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401


CHAPTER 6

ORGANIZING AND FINANCING
MENTAL HEALTH SERVICES

Contents

Overview of the Current Service System  ............................................ 405
The Structure of the U.S. Mental Health Service System  ............................ 405

  The Public and Private Sectors   ................................................  407

  PatternsofUse  ............................................................. 408

    Adults.. ............................................................... 408

    Children and Adolescents .................................................. 409

The Costs of Mental Illness ............................    ........................ 411

  Indirect Costs  ....................................     ........................ 411

  Direct Costs .....................................    ........................ 412
Mental Health Spending  ...........................    ........................ 413
Spending by the Public and Private Sectors  ............    ........................ 413
Trends in Spending  ...............................    ........................ 41.5
Mental Health Compared With Total Health  ...........    ........................ 416

Financing and Managing Mental Health Care  ........................................ 4 18
History of Financing and the Roots of Inequality ................................... 418
Goals for Mental Health Insurance Coverage ......................................  418
Patterns of Insurance Coverage for Mental Health Care  .............................  418
Traditional Insurance and the Dynamics of Cost Containment  ........................ 419
ManagedCare  .............................................................. 420
   MajorTypesofManagedCarePlans ......................................... 421
   TheAscentofManagedCare ...............................................  422
Dynamics of Cost Controls in Managed Care  .....................................  423
Managed Care Effects on Mental Health Services Access and Quality ..................  423
Impact on Access to Services  ..................................................  424
Impact on Quality of Care .....................................................  424


Contents, continued

Toward Parity in Coverage of Mental Health Care  ..................................... 426
Benefit Restrictions and Parity  ................................................ : 426
Legislative Trends Affecting Parity in Mental Health Insurance Coverage  ............... 427

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 428

Appendix 6-A: Quality and Consumers' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430


CHAPTER 6

T his chapter examines what recent research has
revealed about the organization and financing of
mental health services as well as the cost and quality of
those services. The discussion places emphasis on the
tremendous growth of managed care and the attempts
to gain parity in insurance. Understanding these issues
can inform the decisions made by people with mental
health problems and disorders, as well as their family
members and advocates, and health care administrators
and policymakers. Earlier chapters reviewed data on
the occurrence of mental disorders in the population at
large and described the treatment system. In each stage
of the life cycle, issues related to mental health services
have been discussed, including, for example, the
breadth of mental health and human services involved
in caring for children with mental health problems and
disorders; deinstitutionalization and its role in shaping
contemporary mental health services for children and
adults; the problems associated with discontinuity of
care in a fragmented service system; and the impor
tance of primary care medical providers in meeting the
mental health needs of older persons. Special mental
health services concerns such as homelessness, crim-
inalization of persons with mental illness, and dis-
parities in access to and utilization of mental health
services due to racial, cultural, and ethnic identities as
well as other demographic characteristics have been
discussed throughout the report.

There are four main sections in this chapter. The
first section provides an overview of the current system
of mental health services. It describes where people get
care and how they use services. The next section
presents information on the costs of care and trends in
spending. The third section discusses the dynamics of

ORGANIZING AND FINANCING
MENTAL HEALTH SERVICES

insurance financing and managed care. It also addresses
both positive and adverse effects of managed care on
access and quality and describes efforts to guard
against untoward consequences of aggressive cost-
containment policies. The final section documents
some of the inequities between general medical and
mental health care and describes efforts to correct them
through legislation, regulation, and financing changes.

Overview of the Current Service
System

The Structure of the U.S. Mental Health
Service System
A broad array of services and treatments exists to help
people with mental illnesses-as well as those at
particular risk of developing them-to suffer less
emotional pain and disability and live healthier, longer,
and more productive lives. Mental disorders and mental
health problems are treated by a variety of caregivers
who work in diverse, relatively independent, and
loosely coordinated facilities and services-both public
and private-that researchers refer to, collectively, as
the de facto mental health service system (Regier et al.,
1978; Regier et al., 1993).

About 15 percent of all adults and 21 percent of
U.S. children and adolescents use services in the de
k_

fact6:ystemeach year. The system is usually described
as having four major components or sectors:
o The specialty mental health sector consists of
mental health professionals such as psychiatrists,
psychologists, psychiatric nurses, and psychiatric
social workers who are trained specifically to treat

405


Mental Health: A Report of the Surgeon General

   people with mental disorders. The great bulkof
   specialty treatment is now provided in
   outpatient settings such as private office-based
   practices or in private or public clinics. Most
   acute hospital care is now provided in special
   psychiatric units ,of general hospitals or beds
   scattered throughout general hospitals. Private
   psychiatric hospitals and residential treatment
   centers for children and adolescents provide
   additional intensive care in the private sector.
   Public sector facilities include state/county
   mental hospitals and multiservice mental
   health facilities, which often coordinate a wide
   range of outpatient, intensive case manage-
   ment, partial hospl"talization, and inpatient
   services. Altogether, slightly less than 6
   percent of the adult population and about 8
   percent of children and adolescents (ages 9 to
   17) use specialty mental health services in a
    year.
o  The general medical/primary care sector consists
of health care professionals such as general
internists, pediatricians, and nurse practitioners in
office-based practice, clinics, acute medicaY
surgical hospitals, and nursing homes, More than 6
percent of the adult U.S. population use the general
medical sector for mental health care, with an
average of about 4 visits per year-far lower than
the average of 14 visits per year found in the
specialty mental health sector.' The general medi-
cal sector has long been identified as the initial
point of contact for many adults with mental
disorders; for some, these providers may be their
only source of mental health services. However,
only about 3 percent of children and adolescents
contact general medical physicians for mental

' The National Comorbidity Survey, using a single interview
requiring a 12-month recall period, determined that 4 percent of
adults sought mental or addictive treatment services from primary
care physicians. With a more intensive examination of primary
health care use involving three interviews about service use during
a 1 -year period in the Epidemiologic Catchment Area study, more
than 6 percent of adults indicated that they specifically spoke with
their general medical physicians about their "emotions, nerves,
drugs or alcohol."

health services; the human services sector (see
below) plays a much larger role in their care.
o The human services sector consists of social
  services,  school-based counseling services,
residential rehabilitation services, vocational
rehabilitation, criminal justice/prison-based ser-
vices, and religious professional counselors. In the
early 198Os, about 3 percent of U.S. adults used
mental health services from this sector. But by the
early 199Os, the National Comorbidity Survey
(NCS) revealed that 5 percent of adults used such
services. For children, school mental health ser-
vices are a major source of care (used by 16
percent), as are services in the child welfare and
juvenile justice systems, which serve about 3 per-
  cent.

o The voluntary support network sector, which
consists of self-help groups, such as 12-step
programs and peer counselors, is a rapidly growing
component of the mental and addictive disorder
treatment system. The Epidemiologic Catchment
Area (ECA) study demonstrated that about 1 per-
cent of the adult population used self-help groups
in the early 1980s; the NCS showed a rise to about
3 percent in the early 1990s.
Table 6-l summarizes the percentage of U.S. adults
who use different sectors of the de facto mental health
treatment system. (There is overlap across these sectors
because some people use services in multiple sectors.)
Table 6-2 summarizes the percentage of U.S. children
and adolescents using various sectors of this system.

Table 6-l.  Proportion of adult population using mental/

     addictive disorder services in one year
                                           I
Total Health Sector                  ll%*

  Specialty Mental Health        6% /

  General Medical                   6%

Human Services Professionals             5%

Voluntary Support Network             3% I

Any of Above Services               15%

L

*Subtotals do not add to total due to overlap.
Source: Regier et al., 1993; Kessler et al., 1996

406


Table 6-2.  Proportion of child/adolescent populations
     (ages 9-l 7) using mental/addictive disorder
      services in one year

Total Health Sector                   9%'

  Specialty Mental Health              8%

   General Medical                   3%

Human Services Professionals            17%'

   School Services                  16%

   Other Human Services               3%

Any of Above Services                 21%

`Subtotals do not add to total due to overlap.
Source: Shaffer et al., 1996

The Public and Privite Sectors

The de facto mental health service system is divided
into public and private sectors. The term "public
sector" refers both to services directly operated by
government agencies (e.g., state and county mental
hospitals) and to services financed with government
resources (e.g., Medicaid, a Federal-state program for
financing health care services for people who are poor
and disabled, and Medicare, a Federal health insurance
program primarily for older Americans and people who
retire early due to disability). Publicly financed
services may be provided by private organizations. The
term "private sector" refers both to services directly
operated by private agencies and to services financed
with private resources (e.g., employer-provided
insurance). Funding for the de facto mental health
service system is discussed later in the report.

State and local government has been the major
payer for public mental health services historically and
remains so today. Since the mid-1960s however, the
role of the Federal government has increased. In
addition to Medicare and Medicaid, the Federal
government funds special programs for adults with
serious mental illness and children with serious
emotional disability. Although small in relation to state
and local funding, these Federal programs provide
additional resources. They include the Community
Mental Health Block Grant, Community Support

Organizing and Financing Mental Health Set-vices

programs, the PATH program for people with mental
illness who are homeless, the Knowledge Development
and Application Program, and the Comprehensive
Community Mental Health Services for Children and
Their Families Program.

The fact that 16 percent of the U.S. adult
population-largely the working poor-have no health
insurance at all is the focus of considerable policy
activity. Many others are inadequately insured. Ini-
tiatives designed to increase enrollment for selected
populations include the newly created Child Health
Insurance Program, which provides block grants to
                       r
states for coverage of children not eligible for
Medicaid.

These federally funded public sector programs
buttress the traditional responsibility of state and local
mental health systems and serve as the mental health
service "safety net" and "catastrophic insurer" for those
citizens with the most severe problems and the fewest
resources in the United States. The public sector serves
particularly those individuals with no health insurance,
those who have insurance but no mental health
coverage, and those who exhaust limited mental health
benefits in their health insurance.

Each sector of the de facto mental health service
system has different patterns and types of care and
different patterns of funding. Within the specialty
mental health sector, state- and county-funded mental
health services have long served as a safety net for
people unable to obtain or retain access to privately
funded mental health services. The general medical
sector receives a relatively greater proportion of
Federal Medicaid funds, while the voluntary support
network sector, staffed principally by people with
mental illness and their families, is largely funded by
private donations of time and money to emotionally
supportive and educational groups. The relative quality
of care in these various sectors is a matter of intense
interest and discussion, although there is little
definitive research to date.

Effective functioning of the mental health service
system requires connections and coordination among
many sectors (public-private, specialty-general health.
health-social welfare, housing, criminal justice, and

407


Mental Health: A Report of the Surgeon General

education). Without coordination, it can readily become
organizationally fragmented, creating barriers to access,
Adding to the system's complexity is its dependence on
many streams of funding, with their sometimes
competing incentives. For example, if as part of a
Medicaid program reform, financial incentives lead to
a reduction in admissions to psychiatric inpatient units
in general hospitals and patients are sent to state mental
hospitals instead, this cost containment policy con-
ceivably could conflict with a policy directive to reduce
the census of state mental hospitals.

The public and private parts of the de facto mental
health system treat distinct populations with some
overlap. As shown in Table 6-1, 11 percent of the U.S.
population use specialty or general medical mental
health services each year. Nearly 10 percent of the
population-almost all users-received some care in
private facilities, while 2 percent of the population
received care in public facilities. About 1 percent of the
population used inpatient care; of these, one-third
received care in the public sector, suggesting that those
requiring more intensive services rely more heavily on
the public safety net (Regier et al., 1993; Kessler et al.,
1994). Nonetheless, many people with severe and
persistent illness now receive at least some of their care
in the private sector. This makes it important to ensure
that the private sector can meet the full treatment needs
of this population.

Patterns of Use

Adults

Americans use the mental health service system in
complex ways, or patterns. A total of about 15 percent
of the U.S. adult population use mental health services
in any given year. These data come from two
epidemiologic surveys: the Epidemiologic Catchment
Area (ECA) study of the early 1980s and the National
Comorbidity Survey (NCS) of the early 1990s. Those
surveys defined mental illness according to the
prevailing editions of the Diagnosric and Statistical
Manual of Mental Disorders (i.e., DSM-III and DSM-
IILR) and defined mental health services in accordance
with the "de facto" system described above. Figure 6- 1

presents a hierarchy of sectors in the treatment system
(i.e., specialty mental health, general medical, and other
human services).' About 6 percent of the adult
population use specialty mental health care; 5 percent
of the population receive their mental health services
from general medical and/or human services providers,
and 3 to 4 percent of the population receive their
mental health services from other human service
professionals or self-help groups. (The overlap across
these latter two sectors accounts for these figures
totaling more than 15 percent) (Figure 6-l).

Also, slight19 more than half of the 15 percent of
the population that use mental health services have a
specific mental or addictive disorder (8 percent), while
the remaining portion has a mental health problem or a
disorder not included in the ECA or NCS (7 percent).
The surveys estimate that during a 1-year period, about
one in five American adults-or 44 million people-
have diagnosable mental disorders, according to
reliable, established criteri; To be more specific, 19
percent of thq'bdult U.S. population have a mental
disorder alone.&r 1 year); 3 percent have both mental
and addictive disorders; and 6 percent have addictive
disorders alone.`Consequently, about 28 percent of the
population have either a r&ental or addictive disorder
(Regier et al., 1993; Kessler et al., 1994).

Given that 28 percenz; of the population have a
diagnosable mental or substance abuse disorder and
only 8 percent of adults both have a diagnosable dis-
order and use mental health services, one can conclude
that less than one-third of adults with a diagnosable
mental disorder receives treatment in one year. In short,
a substantial majority of those with specific mental
disorders do not receive treatment. Figure 6-l depicts
the 28 percent of the U.S. adult population who meet
full criteria for a mental or addictive disorder, and
illustrates that 8 percent receive mental health services
while 20 percent do not receive such services in a given

year.

Among the service users with specific disorders,
between 30 and 40 per&& perceived some need for

2 For those who use more than one sector of the service system,
preferential assignment is to the most specialized level of mental
health treatment in the system.


care. However, most of those with disorders who did
not seek care believed their problems would go away
by themselves or that they could handle them on their
own (Kessler et al., 1997). In a recent 1998 Robert
Wood Johnson national household telephone survey, 11
percent of the population perceived a need for mental
or addictive services, with about 25 percent of these
reporting difficulties in obtaining needed care (Sturm
& Sherboume, 1999). Worry about costs was listed as
the highest reason for not receiving care, with 83
percent of the uninsured and 55 percent of the privately
insured listing this reason. The inability to obtain an
appointment soon enough because of an insufficient
supply of services was listed by 59 percent of those
with Medicaid but by far fewer of those with private
insurance.              .

Children and Adolescents

Comparable data on service use by children and
adolescents with diagnoses of mental disorder and at
least minimal impairment only recently have been
obtained from a National Institute of Mental Health
(NIMH) multisite survey of children and adolescents
ages 9 to 17 years (Shaffer et al., 1996). Results from
this survey are summarized in Table 6-2 and in
Figure 6-2.

Although 9 percent of the entire child/adolescent
sample received some mental health services in the
health sector (that is, the general medical sector and
specialty mental health sector), the largest provider of
mental health services to this population was the school
system. As shown in Figure 6-2, nearly 11 percent of
the child/adolescent sample received their mental
health services exclusively from the schools or the
human services sector (with no services from the health
sector); another 5 percent (not shown in Figure 6-2)
received school services in addition to health sector
services. Many children served by schools do not have
diagnosable mental health conditions covered in
available surveys-some may have other diagnoses
such as adjustment reactions or acute stress reactions.
In addition, I percent of children and adolescents
received their mental health services from human
service professionals, such as those in child welfare and

Organizing and Financing Mental Health Services

juvenile justice. The latter is a setting under increasing
scrutiny as the result of pending Federal legislation. At
present, child data are unavailable that would exactly
match the adult data on service use (analyzed by
diagnostic severity and by public versus private
sectors).

Almost 21 percent of children and adolescents
(ages 9 to 17) had some evidence of distress or
impairment associated with a specific diagnosis and
also had at least a minimal level of impairment on a
global assessment measure. Almost half of this group
(almost 10 percent of the child/adolescent population)
had some treatment in one or more sectors of the de
facto mental health service system, and the remainder
(more than 11 percent of the population) received no
treatment in any sector of the health care system. This
translates to a majority with mental disorders not
receiving any care. Of the 21 percent of the young
population receiving any mental health services,
slightly less than half (about 10 percent) met full
criteria for a mental disorder diagnosis; the remainder
(more than I1 percent of the population) received
diagnostic or treatment services for mental health
problems, conditions that do not fully meet diagnostic
criteria (Shaffer et al., 1996).

In summary, the mental health treatment system is
a dynamic array of services accessed by patients with
different levels of disorder and severity, as well as
different social and medical service needs and levels
and types of insurance financing. Disparities in access
due to sociocultural factors have been described in
earlier sections of this report. In a system in which
substantial numbers of those with even the most severe
mental illness do not receive any mental health care in
a year, the match between service use and service need
is clearly far from perfect. Neither the number nor the
proportion of people with mental health problems who
need or want treatment is yet established, and many
factors influence perceived need for treatment.
including severity of symptoms and functional
disability as well as cultural factors. But obviously not
everyone with a diagnosable mental disorder perceives
a need for treatment, and not all who desire treatment
have acurrently diagnosable disorder. Providing access

409


Mental Health: A Report of the Surgeon General

Figure 6-l. Annual prevalence of mental/addictive disorders and services for adults

Percent of Population (28%) With
MentaUAddictive Disorders
    (in one year)

Percent of Population (15%) Receiving
    Mental Health Services'
      (in one year)

  _______---_--_----------

     Percent of Population Receiving
       Specialty Care (6%)
      _____-_-----_-------

No Treatment

Percent of Population Receiving
General Medical Care (5%)

________-_----------

     Percent of Population Receiving
        Other Human Services and
        Voluntary Support (4%)
_______-_--_--_----------

* Due to roundin;, it appears that 9 percent of the population has a diagnosis and receives treatment. The actual
figure is closer to 8 percent, as stated in the text. It also appears that 6 percent of the population receives
services but has no diagnosis, due to rounding. The actual total is 7 percent, as stated in the text.

** For those who use more than one sector of the service system, preferential assignment is to the most
specialized level of mental health treatment in the system.

Sources: Regier et al., 1993; Kessler et al., 1996

Figure 6-2. Annual prevalence of mentavaddictive disorders and services for children

Percent of Population (21%) With
MentaUAddlctive Disorders
    (in one year)

Percent of Populatlon (21%) Recelvfng
    Mental Health Servlces
      (in one year)

Diagnosis and
No Treatment
  (11%)

Percent of Population Receiving
  Specialty Care (6%)

-----_--_--_----.
Percent of Population Receiving
General Medical Care (1%)
-------_--------

Percent of Population
Receiving School
Services (11%)

    ------- -_,-__- :---
   Percent of Populatton Receiving
     Other Human Services and
     Voluntary Support (1%)
__-_--_--_--_--------

** For those who use more than one sector of the service system, preferential assignment IS to the mOSt
specialized level of mental health treatment in the system.

Source: Shaffer et al., 1996

410


to appropriate mental health services is a fundamental
concern for mental health policymakers in both the
public and private arenas.

The Costs of Mental Illness

As many of the preceding chapters have indicated,
mental disorders impose an enormous emotional and
financial burden on ill individuals and their families.
They are also costly for our Nation in reduced or lost
productivity (indirect costs) and in medical resources
used for care, treatment, and rehabilitation (direct
costs).

Indirect Costs

The indirect costs of all mental illness imposed a nearly
$79 billion loss on the U.S. economy in 1990 (the most
recent year for which estimates are available) (Rice &
Miller, 1996). Most of that amount ($63 billion)
reflects morbidity costs-the loss of productivity in
usual activities because of illness. But indirect costs
also include almost $12 billion in mortality costs (lost
productivity due to premature death), and almost $4
billion in productivity losses for incarcerated indi-
viduals and for the time of individuals providing family

Organizing and Financing Mental Health Services

care. For schizophrenia alone, the total indirect cost
was almost $15 billion in 1990. These indirect cost
estimates are conservative because they do not capture
some measure of the pain, suffering, disruption, and
reduced productivity that are not reflected in earnings.

The fact that morbidity costs comprise about 80
percent of the indirect costs of all mental illness
indicates an important characteristic of mental dis-
orders: Mortality is relatively low, onset is often at a
younger age, and most of the indirect costs are derived
from lost or reduced productivity at the workplace,
school, and home (Rupp et al.; 1998).

The Global Burden of Disease, a recent publication
of the World Bank and the World Health Organization,
reported on a study of the indirect costs of mental
disorders associated with years lived with a disability,
with and without years of life lost due to premature
death. Disability Adjusted Life Years (DALYs) are
now being used as a common metric for describing the
burden of disability and premature death resulting from
the full range of mental and physical disorders
throughout the world (Figure 6-3). A striking finding
from the study has been that mental disorders account
for more than 15 percent of the burden of disease in

Figure 6-3. Global burden of disease*--DALYs'* worldwide-1990

Disorders

I

Conditions

o Global Burden of Disease (Murray & Lopez, 1996)
o * DALYs - Disability Adjusted Life Years

411


Mental Health: A Report of the Surgeon General

established market economies;  unipolar major
depression, bipolar disorder, schizophrenia, and
obsessive-compulsive disorder are identified as among
the top 10 leading causes of disability worldwide
(Murray & Lopez. 1996).

Direct Costs

Mental health expenditures for treatment and rehabil-
itation are an important part of overall health care
spending but differ in important ways from other types
of health care spending. Many mental health services
are provided by separate specialty providers-such as
psychiatrists, psychologists, social workers, and nurses
in office practice-or by facilities such as hospitals,
                         .
multiservice mental health organizations, or residential

mental health services is typically less generous than
that for general health, and government plays a larger
role in financing mental health services compared to
overall health care.

In 1996, the United States spent more than $99
billion for the direct treatment of mental disorders, as
well as substance abuse, and Alzheimer's disease and
other dementias (Figure 6-4).

More than two-thirds of this amount ($69 billion or
more than 7 percent of total health spending) was for
mental health services. Spending fo? direct treatment of
substance abuse was almost $13 billion (more than 1
percent of total health spending), and that for
Alzheimer's disease and other dementias was almost
$18 billion (almost 2 percent of total health spending)

treatment centers for children. Insurance coverage of   (Figure 6-4).3

Figure 6-4. 1996 National health accounts, $943 billion total-$99 billion* mental, addictive,
       and dementia disorders

Other Physical Disorde
90% = $8430

Mental Disorders

Alzheimer's/Dementias

Addictive Disorders

* Figures add to more than $99 billion due to rounding.
Source: Mark et al., 1998, and additional analyses performed by Mark et al. for this report.

3 Figure 6-4 comes from the spending estimates project conducted by the Center for Mental Health Services and the Center for Substance
Abuse Treatment. Substance Abuse and Mental Health Services Administration. It is limited to spending for formal treatment of disorders
and excludes spending for most services not ordinarily classified as health care. Some of these data come directly from the most recent
report published by this project (Mark et al., 1998), while others are based on unpublished data. Further, minor modifications in estimation
methodology have been made since the Mark et al, (1998) report to meet the special requirements of the Surgeon General's report. The
estimates presented here differ from those published previously by Rice and her colleagues (Rice et al., 1990) in several important respects.
First. they are limited to a definition of mental illness that more closely reflects what most payers regard as mental disorders. Diagnostic
codes such as mental retardation and non-mental health comorbid conditions, which were included in the Rice study, have not been used.
Second. they are based on data sources that were not available at the time of the Rice study. Finally, they result from a different approach
to estimation. which emphasizes linkage to the National Health Accounts published by the Health Care Financing Administration.

Although Alzheimer's disease and other dementias are not discussed further in this chapter, the reader should note that the definition of
serious mental illness promulgated by the Center for Mental Health Services includes these disorders. Further. care of these patients is a
major role of the public mental health system.

It12


Despite the historical precedent for linking all these
disorder groups together for diagnostic and cost
accounting purposes, they are handled differently by
payers and providers. A majority of private health
insurance plans have a benefit that combines coverage
of mental illness and substance abuse. However. most
of the treatment services for mental illness and for
substance abuse are separate (and use different types of
providers), as are virtually all of the public funds for
these services. This separation causes problems for
treating the substantial proportion of individuals with
comorbid mental illness and substance abuse disorders,
who benefit from treating both disorders together
(Drake et al., 1998).

  Alzheimer's disease and other dementias historical-
ly have been considered as both mental and somatic
disorders. However, recent efforts to destigmatize
dementias and improve care have removed some
insurance coverage limitations. Once mostly the
province of the public sector, Alzheimer's disease now
enjoys more comprehensive coverage, and care is better
integrated into the private health care system. Inequities
in coverage are diminishing (U.S. Department of
Health and Human Services Task Force on Alzheimer's

Disease, 1984; Goldman et al., 1985).

As indicated, coverage differs for treatment of
substance abuse and Alzheimer's disease. With respect
to financing policy, both conditions are outside the
scope of this report (although some services aspects of
Alzheimer's disease are discussed in Chapter 5); thus,

Organizing and Financing Mental Health Services

they will not be included in the spending estimates that
follow.

Mental Health Spending

Of the $69 billion spent in 1996 for diagnosis and
treatment of mental illness (see Figure 6-5), more than
70 percent was for the services of specialty providers.
with most of the remainder for general medical services
providers." The distribution for all types of providers is
shown in the figure.

I

Spending by the Public and Private Sectors

Funding for the mental health service system comes
from both public and private sources [Table 6-3 and
Figure 6-6 (percent distribution) and Table 6-4 (dollar
distribution and per capita mental health costs)]. In
1996, approximately 53 percent ($37 billion) of the
funding for mental health treatment came from public
payers. Of the 47 percent ($32 billion) of expenditures
from private sources, more than half ($18 billion) were
from private insurance. Most of the remainder was out-
of-pocket payments. These out-of-pocket payments
include copayments from individuals with private in-
surance, copayments and prescription costs not covered
by Medicare or Medigap (i.e., supplementary)
insurance, and payment for direct treatment from the
uninsured or insured who choose not to use their insur-
ance coverage for mental health care.

' In estimating mental health expenditures, spending can be categorized by provider type, which includes both general medical service
providers and specialty mental health providers. Since spending for mental health services in the human services sector is not covered by
health insurance or included in the national health accounts, neither total costs nor total spending estimates for mental health services are
covered under these direct cost figures, Indirect costs generally include estimates of lost productivity as well as disability insurance and the
costs of treating those with mental illness in the criminal justice system. Hence, it is not possible to provide completely parallel analyses of
the prevalence of mental disorders in the population, the prevalence of treatment in different service sectors, and expenditures in the
treatment system. However, the estimate given here is the best approximation of that intent.
For purpose of these analyses, general medical service providers include community hospitals, nursing homes, non-psychiatrist physicians.
and home health agencies. An intermediate funding category is that of prescription medications, which are prescribed in both general
medical and specialty mental health settings, Other than prescription medications, 18 percent of total mental health funds are allocated in
this analysis to the general medical sector. which provides some mental health services to slightly more than half of all persons (about 6
Percent of the population) using any services in the health system during 1 year.
Specialty providers include psychiatric hospitals. psvchiatrists. office-practice psychologists and counselors (including social workers and
psychiatric nurses), residential treatment centers for-children. and multiservice mental health organizations. These mental health specialists
provided some mental health services to nearly 6 percent of the population-also about half of all people requesting such services from
health and mental health services in the health system.

413


Mental Health: A Report of the Surgeon General
Figure 6-5. 1996 National health accounts, $69 billion total mental health
    expenditures by provider type

Multi-Sv
18%

Psychiatrists  GM Physicians

        T;y/chiatry Hospitals
                      OO
Source: Mark et al., 1998 (Revised)

Figure 6-6. Mental health expenditures by payer-1996 (total = $69 billion)

ULI ler maera
2%  As

Medicaid (PUN Private: 473

Private Insurance
27%

Medic>
14%

Other Private
3%

I   Source: Mark et al., 1998 (Revised)

414


Table 6-3.  Distribution of 1996 U.S. population and
     mental disorder direct costs by insurance
        status
Insurance Status    Population   Direct Costs

Private             63%'        47%

Public                   *a)*        53%

   Medicare         13%"        14%

   Medicaid    12%"        19%

Uninsured

  State/Local

  Other
  Federal

tt.            -

16%         18%

*t*         2%

Total

100%        100%

* About 70 percent of the population has some private
insurance-reflecting the fact that 7 percent of the
population has both Medicare and Medigap or other
dual private insurance coverage. Although 61 percent of
the population has employment-based private
insurance, this percentage also includes some military
insurance coverage.

o * Since 2 percent of the population has both Medicare
and Medicaid insurance coverage, adding this
duplicated count to each insurance category results in
the first column adding to a duplicated total of 104
percent.

*** Although some state/local/and other Federal
government support goes to those who are.
underinsured in the private and public insured groups,
these funds are primarily allocated to the uninsured
population.

Source: Mark et al., 1998 (Revised)

J

Trends in Spending

Between 1986 and 1996, mental health expenditures
grew at an average annual growth rate of more than 7
percent (Table 6-5). Because of changes in population,
reimbursement policies, and legislative and regulatory
requirements during this decade, the share of mental
health funding from public sources grew from 49
percent to 53 percent. Overall, the rate of growth in the
public sector was slightly more than 8 percent per year
(Medicare and Medicaid, both about 9 percent;
state/local government, nearly 8 percent).

Organizing and Financing Mental Health Services

Table 6-4.  Population, spending, and per capita mental
    he&h costs by insurancestatus (1996)

isurance Status

`rivate

  Insurance
Payment

  Out-of-Pocket
Payment

  Other Private

Medicare

Medicaid

Xher and
Jninsured

  SPMI*

  Other

`otal

Number Spending
(millions) ($ billions)

167.5      32.3

         18.4

11.7

2.2

30.6      9.8

27.0      13.0

41.7     13.9

5.1      12.4

36.6      1.5

266.8     69.0

Severe and persistent mental illness

`er Capita
6 per year)

193

    I

320
    !

481     1
    I

333  1

2,431

41

259  j
      /

      I

source: Mark et al., 1998, and calculations by D. Regier,
   personal communication, 1999

In the private sector, out-of-pocket costs increased
only 3 percent, which, together with the private
insurance increases of almost 9 percent, resulted in a
net private cost increase of little more than 6 percent-
significantly lower than the increase found in the public
sector.

415


Mental Health: A Report of the Surgeon General

Table 6-5.  Mental health expenditures in relation to
      national health expenditures, by source of
      payer, annual growth rate (1986-1996)

Average Annual
   Growth Rate
  (1986-l 996)
Mental   All Health
Health Care   Care

srivate

Out-of-Pocket Payment        3%      5%

Private Insurance            9%      9%

Other Private               7%      7%

rotal Private                6%      7%

Public

Medicare

Medicaid

Other Federal Government

State/Local Government

Total Public

-

9%      10%

9%      13%

4%      6%

8%      10%

8%      10%

Total Expenditures            7%      8%

Source: Mark et al., 1998 (Revised)

Among the fastest-rising expenses for mental
health services were outpatient prescription drugs,
which account for about 9 percent of total mental
health direct costs (Figure 6-5). Although these
medications are prescribed in both specialty and
general medical sectors, they are increasingly being
covered under general medical rather than mental
health private insurance benefits.

The higher than average growth rate (almost 10
percent) of spending for prescription drugs reflects, in
part, the increasing availability and application of
medications of demonstrable efficacy in treating mental
disorders. Estimates from the National Ambulatory
Medical Care Survey show that the number of visits
during which such medication was prescribed increased
from almost 33 million in 1985 to almost 46 million in
1994. Only one-third of psychotropic medications are
now prescribed by psychiatrists, with two-thirds
prescribed by primary care physicians and other
medical specialists (Pincus et al., 1998). Although
Medicaid covers 21 percent of drug costs (and

state/local/other Federal government covers 4 percent),
Medicare does not cover prescription drugs. Although
many older adults have supplemental insurance that
does cover prescription drugs, the failure to cover any
prescription drugs under Medicare is a barrier to
effective treatment among the elderly who cannot
afford supplemental insurance.

Mental Health Compared With Total Health
Mental health spending figures acquire more meaning
when they are compared with thqse for all health care.
Annually, the Health Care Financing Administration
produces estimates of this spending. These estimates
include nearly all of the expenditures presented for
mental health services. However, some specialty pro-
viders who work in social service industries are ex-
cluded from the national health care spending
estimates. Accordingly, mental health estimates require
adjustment to allow direct comparison with these
national figures, reducing the total from $69 billion
cited earlier to $66 billion (Table 6-6).

Table 6-6.  Mental health expenditures in relation to
      national health expenditures, by source of
ili
~                  Care  Care Percentage /
"ci, Out-of-Pocket     $11   $171       6%
Private Insurance      $17  $292      6%
Other Private         $2   $32      5%
/Total Private          $30   $495      6%
~ Public
Medicare          $10   $198       5%

Medicaid           $13   $140      9%
Other Federal Government   $1   $41      3%
State/Local Government   $12   $69      18%
iTotal Public          $36   $447    8% /
I
iTotal Expenditures      $66 $943      7%
/Source: Mark et al., 1998 (Revised)

316


Organizing and Financing Mental Health Services

Estimated total health care expenditures were $943
billion in 1996. Of this amount, 7 percent was for
mental health services. Table 6-6 describes expen-
ditures on mental health services as a percentage of
national health spending by source of payment. The
significance of mental health spending for various
payers varies from a low of only 3 percent of "other"
Federal government spending to a high of 18 percent of
health care expenditures by state and local govem-
ments.

Between 1986 and 1996, spending for mental
health treatment grew more slowly than health care
spending in general, increasing by more than 7 percent
annually, compared with health care's overall rate of
more than 8 percent (see Table 6-5). This difference
may stem from the greater reliance of mental health
services on managed care cost-containment methods
during this period. Increased efficiency could account
for a slower rate of growth in mental health care
expenditures. Slowing of the growth rate in the public
sector may also be due to other Federal and state
government policies, such as limitations in states'
ability to use certain Medicaid funds to support state
mental hospitals and states' greater emphasis on
community-based outpatient care as opposed to
inpatient care. Finally, it may also reflect the greater
contribution of institutional care, particularly in nursing
homes, to total health care figures. Changes in these
components affect overall growth rates more in general
health care than in mental health care.

For most provider categories, the rise in mental
health spending was not much different than spending
growth rates for personal health care, with the
exception of home health (higher) and nursing home
(lower) expenditures. For various types of payers,
spending growth in mental health care has been about
the same or less than that in general health care. Mental
health spending in Medicare, Medicaid, and other
Federal programs has grown more slowly than overall
program spending. For private sources, the growth rate
of mental health out-of-pocket expenditures has been
below that of total out-of-pocket spending (see
Table 6-5).

During the past two decades there have been
important shifts in what parties have final responsibility
for paying for mental health care. The role of direct
state funding of mental health care has been reduced.
whereas Medicaid funding of mental health care has
grown in relative importance. This is in part due to
substantial funding offered to the states by the Federal
government. One consequence of this shift is that
Medicaid program design has become very influential
in shaping the delivery of mental health care. State
mental health authorities, however, continue to be an
important force in making public mental health services
policy, working together with state Medicaid programs.
Considerable administrative responsibility for mental
health services has devolved to local mental health
authorities in recent years (Shore & Cohen, 1994).

Private insurance coverage has played a somewhat
more limited role in mental health financing in the past
decade. Various cost containment efforts have been
pursued aggressively in the private sector through the
introduction of managed care. There is also some
emerging evidence on the imposition of new benefit
limits on coverage for mental health services
(HayGroup, 1998). At the same time private insurance
coverage  for prescription  drugs has expanded
dramatically over the past 15 years. In this area,
insurance coverage for mental health treatments is on
par with coverage for other illnesses. Accompanying
this pattern of private insurance coverage are the
availability of innovative new prescription drugs aimed
at treating major mental illnesses and a shift in mental
health spending in private insurance toward
pharmaceutical agents.

In summary, spending for mental health care has
declined as a percentage of overall health spending
over the past decade. Further, public payers have
increased their share of total mental health spending.
Some of the decline in resources for mental health
relative to total health care may be due to reductions in
inappropriate and wasteful hospitalizations and other
improvements in efficiency. However. it also may
reflect increasing reliance on other (non-mental health)
public human services and increased barriers to service

access.

417


Mental Health: A Report of the Surgeon General

Financing and Managing Mental
Health Care

History of Financing and the Roots of
Inequality
Private health insurance is generally more restrictive in
coverage of mental illness than in coverage for somatic
illness. This was motivated by several concerns.
Insurers feared that coverage of mental health services
would result in high costs associated with long-term
and intensive psychotherapy and extended hospital
stays. They also were reluctant to pay for long-term,
often custodial, hospital stays that were guaranteed by
the public mental health system, the provider of
"catastrophic care." These factors encouraged private
insurers to limit coverage for mental health services
(Frank et al., 1996).

Some private insurers refused to cover mental
illness treatment; others simply limited payment to
acute care services. Those who did offer coverage
chose to impose various financial restrictions, such as
separate and lower annual and lifetime limits on care
(per person and per episode of care), as well as separate
(and higher) deductibles and copayments. As a result,
individuals paid out-of-pocket for a higher proportion
of mental health services than general health services
and faced catastrophic financial losses (and/or transfer
to the public sector) when the costs of their care
exceeded the limits.

Federal public financing mechanisms, such as
Medicare and Medicaid, also imposed limitations on
coverage, particularly for long-term care, of "nervous
and mental disease" to avoid a complete shift in
financial responsibility from state and local
governments to the Federal government. Existence of
the public sector as a guarantor of "catastrophic care"
for the uninsured and underinsured allowed the private
sector to avoid financial risk and focus on acute care of
less impaired individuals, most of whom received
health insurance benefits through their employer
(Goldman et al., 1994).

Goals for Mental Health Insurance Coverage
The purpose of health insurance is to protect
individuals from catastrophic financial loss. While the
majority of individuals who use mental health services
incur comparatively small expenses, some who have
severe illness face financial ruin without the protection
afforded by insurance. For people with health
insurance. the range of covered benefits and the limits
imposed on them ultimately determine where they will
get service, which, in turn, affects their ability to access
necessary and effective treatment'services. Adequate
mental health treatment resources for large population
groups require a wide range of services in a variety of
settings, with sufficient flexibility to permit movement
to the appropriate level of care. A 1996 review of the
evidence for the efficacy of well-documented
treatments (Frank et al., 1996) suggested that covered
services should include the following:

.  Hospital and other 24-hour services (e.g., crisis
  residential services);

.  Intensive community services (e.g., partial
hospitalization);

.  Ambulatory or outpatient services (e.g., focused
forms of psychotherapy);

o Medical  management (e.g., monitoring
psychotropic medications);

o Case management:

o  Intensive psychosocial rehabilitation services; and

o  Other intensive outreach approaches to the care of
  individuals with severe disorders.
Since resources to provide such services are finite,

insurance plans are responsible for allocating resources
to support treatment. Each type of insurance plan has a
different model for matching treatment need with
insurance support for receiving services.

Patterns of Insurance Coverage for Mental
Health Care
Health insurance, whether funded through private or
public sources, is one of the most important factors
influencing access to health and mental health services.
In 1996, approximately 63 percent of the U.S.
population had private insurance, 13 percent had
Medicare as a primary insurer (with about 7 percent

418


also having supplemental private insurance), 12 percent
had Medicaid (2 percent had dual Medicaid/Medicare),
and 16 percent were uninsured (Bureau of the Census,
1996) (Table 6-3.)

Most Americans (84 percent) have some sort of
insurance coverage-primarily private insurance
obtained through the workplace. However, its adequacy
for mental health care is extremely variable across
types of plans and sponsors. Of the more than $32
billion spent for mental health services for people with
private insurance, more than $18 billion came from that
insurance, almost $12 billion came from client out-of-
pocket payments, and more than $2 billion came from
other private sources. For these more than 167 million
people, the per capita expenditure was $193 per person
per year (Table 6-4).   .
Slightly more than 13 percent of the U.S.

population are entitled to Medicare, which includes
mental health coverage. The nearly $10 billion spent
for mental health coverage under Medicare for nearly
31 million people reflects an average per capita
expenditure of $320 per year.

Nearly 12 percent of U.S. adults (27 million low-
income individuals on public support) receive Medicaid
coverage (with more than 2 percent having dual
Medicare/Medicaid coverage). With' per capita
expenditures of $48 1 a year for mental health services,
the average cost of this coverage is 2.5 times higher
than that in the private sector. An explanation for this
higher average cost is the severity of illness of this
population and greater intensity of services needed to
meet their needs.

Finally, more than $12 billion (other than Medicaid
funds) from state/local government and more than $1
billion from other Federal government block grant and
Veterans Affairs funds contribute a total of almost $14
billion to cover mental health services for the unin-
sured. Most (75 percent) of the uninsured are members
of employed families who cannot afford to purchase
insurance coverage. Individuals with severe and
persistent mental illness who are uninsured have the
highest annual costs, leaving few resources for
treatment for those with less severe disorders (see
Table 6-4). By applying the technique of Frank and

Organizing and Financing Mental Health Services

colleagues (1994) to 1996 funding patterns. it is
estimated that public sector costs for seriously mentally
ill patients receiving care in the public sector (about j. 1
million people or 1.9 percent of the population) are
about $2,430 per year. As a result, although it is only a
rough estimate, only about $40 per year per capita is
available for those uninsured with less severe mental
illness.

State mental health policymakers have begun to
blend funding streams from Medicaid and the state
public mental health expenditures under Medicaid
"waivers," which offer the potential of purchasing
                      .
private insurance for certain public beneficiaries who
have not been eligible for Medicaid. This new option
has recently been raised as a means of concentrating
public mental health services on forensic and other
long-term intensive care programs not covered by
private insurance (Hogan, 1998). Given the extremely
low level of funding for the uninsured with less severe
mental illness, the recently implemented Federal
legislation to fund a State Child Health Insurance
Program (CHIP) could result in considerably increased
coverage for previously uninsured children. It is
noteworthy that CHIP benefits vary from state-to-state
particularly for mental health coverage.

Traditional Insurance and the Dynamics of
Cost Containment
From the time they were introduced in 1929 until the
199Os, fee-for-service (indemnity) plans, such as Blue
Cross/Blue Shield, were the most common form of
health insurance. Insurance plans would identify the
range of services they considered effective for the
treatment of all health conditions and then reimburse
physicians, hospitals, and other health care providers
for the usual and customary fees charged by
independent practitioners. To prevent the overuse Of
services, insurance companies would often require
patients to pay for some portion of the costs out-of-
pocket (i.e., co-insurance) and would use annual
deductibles, much as auto insurance companies do. to
minimize the administrative costs of processing small
claims.

419


Mental Health: A Report of the Surgeon General

For most health insurance plans covering somatic
illness, to protect the insured. costs above a certain
"catastrophic limit" would be borne entirely by the
insurance company. To protect the insurer against
potentially unlimited claims. however. "annual" or
"lifetime limits"-often as high as $1 million-would
be imposed for most medical or surgical conditions. It
was expected that any expenses beyond that limit
would become the responsibility of the patient's family.
In contrast, in the case of coverage for mental
health services, insurance companies often set lower
annual or lifetime limits, for reasons discussed in the
following paragraphs, to protect themselves against
costly claims, leaving patients and their families
exposed to much greater personal financial risks. The
legacy of the public mental health system safety net as
the provider of catastrophic coverage encouraged such
practices. Further, when federal financing mechanisms
such as Medicare and Medicaid were introduced, they
also limited coverage of long-term care of "nervous and
mental disease" to avoid shifting financial respon-
sibility from state and local government to the Federal
government.

Economists have observed that for potential
insurers of mental health care or general health care,
two financial concerns are key: moral hazard and ad-
verse selection. The terms are technical. but the
concepts are basic. Moral hazard reflects a concern that
if people with insurance no longer have to pay the full
costs of their own care, they will use more services-
services that they do not value at their full cost. To
control moral hazard. insurers incorporate cost-sharing
and care management into their policies. Adverse
selection reflects a concern that. in a market with
voluntary insurance or multiple insurers, plans that
provide the most generous coverage will attract
individuals with the greatest need for care, leading to
elevated service use and costs for those insurers
independent of their efficiency in services provision.
To control adverse selection, insurers try to restrict
mental health coverage to avoid enrolling people with
higher mental health service needs.

  Both forces are at work in the insurance market.
and they tend to be stronger for coverage of some

mental health services than for some general health
services. There is evidence of moral hazard, for
example, from the RAND Health Insurance Experi-
ment. which showed that increased use of insured
services in response to decreased out-of-pocket costs
for consumers (known as "demand response") is twice
as great for outpatient mental health services (mostly
psychotherapy) as for all ambulatory health services
taken together (Manning et al., 1989). The RAND
study did not include a sufficient number of individuals
who used inpatient care or who were severely disabled
to make a determination of the effect of changes in
price on hospital care or on outpatient use by
individuals with severe mental disorders.

While these economic forces are important, insurer
responses to them may have been exaggerated. In the
fee-for-service insurance system, for example, some
insurers have addressed their concerns about moral
hazard by assigning higher cost-sharing to mental
health services. Coverage limitations, imposed to
control costs, have been applied unevenly, however,
and without full consideration of their consequences. In
particular, higher cost-sharing, such as placing a 50
percent copayment on outpatient psychotherapy, may
reduce moral hazard and inappropriate use, but it may
also reduce appropriate use. Limits on coverage may
reduce adverse selection but leave people to bear
catastrophic costs themselves.

  In addition, such measures do not address the issue
of fairness in coverage policy. In particular, although
similar levels of price response and presumed moral
hazard occur in other areas of health care, mental health
coverage is singled out for special cost-sharing
arrangements. There may be a rationale for some level
of differential cost-sharing, but such policies are fair
only if the benefit design policies are applied to all
services in which demand is highly responsive to price.

Managed Care

Managed care represents a confluence of several forces
shaping the organization and financing of health care.
These include the drive to deliver more highly
individualized, cost-effective care; a more health-
promoting and preventive orientation (often found in

320


health maintenance organizations, or HMOs); and a
concern with cost containment to address the problem
of moral hazard. Managed care implies a range of
financing and payment strategies that depart in
important ways from traditional fee-for-service
indemnity insurance. Managed care strategies have
resulted in dramatic savings in a wide range of settings
over the past decade .(Bloom et al., 1998; Callahan et
al., 1995; Christianson et al., 1995: Coulam & Smith,
1990; Goldman et al., 1998; Ma & McGuire, 1998).

Major Types of Managed Care Plans
Health mainfenance orgnnkzrions were the first form
of managed care. Originally developed by the Kaiser
Foundation to provide health services to company
employees, these large group practices initiated con-
tracts to provide all medical services on a prepaid, per
capita basis. Medical staff members were originally
salaried and not paid on a fee-for-service basis, as is the
case in most other financing arrangements. However, in
recent years, some HMOs have developed networks of
physicians-so-called Independent Practice Associa-
tions, or IPAs-who are paid on a fee-for-service basis
and function under common management guidelines.
Health maintenance organizations initially treated
only those mental disorders that were responsive to
short-term treatment. but they reduced copayments and
deductibles for any brief therapy. There was an implicit
reliance on the public mental health system for
treatment of any chronic or severe mental disorder-
especially those for whom catastrophic coverage was
needed.

Preferred Provider Organizations (PPOs) are
managed care plans that contract with networks of
providers to supply services. Providers are typically
paid on a discounted fee-for-service basis. Enrollees are
offered lower cost-sharing to use providers on the
"preferred" list but can use non-network providers at a
higher out-of-pocket cost.

Point-of-Service (POS) plans are managed care
plans that combine features of prepaid (or capitatedj
and fee-for-service insurance. Enrollees can choose to
use a network provider at the time of service. A
significant copayment typically accompanies use of

Organizing and Financing Mental Health Services

non-network providers. Although few plans are purely
of one type, an important difference between a PPO
and a POS is that in a PPO plan, the patient may select
any type of covered care from any in-network provider.
while in a POS, use of in-network services must be
approved by a primary care physician.

In Carve-out Managed Behavioral Health Care,
segments of insurance risk-defined by service or
disease-are isolated from overall insurance risk and
covered in a separate contract between the payer
(insurer or employer) and the carve-out vendor. Even
with highly restrictive admission criteria, many HMOs
have recently found it cost effective to carve out mental
health care for administration by a managed behavioral
health company, rather than relying on in-house staff.
This arrangement permits a larger range of services
than can be provided by existing staff without
increasing salaried staff and management overhead
costs. Carve-outs generally have separate budgets,
provider networks, and financial incentive arrange-
ments. Covered services, utilization management tech-
niques, financial risk, and other features vary de-
pending on the particular carve-out contract. The
employee as a plan member may be unaware of any
such arrangement. These separate contracts delegate
management of mental health care to specialized
vendors known as managed behavioral health care
orgnnizarions (MBHOs).

There are two general forms of carve-outs: payer
carve-outs and health plan subcontracts. In payer
carve-outs, an enrollee chooses a health plan for
coverage of health care with the exception of mental
health and must enroll with a separate carve-out vendor
for mental health care. Examples of payer carve-outs
include the state employee health plans of Ohio and
Massachusetts. In health plan subcontracts. adminis-
trators of the general medical plan arrange to have
mental health care managed by a carve-out vendor or
MBHO; the plan member does not have to take steps to
select mental health coverage. Examples of payer
carve-outs include health plans associated with
Prudential and Humana.

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Mental Health: A Report of the Surgeon General

The Ascent of Managed Care

Over the past decade, the pace of change in U.S. health
insurance has been striking. In 1988, insurance based
on fee-for-service was the predominant method of fin-
ancing health care. But in the ensuing decade, various
management techniques were added such that insurance
that used "unmanaged fee-for-service" as its payment
mechanism plummeted from 71 percent to 15 percent
(HayGroup, 1998). Managedcare arrangements (HMO,
PPO, or POS plans), which fundamentally alter the way
in which health care resources are allocated, now cover
the majority (56 percent) of Americans (Levit &
Lundy, 1998). During the 1988-1998 decade, PPO
plans rose from being 13 percent to 34 percent of
primary medical plans, with a similar rapid rise in
HMO plans from 9 percent tb 24 percent. Point-of-
service (POS) plans rose more slowly as the principal
medical plan. from 12 percent in 1990 to 20 percent in
1998 (HayGroup, 1998).

Managed care has also made significant inroads
into publicly funded health care. Between 1988 and
1997, Medicaid enrollees in managed care rose from 9
percent to 48 percent, while Medicare enrollees in
managed care increased from 5 percent to 14 percent.
Most Medicaid and Medicare managed care growth has
occurred since 1994. In Medicaid, growth is primarily
focused on the population receiving Temporary Aid to
Needy Families support (as opposed to the population
with severe and chronic mental illness, eligible for
Medicaid because of Supplemental Security Income-
eligible disability) (HayGroup, 1998).

In 1999, almost 177 million Americans with health
insurance (72 percent) were enrolled in managed
behavioral health organizations. This represents a 9
percent increase over enrollment in 1998 (OPEN
MINDS, 1999). This administrative mechanism has
changed the incentive structure for mental health
professionals, with "supply-side" controls (e.g.,
provider incentives) replacing "demand-side" controls
(e.g., benefit limits) on service use and cost. In
addition, the privatization of service delivery is
increasing in the public sector. As a result of these
changes, access to specific types of mental health

services is increasingly under the purview of managed
behavioral care companies and employers.
It is difficult to know precisely how many people
are enrolled in various forms of carve-out plans. Recent
reports estimate that 35 percent of employers with more
than 5,000 employees have created payer carve-outs,
while only 5 percent of firms with fewer than 500
employees have adopted them(Mercer/Foster-Higgins,
1997). A survey of 50 large HMOs revealed that
roughly half of HMO enrollees were enrolled in carve-
out plans (OPEN MINDS, 1999). The carve-out
concept has also been adopted by'a number of state
Medicaid programs. At most recent count, 15 states are
using payer carve-out arrangements to manage mental
health care (Substance Abuse and Mental Health
Services Administration [SAMHSA], 1998). More than
20 states use carve-out arrangements to manage non-
Medicaid public sector services.
As the states have adopted Medicaid managed care
for mental health, at least two distinct models have
emerged. States that entered managed care early have
tended to issue contracts to private sector organizations
to perform both administrative (payments, network
development) and management (utilization review)
functions. States that entered managed care more
recently have tended to contract administrative
functions with Administrative Services Organizations
(ASOs), while retaining control of management func-
tions. Under any of these arrangements, financial risk
for the provision of care to a particular population can
be distributed in a variety of ways (Essock & Goldman,
1995).

As the foregoing discussion indicates, mental
health services associated with private insurance,
public insurance, and public direct-service programs
often have managed mental health care arrangements
that are organized differently than are overall health
services. These arrangements have emerged mostly
within the past decade. The next section describes how
the ascent of managed care has shifted patterns of
resource allocation toward financial incentives aimed
at providers, organizational structure, and adminis-
trative mechanisms and away from the use of benefit
design (e.g., using copayments and annual deductibles)

422


meant to encourage consumer cost-sharing. As a result,
cost control and care management are accomplished
through a more complicated set of policies than at any
time in the recent past, and benefit design is no longer
the only factor in determining service allocation or
predicting costs to a health insurer.

Dynamics of Cost Controls in Managed Care
In a managed care system, the moral hazard of
unnecessary utilization need not be addressed through
benefit design. Utilization typically is controlled at the
level of the provider of care, through a series of
financial incentives and through direct management of
the care. For example, managed care reduces cost in
part by shifting treatmenl from inpatient to outpatient
settings,  negotiating discounted hospital and
professional fees, and using utilization management
techniques to limit unnecessary services. In this
fashion, at least theoretically, unnecessary utilization,
the moral hazard, is eliminated at the source, on a case-
by-case basis.

Adverse selection may be addressed through
regulations, such as mandates in coverage that require
all insurers in a market to offer the same level of
services. In this way, no one insurer runs `the risk that
offering superior coverage will necessarily attract
people who are higher utilizers of care. Efforts to
regulate adverse selection may not produce the
intended effect, however, when insurers who offer the
same services use management techniques to control
costs by restricting care to those who use services most
intensely-effectively denying care to those who most
need it. In such instances, patients with the greatest
needs might become concentrated in plans with the
most generous management of care. This may lead to
financial losses for such plans or encourage them to cut
back on services for those who need care most or to
divert resources from other beneficiaries.

As managed care grows, the structure of the
industry changes, with companies merging and
disappearing. Managed behavioral health care
organizations now cover approximately 177 million
Americans. with only three companies controlling 57
percent of all insured persons (or 91 million covered

Organizing and Financing Mental Health Services

lives) (OPEN MINDS, 1999). However, the range of
management controls currently applied to enrollees in
covered plans extends from simple utilization review of
hospitalizations on an administrative services only
(ASO) contract to prepaid, at-risk contracts with exten-
sive employee assistance plan (EAP) screening and
networks of eligible mental health specialists and
hospitals providing services for discounted fees. If and
when mental health service benefits expand, it is
possible for managed behavioral health plans to tighten
the level of supply-side controls to maintain costs at a
                        .
desired level.

  Some consumers and consumer advocates have
expressed concern that the management measures used
to cut the costs of health care may also lower its quality
and/or accessibility. Although this issue was addressed
by the President's Advisory Commission on Consumer
Protection and Quality in the Health Care Industry and
by current Patient Bill of Rights legislation, more
research is needed to understand the effects of industry
competition on costs, access, and quality. (See Appen-
dix 6-A for Patient Bill of Rights.)

Managed Care Effects on Mental Health
Services Access and Quality
Managed care demonstrably reduces the cost of mental
health services (Ma & McGuire, 1998; Goldman et al..
1998; Callahan et al., 1995; Bloom et al., 1998:
Christianson et al., 1995; Coulam & Smith, 1990). That
was one of its goals-to remove the excesses of
overutilization, such as unnecessary hospitalization.
and to increase the number of individuals treated by
using more cost-effective care. This was to be
accomplished through case-by-case "management" of
care. The risk of cost-containment, however, is that it
can lead to undertreatment. Research is just beginning
on how managed care cost-reduction techniques affect
access and quality. Excessively restrictive cost-
containment strategies and financial incentives to
providers and facilities to reduce specialty referrals.
hospital admissions, or length or amount of treatment
may ultimately contribute to lowered access and quality
of care. These restrictions pose particular risk to People
on either end of the severity spectrum: individuals with

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Mental Health: A Report of the Surgeon General

mental health problems may be denied services
entirely, while the most severely and persistently ill
patients may be undertreated. These risks must be seen,
however, in the context of similar problems inherent in
fee-for-service practice. Access and quality problems
and the failure to treat those most in need predate
managed care.

Impact on Access to Services
Despite considerable concern that managed care cost
reductions may inappropriately restrict access to mental
health services, the actual impact of these reductions
has received relatively little systematic study. In
addition, there are currently no benchmark standards
for access to specialty merital health services.5 A
system to measure access and track it over time is
clearly needed. Establishing targets for treated
prevalence6 is also problematic because the appropriate
level and type of service utilization for specific
population groups is only beginning to be documented
(McFarland et al., 1998).

  The term "access to mental health services" refers
generally to the ability to obtain treatment with
appropriate professionals for mental disorders.`Having
health insurance-and the nature of its coverage and
administration-are critical determinants of such
access. But so are factors such as the person's clinical
status and personal and sociocultural factors affecting

' Between the early 1980s and 1990s-prior to the dominance of
managed care-about 5.8 percent of U.S. adults used some type of
specialty mental health outpatient services in any year. This rate
now can be used as one reference point for assessing subsequent
changes in access to mental health services, although there is no
evidence on the appropriateness of this care.

6 Researchers and administrators often report access in terms of
treated prevalence or penetration rates. These rates reflect the
proportion of individuals in a given population (e.g., members of a
particular managed behavioral health care plan) that use specialty
mental health and/or substance abuse services in 1 year.
' This phrase has many additional dimensions and meanings to
consumers. health care providers. and health services researchers.
These include (a) waiting time for emergency, urgent, and routine
initial and followup appointments; (b) telephone access, including
call pick-up times and call abandonment rates; (c) access to a
continuum of services, including treatment in the least restrictive
setting: (d) access to providers from a full range of mental health
disciplines: (e) choice of individual provider; (f) geographic access;
and (g) access to culturally competent treatment.

desire for care; knowledge about mental health services
and the effectiveness of current treatments: the level of
insurance copayments, deductibles, and limits; ability
to obtain adequate time off from work and other
responsibilities to obtain treatment; and the availability
of providers in close proximity, as well as the
availability of transportation and child care. In addition,
because the stigma associated with mental disorders is
still a barrier to seeking care. the availability of
services organized in ways that reduce stigma-such as
employee assistance programs-can provide important
gateways to further treatment when necessary.
  A small number of studies provide a limited
picture of access to managed behavioral health care. It
has been found that the proportion of individuals
receiving mental health treatment varies considerably
across managed behavioral health plans (National
Advisory Mental Health Council, 1998). Some long-
term case studies of managed care's impact on access
find that the probability of using mental health care-
especially outpatient care-increases after managed
behavioral health care is implemented in private
insurance plans (Goldman et al., 1998).

Impact on Quality of Care

The quality of care within health systems has been
assessed traditionally on three dimensions: (1) the
strilcture of the health care organization or system; (2)
the process of the delivery of health services; and (3)
the outcomes of service for consumers (Donabedian,
1966). Many of these dimensions are being tapped in
current efforts to assess-and, it is hoped, ultimately
improve-the overall quality of mental health care in
the United States. These include the use of
accreditation practices, clinical- and systems-level
practice guidelines, outcome measures and "report
cards," and systems-level performance indicators. For
example, to maximize the potential mental health
benefit of patients' contact with the primary health care
sector, which 70 to 80 percent of all Americans visit at
least once a year, guidelines and treatment algorithms
have been developed. The Agency for Health Care
Policy and Research has developed comprehensive
guidelines for the treatment of depression in primary

324


care settings (1993) as well as recommendations for the
treatment of schizophrenia (Patient Outcome Research
Team, Lehman & Steinwachs. 1998). Also funded by
the Agency is the Depression PORT that will soon
release findings on the quality and cost of the treatment
of depression in managed, primary care practice (Wells
et al., in press). In addition, multiple studies are now
under way to develop better coordination between
primary care physicians and mental health specialists
for management of both chronic and acute mental
disorders (Katon et al., 1997; Wells, 1999). These
studies are described in more detail in Chapters 4
and 5.

  Current incentives both within and outside
managed care generally do not encourage an emphasis
on quality of care, Nonetheless, some managed mental
health systems recognize the potential uses of quality
assessment of their services. These include monitoring
and assuring quality of care to public and private
oversight organizations; developing programs to
improve services or outcomes from systematic
empirical evaluation; and permitting reward on the
basis of quality and performance, not simply cost (Kane
et al., 1994, 1995; Institute of Medicine, 1997;
President's Advisory Commission on' Consumer
Protection and Quality in the Health Care Industry.
1997). In the public sector, the Center for Mental
Health Services (CMHS), in conjunction with the
Mental Health Statistics Improvement Program, has
developed a Consumer-Oriented Report Card. Designed
to obtain a consumer perspective on access,
appropriateness, prevention, and outcome, it is being
tested in 40 states under CMHS grant support.

Efforts are ongoing within managed behavioral
health systems to develop quality-reporting systems
based on existing administrative claims data, which
measure aspects of the process of care as well as some
clinical outcome data (American Managed Behavioral
Healthcare Association, 1995; American College of
Mental Health Administrators, 1997; National
Committee for Quality Assurance, 1997).

The first comparative study of quality indicators
within the managed behavioral health care industry
(Frank & Shore, 1996) has revealed very diverse

Organizing and Financing Mental Health Services

practices. For example, across the responding
companies, expected outpatient followup visits within
30 days after hospital discharge for depression occurred
among 92 percent of patients in one plan. but only 39
percent in another. One indicator of inadequate hospital
treatment or discharge planning is rapid hospital
readmission after discharge-an event that occurred in
2 percent to 4 1 percent of discharges. Another indicator
of quality is  the proportion of patients with
schizophrenia who received a minimum of four
medication visits per year; this figure ranged from 15
percent to 97 percent. Meas'ures of access (treated
prevalence rates) also varied widely. Although
methodological problems probably contribute to the
variation among companies, these data raise concerns
about real differences in quality among managed
behavioral health care companies. They also
underscore the need to improve quality measurement.

In a more positive vein, investigators recently
found that rates of readmission after hospital discharge
were not adversely affected by the 1993 transition to a
managed behavioral health carve-out for Massachusetts
state employees. In fact, the proportion of cases
receiving outpatient followup (within 15 or 30 days)
actually increased for patients with major depressive
disorder, despite substantial reductions in inpatient
utilization and costs. However, because the study was
based on the plan's administrative claims data, only
limited conclusions could be made about the quality of
care provided (Merrick, 1997).

Clinical outcome data systems, although more
expensive and complicated than administrative data
systems, have much greater potential for evaluating
how programs and practices actually affect patient
outcomes. Several managed care companies are
currently testing the feasibility of implementing
systemwide collection of clinical outcome data, to be
managed through newly developed comprehensive
clinical quality information systems (Goldman. 1997:
Goldman et al., 1998).

Another way to measure quality takes into account
outcomes outside the mental health specialty sector.
Two recent studies suggest that when management and
financial incentives limit access to mental health care

425