Costs of mandates for outpatient mental health care in private health insurance.

Various methods for estimating the cost of mandated mental health benefits have been devised, each resulting in substantially different estimates. These methods neglect to distinguish between the two components of cost to the insurer: social cost (due to increased utilization) and shifted cost (from other sources of payment). We apply a method we developed for estimating the two types of costs of mandates for outpatient mental health services that integrates data from insurers with information from the literature on financing of mental health services. We applied our method to legislation recently proposed in Massachusetts that would double the mandated minimum benefit level from +500 to +1,000. We expect payments by the largest carrier in the state to increase by a factor of 1.65. More than half of this increase represents shifted costs rather than new costs to society.

Some economics of mental health 'carve-outs'.

We discuss the rationale for benefit carve-out contracts in general and for mental health and substance abuse in particular. We focus on the control of adverse selection as a principal explanation and find that this is consistent with the wide-spread use of sole-source contracting with periodic rebidding. We also find that some degree of risk sharing is common; we interpret this as a method of balancing cost-containment incentives with incentives to maintain access and quality on unmeasured dimensions.

Differences in resource use and cost among facilities treating alcohol, drug abuse, and mental disorders: implications for design of a prospective payment system.

Specialized psychiatric facilities, including qualified distinct-part units in general hospitals, are exempt from Medicare's diagnosis-related group prospective payment system (PPS). One major reason for continuing the exemption is the redistribution of revenue that would probably occur if a single national price were established for care at the diverse facilities that treat patients with psychiatric and substance abuse disorders. This study investigated the extent of such potential redistribution in a private health insurance data base and found that a PPS would systematically underpay specialized facilities and systematically overpay general hospitals without specialized units. Alternatives for addressing this problem are discussed.

Estimating costs of mental health and substance abuse coverage.

The cost of expanding mental health and substance abuse treatment coverage is a major impediment to reforming insurance coverage for these types of conditions. The recent experience with national health care reform offers a case study in cost estimation for mental health and substance abuse coverage. The impact of managed care and the cost of expanding coverage to currently uninsured persons introduced uncertainty into predictions. This paper critically reviews that experience and draws lessons for estimating future costs of policy initiatives.

Costs and incentives in a behavioral health carve-out.

A carve-out of mental health and substance abuse services initiated in 1993 by the Group Insurance Commission (GIC) of the Commonwealth of Massachusetts resulted in changes in the costs of those services. Those changes were related to incentives in the contract between the GIC and its managed behavioral health vendor. Total and plan costs were reduced by 30-40 percent after adjusting for trends. Incentives to produce savings of this magnitude not only were a consequence of the payer/vendor contract but, we speculate, derive from the growth potential facing companies in the managed behavioral health care market.

The politics and economics of mental health 'parity' laws.

The enactment of the Domenici-Wellstone amendment in September 1996, which calls for the elimination of certain limits on coverage for mental health care under private insurance, is being hailed as a major step forward in the quest for "parity" in mental health coverage. Parity legislation is being introduced in a number of state legislatures and is finding new enthusiasm in Congress. In this paper we consider the efficiency rationale for these laws and examine their likely impact in the era of managed care. We conclude that although such successes represent important political events, they may offer only small gains in the efficiency and fairness of insurance markets.

Risk contracts in managed mental health care.

Private employers and state Medicaid programs are increasingly writing risk contracts with managed behavioral health care companies to manage mental health and substance abuse benefits. This paper analyzes the case for a carve-out program and makes recommendations about the form of the payer-managed behavioral health care contract. Payers should consider using a "soft" capitation contract in which only some of the claims' risk is transferred to the managed behavioral health care company. To avoid incentives to underserve seriously ill persons, we recommend that payers not allow choice by enrollees among risk contractors.

Mental health and substance abuse coverage under health reform.

President Clinton's health care reform proposal articulates a complete vision for the mental health and substance abuse care system that includes a place for those traditionally served by both the public and the private sectors. Mental health and substance abuse services are to be fully integrated into health alliances under the president's proposal. If this is to occur, we must come to grips with both the history and the insurance-related problems of financing mental health/substance abuse care: (1) the ability of health plans to manage the benefit so as to alter patterns of use; (2) a payment system for health plans that addresses biased selection; and (3) preservation of the existing public investment while accommodating in a fair manner differences in funding across the fifty states.

Paying for mental health and substance abuse care.

Fifty-four billion dollars was spent on alcohol/drug abuse and mental health treatment in 1990. These expenditures were concentrated in the area of inpatient psychiatric care and on persons with severe mental health and substance abuse problems. The data on expenditure patterns for mental health and substance abuse care suggest that successful health care reform in this area must implement mechanisms for controlling inpatient utilization and managing the care of persons with the most severe disorders.

The value of mental health care at the system level: the case of treating depression.

The value of mental health services is regularly questioned in health policy debates. Although all health services are being asked to demonstrate their value, there are special concerns about this set of services because spending on mental health care has grown markedly over the past twenty years. We propose a method for using administrative data to develop a comprehensive assessment of value for mental health care, which we call systems cost-effectiveness (SCE). We apply the method to acute-phase treatment of depression in a large insured population. Our results show that SCE of treatment for depression has improved during the 1990s.

Measuring the economic costs of schizophrenia.

This article reviews recent data on the cost of mental illness and schizophrenia in the United States, comparing figures for 1985 with data from 1955. The rate of increase in all categories of direct costs has exceeded growth in other health care expenditures. Several major issues in measuring the economic cost of schizophrenia and mental illness are important both from the perspective of costs involved and from the perspective of policy. Two of these are discussed: costs to families with a mentally ill family member and costs of publicly owned capital facilities. Correct accounting for these costs is important for making decisions about the relative cost-effectiveness of community-based and hospital-based treatment programs.

Insurance principles and the design of prospective payment systems.

This paper applies insurance principles to the issues of optimal outlier payments and designation of peer groups in Medicare's case-based prospective payment system for hospital care. Arrow's principle that full insurance after a deductible is optimal implies that, to minimize hospital risk, outlier payments should be based on hospital average loss per case rather than, as at present, based on individual case-level losses. The principle of experience rating implies defining more homogenous peer groups for the purpose of figuring average cost. The empirical significance of these results is examined using a sample of 470,568 discharges from 469 hospitals.

Physician response to fee changes with multiple payers.

This paper develops a general model of physician behavior with demand inducement encompassing the two benchmark cases of profit maximization and target-income behavior. It is shown that when income effects are absent, physicians maximize profits, and when income effects are very strong, physicians seek a target income. The model is used to derive own and cross-price expressions for the response of physicians to fee changes in the realistic context of more than one payer under the alternative behavior assumptions of profit maximization and target income behavior. The implications for public and private fee policy, and empirical research on physician response to fees, are discussed.

Statistical discrimination in health care.

This paper considers the role of statistical discrimination as a potential explanation for racial and ethnic disparities in health care. The underlying problem is that a physician may have a harder time understanding a symptom report from minority patients. If so, even if there are no objective differences between Whites and minorities, and even if the physician has no discriminatory motives, minority patients will benefit less from treatment, and may rationally demand less care. After comparing these and other predictions to the published literature, we conclude that statistical discrimination is a potential source of racial/ethnic disparities, and worthy of research.

Optimal payment systems for health services.

Demand-side cost sharing and the supply-side reimbursement system provide two separate instruments that can be used to influence the quantity of health services consumed. For risk-averse consumers, optimal payment systems--pairs of insurance and reimbursement plans--are characterized by conflict rather than consensus between patient and provider about the quantity of treatment. A model of conflict resolution based on bargaining theory is used to represent the outcome when the payment system creates divergences between desired demand and desired supply. Using that model, we describe the optimal combination of insurance and reimbursement systems that maximize consumer welfare.

Hospital response to prospective payment: moral hazard, selection, and practice-style effects.

In response to a change in reimbursement incentives, hospitals may change the intensity of services provided to a given set of patients, change the type (or severity) of patients they see, or change their market share. Each of these three responses, which we define as a moral hazard effect, a selection effect, and a practice-style effect, can influence average resource use in a population. We develop and implement a methodology for disentangling these effects using a panel data set of Medicaid psychiatric discharges in New Hampshire. We also find evidence for the form of quality competition hypothesized by Dranove (1987).

Payment levels and hospital response to prospective payment.

Nearly ten years after the implementation of Medicare's Prospective Payment System (PPS), some of its major impacts remain hard to explain using existing economic models. We develop a simple model of the hospital's choice of intensity of care, which affects demand for admissions. The model suggests an important role for the level of prospective payment, independent of the effect of marginal incentives. Predictions from the model are compared first with aggregate utilization data from Medicare's PPS experience, and then with various hospital-level studies which control for interhospital differences in reimbursement rates.

Workplace drug abuse policy.

An estimated 70 percent of illicit drug users are in the workforce. This paper studies workplace policies relating to drug abuse treatment and testing in a labor market with asymmetric information about worker proclivities to abuse drugs and to incur costs of workplace accidents. Drug abuse has a moral hazard component related to worker choice of treatment or other deterrent activities, and a selection component related to drug testing. We characterize the type and frequency of workers treated and tested in labor market equilibrium. Labor market incentives will generally lead to too little treatment and too much testing.

Should physicians be permitted to 'balance bill' patients?

This paper studies the efficiency effects of physician fees when the insurer (possibly the government) pays a fee for each procedure, and the doctor may supplement the fee by an extra charge to the patient, a practice known as 'balance billing.' Monopolistically competitive physicians can discriminate among patients on the basis of both price and quality. Equilibria with and without balance billing are compared. The paper analyzes and recommends a new fee policy, a form of payer 'fee discrimination.'

Provider behavior under prospective reimbursement. Cost sharing and supply.

This paper develops a model in which physicians choose the level of services to be provided to their patients. We show that if physicians undervalue benefits to patients relative to hospital profits, prospective payment, a system in which hospitals receive a payment dependent on the diagnosis-related group within which a patient falls, can lead to too few services being provided. In contrast, a 'cost-based' reimbursement system is shown to result in too many services being provided. Competition between hospitals for physicians will tend to augment both of these problems. We also examine a mixed reimbursement system, in which hospital reimbursements are paid partly prospectively and partly cost-based. This system is shown under a variety of circumstances to be superior to the other two reimbursement systems by improving the incentives for the efficient level of services, reducing incentives to unnecessarily admit or reclassify patients, and reducing risk to providers.