFF reports that 38 states (including D.C.) have approved SUD IMD waivers, with three additional applications pending and at least 20 states already granted CMS approval for five-year extensions. Six states (California, Indiana, New Hampshire, Utah, Washington, and Massachusetts) have completed summative evaluations. Demonstrations typically run five years, so pull the specific end date from Medicaid.gov for any state where you operate or are diligencing an asset, and confirm current status on the KFF Medicaid Waiver Tracker.
What happens to Medicaid revenue if a state’s SUD IMD waiver is not renewed or is restricted?
Federal financial participation for residential services in IMDs narrows or stops. Per CMS SMD #17-003, FFP for services in IMDs may be withheld if states are not making adequate progress on meeting the milestones and goals. Approved STCs also carry direct dollar consequences: Minnesota’s STCs, for example, authorize CMS to defer up to $5,000,000 in FFP for IMD services if the state falls behind on milestones. Managed care in-lieu-of authority is more restrictive than most current 1115 waiver terms, capping IMD stays at no more than 15 days per month of payment for enrollees aged 21 through 64.
What ASAM level-of-care documentation does CMS expect residential SUD providers to maintain under a waiver?
CMS expects the state, and by extension its participating providers, to document coverage across the full ASAM continuum: outpatient, intensive outpatient, partial hospitalization (an outpatient level), clinically managed and medically monitored residential, and residential withdrawal management. Under the ASAM Criteria 4th Edition, residential withdrawal management is Level 3.7. Facilities should produce assessment notes tied to a specific level, provider qualifications by level, and step-down documentation aligned with the state’s STCs and the milestones described in SMD #17-003.
How large is the Medicaid exposure for behavioral health operators serving OUD patients?
Very large. KFF reports that Medicaid covers 47% of all nonelderly adults with opioid use disorder and 56% of those receiving medication for opioid use disorder. Brookings estimates Medicaid spent roughly $29 billion on OUD treatment in 2023. Any operator concentrated in OUD residential care should assume Medicaid rules, state waiver terms, and utilization review policy set the ceiling on realizable revenue, not gross admissions.
References
- KFF, A Look at 1115 Waiver Evaluations for Medicaid Payments to IMDs for Substance Use Disorder (April 2026)
- CMS, SMD #17-003, Strategies to Address the Opioid Epidemic (Nov. 1, 2017)
- CMS, SMD #18-011, Opportunities to Design Innovative Service Delivery Systems for Adults with SMI/SED (Nov. 13, 2018)
- MACPAC, Section 1115 waivers for substance use disorder treatment
- Congressional Research Service, Medicaid’s Institution for Mental Diseases (IMD) Exclusion
- Congressional Budget Office, Budgetary Effects of Policies to Modify or Eliminate Medicaid’s IMD Exclusion (2023)
- KFF, Implications of Potential Federal Medicaid Reductions for Addressing the Opioid Epidemic (2025)
- KFF, Tracking Implementation of the 2025 Reconciliation Law Medicaid Work Requirements
- Colorado HCPF, Expanding the SUD Continuum of Care Waiver (updated March 2026)
- Minnesota DHS, SUD System Reform 1115 Demonstration STCs
- Brookings, The role of Medicaid in addressing the opioid epidemic (2025)