Toward Parity in Coverage of Mental Health Care

“Parity” refers to the effort to treat mental health financing on the same basis as financing for general health services. In recent years advocates have repeatedly tried to expand mental health coverage—in the face of cost-containment policies that have been widespread since the 1980s. Parity legislation is an effort to address at once both the adverse selection problem and the fairness problem associated with moral hazard. The fundamental motivation behind parity legislation is the desire to cover mental illness on the same basis as somatic illness, that is, to cover mental illness fairly. A parity mandate requires all insurers in a market to offer the same coverage, equivalent to the coverage for all other disorders. The potential ability of managed care to control costs (through utilization management of moral hazard) without limiting benefits makes a parity mandate more affordable than under a fee-for-service system.

Managed care coupled with parity laws offers opportunities for focused cost control by eliminating moral hazard without unfairly restricting coverage through arbitrary limits or cost-sharing and by controlling adverse selection. However, continued use of unnecessary limits or overly aggressive management may lead to undertreatment or to restricted access to services and plans.

Benefit Restrictions and Parity

As noted above, mental health benefits are often restricted through greater limits on their use or by imposing greater cost-sharing than for other health services. Despite both the cost-controlling impact of managed care and advocacy to expand benefits, inequitable limits continue to be applied to mental health services. Parity legislation in the states and Federal government has attempted to redress this inequity.

In 1997, the most common insurance restriction was an annual limit on inpatient days; annual or lifetime limits were used somewhat less. Higher cost-sharing was used by the smallest percentage, with the use of separate deductibles almost nonexistent on inpatient mental health benefits. For outpatient mental health services, a quarter of the most prevalent plans had no special limitations (Buck et al., 1999). Unlike the situation for inpatient services, there was no marked preference for the use of any particular type of limitation for outpatient services.

Mental health benefits are significantly restricted when special limitations are employed. Maximum lifetime limits for both inpatient and outpatient services were typically only $25,000. In some extreme cases, annual limits were only $5,000 for inpatient care and $2,000 for outpatient care. Day limits remained at the traditional limit of 30 inpatient days. However, the median limit on outpatient visits, traditionally 20, reached 25 in 1997 (Buck et al., 1999)

Studies show that the gap in insurance coverage between mental health and other health services has been getting wider. One study found that the proportion of employees with coverage for mental health care increased from 1991 to 1994 (Jensen et al., 1998). However, more have multiple limits on their benefits, partly due to the increased use of managed care. Another study found that while health care costs per employee grew from 1989 to 1995, behavioral health care costs decreased, both absolutely and as a share of employers’ total medical plan costs (Buck & Umland, 1997).

A report by the HayGroup (1998) on changes in the health plans of medium and large employers provides more recent evidence for these trends. Between 1988 and 1997, the proportion of such plans with day limits on inpatient psychiatric care increased from 38 percent to 57 percent, whereas the proportion of plans with outpatient visit limits rose from 26 percent to 48 percent. On the basis of this and other information, the HayGroup estimated that the value of behavioral health care benefits within the surveyed plans decreased from 6.1 percent to 3.1 percent from 1988 to 1997 as a proportion of the value of the total health benefit (HayGroup, 1998).

Extensive limits on mental health benefits can create major financial burdens for patients and their families. One economic study modeled the out-of-pocket burden that families face under existing mental health coverage using different mental health expense scenarios (Zuvekas et al., 1998). For a family with mental health treatment expenses of $35,000 a year, the average out-of-pocket burden is $12,000; for those with $60,000 in mental health expenses a year, the burden averages $27,000. This is in stark contrast to the out-of-pocket expense of only $1,500 and $1,800, respectively, that a family would pay for medical/surgical treatment.

Legislative Trends Affecting Parity in Mental Health Insurance Coverage

Federal legislative efforts to achieve parity in mental health insurance coverage date from the 1970s and have continued through to present times. However, a major parity initiative was included in the failed 1994 Health Security Act (the Clinton Administration’s health care reform proposal). Although national health care reform stalled, the drive for mental health parity continued, culminating in passage of the Mental Health Parity Act in 1996. Implemented in 1998, this legislation focused on only one aspect of the inequities in mental health insurance coverage: “catastrophic” benefits. It prohibited the use of lifetime and annual limits on coverage that were different for mental and somatic illnesses. As Federal legislation, it included within its mandate some of the Nation’s largest companies that are self-insured and otherwise exempted from state parity laws because of the Employment Retirement Income Security Act. Although it was seen as an important first substantive step and rhetorical victory for mental health advocacy, the Parity Act was limited in a number of important ways. Companies with fewer than 50 employees or which offered no mental health benefit were exempt from provisions of the law. The parity provisions did not apply to other forms of benefit limits, such as per episode limits on length of stay or visit limits, or copayments or deductibles, and they did not include substance abuse treatment. In addition, insurers who experienced more than a 1 percent rise in premium as a result of implementing parity could apply for an exemption. Despite these limitations, Federal parity legislation put mental health coverage concerns “on the map” for policymakers and demonstrated an unprecedented concern to redress inequities in coverage (Goldman, 1997).

State efforts at parity legislation paralleled those at the Federal level. During the past decade, a growing number of states have implemented parity (Hennessy & Stephens, 1997; National Advisory Mental Health Council, 1998; SAMHSA, 1999). Some (e.g., Texas) target their parity legislation narrowly to include only people with severe mental disorders; others use a broader definition of mental illness for parity coverage (e.g., Maryland) and include, in some cases, substance abuse. Some states (e.g., Maryland) focus on a broad range of insured populations; others focus only on a single population (e.g., Texas state employees) (National Alliance for the Mentally Ill, 1999).

Until recently, efforts to achieve parity in insurance coverage for the treatment of mental disorders were hampered by limited information on the effects of such mandates. This led to wide variations in estimates of the costs of implementing such laws. For example, past estimates of the increase in premium costs of full parity in proposed federal legislation have ranged from 3 percent to more than 10 percent (Sing et al., 1998).

Recent analyses of the experience with state and Federal parity laws have begun to provide a firmer basis for such estimates. These studies indicate that implementing parity laws is not as expensive as some have suggested.

Case studies of five states that had a parity law for at least a year revealed a small effect on premiums—at most a change of a few percent, plus or minus. Further, employers did not attempt to avoid the laws by becoming self-insured or by passing on costs to employees (Sing et al., 1998). Separate studies of laws in Texas, Maryland, and North Carolina have shown that costs actually declined after parity was introduced where legislation coincided with the introduction of managed care. In general, the number of users increased, with lower average expenditures per user. There is no evidence on the appropriateness of treatment delivered following the introduction of parity laws (National Advisory Mental Health Council, 1998). Similar findings come from case studies of private insurance plans that have provided generous mental health benefits (Goldman et al., 1998) and of plans that have switched to carve-out managed care (Ma & McGuire, 1998; Sturm et al., 1999).

Some evidence also exists of the effects of the Federal Mental Health Parity Act, which went into effect in 1998. Under that law, group health plans providing mental health benefits may not impose a lower lifetime or annual dollar limit on mental health benefits than exists for medical/surgical benefits. A national survey of employers conducted after the Act went into effect found that while mid- to large-size companies made some reductions in benefits and added cost-sharing, small companies (the majority of companies in the country) did not make compensatory changes to their benefits. This was because they judged that the projected costs were minimal or nonexistent (SAMHSA, 1999). Additional evidence that the law has resulted in minimal added expense comes from exemptions that may be granted if a plan experiences a cost increase of at least 1 percent because of the law. In the first year of the law’s implementation, only a few plans nationwide had requested such an exemption (SAMHSA, 1999).

In summary, evidence of the effects of parity laws shows that their costs are minimal. Introducing or increasing the level of managed care can significantly limit or even reduce the costs of implementing such laws. Within carve-out forms of managed care, research generally shows that parity results in less than a 1 percent increase in total health care costs. In plans that have not previously used managed care, introducing parity simultaneously with managed care can result in an actual reduction in such costs.