When Medicaid Policy Collides with Foster Youth Treatment

If you’ve spent any time working in child welfare, behavioral health, or foster care policy, you’ve probably heard the phrase “unintended consequences.” Few issues illustrate that better than the quiet conflict between two federal laws that are both supposed to help children in foster care—but, in practice, are working against each other.

At the center of the problem is a long-standing Medicaid rule called the Institution for Mental Diseases (IMD) exclusion and how it applies to Qualified Residential Treatment Programs (QRTPs).

This isn’t an abstract policy debate. It’s about whether foster youth with the most complex behavioral health needs can actually access and sustain the care they’re clinically determined to need.

A Quick Refresher: What Are QRTPs?

QRTPs were created under the Family First Prevention Services Act (FFPSA) in 2018. The goal was clear: dramatically reduce the use of congregate care, prioritize family-based placements, and ensure that residential treatment is used only when absolutely necessary—and only with strong clinical oversight.

It was absolutely the intent of Congress to "Get Bad Actors Out of Residential Care."

Therefore, to qualify as a QRTP, a program must meet rigorous standards. These include trauma-informed treatment models, licensed clinical staff, family engagement, regular clinical reviews, and a clear plan to transition youth back to family settings as soon as it’s appropriate.

In California, many Short-Term Residential Therapeutic Programs (STRTPs) meet the federal QRTP definition. These programs are designed to be time-limited, treatment-focused, and accountable, not long-term institutions.

Where Medicaid Comes In—and Where Things Break Down

Here’s the catch: Title IV-E foster care funds only pay for room and board. They do not pay for the behavioral health treatment that defines QRTPs. That treatment is largely funded through Medicaid.

Enter the problem.

Medicaid includes a rule—the IMD exclusion—that generally prohibits federal Medicaid reimbursement for mental health services provided in facilities with more than 16 beds if they are primarily engaged in treating mental illness.

FFPSA created QRTPs, but it did not change Medicaid law. As a result, a QRTP can be fully compliant with federal child welfare requirements and still be classified as an IMD under Medicaid rules.

When that happens, federal Medicaid funding for medically necessary services can disappear.

Why This Matters So Much in Los Angeles County

Los Angeles County serves one of the largest foster care populations in the country. Youth in foster care experience significantly higher rates of trauma, serious emotional disturbance, and behavioral health needs than their peers.

Most foster youth will never need residential treatment—but for the small group who do, STRTPs and QRTPs are essential. In 2022, only about 4.6 percent of foster youth in California were placed in STRTPs, and those youth tend to have the most complex needs, including serious mental health conditions, substance use challenges, developmental disabilities, and long histories of placement instability, especially among older teens.

But when Medicaid funding is blocked because a program exceeds the 16-bed threshold, providers face impossible choices:

• Reduce beds and operate unsustainably

• Close programs altogether

• Shift services away from foster youth to other populations

• Leave the system entirely
  

The result is fewer options for the youth with the highest needs—exactly the opposite of what FFPSA intended.

QRTPs Are Not the “Institutions” People Fear

One concern that often comes up is whether allowing Medicaid funding for larger QRTPs would bring back the large, institutional models of the past.

The short answer: no.

QRTPs are fundamentally different from traditional IMDs.

They are:

• Time-limited, not long-term placements

• Clinically justified, with required assessments and court review

• Family-focused, with mandatory family engagement and aftercare

• Highly regulated, with state licensing and national accreditation

  
  

California’s Continuum of Care Reform adds even more guardrails, ensuring residential treatment is used sparingly and only when less restrictive options aren’t appropriate.

Waiving or clarifying the IMD exclusion wouldn’t expand who qualifies for residential care—it would simply allow Medicaid to pay for treatment for youth who are already appropriately placed.

Why the 16-Bed Limit Doesn’t Work in Practice

On paper, smaller programs sound better. In reality, the math doesn’t work.

QRTPs must maintain:

• Licensed clinicians

• Nursing coverage

• 24/7 supervision

• Clinical supervisors

• Compliance and accreditation systems

  
  

These costs are largely fixed, regardless of whether a program has 16 beds or 24.

Add in strict staffing ratios, fluctuating occupancy, and the high cost of accreditation, and many high-quality providers simply can’t survive at such a small scale. The irony is that the rigid 16-bed limit—meant to prevent institutional care—can actually reduce access to appropriate treatment and push youth into less suitable placements.

A Path Forward

There’s growing recognition that this policy conflict needs to be resolved.

Federal proposals like the Ensuring Medicaid Continuity for Children in Foster Care Act aim to ensure that foster youth don’t lose access to Medicaid-covered services simply because of where they are placed.

Clarifying or waiving the IMD exclusion for QRTPs would:

• Align Medicaid with FFPSA’s goals

• Stabilize essential treatment providers

• Protect access to medically necessary care

• Support better outcomes for youth with complex needs

  
  

Most importantly, it would ensure that financing rules don’t undermine sound child welfare policy.

The Bottom Line

California—and especially Los Angeles County—has spent years reforming its child welfare system to move away from unnecessary congregate care while preserving high-quality treatment options for youth who truly need them.

The current interaction between FFPSA and the Medicaid IMD exclusion threatens that progress.

This isn’t about expanding residential care. It’s about making sure the small, essential part of the continuum designed for the highest-need foster youth can actually function.

Sometimes, fixing the system isn’t about creating something new—it’s about making sure the rules we already have don’t cancel each other out.