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The Discrimination of Mental Health Coverage

Mental illness takes a toll on millions of Americans and imposes a financial burden on society. In recent years, medical science has advanced the understanding of mental illness; disorders are seen today as a combination of biological and psychosocial features. Just as the treatment of mental illness has become more integrated, so too has the way the health care system addresses mental health care. Integration of mental and physical health has been a positive for coordination of services, but financial incentives have led to discrimination issues. Private insurance plays a prominent role when it comes to mental health care services. Because people with mental health disorders are expensive to insure, health plans have an incentive to avoid enrolling people with mental illness or paying for mental health care. This behavior poses a serious threat to the fair treatment of individuals with mental illness.

Interview with Thomas G. McGuire, PhD, Professor of Health Economics, Department of Health Care Policy, Harvard Medical School

Harvard Medical School health economist Thomas McGuire studies the design and impact of health care payment systems and the economics of mental health policy. McGuire, who is a member of the Institute of Medicine and a coeditor of the Journal of Health Economics, has contributed to the theory of physical health, hospital, and health plan payment. McGuire spoke to ERIU about the disparities inherent in payment and coverage of mental heath as compared to physical health services, and the policy implications this holds.

Why do health insurers provide far less coverage for mental health illnesses than for physical health problems?

MCGUIRE: There are two reasons. One relates to moral hazard, a term implying that the reaction of the insured to coverage—which from the insurer's point of view represents a "hazard" or risk —stems from behavior instead of some underlying need. The greater demand response for coverage for a condition implies that utilization is there only if the insurance is there. That leads to the question whether the value of the covered service is as high as for other conditions. Relatively high levels of moral hazard call into question the value of the mental health care for consumers as compared to the other conditions. The other reason has to do with adverse selection. Completely apart from the question of value, insurers compete in markets and competition takes place over what kind of people they are going to enroll. And the people they prefer, of course, need less health care. By the structure of the coverage, insurers will attract or deter different types of individuals. And if the types of individuals they attract with generous mental health benefits are the expensive ones, it would be a bad business proposition for an insurer. If they see mental health coverage leads to an "adverse selection" of the risks, insurers are going to offer less coverage.

Who pays for mental health services?

MCGUIRE: Mental health services are paid somewhat less by private health insurers than for regular health services; about 30 percent as opposed to 60 percent for other health care. Public payers, particularly Medicaid, are bigger buyers of mental health services. Consumer out-of-pocket spending is also larger for mental health.

Highlight the toll mental illness takes from an economic standpoint?

MCGUIRE: The ways these things are thought about and studied are in terms of direct and indirect costs. Direct costs are what people think of first, such as the cost of treatment. These costs amount to about one percent of GNP in the US and this number has been fairly constant over time. The second part is indirect costs, which is composed of the subjective or material costs the person suffering from the illness bares. Some of the things we measure are the loss of work or productivity or the time family members spend caring for someone. There is also the pain and suffering of someone who suffers from depression or serious mental illness. Indirect costs far outweigh the direct costs.

So typically what level of coverage is offered in a group plan for mental health care? What gets covered and what doesn't?

MCGUIRE: The typical group managed care plan has pretty good first dollar coverage for mental health conditions. The main distinction would be in the limits, like the 10- or 20-visit limits for mental health probably do not exist for the physical health care services. The health plans give you the misleading impression that coverage has been equalized for mental health conditions, as compared to physical health conditions. The co-payments required of patients are about the same for mental health and physical health services, but that doesn't mean that someone in a managed care plan can get the same level of benefits or quality of care for mental health care as they could for physical health care. This is largely because of the utilization controls the plans use. The growth of managed care plans has diminished the importance of demand-side cost sharing in terms of being relied upon as a cost-control device. It's almost a nuisance for them to charge a co-payment. The real way these plans control costs is by rationing it, and there's no necessity that they ration equally across all different services. There is health services research that suggests that mental health care rationing is stricter than compared to other health care services.

There has been a movement away from HMOs and more restrictive managed care toward PPOs and open networks in recent years. So how are these more open plans limiting mental health coverage?

MCGUIRE: There has been considerable movement to open plan designs as a result of the managed care backlash. We've seen expanded networks, which give patients more choices and providers more access to patients. Each of those is important to understanding what has happened. It still leaves the plan the ability to structure what works, i.e. through utilization control mechanisms. Patients have access to wider networks but they can still be relatively more stringent for mental health than for physical health. One way it can be done is to have a separate management system that might be a carve out. These networks can be disease specific. You might have primary care being relatively open and generous, and have few administrative restrictions on utilization compared to mental health benefits, which may have a more restrictive network with more hoops that need to be jumped through before people can access services.

What kinds of things tend not to get covered?

MCGUIRE: The partial programs, self-help groups; the things that tend not to be mainstream yet, even in spite of research in many cases that support their cost-effectiveness. Why? These services can indeed be cost-effective in control circumstances, but if the plan covered them, they might be of interest not only to the people who need them but having them covered may attract new people who are likely to use them. Limiting covered services is a way for a health plan to limit access to services.

Do people with a mental health condition represent adverse selection for an insurer? Why? Do they tend to use health care services more often?

MCGUIRE: There are two pieces of the story to keep in mind. When people have coverage they use it more. That's the moral hazard part. When the coverage is present different people join the plan; the adverse selection part. It's that second thing that terrifies health insurers. Imagine if you if ran a health plan and you were known as having the best mental health plan in town. People and families with mental health issues would likely enroll in this type of plan. Mental health problems are relatively predictable. Insurers need to be very alert not to have a plan that is known to be the best when it comes to mental health.

Can risk-adjusted payments help prevent this phenomena?

MCGUIRE: In practice risk adjustment has to be based on observable factors, and these have limited ability to forecast future use. People know better. Risk adjustment can help but isn't able to fully deal with risk selection problems.

Mental health care has been integrated into the medical system. Is this a good or bad thing?

MCGUIRE: This is a long outstanding issue in mental health policy. First it was the integration of mental health in hospital care; originally the creation of state hospitals was a separate system, and has become integrated into general hospital care. Mental health is now integrated into insurance. Mental health care has been partially integrated into Medicare with the way hospitals are paid. And health plans have integrated mental health as coverage in the sense that it has been unified with physical health as they are in the same benefits package. I don't think there is a simple answer as whether it is a good thing or bad thing. In the sense of coordination, integration is a big plus. In circumstances in which financial incentives create reasons to discriminate against the mentally ill, then separation can be a form of protection. In many integrated HMOs just because it's included doesn't mean that services are offered an equitable fashion. Services can be rationed very tightly in an integrated plan.

We have proposals for parity. Parity is seen as a fairness issue. What's wrong with the parity argument? What does research show or portend what would happen with parity?

MCGUIRE: I don't think there is anything wrong with it. In terms of the research, it's a settled issue. In the last five or more years, the question of whether there should be parity on the demand side benefits for mental health coverage has been answered at least to my satisfaction and the answer is yes. There has always been a fairness argument on parity. The insurance argument is that people with mental illness differ from people with physical illness. There was a fairness argument against mental health; that mental health is used by the rich, and paid for by everybody. Fairness is not a one-way street when it comes to parity. The efficiency argument against mental health coverage used to be the moral hazard argument. That argument loses it force with managed care and no long stands in the way. It's taken policy a while to catch up. But researchers in this area say we shouldn't have parity.

If there's parity, what does research show would result?

MCGUIRE: A very small demand increase. There would be cost shifting. Instead of paying 50%, plans would be paying 100%; it's going to cost health insurers 50% more. But that's not demand response, that's just health insurers doing what they are supposed to do, and that's covering health are costs.

So what's the best way for policymakers to address this issue?

MCGUIRE: The problem of adverse selection in mental health is not going to go away with parity. It becomes kind of an invisible and potentially more insidious problem. An insurance plan can ration in a way that's hard to see. It used to be that if a plan was discriminating you could see it; the plan would pay at 50 percent instead of 80 percent. Now you can't see it. It doesn't mean it is not there. The job of people like me is not to relent; rather continue to look out for adverse selection, the incentives and the lack of access to the quality of care discrimination leads to. As for policymakers, they have to be aware of and be prepared to deal with these kind of issues, as well as paying attention to risk adjustment and the way providers are paid. Capitation contracts may not be the way to go.

So what's a better way?

MCGUIRE: Parity on the demand side, that's a staring point. Other things need to be done. Quality monitoring is necessary. Risk adjustment can help. Regulation of provider payment to ensure incentives are not too strong to reduce costs is also worth considering

Carve-outs are part of managed care. What is the effectiveness of such efforts when it comes to mental health care?

MCGUIRE: Carve outs give a payer a chance to write a contract with a level of financing and incentives that have a good chance of achieving the payers goals. It's very hard to regulate managed care. Writing a well thought out contract is a good alternative.

Many economists suggest that a more limited benefits package that protects people from financial catastrophe is the way to go in efforts to expand coverage. Does that approach make sense for mental health?

MCGUIRE: There is some sense to that. There will always be a trade off between the extent of coverage and how many people you can cover, because of money. If you concentrated on 80% of the population and leave 20% with nothing, you can spread it out more. I think that is evident. The other thing that many people agree upon is that we're over insured. That's because we have a tax subsidy for employer contributions for health insurance that encourages people to buy insurance for things they don't need insurance for—first dollar coverage for hospital care, well baby care and eyeglasses and things like that. For mental health care, I don't think there is a difference; coverage should be there at the point in which expenses get high.

What's your bottom-line advice to policymakers?

MCGUIRE: Parity on the demand side has been a longstanding question where research tells us we should have parity. It's on the supply side where we should look to solve our problems for cost control and ensure adequate access for mental health services.

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Funded by The Robert Wood Johnson Foundation, ERIU is a five-year program shedding new light on the causes and consequences of lack of coverage, and the crucial role that health insurance plays in shaping the U.S. labor market.