This study examined the use of alcohol and recreational drugs among 875 youth with severe emotional disturbance (SED) enrolled in Medicaid-funded behavioral health care plans, and whether co-occurring SED and substance use affected the subsequent likelihood of receiving inpatient and/or residential treatment. Youth at five sites nationwide were interviewed about their use of drugs and alcohol, while interviews with their caregivers elicited information about youths' service utilization, degree of functional impairment, and a series of demographic and environmental variables. Results indicated that half of the youth (52%) reported lifetime use of alcohol, street drugs, or over-the-counter medications for recreational purposes, while 18% reported use in the past 30 days. Among those reporting recent use, 32% reported using drugs only, 34% alcohol only, and 33% reported use of both drugs and alcohol. In multivariate logistic regression analyses, the effect of recent use was stronger than that of lifetime use; however, the largest effect occurred for those reporting recent use of both drugs and alcohol, versus either alone, or none. Differences remained significant when controlling for managed care versus fee for service enrollment as well as child, family, and environmental characteristics including study site. These results mirror those of prior studies that found an association between substance use and greater likelihood of inpatient services, even in managed care settings.