This holiday season, the federal government is gifting states a mental health policy it claims will fix a broken system. But is Washington DC acting like Santa Claus or something more akin to Krampus, Santa’s horned, horrifying counterpart who swats kids with sticks?

The federal government has a long history of encroaching on states’ ability to provide mental health care to their residents, and now Congress is trying to do it again by offering to pay for mental health care through Medicaid—with strings attached, of course.

Because people with mental illness often end up homeless or in jail rather than receiving treatment in more appropriate settings, the federal government now wants to spend money on the psychiatric hospital system. It’s faster and easier, according to the feds. But that’s not necessarily true, and using taxpayer funds to build large institutions like psychiatric hospitals violates most states’ policies regarding best practices for mental health services.

Paying States to Institutionalize People

One particularly naughty policy in two pending federal bills would undermine a 50-year-old vestige of state sovereignty in our Medicaid system: the Institutions of Mental Disease, or IMD, exclusion. Changes to this policy can be found in the Helping Families in Mental Health Crisis Act and the Cassidy-Murphy Mental Health Reform Act.

In 1965, when the federal government gave us Medicaid, it excluded IMDs from Medicaid coverage. This means a state cannot get reimbursed for services provided at an institution that has 16 or more beds and provides mental health or substance use disorder services. Many see this provision as a quirk in the system and a blatant disregard of parity in health care.

The Helping Families in Mental Health Crisis Act would create an exception to this exclusion for short-term stays at psychiatric institutions. Stays of less than 20 days would become reimbursable. This is at least partly in response to the recent cries for more state hospital beds to deal with mental health crises nationwide. The Congressional Budget Office estimates this change will cost $40 to $60 billion. The Cassidy-Murphy bill is a bit narrower, allowing payment only if the Centers for Medicare and Medicaid Services actuary certifies it would not lead to a net increase of federal spending.

Before we go spending $40 to $60 billion on rolling back the IMD exclusion, we should understand why it exists. This exclusion was well thought out and designed to ensure the federal government did not entirely undermine state sovereignty or the principles underlying the Community Mental Health Act of 1963. That law authorized federal grants for construction of community mental health centers that would provide alternatives to traditional psychiatric hospitalization, including inpatient, outpatient, partial hospitalization, emergency care, and consultation or education services.

Transferring State Responsibilities to Worse Federal Management

Prior to 1963, state hospitals were the most prominent component of the public mental health system, with the population peaking at over 500,000 (or one psychiatric bed for every 300 people in the United States) in 1955. In 1963, Kennedy signed the Community Mental Health Act because the $1.8 billion states were spending on psychiatric hospitals was “too little to do much good for the individual, but too much if measured in terms of efficient use of our mental health dollars.” Kennedy’s aim was to supplant “reliance on the cold mercy of custodial isolation” with “the open warmth of community concern and capability.”

When Medicaid was established two years later, the IMD exclusion was created for two reasons. The first was that states were already paying for psychiatric hospitals, and they should continue to perform that function because it was the states’ job to provide for the health, safety, and welfare of their citizens. At the time, state or local government funded nearly 75 percent of public health care, which reflected the states’ responsibility.

The second was to incentivize deinstitutionalization. Paying for custodial isolation of people with mental illness went against existing federal policy. Growing evidence at the time and current studies show mental illness can be treated more effectively and more cost-effectively in community settings than in traditional psychiatric hospitals.

Today, little has changed. There are significantly fewer psychiatric hospital beds, but we appear to be isolating people with mental illness in our jails instead. And the federal government now funds about 75 percent of public health care, taking away the states’ power in this area.

We’re now spending a lot more on mental health. The federal government dedicates $130 billion to 112 federal mental health programs. But mental health advocates are still striving to reach Kennedy’s goal of community-based care for people with mental illness.

Community-Based Care Is Better

Over its last two sessions, Texas has invested significant amounts of money into community based behavioral services, with a goal of reducing the need for state hospitals, because community-based care is generally better and cheaper. California has transitioned to almost entirely community-based care, and only uses its state hospitals for its criminal population with mental illness.

Not only would creating an exception for IMDs violate state policy, it contradicts the federal government’s own policies. In 1999, the Supreme Court held in Olmstead v. L.C., that states must provide community-based treatment to people with mental illness if it would be appropriate and the state has the resources. To do otherwise, would be discrimination that violates the Americans with Disabilities Act of 1990 (ADA).

The court found that institutionalization is discrimination because people with mental illness must sacrifice their freedom to receive the medical services they need to get better, while people without mental illness can receive the medical services they need without that sacrifice.

State authority to act in this area has been undermined by the Community Mental Health Act, the Social Security Amendments that created Medicaid, and the ADA. Each of these has done little to improve care for people with mental illness. The federal government should leave the exclusion in place. Their interventions have been ineffective, and a $40 to $60 billion expenditure for temporary psychiatric hospitalization is unconscionable.

Instead of making IMDs Medicaid-reimbursable, the federal government should give states more flexibility to use Medicaid dollars more effectively, allowing them to build up community-based services that fit the states’ unique needs, rather than funding more psychiatric hospital beds. It’s time for “we the people” to let the feds know if their policies have been bad or good, and to insist on the good ones—for goodness sake!

Kate Murphy is a mental health policy fellow at The Texas Public Policy Foundation in Austin, Texas.