Economic Grand Rounds: Economics and the Surgeon General's Report on Mental Health

During the press conference held to launch the report, Dr. Satcher declared that there is "no scientific justification for distinguishing between mental illness and other forms of illness. Mental illnesses are physical illnesses" (1). This statement in support of parity in insurance coverage is consistent with the report's broad denunciation of stigma against persons with mental disorders. Discrimination in insurance coverage is viewed as a major impediment to effective treatment. Under most health insurance plans, coverage for mental disorders is more restrictive than coverage for other medical conditions. Plans commonly require higher copayments and place more stringent limits on the number of inpatient hospital days and outpatient visits for mental health treatment. In addition, lower lifetime and annual expenditure limits have historically been widespread.

Over the past ten years, more than 30 states have passed legislation seeking to address such disparities in coverage, although the scope of these laws varies substantially. The Employee Retirement Income Security Act exempts self-insured companies from state-mandated benefits, so these parity laws apply only to a subset of residents in each state.

In 1996 Congress passed the Mental Health Parity Act, prohibiting the use of annual or lifetime dollar limits on coverage for mental illnesses. This law does not apply to other kinds of restrictions, such as limits on the number of hospital days or outpatient visits or higher copayments. Evidence suggests that this law did not broaden access to mental health services as Congress intended. In May 2000 the General Accounting Office released a report stating that consumers in states without more comprehensive state parity laws have experienced only minor changes in their mental health benefits as a result of the law (2). In December 2001 Congress voted down an effort to expand this law.

The lack of parity between coverage for mental and physical illnesses has been explained as being a product of both economics and stigma. The total cost of coverage depends on how individuals respond to lower prices due to insurance. A basic concern has been that the cost of providing insurance coverage for mental health care is proportionally greater than the cost for general medical care because the demand for mental health care is more sensitive to insurance coverage than that for medical care.

Empirical evidence supports the view that consumers are more sensitive to changes in the price of mental health services than other health services under indemnity insurance arrangements. The Rand Health Insurance Experiment showed that the increase in use of services by consumers in response to lower out-of-pocket costs was twice as great for outpatient mental health services as for outpatient services as a whole (3).

Although the findings of the Rand Health Insurance Experiment have been broadly accepted in health economics and policy circles—for example, the Congressional Budget Office—some mental health advocates and providers continue to challenge the idea that indemnity insurance is more costly for outpatient treatment of mental disorders than for other conditions (4). The Surgeon General's report takes a clear position in this debate, citing the results of the Rand Health Insurance Experiment as definitive evidence that demand response exists and must be reckoned with in fee-for-service insurance systems.

The report further states that economic analysis may justify differential cost sharing in some cases. It cautions, however, that such policies are fair only when applied specifically to services for which demand is highly responsive to price. Furthermore, the report suggests that the response of insurers "may have been exaggerated," noting that high cost sharing to reduce moral hazard and unnecessary or low-benefit care also appears to restrict appropriate care.

The Surgeon General's report also highlights a concern with the effect of adverse selection in insurance coverage for mental disorders. Mental health is an area in which selection incentives appear to have a particularly strong impact. Inefficiently low levels of coverage for behavioral health may result if health plans compete to enroll persons who are considered to be good risks and avoid caring for high-cost, persistently ill patients. Plans may set low limits on the number of inpatient days and outpatient visits to send a message to consumers with mental illnesses that they may be better off choosing another plan.

Attempts have been made to control adverse selection through regulations, such as parity legislation, that require all insurers in a market to offer similar coverage. Yet the Surgeon General's report issues a strong warning that "efforts to regulate adverse selection may not produce the intended effect…when insurers who offer the same services use management techniques to control costs by restricting care to those who use services most intensely." Below we consider how these insurance market efficiency concerns are transformed in a managed care environment.

Over the past decade, managed care has fundamentally altered the delivery of mental health care services. The Surgeon General's report began the process of addressing how this transformation changes the policy context with regard to demand response and adverse selection. The report's bottom-line message is that managed care has created both opportunities and challenges for providing appropriate mental health care.

Managed care transforms the way in which insurers control mental health costs by relying less on demand-side controls such as cost sharing and benefit limits and more on supply-side controls. Specifically, managed care creates incentives for providers to control costs through prepaid reimbursement, bonus and withhold mechanisms, and provider networks. It also uses administrative mechanisms such as utilization management and standardized treatment protocols.

The Surgeon General's report highlights the fact that management of mental health services has substantially reduced the cost of mental health care over the past decade. About 67 percent of Americans with health insurance were enrolled in a managed behavioral health care plan in 2000 (5). The report cites a number of studies that have shown remarkable cost savings associated with the adoption of managed care (6,7,8,9,10,11). In some cases, savings have been achieved even with expansions in benefit design.

The evidence reviewed in the previous section on demand response for mental health services under traditional insurance led to the concern that parity would be too costly. The Surgeon General's report indicates that under managed care, cost control does not need to rely primarily on benefit design. Indeed, the report suggests that managed care coupled with parity laws offers new opportunities to "focus on cost control…without unfairly restricting coverage through arbitrary limits or cost sharing."

Satcher's report concedes that there is currently little conclusive evidence on how managed care cost-reduction techniques affect access and quality. Some long-term case studies of access under managed care have shown that the probability of using mental health services increases after implementation of managed behavioral health care in private insurance arrangements (8). Yet Satcher's report warns that overly aggressive management under managed care may lead to undertreatment and may limit access. When mental health benefits expand as in the case of parity, managed care plans have the capacity to "tighten the level of supply-side controls to maintain costs at a desired level." The report concludes that, generally speaking, managed behavioral health care has yet to fulfill its potential for encouraging quality improvement.

The Surgeon General's report also suggests that the problem of health plans competing to enroll low-risk patients and avoid the sickest patients may be exacerbated under managed care. The report states that efforts to regulate adverse selection—through parity laws—"may not produce the intended effect," because the application of administrative mechanisms can be used to make health plans less attractive to the sickest individuals, even with a parity benefit. Because managed care techniques are numerous and are often difficult to monitor, they may create enhanced opportunity for selection of healthier enrollees. Thus mandating parity in nominal benefits may accomplish less as a remedy for adverse selection problems in a managed care environment.

Finally, the report alludes to the arbitrary nature of the distinction between biologically based brain disease and other mental disorders. A number of state mental health parity laws have been narrowly defined to include only a subset of mental disorders that are classified as biologically based. Yet, as we learned from the tragedy of September 11, the need for effective behavioral health treatment for posttraumatic stress disorder is no less legitimate or worthy than the need for treatment for other mental disorders.

Posttraumatic stress disorder is classified as an anxiety disorder that occurs in the aftermath of a shattering event and that causes extreme fear, shock, or helplessness. As such, it does not meet the criteria for a biologically based brain disorder, yet persons who suffer from posttraumatic stress disorder may benefit substantially from appropriate treatment. In his report, Satcher stresses that the causes of health and disease, including mental health and mental illness, are generally viewed as products of "the interplay or interaction between biological, psychological, and socio-cultural factors."

The report further states that "neuroscience does not intend to reduce all phenomena to neurotransmission or to reinterpret them in a new language of synapses, receptors, and circuits. Psychological and sociocultural events and phenomena continue to have meaning for mental health and mental illness." Thus it is as important to treat trauma victims or abused children within a mental health financing system as it is to treat persons with schizophrenia or bipolar disorder. By eschewing this distinction, the Surgeon General's report sends a strong message against seeking to combat discrimination and broaden insurance coverage within the narrow confines of a brain-centered definition of mental illness.

Mental Health: A Report of the Surgeon General definitively concludes that a host of powerful treatments are available for debilitating mental illnesses. The dissemination of this central finding constitutes an enduring legacy of David Satcher's term as Surgeon General. The report also weighs in on a number of significant economic issues, although this is a less publicized aspect of the report. Importantly, the report concludes that empirical research has yet to answer key questions about the effects of managed care on efficiency, access, and quality. It also warns that adverse selection may pose a substantial threat to vulnerable patients, including those with chronic mental illness, in the era of managed care.

With the release of the report, Dr. Satcher distinguished his term as Surgeon General by placing mental health and mental illness at the forefront of health policy concerns for the 21st century. Long after his departure from office, David Satcher should be remembered both for his contribution to public understanding of the nature of mental health and for his role in clarifying how key economic issues affect access, quality, fairness, and efficiency in the mental health policy field.

Ms. Barry received training grant support from the National Institute of Mental Health. The authors thank Howard H. Goldman, M.D., Ph.D., for his helpful comments on an earlier draft.

The authors are affiliated with the department of health care policy of Harvard Medical School, 180 Longwood Avenue, Boston, Massachusetts 02115 (e-mail, [email protected]). Steven S. Sharfstein, M.D., is editor of this column.