Bipartisan legislation introduced Wednesday would strike the term "mentally retarded" from the section of the U.S. Code that governs major federal entitlements.
The bill from Sens. John Kerry (D-Mass.) and Chuck Grassley (R-Iowa) would also expand the mental health services available to young people on Medicaid.
The portion of the bill striking "mentally retarded" would apply to the Social Security Act, which includes Medicare, Medicaid, Social Security and the State Children's Health Insurance Program.
Grassley emphasized that the new care option under Medicaid would mean better access to home- or community-based treatments for many young people with mental health needs — providing an alternative to institutional care.
"The federal government should give states incentives to use community-based settings for children with intensive mental health needs," Grassley said.
"This bipartisan legislation will give states the tools they need to provide care through smaller settings."
The Senate recently approved a bill striking the word "lunatic" from everywhere that it appears in the federal code.
That bill, introduced by Sens. Kent Conrad (D-N.D.) and Mike Crapo (R-Idaho), was praised by health groups.
A release for the Grassley-Kerry bill said the measure has been endorsed by more than 35 advocacy groups.