Designing 

EmployerSponsored 

Mental Health 

Benefits

Rachel Sethi

Joanne Jee

Lisa Chimento

D. Richard Mauery

Designing Employer-Sponsored Mental Health Benefits iii

Acknowledgments

The authors of this report are Rachel Sethi, Joanne Jee, and Lisa Chimento of The Lewin 

Group, and D. Richard Mauery of the Department of Health Policy at The George Washington 

University School of Public Health and Health Services. The authors acknowledge the contributions of Shelagh Smith, government project officer, and Jeffrey A. Buck, Associate Director of 

Organization and Financing, Center for Mental Health Services (CMHS), as well as Karen 

Linkins, Maya Bhat, and Catherine Tsien of The Lewin Group. Valuable direction and guidance was provided by the advisory panel members (listed in Appendix B).

Disclaimer

Material for this report was prepared by The Lewin Group for the Substance Abuse and Mental Health Services (SAMHSA), U.S. Department of Health and Human Services (DHHS), 

under Task Order Number 280-03-2701. The content of this publication does not necessarily 

reflect the views or policies of CMHS, SAMHSA, or DHHS.

Public Domain Notice

All material appearing in this report is in the public domain and may be reproduced or copied 

without permission from SAMHSA or CMHS. Citation of the source is appreciated. However, 

this publication may not be reproduced or distributed for a fee without the specific, written 

authorization of the Office of Communications, SAMHSA.

Electronic Access and Copies of Publication

This publication can be accessed electronically through the following Internet World Wide Web 

connection: www.samhsa.gov. For additional free copies of this document, please call SAMHSA’s 

Mental Health Information Clearinghouse at 1-800-789-2647.

Recommended Citation

Sethi, R., Jee, J., Chimento, L., & Mauery, D.R. Designing Employer-Sponsored Mental 

Health Benefits. (2006) DHHS Pub. No. SMA-06-4177. Rockville, MD: Center for Mental 

Health Services, Substance Abuse and Mental Health Services Administration.

Originating Office

Office of the Associate Director for Organization and Financing, Center for Mental Health 

Services, Substance Abuse and Mental Health Services Administration, One Choke Cherry 

Road, Rockville, MD 20857. 

DHHS Publication No. SMA-06-4177

Printed 2006

Designing Employer-Sponsored Mental Health Benefits 

Contents

Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

A. Purpose of the Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

B. Employer Characteristics and Health Plan Types . . . . . . . . . . . . . . . . . 7

C. Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

1. Interviews and Conceptual Framework . . . . . . . . . . . . . . . . . . 9

2. Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

3. Actuarial Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

4. Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

D. Organization of the Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

II. Prevalence and Financial Implications of Mental Illness . . . . . . . . . . . . . 13

A. Prevalence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

B. Financial Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

1. The Costs to Employers of Untreated Mental Illness . . . . . . 16

2. The Cost of Providing Mental Health Benefits . . . . . . . . . . . 18

3. Return on Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

4. Medical Cost Offsets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

5. Parity of Mental Health Benefits . . . . . . . . . . . . . . . . . . . . . . 22

C. Protection from Catastrophic Costs . . . . . . . . . . . . . . . . . . . . . . . . . . 25

D. Plan Design Issues and Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

1. Regulatory Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

2. Cost Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

3. Consumer-Directed Health Benefits: Issues for 

Mental Health Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

III. Administration of Mental Health Benefits: Overview of 

Carve-Out Purchasing Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
vi Special Report

IV. Objectives and Options for Designing an Adequate Mental 

Health Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

A. Provide Protection from Catastrophic Costs, Cover a 

Wide Array of Treatments, and Allow Flexibility within Plan . . . . . . 37

1. Current Practice and Evidence from the Literature . . . . . . . . 40

2. Options for Meeting the Objective . . . . . . . . . . . . . . . . . . . . 47

B. Ensure Access to Covered Services . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

1. Current Practice and Evidence from the Literature . . . . . . . . 50

2. Options for Meeting the Objective . . . . . . . . . . . . . . . . . . . . 57

C. Include Evidence-Based Practices and Treatment Guidelines 

as Available in Mental Health Benefits . . . . . . . . . . . . . . . . . . . . . . . . 57

1. Current Practice and Evidence from the Literature . . . . . . . . 58

2. Options for Meeting the Objective . . . . . . . . . . . . . . . . . . . . 63

V. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Appendices

Appendix A: Actuarial Analysis—Relationship Between Benefits 

and Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Appendix B: Advisory Panel Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Designing Employer-Sponsored Mental Health Benefits vii

List of Exhibits

Exhibit 1. Summary of Workplace Costs of Mental Illness . . . . . . . . . . . . . . . . . 18

Exhibit 2. Typical Models of Behavioral Health Care Contracting . . . . . . . . . . . 35

Exhibit 3. In- and Out-of-Network Cost Sharing . . . . . . . . . . . . . . . . . . . . . . . . 46

Exhibit 4. Benefits and Drawbacks of Carving Out to MBHO . . . . . . . . . . . . . 53

Exhibit 5. Hawaii’s Medical Definition in State Independent Review Statute . . . 61

Exhibit 6. NGC Mental Health and Substance Abuse Treatment 

Guideline Categories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Exhibit A-1. Estimated PMPM Benefit Costs (excl. admin.) for Typical 

In-Network Health Care Plan with Varying Levels of Mental Health 

and Substance Abuse Benefits (U.S. average, 2005) . . . . . . . . . . . . . . . . . 83

Exhibit A-2. Estimated PMPM Benefit Costs (excl. admin.) for Typical 

and Modified PPO Plans with Varying Levels of Mental Health/

Substance Abuse Benefits (U.S. average, 2005) . . . . . . . . . . . . . . . . . . . . 84

Exhibit A-3. Estimated PMPM Benefit Costs (excl. admin.) for Typical 

and Modified HMO Plans with Varying Levels of Mental Health/

Substance Abuse Benefits (U.S. average, 2005) . . . . . . . . . . . . . . . . . . . . 85



Recently published analyses of the latest 

National Comorbidity Study-Replication 

revealed high lifetime and annual prevalence 

of mental illnesses in the United States 

(Kessler, Berglund, Demler, Jin, & Walters, 

2005; Kessler, Chiu, Demler, & Walters, 

2005). In light of the high level of burden of 

illness as a result of the prevalence of mental 

disorders, reduced productivity, and 

increased absenteeism caused by those disorders, employers have a vested interest in 

ensuring that appropriate treatments are 

available, accessible, and affordable. With 

medication, rehabilitation, psychotherapy, 

group therapy, self-help, or a combination of 

these treatments as well as recovery support 

services, people with mental illness can 

recover or manage their conditions. The 

costs to employers of not sufficiently covering mental health benefits include losses in 

employee productivity, higher disability 

costs, and the possibility of employees being 

faced with catastrophic out-of-pocket costs 

that for some may result in medical bankruptcy filings.

The literature reviewed for this study did 

not provide a conclusive guide to the development of an adequate mental health benefit, but major findings include the following:

n Most employer-sponsored health plans 

cover mental health services, though these 

services generally are limited and often 

have cost-sharing requirements that are 

higher than those for medical/surgical 

benefits.

n Factors influencing employer choices in 

designing mental health benefit packages 

include costs, regulatory requirements, 

employee attraction and retention, productivity goals, employee health and wellbeing, and treatment effectiveness. 

n	 The mental health care market is now 

dominated by managed care, and nearly 

This report explores the current design and administration of 

mental health coverage and what constitutes adequate mental 

health coverage in employer-sponsored health benefits. The 

information and suggestions presented in the report have been informed by 

an extensive literature review, input from experts in a variety of fields relating to mental health and illness and insurance and benefits, and actuarial 

analysis. While there is no accepted definition of “adequacy” in mental 

health benefits, this report lays out the necessary components of an adequate 

mental health benefit by examining such areas as the evidence base for 

particular mental health benefits; the effects of different types of benefit 

limits on access, utilization, and costs; the components of a cost-effective 

mental health benefit package; and the effects of benefits administration on 

effectiveness.

Executive Summary

Designing Employer-Sponsored Mental Health Benefits
 Special Report

by a relatively small amount. As the 

number of covered services increases, 

the cost per additional unit of service 

decreases substantially. 

n	 Combining coverage for outpatient

and intermediate level services in a 

managed but unlimited benefit and 

retaining some generous limits on inpatient care. 

n Covering inpatient care with generous

limits, as this is unlikely to induce additional demand. Actuarial analysis indicates that providing coverage for additional inpatient days increases plan 

costs by a relatively small amount, and 

the cost per additional day decreases as 

the number of covered days increases. 

n Providing a flexible benefit package.

Employers or their health plan vendors 

should create a flexible mental health 

benefit plan that covers a range of services and treatment types (including 

intermediate services) and allows 

enrollees to trade services of different 

types among the benefit limits. 

n	 Use the EAP for access and integrate it 

with the mental health benefit. If using an 

employee assistance plan (EAP), employers 

should advertise the services to employees 

and their dependents and use the EAP to 

get members who need care into appropriate treatment quickly. 

n	 Use treatment plans and prior authorization. Employers and plans can utilize 

provider-developed and plan-approved 

treatment regimens and prior authorization to manage the care delivered to members. Doing so would reduce demand for 

unnecessary services possibly induced by 

increased limits or lower cost sharing. 

n Use a disease case management approach 

to improve outcomes and help manage 

three-quarters of Americans with health 

insurance are covered by managed mental 

health benefits. 

Based on a synthesis of the literature 

reviewed, discussions with members of the 

advisory panel, and our actuarial analysis, we 

offer the following three objectives that 

employers and the health plans with which 

they contract should strive to meet in order 

to provide an adequate mental health benefit 

to their employees, along with suggested 

options that employers should consider for 

achieving each of the objectives. 

Objective: Provide protection from catastrophic costs, cover a wide array of treatments, and allow flexibility within plan—

n	 Combine the out-of-pocket maximums for 

mental and physical health care services.

Patients’ out-of-pocket expenses for mental 

health services should be applied to a unified benefit out-of-pocket maximum that 

also includes unreimbursed expenses for 

medical/surgical care. 

n	 Provide coverage for a variety of treatment 

modalities. In order to provide adequate 

coverage, a health plan should provide for 

a variety of treatment types, including 

inpatient, intermediate, and outpatient services and prescription drugs. 

n	 Provide a flexible mental health care benefit with generous or no limits. An employer that prefers to retain some limits on 

care covered may wish to focus on limits 

for inpatient services and clarify explicit 

criteria for evaluating medical necessity. 

Some specific options are as follows: 

n Eliminating limits for outpatient benefits. Actuarial analysis of the relationship between benefits and premiums 

finds that increasing the number of 

covered visits would increase plan costs 
Designing Employer-Sponsored Mental Health Benefits 

costs. Employers and health plans have 

found that using disease case management 

programs for conditions such as asthma 

and diabetes is an effective way to manage 

care tied to clinically desirable outcomes. 

Similar approaches can be taken for managing the treatment of conditions such as 

depression or anxiety.

Objective: Ensure access to covered services—

n Choose mental health carve-out vendors 

carefully and negotiate contracts to ensure 

access, quality of care, care management, 

and appropriate care for vulnerable 

populations.

n Incorporate approaches to coordinate 

mental and physical health care services. 

Provide for communication between different provider types and specialties, to 

include sharing information about diagnoses, treatment plans, prescribed drugs, 

and prognoses.

n Take care in structuring mental health 

benefits as consumer-directed health benefits become more prevalent. The literature regarding these plans and what they 

may mean for mental health care delivery 

is still in its infancy but is growing rapidly. More information is needed from the 

professional community regarding any 

special considerations that mental health 

should receive when establishing these 

types of plans.

n Encourage employees to consider mental 

health needs in funding health savings 

accounts (HSAs) or other types of 

accounts. This is clearly an issue for someone contemplating an HSA who has an 

existing mental health condition. It is not 

yet clear how individuals will finance 

HSAs to insure against the catastrophic 

costs of an unanticipated mental illness.

n Contract with health plans that are accredited by a national quality review organization. These accreditation standards 

comprise quality performance indicators 

related to access and outcomes that help to 

ensure that mental health benefits are provided on a timely basis in safe and effective treatment settings.

n	 Assess care provided by primary care providers and referral procedures. A substantial amount of treatment in the form of 

mental health screening and prescribing of 

psychopharmaceuticals occurs in primary 

care settings. Primary care physicians 

should monitor for “triggers” that indicate 

a need for specialty mental health providers to engage in focused therapies such as 

short-term cognitive behavioral therapy. 

Objective: Include evidence-based practices 

and treatment guidelines as available in 

mental health benefits—

n	 Include coverage of available evidencebased and effective practices and monitor 

fidelity with treatment guidelines. Employer health plan purchasers should require 

coverage of evidence-based practices, as 

well as assurances from health plans that 

covered services are effective, where 

appropriate. 

n	 Establish or contract with health plans 

that have outcomes management systems.

These systems may be able to link the use 

of evidence-based standards and/or treatment guidelines to clinically desirable 

outcomes. Health plans with outcomes 

management systems should be flexible 

enough to incorporate coverage for treatments aimed at maintenance of functioning and prevention of deterioration as well 

as those focused on recovery from mental 

health disorders.



I.

Today, 98 percent of workers with 

employer-sponsored health insurance have 

mental health benefits as part of that coverage (Kaiser Family Foundation and Health 

Research and Educational Trust [KFF/HRET], 

2004). This was not always true; mental 

health treatment was long regarded as a State 

responsibility, and few employers offered 

mental health benefits until the 1960s. While 

mental health benefits offered by employers 

have expanded since the 1960s, they have yet 

to reach parity with physical health benefits 

in many cases. 

Employer-sponsored health insurance often 

covers treatments for mental health less generously than it covers treatments for physical 

health and imposes stricter limits on coverage or greater cost sharing for patients. 

While mental health benefits are regulated 

by the Federal Mental Health Parity Act 

(MHPA) and various State parity and other 

laws, these laws often are limited in scope or 

applicability (Frank, Koyanagi, & McGuire, 

1997). Many of the regulations around the 

provision of mental health benefits apply 

only to employers with some minimum number of employees, and due to the Employee 

Retirement Income Security Act of 1974

(ERISA) preemption, State insurance laws do 

not apply to self-insured employment-based 

health plans. These regulatory limitations 

leave employer-sponsored and other health 

Introduction

I

n the United States, the prevalence of mental disorders has remained 

relatively stable over time, but rates of treatment, and total spending for mental health treatment, have been rising. Between 1987 

and 2000, the number of persons receiving treatment for mental disorders 

doubled and spending for those disorders increased 3.5 times, accounting 

for 7.4 percent of the increase in total health care spending over the period. 

Only heart disease and pulmonary conditions were responsible for a greater 

proportion of the total spending increase (Thorpe, Florence, & Joski, 2004). 

In the United States, 39 million people between the ages of 18 and 54 have 

at least one mental or substance use disorder each year, and 72 percent of 

them are in the workforce (Hertz & Baker, 2002). The financial impact of 

mental disorders in the workplace due to absenteeism, “presenteeism,” and 

disability costs is significant. (The term “presenteeism” describes a situation 

in which an employee is at work but is less than normally productive, often 

as the result of a health problem affecting himself/herself or a family member.) At the same time, however, the cost of providing mental health benefits 

to workers has declined as a percentage of total health plan costs (Buck & 

Umland, 1997; Foote & Jones, 1999). 

Designing Employer-Sponsored Mental Health Benefits
 Special Report

plans with much flexibility in designing benefits, and as a result, where full parity is not 

required, mental health benefits often have 

lower limits on care provision or greater cost 

sharing than benefits for general or physical 

health care. 

Coverage of mental health treatments by 

employers has a direct and measurable effect 

on corporate financial well-being. A growing 

body of rigorous cost-effectiveness studies 

has found that employee productivity is 

greatly enhanced when such treatments are 

accessible and affordable (Simon et al., 2001; 

Wang et al., 2004). To the extent they are 

not, added costs to employers include the 

costs of diminished productivity on the job 

and sick leave absences that may incur the 

cost of hiring temporary replacements. From 

the perspective of viewing employees as a 

firm’s most important “human capital” asset, 

providing insurance for both physical and 

mental health conditions can be seen as an 

indispensable investment in meeting a firm’s 

goal of achieving sustainable profits in a 

highly competitive economy.

A.	 Purpose of the Report

The purpose of this report is to delineate the 

necessary components of an adequate mental health benefit, keeping in mind plan 

sponsors’ concerns about the cost of that 

benefit. This report is designed to offer 

employers and health plan purchasers suggested options to assist them in providing an 

adequate mental health care benefit to their 

covered employees and dependents. It also 

may serve as a tool for policy makers in 

developing laws, regulations, and government programs that will assist and encourage employers in this effort. This report 

embodies the culmination of an effort to 

explore what constitutes adequate mental 

health coverage in employer-sponsored 

health benefits. The information and options 

presented in the report have been informed 

by an extensive literature review spanning 

the 15-year period from 1989 to 2004; input 

from experts in the fields of mental health 

and illness, insurance, employers/purchasers, 

employee benefits design experts, providers, 

advocates, and academia; and actuarial 

analysis. Throughout the study, the research 

focus has been on mental health care rather 

than behavioral health care, which includes 

substance abuse services. To the extent possible in this report, mental health benefits 

are discussed alone, but in some cases, such 

as the actuarial analysis, substance abuse 

services are included. 

This effort has utilized empirical information and expert opinion to understand 

the provision of mental health services and 

the organization and financing of care. 

Adequacy of a mental health benefit plan is 

measured differently by individuals and 

families with varying mental health care 

needs. In struc­turing their benefit plan, 

employers may ask: For whom is the benefit 

adequate? What levels of services are covered, in what cir­cumstances, and to meet 

what level of need? 

n	 “Adequate” will be what works for most 

people based on their needs, and adequacy 

should consider the efficacy and efficiency 

of the benefit. As a concept in mental 

health benefits, adequacy is distinct from 

both parity and generosity. An adequate 

mental health benefit would be one that 

meets the needs of the bulk of the covered 

population. 

n Adequacy must take into consideration 

the incidence and prevalence of mental 

disorders in the population, the possible 

catastrophic costs of mental disorders, 
Designing Employer-Sponsored Mental Health Benefits 

the effect of benefit limits, the impact of 

benefits administration, and the knowledge base for the provision of various 

treatments. 

While the literature reviewed for this study 

generally did not comment directly on the 

adequacy of mental health benefit packages, 

some studies presented analyses, perspectives, 

and recommendations identifying criteria to 

be considered in determining the adequacy of 

mental health benefits packages. This report 

does not recommend one particular set of 

benefits that will be adequate for all employers, employees, and dependents. Rather, it 

lays out the basis for providing an adequate 

benefit and offers three objectives to be met 

by employer-sponsored mental health benefit 

plans—along with options for meeting those 

objectives.

B.	 Employer Characteristics and

Health Plan Types

Employer-sponsored heath benefit packages 

vary from employer to employer. The benefits 

offered by an employer are influenced by a 

variety of factors, including both characteristics of the firm and the type(s) of health plan 

offered.

First, certain employer characteristics are 

associated with different likelihoods of offering health benefits and different benefit structures. These characteristics are

n	 firm size; 

n	 industry; 

n	 unionization; 

n	 geographic location; 

n	 self-insured status 

Firm size impacts employers’ likelihood of 

offering health benefits in general. Large 

firms are much more likely than small firms 

to offer health insurance to their employees. 

In fact, nearly all large employers (with 200 

or more employees) offer health insurance, 

while less than 6 in 10 small employers (with 

fewer than 200 employees) do so (KFF/HRET, 

2005). According to benefit consultants, very 

large firms (with more than 20,000 employees) set the standards in benefits offerings, 

and mid-sized employers (with 5,000 to 

10,000 employees) tend to follow their lead. 

The industry in which an employer 

operates also affects its benefits decisions. 

Government employers and those in the 

manufacturing industry are the most likely to 

offer employer-sponsored health insurance, 

while employers in service industries and 

agriculture are the least likely (Agency for 

Healthcare Research and Quality [AHRQ], 

2002). Even among employers that offer 

benefits, the generosity of the benefit plans 

also likely varies by industry.

Unionization of a firm’s workforce is an 

important factor in benefit plan design. 

Whether or not an employee population is 

able to collectively bargain for its benefits 

has a great impact on benefits generally. 

Ninety percent of firms with union workers 

offer health benefits, while 59 percent of 

firms that do not have union workers do so 

(KFF/HRET, 2005).

Various aspects of an employer’s geographic location also may affect its decisions about 

whether to offer health benefits, what type of 

health plans to offer, and how generous to be 

in its benefit plan. Considerations could 

include urban/rural status, demand for health 

benefits in the local labor pool, other sources 

of coverage in the area, and types of health 

plans available. A related consideration is 

whether the firm has a single location or 

multiple locations, including whether the 

company operates locally, statewide, or interstate. Ninety-five percent of firms with two 
 Special Report

or more locations offer health benefits, while 

45 percent of firms with only one location do 

so (AHRQ, 2002). 

Second, health plan types, alone and in 

combination with the above employer characteristics, also affect the benefit structures 

provided by an employer. In addition, an 

employer may offer employees a choice 

between different health plan types or may 

utilize different health plan types in different 

geographic areas. Managed care arrangements, such as health maintenance organizations (HMOs), preferred provider organizations (PPOs), and point-of-service (POS) 

plans, dominate the market, while fee-forservice (FFS) mental health benefits are less 

common. For example, it is common for a 

very large, national (or international) 

employer to offer nationally available PPO 

and POS plans as well as locally based 

HMOs in areas with high concentrations of 

employees. The array of health plans an 

employer offers impacts its decisions around 

mental health benefits, including the decision 

as to whether to carve out the benefit to a 

managed behavioral health organization 

(MBHO). Employers must consider the particulars of their benefit plans when assessing 

the likely impact of changes. Various health 

plan types are utilized to offer mental health 

benefits to employees. 

This discussion of health plan types also 

must include a mention of consumer-directed 

health benefits (CDHB). In recent years, 

there has been a movement toward more 

consumer involvement in the financing and 

delivery of health care, and some employers 

have used high-deductible health plans 

(HDHPs) with account-based spending funds 

to encourage more consumer involvement in 

health care decision-making (Fronstin, 

2004). Though CDHB makes up a small 

percentage of the insurance market, it is 

growing. A few employers have begun to 

offer it as a total replacement for all of 

their health benefits, and others offer it as 

a choice among a selection of health plans. 

Enrollment in CDHB is predicted to grow 

over the coming years; and as it does, attention will need to be paid to how these plans 

provide for mental health care and whether 

enrollee needs are being met, particularly in 

cases of serious mental disorders. Additional 

issues related to the movement toward 

CDHB and spending accounts are discussed 

in Section II below. 

Finally, whether an employer’s health plan 

is self-insured or fully insured (via contracts 

with third-party health insuring organizations) can affect the administration of mental 

health benefits in that self-insuring allows an 

employer to disregard many State insurance 

laws. Self-insured health plans also are 

exempt from State insurance laws through 

ERISA and can exclude State-mandated benefits; they are subject to Federal oversight and 

the Federal MHPA. However, while selfinsured employers have greater flexibility in 

structuring their health benefit plans and 

would be able to offer less generous benefits, 

experts assert that self-insured plans provide 

at least as generous mental health benefits as 

fully insured plans (Acs, Long, Marquis, & 

Short, 1996). Self-insured employers, which 

tend to be larger employers, can have greater 

control and flexibility over their health benefit packages because they administer their 

own health plans (or use a third-party administrator). On the other hand, employers with 

fully insured plans purchase a health benefits 

package from an insurer and pay premiums 

for their covered employees. These insurance 

products are subject to applicable State and 

Federal laws.
Designing Employer-Sponsored Mental Health Benefits 

C.	 Method

1. Interviews and Conceptual Framework

Before the literature review was conducted, 

key experts representing various stakeholder 

groups were interviewed and asked to discuss 

the issues employers face as they design and 

administer mental health benefits. Expert 

input and initial research findings then were 

used to develop a conceptual framework to 

guide the literature review and analytic 

report. 

2. Literature Review

Articles included in the literature review 

related to the delivery of mental health services in private managed care plans in the 

United States during the past 15 years. Thus, 

the literature spanned the period from 1989 

to 2004, during which some key milestones 

related to the provision of mental health care 

services were achieved. 

n	 In the early 1990s there was a greater 

movement to managed delivery systems for 

behavioral health care. While physical 

health care already had begun transitioning to managed care, behavioral health 

care services mostly remained in FFS type 

plans. 

n	 In 1996, the Federal MHPA was signed 

into law, with implementation occurring in 

1998. MHPA achieved mental health parity to some degree, but differences between 

physical and mental health care persist. 

Several articles specifically address the 

impact of these events, while others written 

before their occurrence speak for or against 

their enactment. These articles provided a 

useful “before-and-after” perspective on these 

important issues.

Literature in the review included professional, peer-reviewed, published articles as 

well as unpublished “fugitive” literature. 

Fugitive literature refers to reports, analyses, 

presentations, position statements, and other 

general information and research published 

in non-peer-reviewed sources, such as publications by mental health professional and 

advocacy organizations. It also may include 

internal studies conducted by employers, 

employer groups, insurers, managed care 

organizations (MCOs), and MBHOs. Fugitive literature supplemented the peer-reviewed 

literature and also was used in cases where 

little or no peer-reviewed literature was 

available. 

The initial search was undertaken via 

PubMed, an electronic retrieval database. 

The specific search terms used included 

mental health care, employee assistance programs, managed behavioral health, and a 

combination of the following terms with 

“mental health:” carve-out, cost sharing, 

parity, benefit design, adverse selection, private insurance, managed care, evidence-based 

medicine, and benefit administration. The 

search was enhanced by reviewing references 

cited in the literature to ensure that seminal 

and influential works were not missed. Additional searches were performed in specific 

publications, including Health Affairs, 

Psychiatric Services, Archives of General 

Psychiatry, and the Journal of the American 

Medical Association. These searches produced literature on the evidence base for different mental health services; the factors 

affecting benefit design; the characteristics of 

existing employer-sponsored mental health 

benefits and analyses of the costs of such 

benefits; the prevalence of catastrophic costs; 

and the effects of methods of benefits administration on access, utilization, effectiveness 

and costs. In all, approximately 7,500 articles 

were identified.
10 Special Report

Nearly 60 percent of the articles identified 

were strictly clinical in nature, and were eliminated. The literature search also resulted in 

numerous duplicate citations, which were 

removed. The remaining articles were sorted 

by relevance. The following criteria were 

applied to the 100 most relevant articles for 

each search term, as determined by the search 

engine(s): 

n	 Published in English between 1989 and 

2004;

n	 Conducted in the United States; 

n	 Addressed one or more of the following 

topics: mental health benefits design; 

financial analysis of mental health benefits; catastrophic costs; administration of 

mental health benefits; recommendations 

regarding adequate mental health benefits; 

n	 Addressed mental health benefits from a 

managed care perspective and focused on 

private insurance coverage; 

n	 Focused on health services and management issues rather than clinical studies; and

n	 Considered credible by most audiences, 

including industry experts and academics, 

though not necessarily peer-reviewed (for 

fugitive literature sources). 

References not meeting these selection criteria were eliminated, the remaining articles 

were analyzed, and the literature review was 

drafted. An advisory panel of industry 

experts, including those previously interviewed, was then convened via teleconference 

to discuss the draft literature review. (See 

Appendix B for the full list of panelists.) This 

advisory panel provided input on the findings 

described in the draft literature review, identified areas for further research, and suggested 

additional literature. Based on the feedback 

provided by the advisory panel, the literature 

review was revised and expanded by performing additional targeted searches and 

adding recommended articles. 

3. Actuarial Analysis

Actuarial analysis was performed of the 

costs of different levels of mental health 

benefits. To estimate the costs associated 

with various mental health benefit packages, 

a series of net premium calculations (i.e., 

excluding administrative costs) was performed for a typical health care benefit 

package, assuming different levels of mental 

health benefits for each calculation. The 

plan design used was typical of what might 

be found in an HMO or the in-network portion of a PPO or POS plan (after converting 

all flat-dollar copayments into coinsurance 

percentages). It included a $100 combined 

annual deductible for all services, a 90 percent benefit rate (i.e., 10 percent beneficiary 

coinsurance) for physical health services, 

and a $1,000 out-of-pocket limit for all beneficiary cost sharing. Cost estimates were 

developed using a computer program based 

on commercial health insurance plans and 

populations, which was calibrated to reflect 

average costs in the United States for calendar year 2005. (See Appendix A for a complete description of the actuarial analysis 

and results.)

4. Report

A report was drafted using the findings 

from the literature, input from the members 

of the advisory panel, and actuarial analysis 

of the costs of different levels of mental 

health benefits in a typical health care benefit package. The advisory panel was then 

convened in an in-person meeting to discuss 

the draft report. Based on the feedback of 

the advisory panel, the report was then 

revised and augmented with additional 

research and information on select topics. 
Designing Employer-Sponsored Mental Health Benefits 11

Additional literature sources were reviewed 

and used in preparing the final report for 

this study, including 13 published in 2005, 

which provided the most up-to-date statistics 

in specific areas. In total, 178 literature 

sources are cited in this final report. 

D.	 Organization of the Report

This report is organized as follows: 

n	 Section II discusses the literature regarding 

the prevalence of mental disorders and 

conditions and the financial and other consequences of untreated mental disorders; 

n	 Section III addresses an important issue 

in the administration of mental health 

benefits, namely, the use of carve-out 

arrangements that contractually split 

administration of general medical and 

mental health benefits between two 

health insuring organizations; 

n	 Section IV identifies and describes key 

objectives employers should strive to 

meet in crafting their mental health benefit plans and examines current practices, 

describes the published evidence from the 

clinical and health services literature, and 

provides suggested options for employers 

in the effort to meet those objectives; and 

n	 Section V presents concluding thoughts 

and a recap of the objectives and options 

to ensure the provision of adequate mental 

health benefits. 

Designing Employer-Sponsored Mental Health Benefits 13

II. Prevalence and 

Financial Implications 

of Mental Illness 

A.	 Prevalence

The 2004 National Survey of Drug Use 

and Health (NSDUH) estimates that the 

12-month period prevalence of “serious 

psychological distress” (SPD) among noninstitutionalized adults aged 18 years or older 

in the United States is 9.9 percent, representing approximately 21.4 million persons 

(­SAMHSA, 2005). The NSDUH estimate is 

based on a 6-item index of psychological 

distress experienced “over the past 12 

months”. Only those individuals with index 

scores of 13 and above are classified as having “serious psychological distress” (SPD). 

Persons with scores ranging from 1 to 12 are 

presumed to have “non-serious” psychological distress, and those who score 0 presumably have “no” psychological distress. 

In contrast, the 2001–2003 National 

Comorbidity Study-Replication (NCS-R) 

estimates that 26.2 percent of noninstitutionalized adults aged 18 and older 

experienced some type of mental disorder(s), 

ranging from mild to severe, over a 12-month 

period (Kessler, 2005). Because the NCS-R 

captures the 12 month period prevalence for 

mental disorders that includes “mild” cases, 

it will include persons who meet the NSDUH 

criteria for “non-serious” psychological 

distress.

Consequently, the 12-month period prevalence of SPD estimated by the NSDUH is 

lower than the estimated 12-month period 

prevalence of persons with mental disorders 

estimated by the NCS-R because the NSDUH 

criteria for SPD is designed to exclude persons with “mild” cases of mental disorders 

or “non-serious” psychological distress. 

Excluding the “mild” disorders, the NCS-R 

prevalence rate for moderate to severe mental 

disorders is 16 percent (moderate=9.8%; 

severe=5.8%), a rate which is more consistent with the NSDUH estimate of SPD.

These differences in criteria for the identification of persons with mental problems 

This section describes the prevalence of mental disorders in the 

United States, the financial implications to employers of those 

mental disorders and business reasons to provide adequate 

mental health benefits, including the cost of providing mental health benefits and returns on that investment, protection from catastrophic costs of 

mental disorders for individuals and their families, and plan design issues 

and criteria. 
14 Special Report

between these two epidemiological crosssectional survey results in differences in estimates of prevalence and treatment rates for 

persons with mental illness. 

Recently published analyses of the latest 

National Comorbidity Study-Replication 

(a nationally representative face-to-face 

household survey conducted between 

February 2001 and April 2003) revealed 

high lifetime and annual prevalence of mental illnesses in the United States (Kessler, 

Berglund, Demler, Jin, & Walters, 2005; 

Kessler, Chiu, Demler, & Walters, 2005). 

The authors estimated that approximately 

half of all Americans will meet the criteria 

for one or more Diagnostic and Statistical 

Manual of Mental Disorders (4th ed.) 

(DSM-IV) disorders at some point in their 

lives, with first onset usually in childhood 

or adolescence.

The availability of mental health services 

is important for persons who have chronic 

and life-threatening physical conditions, such 

as cancer, heart disease, diabetes, asthma, 

multiple sclerosis, or HIV/AIDS (Drainoni, 

1999). Supportive mental health services 

may assist them with managing their illnesses 

and may lead to better outcomes. For example, depression following surgery for a myocardial infarction is a common occurrence, 

and if left untreated the risk of death 18 

months after surgery is nearly doubled 

(Frasure-Smith, Lespérance, & Talajic, 

1995). Risk of cardiac death in the 6 months 

after an acute myocardial function was estimated to be approximately four times greater in patients with depression compared with 

nondepressed control subjects. The risk of 

cardiac death remains elevated even 5 years 

after an acute myocardial infarction, with 

cardiac patients with depression or depressive symptomatology having an increased 

risk of greater than 3.5-fold compared with 

cardiac patients without depression (Evans et 

al., 2005). In another study, for the 5 to 10 

years following hospitalization for coronary 

artery disease, cardiac patients with moderate to severe depression had an 84 percent 

greater risk of a cardiac death, and a 72 percent greater risk after more than 10 years, 

than cardiac patients without depression 

(Barefoot et al., 1996). 

Studies also have found that the rate of 

depression in individuals with diabetes is 

greater than in individuals without diabetes. 

A study published in 2002 found that individuals with diabetes were 2.5 times more 

likely than a comparable sample from the 

general U.S. population to have diagnosed 

depression. Patients with comorbid diabetes 

and depression were most often younger 

adults (< 65 years), women, and unmarried 

individuals. Patients with diabetes and 

depression had higher use of ambulatory care 

(average of 12 annual visits for comorbid 

diabetes and depression versus an average of 

7 annual visits for patients with diabetes but 

no depression. Patients with comorbid diabetes and depression filled more prescriptions 

(average of 43 annual prescriptions) than 

their counterparts without depression (average of 21 annual prescriptions). Finally, for 

the year 1996, among individuals with diabetes, total health care expenditures for individuals with depression was 4.5 times higher 

than that for individuals without depression 

($247,000,000 versus $55,000,000) (Egede, 

Zheng, & Simpson, 2002).

Whether the primary diagnosis is a mental 

or physical disorder, the benefits to employers 

of providing adequate access to a coordinated 

spectrum of mental health care services are 

clear. Doing so results in higher employee 

productivity, reductions in severity of illnesses 
Designing Employer-Sponsored Mental Health Benefits 15

that affect employees’ ability to do their jobs 

and their quality of life, and reductions in 

costs for employer purchasers when fewer 

expensive hospitalizations occur as conditions 

are promptly detected and treated early in 

lower intensity levels of care. Each of these 

considerations is addressed below.

B.	 Financial Implications

The costs associated with mental health care 

can be significant, but there are also business 

costs of untreated mental illness, as evidenced 

by increased absenteeism, presenteeism, 

diminished productivity, and increased disability claims costs. In fact, in some cases, 

these costs have been found to be greater 

than the cost of providing mental health care 

benefits. The decision of employers to include 

mental health care services in their benefits 

packages may be informed by the potential 

for significant return on investment (ROI) 

and the opportunity to realize future medical 

cost offsets. However, the measures of both 

the costs of mental illness in the workplace 

and potential savings through ROI and cost 

offsets are still in development, and exact 

quantification is difficult.

In light of the high level of burden of illness as a result of the prevalence of mental 

disorders, employers have a vested interest in 

ensuring that appropriate treatments are 

available, accessible, and affordable. Financial implications of mental disorders include 

both the direct medical costs of treating the 

disorders and indirect business costs of productivity losses associated with the conditions, which may increase if coverage for 

mental disorders is insufficient. The costs of 

not sufficiently covering mental health benefits include losses in employee productivity 

(in the forms of absenteeism and presenteeism) either as a result of the employee’s own 

mental disorder or as a result of having to 

care for a dependent whose mental disorder 

is not sufficiently covered. 

In addition, if an employee or a dependent 

of an employee has a serious mental illness 

that is expensive to treat, insufficient mental 

health benefits will be exhausted quickly, 

leaving the family with high and often unaffordable self-pay costs. A 2001 analysis of 

1.5 million personal bankruptcy filings in the 

United States revealed that nearly half were 

filed due to medical bills that exceeded a 

family’s ability to pay for costs not covered 

by their health plans. Approximately 10 percent were for bills related to treatment for 

mental disorders (Himmelstein, Warren, 

Thorne, & Woolhandler, 2005). 

Workplace studies have found that direct 

medical costs to employers generally amount 

to less than 50 percent of the total employer 

costs associated with physical and mental illnesses among employees and their dependents 

(Goetzel, Hawkins, Ozminkowski, & Wang, 

2003). While some have characterized productivity losses as “indirect costs,” in reality, 

they are true costs to the organization. 

Goetzel, Hawkins, Ozminkowski, and Wang 

(2003) described the nature of these costs:

... [R]esources must be spent to compensate for downtime or for tasks 

normally performed by absent employees, either in the form of overstaffing 

or by hiring replacements for them. If 

employers choose not to overstaff or 

hire replacements, they may choose to 

incur the productivity loss, but this will 

result in fewer goods and services sold, 

lower revenues, and lower profits...

[I]ndividual health plays an important 

role in the performance of workers and 

ultimately the organization that employs 

them. Knowing that these conditions 

exert a cost burden on both health and 

productivity outcomes should inspire 
16 Special Report

company officials to direct more attention toward better management of these 

conditions so that worker performance 

is not compromised (pp. 5, 13–14).

1.	 The Costs to Employers of Untreated

Mental Illness

Quantifying the cost of mental illness at 

the workplace is challenging, and the literature demonstrates that estimates vary greatly. 

This point was reiterated by members of the 

advisory panel, who cautioned that it is 

important to bear in mind that measurements 

of productivity losses and other workplace 

costs are in developmental stages. Metrics for 

the cost of mental illness in context of the 

workplace include measures of lost productivity and presenteeism, absenteeism, and disability claims costs. “Presenteeism” refers to 

an employee who is physically present on the 

job, but due to emotional difficulties, has 

decreased productivity. Employer costs for 

lost productivity and absenteeism are significantly higher than direct spending for mental 

health care services (England, 1999). 

A.	Lost Productivity and Presenteeism

Estimates of the indirect costs of mental 

illness in the workplace vary significantly. 

In 1993, employers incurred $24 billion in 

losses from lost productivity and work time 

associated with employees with depression, 

which affects about 12 million adults in the 

workforce (England, 1999). In a later study, 

depression was estimated to cost $28.8 billion in lost productivity and worker absenteeism (Coalition for Fairness in Mental Illness 

Coverage, 2003). In another analysis, 

Greenberg et al. (2003) found that 60 percent 

of the economic burden of depression was 

workplace costs related to absenteeism and 

presenteeism. The authors reported that in 

2000, the workplace costs of depression 

totaled $51.5 billion, or 62 percent of the 

total economic burden of the illness. The 

National Mental Health Association 

(NMHA) estimates that 20 million employee 

workdays per year are lost due to depression 

alone (Whitehouse, 2003). Another study 

reported that the cost to employers of lost 

productivity among employees with depression was estimated to be $44 billion annually 

(Langlieb & Kahn, 2004). A national study 

by Stewart, Ricci, Chee, Hahn, and 

Morganstein (2003) found that $31 billion a 

year was lost due to unproductive work time, 

averaging 5.6 hours per week of lost productivity per depressed worker, compared with 

1.5 hours per week per nondepressed worker. 

A report by Pfizer, Inc. estimated that mental 

disorders are associated with 217 million 

days of absence or lost productivity, costing 

$17 billion annually (Hertz & Baker, 2002). 

Simon et al. (2001) found that treatment of 

workers with depression could lead to indirect cost savings that outweigh the direct 

costs of treatment.

When the scope of conditions studied is 

broader and includes mental illness and 

addictive disorders more generally, figures 

estimating lost productivity costs grow to 

$105 billion. Using this expanded scope of 

conditions, for example, mental and addictive 

disorders resulted in 1 billion lost days of 

productivity in 1997 (NMHA, 2001). 

Lerner and colleagues developed the Work 

Limitations Questionnaire (WLQ) as a measure of the on-the-job impact of chronic 

health problems and/or treatments, including 

the impact of depression. Using the WLQ, 

Lerner et al. (2003) found that employee 

work limitations have a negative impact on 

work productivity. Depressive symptoms 

were found in 15 percent of employees surveyed. However, in contrast to other studies 
Designing Employer-Sponsored Mental Health Benefits 17

reviewed, depressive symptoms were not significantly associated with lower productivity. 

These results may reflect reporting inconsistencies, as well as the need for a depression 

indicator based on established diagnostic 

criteria as opposed to a general mental 

health score.

Goetzel (2003) presented estimates of 

presenteeism for various ailments: On a day 

during which an employee is affected by an 

anxiety disorder or depression, 2.2 hours 

would be unproductive because of the condition. Presenteeism is estimated to contribute more to lost productivity than disability 

and absenteeism combined (Hymel & 

Loeppke, 2003). A study by Wang et al. 

(2004) of the effects of untreated major 

depression among a cohort of service industry personnel found that, as compared to 

allergies, arthritis, asthma, back pain, headaches, and high blood pressure, major depression had a significant deleterious effect on job 

performance. The loss in productivity was 

measured as equivalent to approximately 

2.3 days absent because of sickness per 

depressed worker per month of being 

depressed. The authors noted that even 

with the relatively low salaries of the service 

workers in the study, the combined salaryequivalent effect of major depression on 

absenteeism and lost productivity was more 

than $300 per month. According to the 

authors, an important implication of these 

results is that the cost-effectiveness of depression treatment from the perspective of the 

employer might be substantially greater than 

previously thought (Wang et al., 2004).

B.	 Absenteeism

Several studies have looked at absenteeism 

resulting from mental illness. Absenteeism is 

greater among workers with mental health 

concerns than those without (French & 

Zarkin, 1998). A survey of employers found 

that employees commonly miss 3 to 5 days 

of work each year and that stress and mental health issues at work were on the rise; 

on average, the cost of missed workdays 

was about $327 per day (Updike, 2003). 

Individuals under a high level of stress are 

more than twice as likely to be absent from 

work more than five times per year 

(McClanathan, 2004).

Thirty percent of individuals with depression miss one or more workdays each month 

(J.D. Power and Associates, 2004). Workers 

with depression are three times more likely 

to miss work than those who do not have 

depression (American Psychological Association, 2004). Jones and Brown (2003) stated 

that absenteeism and presenteeism related to 

depression among workers result in $24 billion in losses for employers. 

In a 1999 study, decreased use of mental 

health services was associated with increased 

absenteeism and increased use of medical 

outpatient services among employees of a 

large corporation over a 3-year study period 

(Rosenheck, Druss, Stolar, Leslie, & Sledge, 

1999). Employees in the same firm who did 

not use mental health services did not exhibit 

similar increases in absenteeism and use of 

outpatient medical services.

C.	 Disability Claims Costs

Disability claims costs related to mental 

disorders contribute to employer costs. 

Workers with depression are four times more 

likely to take disability days than workers 

who do not have depression (American Psychological Association, 2004). Workers with 

depression have from 1.5 to 3.2 more shortterm disability days, with disability costs for 

these days ranging from $182 to $395 per 

worker (Coalition for Fairness in Mental Illness Coverage, 2003; Kessler et al., 1999). 
18 Special Report

Disability claims costs related to mental illness are lower in employer health plans that 

provide greater access to outpatient mental 

health services (Coalition for Fairness in 

Mental Illness Coverage, 2003).

Conti and Burton (1995) found that individuals with depression who were on shortterm disability had longer average lengths of 

disability and a higher probability of recidivism than short-term disability recipients 

with physical health care conditions such as 

low back pain, heart disease, high blood 

pressure, or diabetes. 

Exhibit 1 summarizes various estimates of 

the workplace costs of mental health illness 

presented in the literature.

2. The Cost of Providing Mental Health 

Benefits 

A key concern among employers is that 

providing better mental health care benefits 

will result in higher costs and increased utilization of those services. According to a trade 

journal published by International Society of 

Certified Employee Benefit Specialists, mental 

health care costs increased significantly 

throughout the 1980s and early 1900s; in 

one year (from 1987 to 1988), these costs 

grew by 27 percent (Sterman, 1997). Spending for mental health disorders increased 

three and a half times between 1987 and 

2000 (Thorpe, Florence, & Joski, 2004). 

However, with the growth of health care 

Exhibit 1. Summary of Workplace Costs of Mental Illness

Study Estimated Costs*

Lost Productivity

England, 1999 $24 billion** 

Coalition for Fairness in Mental Illness Coverage, 2003 $28.8 billion** 

Greenberg et al., 2003 $23.8–$51.5 billion**

Whitehouse, 2003 20 million lost workdays**

Langlieb & Kahn, 2004 $44 billion** 

National Mental Health Association, 2001 $105 billion 

Stewart, Ricci, Chee, Hahn, & Morganstein, 2003 $31 billion

Hertz & Baker, 2002 $17 billion 

Wang et al., 2004 $300 per employee per month

Absenteeism

Updike, 2003 $327 per day 

J.D. Power and Associates, 2004 30% of workers with depression miss 1 or more 

workdays per month

Jones & Brown, 2003 $24 billion

Disability Claims Costs

Coalition for Fairness in Mental Illness Coverage, 2003 $182 per day

Kessler et al., 1999 $395 per day

* Estimated costs are annual unless otherwise noted.

**Costs associated with workers with depression.
Designing Employer-Sponsored Mental Health Benefits 19

costs generally, a study of a panel of 171 

employers with more than 500 employees 

and a stratified random sample of all U.S. 

employers with 10 or more employees indicated that employers’ costs of providing mental health benefits decreased from 6 percent 

to 4 percent of total health plan costs 

between 1993 and 1995 (Buck & Umland, 

1997). Foote and Jones (1999) reported that 

in the Federal Employee Health Benefits Program (FEHBP), the cost of behavioral health 

services dropped from 5.3 percent to 1.9 percent of total claims from 1987 to 1997, while 

the benefit plans did not change significantly. 

The authors attributed this decrease to the 

growing use of utilization review techniques. 

Private employers also experienced declines 

in mental health premium costs ranging from 

30 percent to 50 percent upon implementation of benefits management. From 1988 to 

1998, the cost of behavioral health care premiums decreased from 6.1 percent to 3.2 percent of total claims costs (Foote & Jones, 

1999). In addition, the actuarial analysis performed for this study, which is described in 

Appendix A, found that increasing the generosity of mental health benefits by raising (or 

even eliminating) the limits placed on service 

use would increase plan costs by only a relatively small amount on a per-member permonth (PMPM) basis. 

In assessing service needs and costs, 

employers must consider their employees’ 

dependents as well as the employees themselves. Employer-sponsored mental health 

benefit packages typically provide mental 

health coverage to both employees and their 

dependents. Glied and Cuellar (2003) reported that an estimated 11 percent of American 

children and adolescents have a mental health 

condition causing significant functional 

impairment. The authors found that the total 

mental health service-related expenditures for 

privately insured children and adolescents 

were $11.75 billion in 1998, and the out-ofpocket share of costs for these children was 

33.5 percent of the total cost in 1998, a significant drop from 1987. This decrease in 

out-of-pocket costs was due to managed care, 

increased treatment through primary care 

providers, and increased prescription drug 

coverage (Glied & Cuellar, 2003). A study by 

Glied, Hoven, Moore, Garrett, and Regier 

(1997), using 1992 data from the National 

Institute of Mental Health (NIMH) Methods 

for Epidemiology of Child and Adolescent 

Mental Disorders study, reported that families with insurance typically paid for half of 

the mental health services for their children. 

A study of enrollees in a behavioral health 

care carve-out found that adolescents are 

more likely to use inpatient mental health 

services than adults and younger children, the 

annual mean cost of inpatient care for adolescents being $8,975, approximately $4,000 

more than the cost for adults. The authors 

assert that these higher costs for adolescents 

imply that the elimination of coverage limits 

may benefit this group the most (Gresenz, 

Liu, & Sturm, 1998).

The cost of mental health treatment is 

increased further by nonadherence to prescribed treatment, which can lead to a greater 

likelihood of relapse, rehospitalization, and 

poor outcomes for patients with serious 

mental illnesses (Centorrino et al., 2001). 

Rittmannsberger, Pachinger, Keppelmuller, 

and Wancata (2004) found that nonadherence to prescription regimens can result in 

additional inpatient treatment (44.8 days, 

compared with 20.6 days for compliant 

patients) and is associated with a lack of 

adequate treatment. Of the 95 patients in 

inpatient psychiatric treatment studied by 
20 Special Report

Rittmannsberger and colleagues, only 43 percent took their medicine as prescribed. In 

addition, one-third of patients with bipolar 

disorders take less than 30 percent of their 

medication, leading to rehospitalization and 

suicide. Nonadherence to treatment is common; however, interventions that address 

issues of appropriately taking medication to 

manage illness can enhance adherence 

(Sajatovic, Davies, & Hrouda, 2004).

Two studies looked at the level of spending 

necessary to ensure access to mental health 

care services, specifically in a managed care 

environment. Weissman, Pettigrew, Sotsky, 

and Regier (2000) suggest that a PMPM 

expenditure of $6.00 (in 1997 dollars) is 

necessary to provide adequate mental health 

benefits. Cuffel and Regier (2001) analyzed 

data on service use and spending from 1992 

to 1998 to estimate a target PMPM expenditure of about $4.50 to ensure access to 

mental health care services at the level of use 

that prevailed prior to the widespread adoption of managed care. The authors of both 

reports suggested that employers that spend 

substantially less than the amount estimated 

in the studies may be hampering access to 

needed mental health services and may be at 

risk for experiencing higher disability or 

medical costs. 

The spending target of $6.00 PMPM 

found by Weissman, Pettigrew, Sotsky, and 

Regier (2000) is in 1997 dollars. The actuarial analysis prepared for this study (see 

Appendix A) updates the 1997 estimate to 

2005. Projecting the $6.00 target to 2005 

using the Consumer Price Index (CPI) for 

medical care services (a component of the 

CPI for medical care in general) results in an 

increase of 41.3 percent, bringing the amount 

to $8.48 PMPM. However, it is more appropriate to use an adjustment factor based on 

the overall increase in per-capita medical 

spending, because that includes utilization 

increases as well as price increases. Using 

such a factor to project the authors’ spending 

target to 2005 dollars results in an increase 

of 63.1 percent, bringing the amount to 

$9.79 PMPM. Covering substance abuse services would add approximately 35 percent to 

this amount, resulting in a total of $13.22. 

Note that this is very close to the PMPM 

benefit cost range calculated for a “less 

generous” HMO plan ($13.05–$13.26) in the 

actuarial analysis described in Appendix A. 

(Cuffel and Regier do not mention any 

adjustment of their data to a single base year, 

so their spending target could not be projected forward with the same degree of precision 

as Weissman’s target.) 

According to members of the advisory 

panel, plans with generous benefits do not 

lead to high costs and utilization, but they do 

lead to employee satisfaction and positive 

feedback. Employee satisfaction can serve to 

reduce turnover and improve employee retention—a major goal of benefits in general.

3. Return on Investment

Employers that provide behavioral health 

coverage do so to improve the health and 

well-being of their employees, and because 

they believe that their businesses will benefit 

from the investment. Employers that cover 

behavioral health services may experience 

improvements in the rates of disability program use, medical care costs, productivity, 

absenteeism, and performance. Mental health 

treatment is more cost-effective than treatment for some physical conditions (Langlieb 

& Kahn, 2004).

The NMHA (2001) reported that for every 

dollar spent on prevention and early treatment of mental illness and addictive disorders, between two and ten dollars is saved. In 
Designing Employer-Sponsored Mental Health Benefits 21

testimony before the House Committee on 

Energy and Commerce, Subcommittee on 

Health, Regier described one employer that 

reported a four-to-one ROI in mental health 

care provision once medical claims, absenteeism, and turnover were factored in (Regier, 

2002).

Zhang, Rost, Fortney, and Smith (1999) 

studied 435 subjects and determined that 

treatment for depression pays for itself in 

terms of savings in lost earnings. The authors 

noted that their measurement of cost included only lost workdays, and did not include 

other benefits such as reduced pain and suffering and increased productivity while at 

work. The study also suggests that cost 

sharing should be limited to encourage individuals with depression to seek professional 

help. Wang et al. (2004) found that productivity losses related to depression appear to 

exceed the costs of effective treatment. There 

is growing recognition that employer purchasers need more accurate and comprehensive estimates of the cost-effectiveness of 

mental health treatments, particularly estimates that reflect the costs of productivity 

losses resulting from absenteeism and presenteeism. NIMH currently is sponsoring a new 

effectiveness trial known as the Work Outcomes Research and Cost-Effectiveness Study. 

The results of this trial and future research 

initiatives may illustrate the ways that depression and other mental illnesses affect work 

performance and better demonstrate the 

value that mental health treatment holds for 

employers (Wang et al., 2004). 

4. Medical Cost Offsets

Cost savings, or cost offsets, may occur in 

general medical care as a result of increased 

access to mental health care services. The 

cost offset effect of mental health care treatment occurs when expenditures in the mental 

health sector lead to savings in another sector 

or to overall savings. Goodman (1989) 

reported that mental health care does substitute for aspects of ambulatory physician 

medical care, and several studies have found 

cost offsets in physical health services (or 

the potential for them) as a result of the provision of certain mental health services 

(Gabbard & Lazar, 1997; Goodman, 1989; 

Holder, 1998).

Compared with the general population, 

cost offsets are more likely to occur in the 

following three populations: distressed elderly 

medical inpatients, primary care outpatients 

with multiple unexplained somatic complaints, and nonelderly individuals with alcoholism (Olfson, Sing, & Schlesinger, 1999). 

Because the evidence supporting cost offsets 

occurs among targeted mental health interventions in specific population groups, the 

cost offset effects may not be applicable to 

broader populations or to more general mental health care services (Sturm, 2000) and are 

subject to continued analysis and debate 

among industry experts. 

Nitzkin and Smith (2004) cited studies 

showing high prevalence of psychiatric illness 

and/or depression among high utilizers of 

medical care. These authors suggested that 

screening for and effective treatment of 

depression may serve to reduce physical 

complaints and medical visits. Simon, Ormel, 

Von Korff, and Barlow (1995) studied the 

overall health care costs associated with 

depression and anxiety disorders among 

primary care patients. Patients with depression or anxiety disorders had higher health 

care costs than patients with no disorder. In a 

6-month period, the total costs (mental and 

physical) for patients with one of the disorders were $2,390, compared with $1,397 for 

patients without depression or anxiety. The 
22 Special Report

cost differences reflected higher utilization of 

general medical services.

Simon et al. (2001) examined the costeffectiveness of a depression management 

program for high utilizers of medical care 

and found that the program produced better 

health outcomes but also increased health 

service costs. Patients in the depression management program made, on average, two 

more outpatient visits than the control 

group and were significantly more likely to 

receive antidepressant treatment. The authors 

asserted that achieving better medical results 

often requires the investment of additional 

resources. The study included only a 1-year 

period to study cost-effectiveness; therefore, 

long-term cost savings may not have been 

captured.

Olfson, Sing, and Schlesinger (1999) 

looked at a range of psychosocial treatments 

and found that the treatments were associated 

with an average 10 percent reduction in 

inpatient medical care costs. Individuals frequently seeking outpatient medical services 

for unexplained medical complaints who also 

received mental health services had about 

half the medical costs of like individuals who 

received no mental health services. Medical 

costs are reported to decrease by as much as 

$900 per employee per year, and absenteeism 

can be reduced by 9 percent if employees 

with depression are treated (Regier, 2002). A 

study of depression in the workplace found 

that between 45 percent and 98 percent of 

pharmacotherapy costs for depression could 

be offset by increased productivity at work 

(Kessler et al., 1999).

Olfson, Sing, and Schlesinger (1999) 

asserted that, to achieve cost offsets, physical 

and mental health care delivery and financing 

should be integrated, utilization management 

and medical staff should be trained to identify patients whose high medical care use may 

be influenced by mental health conditions, 

and pricing policies should be combined with 

utilization management techniques to encourage access to mental health care services. 

England (1999) stated that to provide mental 

health care that is appropriate and yields cost 

offsets, employers and health plans must look 

beyond the benefit design itself toward care 

management tools. 

In addition, some preventive mental health 

interventions have been shown to lead to 

both cost offsets (or cost savings in general 

health care costs) and positive health outcomes (Olfson, Sing, & Schlesinger, 1999). 

Examples of effective preventive interventions 

are prenatal and infancy home visits, targeted 

smoking cessation, targeted short-term mental health therapy, self-care education for 

adults, presurgical education for adults, brief 

counseling to reduce alcohol use, screening 

children and adolescents for behavioral disorders, and screening adolescents and adults for 

use of tobacco, use/abuse of alcohol, depression, and anxiety (Dorfman, 2000; Dorfman 

& Smith, 2002; Nitzkin & Smith, 2004). 

Such preventive interventions could be considered to be consistent with the overarching 

goal of managed mental health care and may 

be appropriate for inclusion in managed care. 

5. Parity of Mental Health Benefits

In recent years, there has been an effort to 

require through Federal law that the mental 

health benefits provided through a benefit 

plan be on par with its medical/surgical benefits. Employers and other plan purchasers 

have been concerned about the potential cost 

increases of meeting this requirement. As 

described below, studies and evaluations of 

the cost effects of mental health parity 

showed that the cost increases plans experi-
Designing Employer-Sponsored Mental Health Benefits 23

enced were largely insignificant, and other 

plans reported cost decreases with mental 

health parity implementation. In addition, the 

studies described below found that very few 

employer purchasers dropped mental health 

benefit coverage altogether, and that quality 

and access were improved as a result of 

enacting parity of coverage.

The National Business Group on Health, 

formerly the Washington Business Group on 

Health, convened a group of eight very large 

employers that provided generous mental 

health benefits to their employees. These 

employers together employed about 1.2 million employees in the United States, and their 

health plans covered more than 2.4 million 

lives. Apgar (2000) reported that one of these 

employers implemented behavioral health 

parity in 1993 within a managed care carveout context and experienced a 46 percent 

drop in inpatient costs and a 21 percent drop 

in outpatient costs.

A.	The Effects of Federal Mental Health Parity

Legislation

The Federal MHPA was signed into law on 

September 26, 1996. The law prohibits differential treatment regarding annual and lifetime maximums and reimbursement ceilings 

between physical and mental health benefits. 

It applies only to plans that offer mental 

health benefits and does not mandate inclusion of such benefits in health plan packages. 

Plans that have mental health benefits are 

allowed to drop such coverage entirely, and 

they are allowed to continue to place annual 

and day visit limitations on covered services, 

as well as to require higher levels of cost 

sharing for mental health benefits than for 

physical health benefits (Frank, Koyanagi, & 

McGuire, 1997).

During debate over Federal mental health 

parity legislation, a key concern was the 

impact of parity on the cost of providing 

mental health benefits. Estimates of the 

claims cost increases resulting from the Federal parity law ranged from 0.3 percent to 

11.4 percent, depending on the specifications 

of the parity provisions (Fronstin, 1997; Sing, 

Hill, Smolkin, & Heiser, 1998). However, a 

recent U.S. Government Accountability 

Office (GAO) study indicated that the costs 

associated with the Federal mental health 

parity law appear to have been negligible. 

The GAO (2000) found that, while the 

majority of employers it surveyed did not 

know to what extent their claims costs were 

affected, only 3 percent of private employers 

with more than 50 employees in States without more comprehensive parity laws indicated 

that their claims costs had increased; 37 percent of surveyed employers reported that 

implementing the Federal parity rules did not 

increase claims costs. However, two-thirds of 

employers that were newly compliant with 

the Federal rules had increased restrictions 

for other plan features, such as office visit or 

hospital day limits, which may have limited 

the extent to which costs would increase. The 

survey also found that consumers in these 

States have seen only minor changes in their 

health benefits, with little or no increase in 

access to mental health services. The GAO 

survey results showed that less than 1 percent 

of employers eliminated their benefit plans 

(for mental health or health in general) after 

enactment of the Federal mental health parity 

law. The survey also reported that a more 

comprehensive parity law covering service 

limits, cost sharing, or both would increase 

costs by between 2 and 4 percent.
24 Special Report

B.	 Parity in the Federal Employees Health Benefits

Program

The U.S. Department of Health and Human 

Services (DHHS) recently published an evaluation and actuarial analysis of parity in the 

FEHBP. In January 2001, the FEHBP implemented a policy of full parity, requiring benefit design features for behavioral health services (mental health and substance abuse), 

such as deductibles, copayments, and limits 

on visits and inpatient days, to match those 

for general medical care in all FEHBP plans. 

This study looked at both implementation 

results and the impact of the parity policy. 

Overall, the study found that the implementation of the parity policy was achieved as 

intended and had little or no significant 

adverse effect on access, spending, or quality, 

and it provided users of behavioral health 

care services with improved financial protection (DHHS, 2004). The study evaluated nine 

FEHBP plans that were matched to a nonFEHBP comparison group. The use of behavioral health care increased universally during 

the study period and was reflected in both 

the FEHBP and non-FEHBP plans. In comparison to the non-FEHBP plans, the FEHBP 

parity policy did not specifically increase the 

utilization of mental health care. Even with 

an increase in access, after adjusting for global spending trends, spending for behavioral 

health care services actually declined in seven 

of the nine FEHBP plans, with four of these 

plans seeing statistically significant declines. 

The parity policy also resulted in decreases in 

out-of-pocket spending for beneficiaries in six 

of the nine FEHBP plans, five of which were 

statistically significant. Beneficiaries in the 

other three plans experienced increases in 

out-of-pocket spending that were in line with 

system-wide trends. Finally, the study found 

that quality, represented by the quality of 

treatment for major depressive disorder in 

adults, remained unchanged or improved 

slightly as a result of the parity policy in all 

but one of the FEHBP plans studied.

C.	 The Effects of State Mental Health Parity

Legislation

The experiences of States that had implemented mental health parity laws before the 

Federal parity law, which became effective 

January 1, 1998, also provide some insights 

into the cost effects of mental health parity. 

Sing, Hill, Smolkin, and Heiser (1998) estimated that full parity for mental health and 

substance abuse services (which is more comprehensive than the Federal parity law) 

would raise premiums by 3.6 percent on 

average. In testimony before the U.S. House 

of Representatives Committee on Energy and 

Commerce, Subcommittee on Health, Regier 

(2002) cited studies showing that in Texas 

and North Carolina, mental health parity 

implemented in combination with managed 

care resulted in costs for mental health benefits decreasing between 30 percent and 50 

percent, and the population accessing care 

increased 1 to 2 percent. In Maryland, where 

mental health care already was provided 

largely through managed care, costs increased 

by less than 1 percent when parity was introduced in 1994 (Regier, 2002). In a study of 

Ohio’s State employee benefits program, 

which implemented a behavioral health 

carve-out with parity, researchers learned that 

the cost of behavioral health services was the 

same in the periods before and after parity 

was implemented (Sturm, Goldman, & 

McCulloch, 1998).

Vermont implemented the most comprehensive parity law in the Nation in 1998, at 

the same time the Federal MHPA went into 

effect. The State’s parity law established 

equality of coverage for both mental health 
Designing Employer-Sponsored Mental Health Benefits 25

and substance abuse and exceeded the provisions of the Federal parity law on every 

dimension. The law defined mental health 

conditions broadly and required equal terms 

with general health care for service limits and 

cost sharing. Rosenbach et al. (2003) studied 

the impact of the Vermont parity law on 

health plans, employers, providers, and consumers. While their study was limited to only 

the first 2 to 3 years of parity in Vermont, 

the authors identified several major conclusions around parity in mental health benefits: 

n	 Parity did not cause employers to drop 

coverage or switch to self-insured 

products.

n	 Managed care for mental health and substance abuse services was an important 

factor in controlling costs. 

n	 Access to outpatient mental health services 

improved with parity.

n	 Total spending (health plan payments and 

consumer out-of-pocket payments to providers) for covered mental health and substance abuse services declined after parity, 

despite lower consumer cost sharing and 

higher limits on service use.

n	 Consumers paid a smaller share of total 

spending for covered mental health and 

substance abuse treatment after parity.

n	 Awareness of parity was relatively low 

among consumers, which complicated 

implementation of the law for employers, 

providers, and consumers. 

Managed care may help moderate premium costs when parity is implemented because 

of the utilization management strategies of 

many health plans and MBHOs (Burnam & 

Escarce, 1999; Otten, 1998; Sing, Hill, 

Smolkin, & Heiser, 1998). Sterman (1997) 

reported that during the time when managed 

behavioral health care was growing in prevalence, the rate of inpatient days declined 

while the outpatient visit rate increased. 

Specifically, inpatient days per 1,000 lives 

decreased from 100 per 1,000 in 1986–1988 

to 25 per 1,000 in 1994–1995; and the outpatient visit rate grew from 600 per 1,000 in 

1986–1988 to 750 per 1,000 in 1989–1991. 

The shift from inpatient to outpatient services 

affected claims costs by decreasing the annual 

per enrollee cost from $750 in 1986–1988 to 

$150 in 1994–1995. 

C.	 Protection from Catastrophic Costs

While the section above describes costs from 

the perspective of an employer purchaser, this 

section describes costs borne by covered 

employees in the form of out-of-pocket costs 

that result from the need for services that 

exceed the duration, level, or scope of mental 

health services covered by a health plan, as 

well as the costs of mental health services 

that are not included in, or are specifically 

excluded from, the health plan’s benefit package and thus not reimbursable.

As previously mentioned, a review of 

bankruptcy filings for 2001 estimated that 

about half of the approximately 1.5 million 

American families who filed for bankruptcy 

that year cited out-of-pocket medical costs as 

the reason for their filing (Himmelstein, 

Warren, Thorne, & Woolhandler, 2005). 

Results from the 2003 Commonwealth Fund 

Biennial Health Insurance Survey revealed 

that 77 million adults reported that they had 

medical bill problems, accrued medical debt, 

or both. This finding translates to nearly two 

of every five (37 percent) adults in the United 

States. Of these 77 million adults with medical bill problems, 71 million are of working 

age. The burden of this medical debt has 

health consequences as well. The survey 

found that 63 percent of adults who had 

problems with medical bills had gone without 
26 Special Report

needed medical care in the past 12 months. 

Forty-three percent reported that they did not 

fill a prescription, were unable to go to a 

needed doctor visit, or skipped recommended 

follow-up tests or visits (Doty, Edwards, & 

Holmgren, 2005).

Employers must consider the potential 

effect on an employee of catastrophic costs 

resulting from a serious mental disorder. A 

central purpose of health insurance coverage 

is to protect individuals and families from 

catastrophic financial losses caused by illness 

or injury. Mental health benefits, then, protect against the potential catastrophic costs of 

a mental disorder. However, there is no single, 

clear threshold for identifying catastrophic 

costs, and definitions vary significantly. The 

cost of the mental health benefit must be 

weighed against the plan’s protection against 

catastrophic costs, both for the employer and 

the employee. 

“Catastrophic costs” are not well-defined 

in the literature—instead, many authors refer 

to “catastrophic episodes,” during which 

enrollees incur high out-of-pocket costs, or 

catastrophic costs. Different criteria have 

been used to define catastrophic costs in 

mental health care, including dollar thresholds, exhaustion of covered benefits, and 

diagnosis of certain serious mental disorders. 

However, none of these criteria have been 

assigned a generally accepted level above 

which costs are considered catastrophic. For 

example, one study in the literature review 

defined two catastrophic scenarios in which 

an enrollee would require a large volume of 

services that would exhaust the benefits 

provided by many insurance plans. The first 

scenario consisted of 90 outpatient visits, a 

30-day inpatient stay, and 10 inpatient physician visits, and the second consisted of 80 

outpatient visits, a 60-day inpatient stay, and 

20 inpatient physician visits, both in a 1-year 

period (Zuvekas, Banthin, & Selden, 1998). 

Comparing these catastrophic scenarios with 

the “typical” mental health benefit covering 

30 inpatient days and 20 outpatient visits 

annually leads to the conclusion that, in general, mental health benefits may be inadequate to protect against catastrophic costs. 

Although the majority of individuals 

receiving mental health services incur relatively low expenses, and completion of outpatient treatment for a mental health disorder 

typically occurs within 10 visits (DHHS, 

1999; Olfson, Sing, & Schlesinger, 1999), 

individuals with chronic or serious mental illness have a greater likelihood of incurring 

catastrophic mental health care costs (DHHS, 

1999; Frank, Goldman, & McGuire, 1992; 

Sing, Hill, & Puffer, 2001). 

The financial burden of treatment for individuals receiving care for serious mental illnesses may be quite substantial. However, 

overall, the number of individuals who experience a catastrophic mental health episode in 

a given year, and therefore incur catastrophic 

service costs, is very low. One estimate of the 

number of individuals experiencing catastrophic costs is the 1 percent of plan enrollees exceeding the caps on mental health benefits. Another estimate is the approximately 

22.3 percent of the general population suffering from serious mental illness (Narrow et 

al., 2000; Zuvekas, 2001). Serious mental illnesses are defined on the basis of diagnosis, 

disability, and duration, and include disorders 

such as schizophrenia, schizoaffective disorder, manic depressive disorder, autism, major 

depression, panic disorder, and obsessivecompulsive disorder (Narrow et al., 2000). In 

addition, while the proportion of the population seeking mental health treatment has 

grown, just 1 to 2 percent receives inpatient 
Designing Employer-Sponsored Mental Health Benefits 27

treatment (Hertz & Baker, 2002; Zuvekas, 

2001). Some individuals with high levels of 

mental health care needs also may exhaust 

their financial resources to the extent that 

they qualify for coverage of mental health 

care services in the public sector. In fact, public programs are paying for a greater proportion of mental health services now than in 

past years—63 percent in 2001 versus 57 

percent in 1991 (Mark et al., 2005). 

The U.S. Tax Code currently allows taxpayers to deduct medical and dental expenses 

that exceed 7.5 percent of their adjusted 

gross income. In defining the underinsured, 

or insured persons with insufficient coverage, 

Schoen, Doty, Collins, and Holmgren (2005) 

included those with medical expenses totaling 

10 percent or more of income, or for those 

with income below 200 percent of the Federal 

poverty level, medical expenses totaling at 

least 5 percent of income. 

Studies of out-of-pocket spending provide 

some helpful information. McKusick, Mark, 

King, Coffey, and Genuardi (2002) studied 

the trends in benefits and consumer spending 

from 1987 to 1997 and determined that 

changes in health plan benefits during that 

period resulted in lesser coverage for those 

with more need or high utilization because of 

the increased use of service limits that they 

would likely exceed, while those with less 

intensive needs had a slight increase in coverage because of the accompanying decrease in 

cost-sharing levels. 

Ringel and Sturm (2001) studied out-ofpocket spending for mental health services 

among different socioeconomic groups. The 

study included only individuals with a probable mental health diagnosis who had used 

mental health services in the previous year. 

Among the privately insured in their sample, 

the average out-of-pocket spending was 

about 3 percent of household income. However, they found that 5.2 percent of that privately insured group had significant out-ofpocket spending, defined as spending equal 

to or greater than 20 percent of household 

income. In relation to the cost of the services 

received, the privately insured group paid for 

an average of 30 percent of their treatment 

costs, and nearly 26 percent of the group 

paid for 50 percent or more of their total 

treatment costs. It is important to note that 

the study did not indicate the type of private 

insurance, and may include both group and 

individual coverage. The authors also noted 

that it is possible that some expenses for the 

privately insured group may have been 

incurred at a time during the year when they 

were not covered by the insurance. Findings 

were similar to a previous study by Zuvekas, 

Banthin, and Selden (1998), which estimated 

consumer share of cost based on current coverage and possible treatment scenarios. The 

authors found that for catastrophic mental 

health episodes, individual out-of-pocket 

costs would average 30 percent of total treatment costs.

Members of the advisory panel suggested 

that a particular problem in mental health 

benefits is that out-of-pocket spending for 

services received beyond plan limits does not 

count toward the plan’s overall out-of-pocket 

maximum. This same exclusion is used in 

both mental and physical health benefits, and 

any expenses that a member incurs for services beyond the benefit limit (e.g., on chiropractor visits, or inpatient mental health days) do 

not count toward the plan’s out-of-pocket 

limit (Sing, Hill, & Puffer, 2001). These 

expenditures that are not counted toward the 

out-of-pocket maximums in some cases may 

total very large amounts and contribute to the 

catastrophic nature of these individuals’ and 
28 Special Report

families’ health care costs. The advisory panel 

members noted that, as mental health benefits 

often are more limited than physical health 

benefits, the risk of exceeding the benefit limit 

and then facing unlimited out-of-pocket costs 

for additional services may be greater on the 

mental health side. 

D.	 Plan Design Issues and Criteria

In addition to general concerns about the 

prevalence of mental disorders and the financial implications of those disorders to both 

employers and employees, several other factors influence employer decisions regarding 

mental health benefit design. Employers take 

into consideration regulatory requirements 

and costs, and their benefits decisions also 

are influenced by the goals of employee 

health and well-being, employee attraction 

and retention, and employee productivity. 

Designing mental health benefits can be challenging because employers may have disparate goals in providing mental health benefits. 

The way the mental health benefit package is 

designed can help employers achieve a balance among those goals. On one hand, 

employers want to assure the mental wellbeing of their employers and encourage 

appropriate service use; on the other hand, 

employers face growing health and mental 

health care costs and see a need to control 

their expenditures. 

The notion of developing criteria for 

selecting mental health plan components is 

appealing, because in theory the criteria 

would simplify employers’ decision-making 

with respect to mental health benefit design. 

Possibly, criteria could be set with regard to 

some factors such as the evidence base for or 

cost-effectiveness of treatments. However, 

several factors complicate the ability to 

develop one set of criteria broadly usable by 

employers, and may render developing criteria inadvisable. As discussed in the introduction to this report, employers are diverse in 

their size, industry, unionization of their 

workforces, locations, self-insured versus 

fully insured status, and other characteristics 

that affect their health care benefit strategies. 

It would be nearly impossible to determine a 

set of criteria that adequately met the needs 

of all employers. Factors affecting employers’ 

needs when designing a mental health benefits package also include whether they offer 

multiple health plans and the types of plans 

offered (HMO, PPO, etc.). 

A study of eight employers that offer generous mental health benefits (Apgar, 2000) 

identified essential techniques to manage the 

quality of mental health care: preferred networks, pre-approval for treatment, a full range 

of treatment settings in the networks, referral 

mechanisms to connect employees to appropriate services, and utilization review and 

financial accountability. Areas that remained 

problematic for the employers included stigma surrounding mental health issues, lack of 

coordination of care, and co-occurring mental illness and addiction disorders. 

Another study of seven employers that 

offered generous mental health benefits 

(Robinson, Chimento, Bush, & Papay, 2001) 

reported that these employers believed generous benefits could decrease health care costs, 

increase productivity, reduce absenteeism, 

and create a comparative advantage in the 

labor market. The study also suggested certain common approaches, including early 

intervention, offering services across a continuum of care, and covering treatments for a 

wide range of mental health problems. The 

study found that between 5 and 7 percent of 

total health care expenditures were needed to 

provide a comprehensive mental health bene-
Designing Employer-Sponsored Mental Health Benefits 29

fit. This level of funding reflected the employers’ belief that adequate mental health services 

could reduce other health care costs. These 

companies also made efforts to reduce the 

stigma of mental illness and to offer multiple 

entry points to mental health care to facilitate 

access to services. They also actively managed 

their mental health benefits, using extensive 

review processes and monitoring vendors 

throughout their contractual relationships.

Specific issues and criteria affecting the 

design of mental health benefits include the 

following:

1. Regulatory Requirements

Employers must ensure that their mental 

health benefits meet Federal and/or State 

requirements. As previously mentioned, the 

Federal MHPA of 1996 requires group health 

plans sponsored by companies with more 

than 50 employees to provide the same level 

of annual or lifetime dollar limits of coverage 

for mental health as they provide for medical 

and surgical benefits for physical illness, if 

they offer mental health benefits at all. 

However, while total coverage limits may not 

differ, plans may have higher deductible 

amounts, copayment rates, or limits on covered visits for mental health services. Also, if 

covering mental health services at the same 

level as physical health benefits would 

increase a plan’s costs by at least 1 percent, 

the plan may opt out of the requirement. 

In addition, 46 States have laws governing 

the provision of mental health benefits under 

employment-based health plans. These laws 

vary in their focus, from parity to minimum 

benefit mandates to mandated offering of 

optional benefits (National Conference of 

State Legislatures, 2004). More than half the 

State laws are more comprehensive than the 

Federal parity law by requiring parity in service limits or cost-sharing provisions. Sixteen 

of the State laws require full parity, in that 

they require mental health coverage in all 

group health plans sold, and they require 

parity in all aspects (GAO, 2000). While 

many States regulate provision of mental 

health benefits, because of ERISA exemptions, these State insurance laws do not apply 

to self-insured employer-sponsored plans. 

2. Cost Factors

The experts interviewed for this project confirmed that cost is one of the most important 

considerations for employers in designing a 

benefit. Employers are concerned about 

health insurance costs in general. These costs 

increased by double-digit percentages between 

2001 and 2004 and increased by 9.2 percent 

from spring 2004 to spring 2005 (Gabel et 

al., 2005). Employers report that the cost of 

an episode of care for a mental health problem is two to three times the cost of an episode of care for other health problems 

(Fronstin, 1997). Employers have used various strategies to control mental health care 

costs, such as cost sharing, utilization review, 

managed care strategies, capitation (fixed 

payment per enrollee), and bundling of services (e.g., a fixed total payment for all care provided during an inpatient stay). In the early 

days of employer-sponsored health insurance, 

employers covered mental health benefits at 

the same level as physical health conditions. 

However, in the 1970s and early 1980s, they 

found that the costs associated with mental 

health care were very high, even though a 

small proportion of their members used the 

services. In response, employers placed limits 

on mental health benefits to reduce their risk 

of these high-cost claims (Fronstin, 1997). 

A.	Adverse Selection

One element of employer concern regarding 

benefit plan cost is adverse selection, or 
30 Special Report

attracting employees who need health care 

services by offering generous health plans. 

Deb, Wilcox-Gok, Holmes, and Rubin 

(1996) found that the perceived mental 

health risk of family members affected choice 

of health insurance among privately covered 

individuals. Branstorm and Cuffel’s 2004 

study of the existence of adverse selection 

after limited parity was introduced supports 

the view that adverse selection does exist in 

partial carve-outs in which mental health 

benefits are provided or managed separately 

from physical health care. In the study, one 

employer offered a full carve-out, in which 

employees had no choice of health plan, and 

a second offered employees a partial carveout, with the option of choosing between 

health plans. Under the partial carve-out, 

new members not only sought out behavioral 

health treatment more frequently than before 

the carve-out, but also cost more on average 

than existing members. 

Other studies reviewed reported inconclusive evidence of the occurrence of adverse 

selection with regard to mental health benefits. Sturm et al. (1995) reported that adverse 

selection initially occurred when the switch to 

managed mental health benefits was implemented. Enrollees with depression who 

switched from FFS to prepaid health plans 

had fewer mental health visits than those 

who stayed in the prepaid plans, and those 

switching from prepaid plans to FFS were 

among the highest users of mental health services. However, the adverse selection effects 

eventually dissipated.

B.	 Moral Hazard

A related concern is that of “moral hazard,” 

which occurs when the availability of generous benefits or lower out-of-pocket costs 

leads to increased use of services. Moral hazard is a greater risk with respect to mental 

health services than with services for physical 

health care (Frank, McGuire, Bae, & Rupp, 

1997). One of the strategies employers have 

used to control mental health expenditures is 

increased cost sharing, such as higher copayments for mental health services. Research 

has shown that mental health care is more 

responsive to cost-sharing arrangements and 

that member costs affect the decision to use 

mental health care more than they affect the 

decision to use other health care services 

(Fronstin, 1997). Cost sharing also affects 

enrollee choice of provider (e.g., psychiatrist, 

other physician, or other mental health providers such as social workers or psychologists) at the enrollee’s initial mental health 

care visit (Holmes & Deb, 1998). 

Higher employee cost sharing can also 

affect utilization of needed mental health services. Simon, Grothaus, Durham, Von Korff, 

and Pabiniak (1996) studied the impact of 

increasing copayments on the use of outpatient mental health services in a staff model 

HMO. They found that instituting a $20 per 

visit copayment was associated with a 16 

percent decrease in the likelihood of service 

use initiation but no change in frequency of 

visits among current service users. A subsequent increase to $30 per visit was associated 

with no significant change in likelihood of 

use but resulted in a 9 percent decrease in 

visits per year among those already using services. Previous work by the same authors 

also found that higher out-of-pocket costs for 

outpatient mental health visits reduced utilization among HMO members irrespective of 

illness severity. Mental health care is at least 

as responsive to price as general medical care 

(Simon, Von Korff, & Durham, 1994). 

In response to the assertion that a lack of 

coverage for outpatient mental health care 

would reduce only unnecessary mental health 
Designing Employer-Sponsored Mental Health Benefits 31

service utilization, Landerman, Burns, 

Swartz, Wagner, and George (1994) studied 

utilization of mental health care services for 

those with and without diagnoses of a psychiatric disorders and found that both were 

affected by insurance coverage. This finding 

provides further evidence that limiting coverage would reduce necessary as well as unnecessary utilization of outpatient mental health 

care and suggests that coverage limits and 

higher cost sharing would affect necessary 

treatment as well.

Although it predates the large-scale market 

shift to managed care, the RAND Health 

Insurance Experiment (HIE) was a large-scale 

social experiment that investigated the effects 

of alternative health insurance plans with 

varying levels of cost sharing on the use of 

health services and on the health status of 

individuals. As noted by members of the 

advisory panel, though it dates back to the 

1970s and early 1980s, the RAND HIE provides an important context for understanding 

the effects of out-of-pocket costs on mental 

health service utilization. Findings from the 

RAND HIE indicated that ambulatory mental health costs increase four-fold when full 

insurance is available where previously there 

had been none, as compared to doubling for 

ambulatory medical costs (Frank, McGuire, 

Bae, & Rupp, 1997; Keeler, Wells, Manning, 

Rumpel, & Hanley, 1986). 

The RAND HIE also demonstrated that 

reducing the level of cost sharing increased 

the demand for mental health services 

(Wells, Manning, Duan, Ware, & Newhouse, 

1982). The authors reported that the probability of use of ambulatory mental health services in a plan with no cost sharing (0 percent coinsurance) was double that in a plan 

with high cost sharing (95 percent coinsurance with an out-of-pocket maximum); 

ambulatory mental health care expenditures 

for those in the 0 percent coinsurance plan 

were 75 percent more than for those in the 

high cost-sharing plan. 

Wells, Manning, and Valdez (1989) found 

that cost sharing does not have negative 

effects on mental health outcomes generally. 

Using data from the RAND HIE, the 

researchers found that, averaged over the 

covered population, there was no adverse 

effect on mental health outcomes of plans 

requiring cost sharing relative to plans that 

did not. This finding was particularly strong 

for those who were initially well and poor; 

the authors cautioned against generalizing 

this result to the sick poor, some of whom 

were shown to have better improvement 

under a care plan with low or no coinsurance 

requirements.

3. Consumer-Directed Health Benefits: 

Issues for Mental Health Benefits

Another consideration related to employer 

goals and decision-making around health 

care benefits is the type of health plan used 

to provide the broader health care benefit. 

The vast majority of employers currently use 

managed care plans to provide their health 

care benefits, with 61 percent of covered 

workers in PPOs, 21 percent in HMOs, 15 

percent in POS plans, and 3 percent in conventional (FFS) plans (KFF/HRET, 2005). In 

addition, there is considerable and growing 

interest in CDHB. A growing number of 

companies are offering HDHPs, which 

require more upfront spending on the part of 

the consumer before services are covered, and 

which may be combined with account-based 

spending funds, funded either by the employer 

or the employee or both. In 2005, 20 percent 

of all firms offered HDHPs to employees, up 

from 10 percent in 2004 and 5 percent in 

2003. These plans are even more common 
32 Special Report

among the largest firms; 33 percent of firms 

with 5,000 or more workers offer them 

(KFF/HRET, 2005). 

However, fewer firms offer spending 

accounts along with their HDHPs. According 

to the 2005 Employer Health Benefits Survey, 

about 2 percent of firms with health benefits 

offer HDHPs with health reimbursement 

arrangements (HRAs), which are funded 

solely by employers. These plans cover about 

1.6 million workers in 2005. In addition, 

about 2 percent of firms with coverage offer 

health savings account (HSA)-qualified 

HDHPs, which allow workers to establish 

accounts to which both they and their 

employers can contribute. About 810,000 

workers are covered by HSA-qualified 

HDHPs (Claxton et al., 2005). Persons covered by HDHPs in the individual (non-group) 

market also can establish HSAs, and a recent 

study by Forrester Research indicated that 

the number of HSAs is expected to grow to 

more than 6 million by 2008, driven by 

growth in HDHPs (Henrickson, 2005). 

Some experts anticipate a shift to more 

individual coverage as employers drop coverage in response to the rising costs of providing benefits, though this has not yet been 

borne out in the coverage data. Rather, 

according to several U.S. Census Bureau 

Current Population Reports, governmentsponsored coverage has been increasing in 

recent years, while individually purchased 

coverage has remained stable (DeNavasWalt, Proctor, & Lee, 2005; DeNavas-Walt, 

Proctor, & Mills, 2004; Mills & Bhandari, 

2003). Additional growth in individually 

purchased coverage may occur as a result of 

the institution of HSAs. Furthermore, legislation was submitted recently—HR 2355, 

the Health Care Choice Act of 2005—that 

would allow an insurer selling individual 

health insurance policies in a primary State 

to sell individual policies in secondary States 

as well, while remaining subject to the insurance laws in the primary State and avoiding 

most of the insurance laws in the Secondary 

states, such as those mandating coverage of 

certain benefits or treatments. 

With this movement toward CDHB or 

HDHPs with spending accounts, there are 

concerns related to coverage for mental 

health care services. Specific concerns related 

to mental health care services and HSAs 

involve the definition of preventive care and 

the services provided by Employee Assistance 

Programs (EAPs). In order to qualify to establish an HSA, an individual must be covered 

by an HDHP, which is allowed to provide 

first dollar coverage only for preventive care 

services (U.S. Department of the Treasury, 

2004a). Therefore, as long as the services 

provided by the EAP are considered preventive, it will not create an eligibility problem. 

A Question and Answer Notice from the U.S. 

Department of the Treasury indicates that an 

EAP will not interfere with HSA eligibility 

“if the program does not provide significant 

benefits in the nature of medical care or 

treatment,” and that screening and other 

preventive care services will be disregarded 

(U.S. Department of the Treasury, 2004b).
Designing Employer-Sponsored Mental Health Benefits 33

An employer also may use self-insurance 

to exert more control over its health benefit 

plan. A self-insured plan is one in which the 

employer retains the financial risk of the 

health care services utilized under the plan 

by employees and dependents. Conversely, a 

fully insured plan is one in which the 

employer pays a premium per covered member to an insurance company, and the insurance company assumes the financial risk for 

paying for covered services. Self-insured 

employers, which generally are large companies, administer their own health plans (or 

use a third-party administrator) and are 

exempt from State insurance laws through 

ERISA. Self-insured plans are subject to 

Federal oversight and the Federal MHPA. In 

2005, 54 percent of workers with health 

insurance were enrolled in self-insured or 

partially self-insured health benefit plans 

(KFF/HRET, 2005). 

Self-insuring offers employers increased 

flexibility in the benefits covered by their 

health benefit plans. The exemption from 

When designing a mental health benefit package, employers must consider how they will administer the benefits. Employers may choose from a variety of health plan 

types: HMOs, PPOs, POS plans, FFS, or CDHB plans. Larger employers 

may choose to offer several of these plan types, and they should consider 

how the plans will deliver the mental health benefit. After choosing the plan 

type(s), employers can choose to have a specialty MBHO deliver the benefit 

or have the mental health benefit included in the broader health benefit 

plans. Employers can also consider varying models of risk sharing. Employers can put the plans at full risk with certain limits on losses or profits or 

create a partial risk-sharing arrangement. Risk sharing increases the pressure 

on plans to ensure that benefits are utilized appropriately.

III. Administration 

of Mental Health 

Benefits: Overview of 

Carve-Out Purchasing 

Arrangements
34 Special Report

certain State insurance laws through selfinsuring can allow an employer to offer less 

generous benefits or exclude State-mandated 

benefits. However, Acs, Long, Marquis, and 

Short (1996) gave data showing that selfinsured plans provided at least as generous 

outpatient mental health benefits as fully 

insured plans. In addition, the authors found 

that average monthly premiums were similar 

in self-insured and fully insured plans. 

Managed care dominates the mental health 

care market, and nearly three-quarters of 

Americans with health insurance are covered 

by managed mental health benefits (Shore & 

Altman, 1999). The main decision in the 

administration of employer-sponsored mental 

health benefits appears to be whether to 

carve the benefit out to a specialty MBHO. 

The benefits of carve-outs include cost control, standardization of the benefit, care 

management, and (possibly) better access to 

care, while the drawbacks include a lack of 

coordination with physical health services 

and the difficulty of treating patients with 

special needs (Grazier & Eselius, 1999). 

Firm size (measured as revenues) is the 

strongest predictor of an employer’s likelihood of carving out its mental health benefits. Large firms are more likely to use carveouts; 40 percent of Fortune 500 companies 

carve out their mental health benefits, while 

only 30 percent of smaller companies (with 

10,000 or fewer employees) do so. Firms in 

the manufacturing and infrastructure industries also are more likely to carve out their 

mental health benefits, and employers using 

carve-outs have higher rates of union membership than other firms. In addition, 

employers interested in special expertise and 

cost savings are more likely to carve out their 

mental health benefits, while those more concerned with care coordination are less likely 

to use carve-outs. Finally, among employees, 

those in non-HMO plans are more likely 

than HMO enrollees to have their mental 

health benefits carved out (Hodgkin, Horgan, 

Garnick, Merrick, & Goldin, 2000). 

Mental health carve-outs can be designed 

to deliver adequate mental health benefits, 

but employers must choose their vendors and 

negotiate their contracts carefully. To influence the cost and quality of care, an employer 

must be willing to exert its influence during 

the initial contract negotiations and during 

periodic contract reviews. Carve-out designs 

vary, as employers must determine the level 

of responsibility and control they desire. In 

addition, many employers use carve-outs for 

enrollees in certain health benefit plans, such 

as indemnity plans, while using carved-in 

benefits (i.e., integrated health plans) for 

other enrollees, such as those in managed 

care plans (Hodgkin, Horgan, Garnick, 

Merrick, & Goldin, 2000).

Mental health services generally are carved 

out either by the employer or by the health 

plan. Exhibit 2 shows three typical models 

of behavioral health care contracting, which 

are described below. Employers that prefer 

having to interact with only one entity may 

prefer either the first or second model of 

carve-out.

n	 Integrated Plan: The employer contracts 

with a single integrated health plan, with a 

carved-in mental health benefit. The health 

plan is responsible for administering both 

the physical and mental health benefits. 

n	 Health Plan Carve-Out: The employer 

contracts with a single entity, the health 

plan, but the health plan then carves out 

mental health services to an MBHO. The 

contract exists between the health plan 

and the MBHO, leaving the employer little 
Designing Employer-Sponsored Mental Health Benefits 35

or no ability to affect the contract with the 

MBHO. 

n	 Employer Carve-Out: The employer contracts separately with the health plan(s) for 

physical health care benefits and directly 

with an MBHO for mental health care 

benefits. This arrangement offers the 

employer greater control over the mental 

health benefit in areas such as making 

decisions about what services to cover and 

the extent of coverage. However, the 

employer carve-out also places greater 

administrative responsibility on employers 

for maintaining contracts. 

In another model (not shown in Exhibit 

2), the partial carve-out, certain aspects of 

mental health care are carved out, such as 

administrative services, utilization management, or in some cases, all mental health care 

services once a certain level of utilization has 

been reached. 

The potential effects of mental health 

carve-out designs on access to, and quality 

of, benefits are addressed in Section IV.B.

Exhibit 2. Typical Models of Behavioral Health Care Contracting

Employer Employer

MBHO

MBHO Physical

Health Plan

Employer

Health Plan

Employer

Carve-outs

Health Plan

Carve-outs

Integrated

Plan

Integrated

Health Plan

Employer Employer

MBHO

MBHO Physical

Health Plan

Employer

Health Plan

Employer

Carve-outs

Health Plan

Carve-outs

Integrated

Plan

Integrated

Health Plan

Note: In all cases, financial risk may or may not be transferred from employer to administrator.

Designing Employer-Sponsored Mental Health Benefits 37

IV. Objectives and 

Options for Designing 

an Adequate Mental 

Health Benefit

The sections that follow describe the current state of knowledge about actions that 

have been taken to address these three 

objectives, and offer suggested options that 

employer purchasers and plans may consider 

using to meet them.

A.	 Provide Protection from

Catastrophic Costs, Cover a Wide

Array of Treatments, and Allow

Flexibility within Plan

Mental health benefits can and should be 

designed to protect individuals from catastrophic costs, and some options to protect 

against catastrophic costs have been identified. The literature asserts that the most 

important risks to insure are risks of catastrophic expenditures and that limiting benefits inhibits protection against catastrophic 

costs, but authors also state that cost controls are necessary (Frank, Goldman, & 

McGuire, 1992). For example, according to 

the literature, users of mental health care 

services can be protected from catastrophic 

costs by providing benefit packages that do 

not have service limits, cover a wide range of 

treatments, have high annual or lifetime 

spending limits, and have annual out-ofpocket spending maximums, which could 

help cap a beneficiary’s financial burden 

(Sing, Hill, & Puffer, 2001). Also, in an early 

report describing a model mental health 

benefit, Frank, Goldman, and McGuire 

(1992) recommend offering a benefit package without service limits but with a higher 

level of enrollee cost sharing to discourage 

Through review of the literature and expert opinion, we identified 

three objectives that employer-sponsored mental health benefits 

should strive to achieve:

n	 To provide protection from catastrophic costs, cover a wide array of 

treatments, and allow flexibility within plan;

n	 To ensure access to covered services; and

n	 To include available evidence-based practices and treatment guidelines in 

mental health benefits.
38 Special Report

inappropriate or excessive use of services. 

This model would make the benefit most 

useful to those with real needs for services, 

rather than inducing demand for services that 

may be unnecessary (moral hazard).

As previously mentioned, members of the 

advisory panel noted that out-of-pocket 

expenses for mental health services often are 

not counted toward a health plan’s overall 

calculation of protection against catastrophic 

costs for enrollees. As a result, enrollees are 

at risk for incurring high out-of-pocket costs 

associated with mental health treatment services, a finding noted by Zuvekas, Banthin, 

and Selden (1998) in their analysis of the 

1997 National Medical Expenditure Panel 

Survey. A potential remedy, recommended by 

the advisory panel, is to require that a health 

plan’s overall catastrophic protection include 

both physical and mental health out-ofpocket costs.

While limits are used in most mental 

health benefit packages (in part to mitigate 

risk), whether limits are necessary for all 

treatment types is still in question. Twenty 

percent of individuals covered by employersponsored health plans have no day or visit 

limits on their mental health benefits (Sturm 

& Pacula, 2000). Several States regulate 

mental health benefit limits for plans subject 

to State insurance laws. Some States also 

mandate that individuals be allowed to use 

intermediate services in place of inpatient 

stays, and some even prescribe how to calculate the number of intermediate service units 

that are equivalent to each inpatient day 

(National Association of Insurance Commissioners [NAIC], 2003). 

In practice, catastrophic coverage for mental disorders may not mean protection 

against high out-of-pocket expenditures from 

catastrophic episodes. For example, Utah 

legislation addressing employer-sponsored 

benefits considers catastrophic coverage to 

mean parity with physical health coverage; 

catastrophic coverage for mental health is 

defined as “coverage that does not impose 

any lifetime, annual, episodic, inpatient service, outpatient service, or maximum out-ofpocket limit that places a greater financial 

burden on an insured member for the evaluation and treatment of a mental health condition than for a physical health condition” 

(Hawley, 2004, emphasis added). While this 

definition suggests that adequacy is achieved 

through parity with physical health care benefits, the literature did not specifically define 

what constitutes an adequate mental health 

benefit package. It also has been noted that 

mandating parity between mental and physical health care benefits does not necessarily 

ensure adequacy of the mental health benefit 

if the physical health benefit itself is inadequate (Otten, 1998).

Quantification of catastrophic costs is difficult, as there is no commonly accepted definition of these costs. But even without a definition or threshold for catastrophic costs, it is 

clear that the costs associated with care for 

catastrophic mental illness can place a great 

burden on individuals and their families. At 

the same time, the occurrence of catastrophic 

mental health care costs is relatively rare; the 

majority of individuals complete outpatient 

treatment within 10 visits. Individuals with 

serious mental illnesses are at greater risk for 

catastrophic costs, but only about 2.8 percent 

of the population has a serious mental illness 

(Narrow et al., 2000). Limits on care increase 

the financial burden for these individuals, as 

they are more likely to exceed these limits. 

While few individuals and families experience catastrophic mental health care costs, 

dependents (especially adolescents) are more 
Designing Employer-Sponsored Mental Health Benefits 39

likely to have high-cost illnesses. Covering 

dependents for possible catastrophic episodes 

would address several issues, including 

employee absenteeism (to deal with untreated 

mental illness at home), low productivity and 

presenteeism, and possible turnover.

Most employer-sponsored health plans 

cover mental health services, although these 

plans generally are limited and often have 

moderate to high cost-sharing requirements.

Several studies suggested that benefit flexibility and innovation are important to ensure 

that the mental health care package meets the 

needs of a wide range of enrollees. Services 

most frequently covered by mental health 

plans include inpatient psychiatric services, 

outpatient care, and prescription drugs. 

Intermediate-level services (e.g., nonhospital 

residential programs, partial or day hospitalization) are covered less frequently, but can 

substitute for more expensive inpatient treatment when clinically appropriate. 

Employers increasingly are offering EAPs 

to provide outreach, education, case management, and counseling services for employees, 

and in some cases to serve as a gateway to 

additional behavioral health services (Teich 

& Buck, 2003). England and Vaccaro (1991) 

profiled the EAPs of six large U.S. corporations, and the results of their interview-based 

case studies revealed several common beliefs 

shared by these companies’ EAP directors. 

For example, EAP services were seen as 

enhancing early case finding and easy access 

to benefits, as well as providing long-term 

management of care. Following implementation of these companies’ EAPs, improvements 

in access and quality of care were documented, as well as decreased costs associated with 

preventive case management services aimed 

at reducing avoidable hospitalizations and 

shortening lengths of stay.

Benefit limitations typically take the form 

of limits on total dollars spent or on the 

number of days/visits, but the generosity of 

the limits varies by type of service and plan. 

Cost-sharing amounts vary significantly 

according to service, whether the service is 

provided by an in- or out-of-network provider, and plan type. One of the reasons 

employers use cost sharing is to discourage 

inappropriate or excessive use of services; 

however, some employers use innovative costsharing structures to encourage appropriate 

access to care.

Mental health benefit packages typically 

include several key components that employers providing mental health coverage will 

want to consider when making benefit 

design decisions:

n	 covered services; 

n	 benefit limits; 

n	 cost sharing; and 

n	 disease management.

Decisions regarding each of these components can affect the adequacy of the mental 

health benefit.

Additional plan components—related to 

benefits and service limits—are treatment 

plans and grievance and appeals procedures. 

Treatment plans allow for more coordination 

of care and care management, but often are 

expensive to support. Grievance and appeals 

procedures, which allow patients or their 

representatives to appeal service denials, may 

serve to address distrust of managed behavioral health caused by disagreements regarding the appropriate course of care, the fact 

that some health plans are for-profit entities, 

and overmanagement of the mental health 

benefit. To address that distrust, a grievance 

and appeals procedure should be accessible 

to enrollees, allow patient representatives to 
40 Special Report

file grievances early in the treatment process, 

and provide clear guidelines for service 

authorization (Mechanic, 2002). 

1. Current Practice and Evidence from the 

Literature

A.	Covered Services

Employer-sponsored health plans typically 

cover a wide range of mental health services, 

and these covered services have remained 

relatively unchanged over the last several 

years. Nearly all employer-sponsored mental 

health benefit packages include coverage for 

inpatient treatment, outpatient treatment, 

and prescription drugs, which have become 

increasingly central to the treatment of mental illnesses (Buck, Teich, Umland, & Stein, 

1999; Maxfield, Achman, & Cook, 2004; 

Merrick et al., 2001; Sing, Hill, & Puffer, 

2001). The clinical and cost effectiveness of 

intermediate-level services such as partial 

hospitalization were documented in 2001 in 

an extensive meta-analysis of the literature 

(Horvitz-Lennon, Normand, Gaccione, & 

Frank, 2001). Members of the advisory panel 

indicated that coverage for intermediate-level 

services is becoming more common but is still 

not sufficient. To ensure that the benefit 

package meets the needs of enrollees across 

types and severity of mental health conditions, an appropriate range of services should 

be covered. If the required services are not 

provided, enrollee mental health care needs 

cannot be met regardless of other design features (e.g., generous limits or low cost-sharing 

requirements).

In designing an adequate mental health 

benefit package, ensuring access to an appropriate range of services is of key importance. 

Because employees have mental health care 

needs across the spectrum of services, and 

those needs often shift across the spectrum, 

an adequate benefit package provides access 

to each of these categories of service in combination with each other. For example, an 

acute mental health event requiring hospitalization often is followed by extensive outpatient and prescription drug therapy. The 

appropriate combination of services—

inpatient, outpatient, and prescription 

drugs—is critical to improving the mental 

health condition of an individual in this 

situation. A benefit package with unlimited 

inpatient benefits and few or no outpatient 

benefits is very generous from an inpatient 

perspective, but does not meet the needs of 

individuals needing outpatient mental health 

care services.

i) Inpatient Treatment

Studies show that between 94 and 100 percent of employer mental health plans cover 

inpatient treatment, which includes care in 

facilities such as hospitals and nursing homes 

(Buck, Teich, Umland, & Stein, 1999; 

Merrick et al., 2001). The proportion of 

mental health spending going to inpatient 

treatment decreased dramatically between 

1991 and 2001 (Mark et al., 2005). Some 

critics of managed care have voiced concerns 

that coverage for inpatient care is sometimes 

inappropriately denied to those whose severity of illness merits this level of care. Without 

it (and without appropriate post-discharge 

follow-up care), a potentially preventable 

deterioration in mental health status may 

occur, and additional inpatient admissions 

may be necessary. 

ii) Outpatient Treatment

Outpatient services are covered somewhat 

less frequently than inpatient services but are 

covered by between 86 and 98 percent of 

plans (Buck, Teich, Umland, & Stein, 1999; 

Merrick et al., 2001). Outpatient treatment 
Designing Employer-Sponsored Mental Health Benefits 41

includes both primary care and specialty 

physicians, other mental health professionals, 

and treatment provided at a hospital or other 

facility on an outpatient basis. The proportion of mental health spending accounted for 

by outpatient treatment remained largely 

constant between 1991 and 2001 (Mark et 

al., 2005). 

iii) Intermediate Services

As stated above, providing intermediate-level 

services is becoming more common. Intermediate services offer health plans an alternative to costly inpatient services, when clinically appropriate. Intermediate-level services 

include less intensive or nonhospital residential programs, partial or day hospitalization, 

and intensive outpatient services such as psychosocial rehabilitation and case management (Buck, Teich, Umland, & Stein, 1999; 

Buck & Umland, 1997; Frank, Goldman, & 

McGuire, 1992; Sing, Hill, & Puffer, 2001). 

In a study of 1,017 medium and large firms, 

about half of employer-sponsored health 

plans included coverage of intermediate 

services (Sing, Hill, & Puffer, 2001). Intensive outpatient services are covered more 

frequently than nonhospital residential programs, ranging from 64 percent to 92 percent and 52 percent to 87 percent, respectively. Employer carve-out plans covered 

intermediate-level services more often than 

other plan types (Buck, Teich, Umland, & 

Stein, 1999; Merrick et al., 2001). Forty-nine 

percent of plans also included coverage for 

crisis-related services, such as mental health 

hotlines or crisis intervention (Buck, Teich, 

Umland, & Stein, 1999).

iv) Prescription Drugs

An increasing number of prescription drugs 

have been developed to treat mental disorders, and they have come to be considered a 

standard mental health benefit, covered by 

nearly all employer-sponsored plans 

(Maxfield, Achman, & Cook, 2004; Sing, 

Hill, & Puffer, 2001). Prescription drugs have 

grown increasingly important in the treatment 

of mental disorders; in fact, they are the predominant form of treatment in many cases. 

While the proportion of the U.S. population 

using outpatient mental health or substance 

abuse services was slightly higher in 2001 

than in 1996 (7.1 percent versus 6.9 percent, 

respectively), the mean number of visits per 

user decreased from 8.4 to 6.6; at the same 

time, the proportion of the U.S. pop­ulation 

using psychotropic drugs increased from 5 

percent to 8.1 percent (Zuvekas, 2005). In 

2001, 21 percent of mental health spending 

was for prescription drugs, up from 7 percent 

in 1991 (Mark et al., 2005). In 2001, about 

13 percent of total spending on prescription 

drugs was for mental health drugs. Costs per 

prescription have increased recently in certain 

classes of mental health drugs owing to 

changes in therapeutic mix (the use of more 

expensive drugs and drug strengths) and the 

introduction of new drugs into the class. 

While nearly all employer-sponsored 

health benefit plans include coverage for 

prescription drugs, generosity of the benefit 

varies across health plans according to their 

formulary or preferred drug list requirements. 

A common structure for prescription drug 

benefits currently is a three-tiered plan, in 

which member copayments are lowest for 

generic drugs, more for preferred brand-name 

drugs, and highest for nonpreferred brandname drugs. In addition, prescription drugs 

typically are not included in calculating the 

cost of mental health benefits, and these generally are considered separate aspects of an 

employer’s health benefit plan. Utilization 

and spending for prescription drugs typically 
42 Special Report

is managed through traditional prescription 

drug management approaches (e.g., tiered 

copayments, formularies).

v) Employee Assistance Programs

A considerable and growing percentage of 

private employers offer EAPs as part of their 

employee benefit packages. In 1995, 39 percent of employers with 50 or more workers 

offered an EAP, compared with 33 percent in 

1993 (French, Zarkin, Bray, & Hartwell, 

1999). In 1997, 28 percent of employees in 

small firms (fewer than 50 employees) had 

access to an EAP, as did 61 percent of 

employees in midsize firms and 75 percent of 

those in large firms (1,000 or more employees) (Masi et al., 2004). In 2002, a survey of 

645 managed behavioral health provider 

organizations found that 80.2 million individuals were enrolled in EAPs, constituting 

approximately 32 percent of Americans with 

health insurance (Open Minds, 2002). In a 

survey of more than 1,500 worksites with 

more than 50 employees, 80 percent of EAPs 

were external with a contractor providing 

EAP services to employees, 17 percent were 

internal or staffed by company employees, 

and 3 percent used a combined external/

internal model (French, Zarkin, Bray, & 

Hartwell, 1999). Internal EAPs are typically 

more expensive to operate, possibly making 

them a less popular option (French, Zarkin, 

Bray, & Hartwell, 1999). 

The relationship between the EAP and the 

mental or behavioral health benefit can influence the role of the EAP and how employees 

access covered services. In a stand-alone 

model, there is no service relationship 

between the EAP and the behavioral health 

benefit provider. In this situation, the EAP 

cannot transfer an employee as easily from 

EAP services to the more extensive services of 

a behavioral health provider. In an integrated 

model, the EAP is linked to the behavioral 

health provider and may serve as a gateway 

to behavioral health services (Masi et al., 

2004). The integrated model also facilitates a 

behavioral health provider’s ability to suggest 

use of the EAP for certain patients (Leopold, 

2003). 

The role of EAPs has evolved over time, 

from primarily providing confidential access 

to mental health and substance abuse services, 

to providing assessment and referral, monitoring short-term disability cases, and conducting utilization review for mental health 

services (Coughlin, 1992; Kent, 1990). In a 

national survey of 2,180 employers with 

more than 10 employees, 79 percent of EAPs 

provided face-to-face counseling as opposed 

to telephone counseling only. Two-thirds of 

the EAPs provided brief therapy for behavioral health problems. Most of the EAPs 

also reported providing counseling or referral 

services for work or family issues (Teich & 

Buck, 2003). EAPs often are considered onestop shops for mental health and work/family 

life services (Masi et al., 2004). Experts 

anticipate that the role and prevalence of 

EAPs will continue to expand. While many 

studies reported on the characteristics and 

prevalence of EAPs, few reported utilization 

rates. A study of the EAP at Federal Occupational Health, a service unit within the 

DHHS’ Program Support Center that delivers 

occupational health services to the Federal 

civilian and military workforces, reported 

that between 1999 and 2002, approximately 

3.5 percent of the 3.3 million enrollees used 

EAP services (Selvik, Stephenson, Plaza, & 

Sugden, 2004). 

B.	 Benefit Limits

While covering various types of services and 

treatments, nearly all plans enforce some 

limits on the amount or cost of services that 
Designing Employer-Sponsored Mental Health Benefits 43

are covered under the plan. Employers and 

health plans typically place limits on covered 

mental health benefits to control their financial liability. Some also may use limits out of 

the concern that mental health services will 

be used by healthy individuals who are not in 

need of them. The type of benefit limit used 

varies according to the type of service (i.e., 

inpatient or outpatient) and provider. The 

most common limits are annual limits on the 

number of visits or days of service. Annual 

limits most frequently used across employers 

of varying sizes and plan types are 20 outpatient visits and 30 inpatient days (Barry et al., 

2003; Buck, Teich, Umland, & Stein, 1999; 

Buck & Umland, 1997; Hay Group, 1999; 

Merrick et al., 2001). 

The use of limits on covered mental health 

benefits has grown over time, and nearly all 

plans have implemented such limits (Hay 

Group, 1999). It is estimated that only about 

20 percent of all individuals in the United 

States with employer-sponsored health plans 

have no day or visit limits on mental health 

benefits (Sturm & Pacula, 2000). By 1997, 

annual limits on inpatient days were the most 

prevalent limit on mental health benefits 

(Buck, Teich, Umland, & Stein, 1999). 

McKusick, Mark, King, Coffey, and Genuardi 

(2002) reported findings from a national 

household survey that the proportion of 

plans without limits on inpatient services 

decreased from 60.4 percent to 25.4 percent 

between 1987 and 1996. During this time, 

the level of enrollee cost sharing also 

decreased. The authors concluded that these 

benefit design changes—increased use of 

limits and lower cost-sharing levels—affect 

mental health care users differently depending on their needed level of utilization. Individuals considered to be catastrophic users 

(defined as those who used more than 50 

inpatient days and 100 outpatient visits) 

reached their limits sooner and incurred 

increased out-of-pocket costs for services 

beyond their limits, whereas infrequent users 

of mental health care services who were 

unlikely to reach the limits benefited from 

the lower cost sharing. 

A recent survey of about 3,000 randomly 

selected employers with three or more 

employees found that just 19 percent of covered workers have coverage for an unlimited 

number of outpatient mental health visits, 

and more than 6 in 10 are limited to 30 or 

fewer visits per year. For inpatient mental 

health care services, 21 percent of covered 

workers have coverage for an unlimited number of days of treatment, 14 percent are covered for 20 or fewer days per year, 45 percent 

are covered for 21 to 30 days per year, and 

21 percent are covered for 31 or more days 

per year (KFF/HRET, 2004). 

While limits on the number of allowed 

visits are popular, employers and health 

plans may not realize cost savings from 

limits on the duration of inpatient stays, as 

inpatient stays typically are short and the 

costs are concentrated in the first few days 

of the stay. In addition, several patient- and 

provider-­specific characteristics influence 

inpatient mental health lengths of stay (e.g., 

a primary diagnosis of schizophrenia, the 

number of previous admissions, a primary 

diagnosis of a mood disorder, age, a secondary diagnosis of an alcohol- or other drugrelated disorder) merit consideration when 

designing flexible benefits without arbitrary 

limits (Hopko, Lachar, Bailley, & Varner, 

2001; Huntley, Cho, Christman, & 

Csernansky, 1998).

Sing, Hill, and Puffer (2001) made recommendations for improving mental health 

benefits without increasing costs. Their 
44 Special Report

recommendations included strategies to 

improve access to services by covering a 

wide range of clinically effective services 

and treatment, with incentives to substitute 

lower cost treatment when appropriate (e.g., 

intermediate-level care). A current benefit 

design trend is to allow members to trade 

services within limits. That is, rather than 

having 1 inpatient day stay, a member can 

receive 2 to 3 intensive outpatient days or 

other intermediate-level services, such as 

partial day treatment. This arrangement 

both permits greater flexibility in use of services within specified limits and encourages 

use of less costly mental health services, as 

appropriate. Members of the advisory panel 

also suggested combining outpatient and 

intermediate-level services in a managed but 

unlimited benefit and retaining some generous limits on inpatient care. The search of 

the peer-reviewed literature did not locate 

sources that reported empirical results of the 

effects of such a combination. It is an area 

that merits further research.

Other limits used include maximum annual and lifetime dollar limits on the value of 

services received (Buck, Teich, Umland, & 

Stein, 1999). Financial limits vary significantly across plan type. In 1996 (prior to 

implementation of the Federal MHPA), for 

employers with more than 500 employees, 

median annual limits on inpatient services 

were $10,000 and lifetime limits were 

between $30,000 and $50,000. Median 

outpatient annual limits were $2,000 and 

lifetime limits were $25,000 to $50,000 

(Robinson, Chimento, Bush, & Papay, 

2001). Survey data from companies with 

10 or more employees as well as companies 

with more than 500 employees showed that 

in 1997, median lifetime limits ranged from 

$25,000 to $40,000 for inpatient services 

and from $20,000 to $50,000 for outpatient 

services. The median annual limits were 

$5,000 for inpatient services and between 

$1,500 and $2,000 for outpatient services 

(Buck, Teich, Umland, & Stein, 1999; 

Merrick et al., 2001). However, use of 

annual dollar limits for outpatient services 

is not as common as it once was (Hay 

Group, 1999), and industry experts note 

that the trend has been away from using 

maximum lifetime limits. 

Laws in many States regulate limits 

on coverage for mental health treatment. 

According to a compendium of State laws 

published by the NAIC (2003), 17 States 

mandate coverage with at least specified 

minimum benefits in group contracts, 25 

States require that mental health services 

(for at least biologically based mental illnesses) be covered under the same terms 

and conditions (or with no more restrictive 

limits) as other illnesses, and the following 

4 States regulate coverage limits by placing 

a specific minimum on covered days 

or visits:

n	 Mississippi: Group plans are required to 

cover at least 30 days of inpatient care, 

60 days of partial hospital treatments, and 

52 outpatient visits per year.

n	 Nevada: Plans must provide at least 

40 days of inpatient hospital care and 

40 outpatient visits each year for severe 

mental illness.

n	 Pennsylvania: Coverage for serious mental 

illness must include a minimum of 30 

inpatient and 60 outpatient days annually 

and must have no difference in annual or 

lifetime limits from other illnesses.

n	 Virginia: Coverage is mandated to be the 

same as for other illnesses except that 

coverage may be limited to 30 days per 

policy year.
Designing Employer-Sponsored Mental Health Benefits 45

In some States, trading of services is 

required to be an option under mental health 

benefit plans. In Texas, for example, a plan 

with coverage for inpatient care must cover 

psychiatric day treatment facilities (an intermediate service); according to the benefits 

calculation prescribed in statute, a full day of 

care in a psychiatric day treatment facility is 

equal to one-half day of inpatient care. Due 

to ERISA preemption, State laws regarding 

insurance do not apply to all employers, and 

many workers and their dependents are not 

covered by these protections.

A case study of employers providing 

mental health benefits offered examples 

of criteria for comprehensive mental health 

coverage. These criteria included providing 

benefits beyond the traditional limits of 

30 inpatient days and 20 outpatient visits, 

providing innovative and flexible benefits, 

including intermediate levels of care, coordinating with EAPs, and encouraging 

employees’ use of mental health services. 

Examples of innovative programs include 

wellness programs, disease management, 

onsite psychiatric care, rapid-response 

teams for crisis intervention, incentives 

for participation in preventive health care 

programs, training for supervisors to 

detect mental health problems, and opportunities for employees to shape pro­vider 

networks (Robinson, Chimento, Bush, & 

Papay, 2001).

Frank, Goldman, and McGuire (1992) 

recommended that the payment system 

encourage substitution of lower cost for 

higher cost providers, as there is an array 

of provider and facility types that can serve 

patients appropriately. They also recommended that the payment system be consistent with managed care techniques that 

have been shown to be effective, including 

prior authorization, concurrent review, and 

case management.

C.	 Cost Sharing

Cost sharing is required in most managed 

behavioral health care products to encourage appropriate use of services and to discourage unnecessary or inappropriate use of 

services. In a study of 434 MCOs in which 

704 different products were available, 67 

percent of managed care plans required 

copayments for outpatient mental health 

services, 30 percent required coinsurance 

payments, and 3 percent required neither 

(Hodgkin, Horgan, Garnick, & Merrick, 

2003). In 1997, about 94 percent of plans 

offered by Fortune 500 firms with carvedout mental health benefits had some form of 

cost sharing. The median in-network cost 

sharing was a $15 copayment or 20 percent 

coinsurance for outpatient services, a $100 

copayment or 20 percent coinsurance for 

inpatient services, and a $20 copayment or 

20 percent coinsurance for intermediate services (Merrick et al., 2001).

The level of cost sharing may vary depending on whether in- or out-of-network providers supply the services, with higher levels 

of cost sharing for out-of-network services. In 

Ma and McGuire’s (1998) study of Massachusetts’ behavioral health carve-out for State 

employees, in-network coverage for inpatient 

services required no cost sharing, while outof-network services required 20 percent 

coinsurance. Exhibit 3 shows the median 

coinsurance rates for in-network versus 

out-of-network providers in various health 

plan types. 

Some employers have structured costsharing requirements to encourage the use of 

less costly services, to move the provision of 

services from inpatient settings to less expensive outpatient settings, and to discourage 
46 Special Report

inappropriate or excessive use of health services. For example, mental health benefit cost 

sharing is sometimes structured incrementally, 

so that initial mental health care visits are 

provided with little or no cost sharing followed by higher cost sharing for extended 

use of outpatient services (Robinson, 

Chimento, Bush, & Papay, 2001). However, 

according to a member of the advisory panel, 

this incremental cost sharing is less common 

now than it once was. While cost sharing is 

an important tool for discouraging inappropriate or excessive use of mental health services, setting cost-sharing levels too high 

might discourage individuals from seeking 

necessary care (Simon, Grothaus, Durham, 

Von Korff, & Pabiniak, 1996; Simon, Von 

Korff, & Durham, 1994). In fact, other literature recommended reducing enrollee cost 

sharing as a way to promote access to care 

(Sing, Hill, & Puffer, 2001).

D.	Use of Disease Case Management Approaches

for Chronic Mental Health Conditions

Disease management programs are being 

used increasingly to improve the care of persons with chronic conditions such as asthma, 

diabetes, and heart disease (Bodenheimer, 

2000). Many disease management strategies 

have been developed for chronic conditions 

that are high cost both clinically (in terms of 

the burden of suffering) and economically (in 

terms of resource utilization). Although there 

is not a universally agreed-upon definition of 

the term “disease management,” the following is a particularly helpful one that encompasses features commonly found in various 

definitions:

Disease management is an approach to 

patient care that coordinates medical 

resources for patients across the entire 

health care delivery system. A critical 

distinction between disease management 

and other approaches to traditional 

medical care is a shift in focus from 

treating patients during discrete episodes 

of care to provision of high-quality care 

across the continuum.

There are at least 4 essential components of disease management. These 

include: 

1. An integrated health care delivery 

system capable of coordinating 

health care across the continuum; 

2. A comprehensive knowledge base of 

the prevention, diagnosis, treatment, 

and palliation of disease; 

3. Sophisticated clinical and administrative information systems that can 

be used to analyze practice patterns; 

and 

4. Continuous quality improvement 

methods (Ellrodt et al., 1997, 

p. 1687).

Numerous studies have found that the use 

of a disease case management approach for 

Exhibit 3. In- and Out-of-Network Cost Sharing

Inpatient Outpatient

In-network Out-of-network In-network Out-of-network

PPO 0% 20% 50% 70%

HMO 0% — 20% —

POS 0% 20% 20% 40%

FFS 10% — 20% —

Source: Sing, Hill, & Puffer, 2001.
Designing Employer-Sponsored Mental Health Benefits 47

persons with chronic mental health conditions such as major depression has resulted in 

improved patient outcomes and improved 

ability of employer purchasers and health 

plans to control costs. For example, a 2001 

review of studies that examined the effects of 

disease management techniques for persons 

with major depression found that these programs had several common successful features related to screening, patient education, 

and the use of treatment guidelines. These 

features included taking responsibility for 

patient follow-up, determining whether 

adherence to treatment recommendations 

was occurring, assessing treatment outcomes 

for improvement, and intervening when 

patients were not adhering to their treatment 

regimens or achieving expected improvements. In many of the studies reviewed, case 

management services were provided over the 

telephone at a low cost per case treated. Successful disease management programs were 

designed to calibrate the level and intensity of 

services based on patient needs (e.g., determining how best to coordinate the services of 

primary care providers, case managers, and 

mental health specialty providers such as psychologists and psychiatrists) (Von Korff & 

Goldberg, 2001).

A meta-analysis of published studies 

designed to measure the effects of disease 

management programs on treatment of 

depression found that the pooled results of 

these studies documented statistically significant improvements in the following 

indicators: 

n	 symptoms of depression; 

n	 physical functioning; 

n	 health status; 

n	 satisfaction with treatment; and 

n	 adherence to treatment regimens. 

Other improvements also were found in 

the following areas: 

n	 the rate of detection of depression; 

n	 adequacy of treatment with antidepressants; and 

n	 outcomes that are influenced by both providers’ and patients’ adherence. 

Although the authors did not measure productivity gains that might have occurred as a 

result of a disease management approach, 

they noted that such programs improve quality of care, measured in terms of both processes and outcomes of care. Although such 

programs can increase treatment costs (at 

least in the short term), the investment potentially results in longer term cost savings in the 

form of reductions in avoidable hospitalizations and enhanced employee productivity 

(Badamgarav et al., 2003).

2. Options for Meeting the Objective

To meet the objective of providing protection 

from catastrophic costs, covering a wide 

array of treatments, and allowing flexibility 

within their plans, employers should consider 

the following options:

n	 Combine the out-of-pocket maximums for 

mental and physical health care services.

Patients’ out-of-pocket expenses for mental 

health services should be applied to a unified benefit out-of-pocket maximum that 

also includes unreimbursed expenses for 

medical/surgical care. The role of health 

insurance generally is to protect against 

financial ruin caused by medical care costs. 

The main concern is the total amount of 

these costs and the ability of the individual 

or family to shoulder the burden. It may 

be more appropriate to consider spending 

for mental and physical health care services together rather than separately when 
48 Special Report

calculating out-of-pocket maximums and 

expenditures. 

n	 Provide coverage for a variety of treatment modalities. To provide adequate coverage, a health plan should cover a variety 

of treatment types, including inpatient, 

intermediate, and outpatient services and 

prescription drugs. Intermediate services 

may be provided both as a less intensive 

treatment modality for those not requiring 

inpatient care and as a less expensive service. Plans could reduce costs by encouraging providers and patients to “step down” 

from inpatient to intermediate services as 

soon as is medically feasible for the 

patient. Also, as prescription drugs have 

grown more integral to the treatment of 

mental illnesses, the prescription drug benefit should cover a range of mental health 

drugs to ensure access. 

n	 Provide a flexible mental health care 

benefit with generous or no limits. An 

employer that prefers to retain some limits on care covered may wish to focus on 

limits for inpatient services and clarify 

explicit criteria for evaluating medical 

necessity. Some specific options include 

the following: 

n Eliminating limits for outpatient benefits. Actuarial analysis of the relationship between benefits and premiums 

finds that increasing the number of 

covered visits would increase plan costs 

by a relatively small amount, and as 

the number of covered services is 

increased the cost per additional unit of 

service decreases substantially. If the 

typical outpatient benefit limit of 20 

visits per year is increased to 90 visits 

(essentially an unlimited benefit), the 

overall cost of the outpatient mental 

health benefit will increase by 17 percent, or $0.68 PMPM for general mental health and $0.18 PMPM for substance abuse (based on a 90 percent 

benefit rate). These dollar amounts represent increases of only 0.2 percent (for 

mental health) and 0.06 percent (for 

substance abuse) of the PMPM cost for 

all benefits (physical and mental combined) for a typical health care plan. 

(See Appendix A for a complete 

description of this analysis and for 

PMPM figures for various benefit limits.) Employers and health plans also 

could calibrate graduated cost sharing 

for outpatient visits, with the first few 

visits having low or no cost sharing. 

n Combining coverage for outpatient 

and intermediate-level services in a 

managed but unlimited benefit and 

retaining some generous limits on inpatient care. While not yet supported in 

the empirical literature, based on the 

advisory panel’s advice it may be feasible to implement such a combination, 

provided monitoring techniques are in 

place to measure the effects on access, 

cost, and quality of services. 

n Covering inpatient care with generous 

limits, as this is unlikely to induce additional demand. Actuarial analysis, 

described in Appendix A, indicates that 

providing coverage for additional inpatient days increases plan costs by a relatively small amount, and the cost per 

additional day decreases as the number 

of covered days increases. For example, 

if the typical inpatient benefit limit of 

30 days is doubled to 60 days, the 

overall cost of the inpatient mental 

health benefit will increase by 22 percent, or $1.55 PMPM for general mental health and $0.62 PMPM for sub-
Designing Employer-Sponsored Mental Health Benefits 49

stance abuse (based on an 80 percent 

benefit rate and assuming average U.S. 

costs in 2005). These dollar amounts 

represent increases of only 0.4 percent 

(for mental health) and 0.2 percent (for 

substance abuse) of the PMPM cost for 

all benefits (physical and mental combined) for a typical health care plan. 

n Providing a flexible benefit package.

Employers or their health plan vendors 

should create a flexible mental health 

benefit plan that covers a range of services and treatment types (including 

intermediate services) and allows 

enrollees to trade services of different 

types among the benefit limits. A flexible benefit package can adapt to the 

needs of employees and their dependents, allowing the benefit to cover 

more people adequately. Flexibility in 

the benefit package enables providers 

to ensure that individual patients are 

provided with treatments that work for 

them. Plans also should use incentives 

to encourage the use of lower cost 

treatments (such as intermediate-level 

care) and providers where appropriate, 

and they should ensure that the mental 

health benefit covers the services needed by patients of different ages with 

different needs.

n	 Use the EAP for access and integrate it 

with the mental health benefit. If using an 

EAP, employers should advertise the services to employees and their dependents 

and use the EAP to get those who need 

care into appropriate treatment quickly. 

Outreach and employee education should 

be stressed. The EAP should be portrayed 

as an acceptable option for employees, to 

reduce the stigma associated with mental 

health care. Integration of the EAP with 

the mental health benefit would allow 

timely provision of treatment to individuals identified through calls to the EAP. 

Employers also should ensure appropriate 

funding of the EAP. 

n	 Use treatment plans and prior authorization. Employers and plans can use providerdeveloped and plan-approved treatment 

plans and prior authorization to manage 

the care delivered to members. These techniques would serve to reduce demand for 

unnecessary services possibly induced by 

increased limits or lower cost sharing. 

However, plans should avoid creating 

unnecessary barriers to care, such as heavyhanded utilization management, which 

may impinge on service delivery. This may 

be accomplished through providing initial 

visits without prior authorization or referral requirements. In addition, plans should 

provide an accessible grievance and appeals 

procedure with clear guidelines for approval and denial of services.

n	 Use a disease case management approach 

to improve outcomes and help manage 

costs. Employers and health plans have 

found that using disease case management 

programs for conditions such as asthma 

and diabetes leads to clinically desirable 

outcomes. Similar approaches can be taken 

for managing the treatment of depression 

or anxiety to improve employees’ ability to 

remain productive both on and off the job.

B.	 Ensure Access to Covered

Services

Regardless of the numbers and types of services covered by a mental health benefit 

plan, if employees and their covered dependents cannot access the covered services they 

need, the benefit is not adequate. Employees 

must be educated about the benefit and the 
50 Special Report

services/provider types covered in order to 

know how to seek care when they need it. 

Other factors to consider include having sufficient numbers and types of providers in the 

plans’ networks within a reasonable travel 

distance to meet enrollees’ needs and to provide enrollees with a choice of providers and 

timely appointments.

1. Current Practice and Evidence from the 

Literature

A.	Effects of Financial Risk-Sharing Arrangements

on Access to Care

Financial risk-sharing relationships vary 

among and across delivery models of behavioral health care. On one end of the spectrum, all the financial risk is transferred to 

the MBHO; on the other end, the MBHO 

bears little or no risk. Within the spectrum 

are shared risk relationships, in which payment to MBHOs is based on their performance relative to performance targets (Frank, 

McGuire, & Newhouse, 1995). Arrangements in which MBHOs share risk appear to 

be more common than ones in which 

MBHOs bear no risk (Garnick et al., 2001). 

In a survey of 458 MBHOs, Garnick et al. 

(2001) found that in 1999, 12.8 percent of 

the MBHOs operated under partial risksharing agreements. The most frequent risksharing arrangement across plan types is one 

in which MBHOs are fully at risk within certain limits on the MBHO’s losses or profits. 

In 1999, 52.8 percent of managed behavioral 

health products participated in this kind of 

arrangement (Garnick et al., 2001). Risksharing mechanisms affected the supply of 

services; outpatient mental health visits were 

reduced between 20 percent and 25 percent 

when risk sharing was introduced in an 

MBHO that covered approximately 2 million 

enrollees (Rosenthal, 1999; 2000).

For mental health benefits that are carved 

into the general health care benefit plan, 

financial risk-sharing relationships between 

the employee and the employer or plan may 

change as employers increase their use of 

CDHB and HDHPs, with or without 

account-based spending accounts such as 

HSAs. As discussed in Section II, members of 

the advisory panel expressed concerns related 

to coverage for mental health care services in 

these types of plans, specifically in regard to 

the definition of preventive care and what 

services will qualify for coverage or apply to 

the deductible. As the prevalence of these 

plans increases, attention will need to be 

given to these cost and coverage issues, and 

employees will need guidance on their funding decisions related to HSAs or other health 

care accounts. 

B.	 Effects of Carve-Outs on Access to Mental

Health Care Services

As described in Section III, several factors 

influence employer decisions about carving 

out their mental health benefits. In particular, 

employers must consider various aspects of 

the plans, including utilization management 

and quality of care, contracts with accredited 

MCOs and MBHOs, care management and 

coordination, provision of services to vulnerable populations, and costs, as discussed below. 

i) Utilization Management and Quality of 

Care

The literature shows that patterns of mental 

health care utilization have changed with the 

increased use of the MBHO model, but the 

overall use of mental health care has not. In 

some cases, access to care has increased, perhaps due to programs like EAPs, direct access 

to services under MBHOs, and better coordination and education efforts among specialists, primary care providers, and consumers 
Designing Employer-Sponsored Mental Health Benefits 51

(Feldman, 1998; Hodgkin, Horgan, Garnick, 

Merrick, & Goldin, 2000; Zuvekas, Regier, 

Rae, Rupp, & Narrow, 2002). For example, 

enrollees in MBHOs typically access mental 

health services via a toll-free number that can 

be reached 24 hours a day or through an 

EAP referral, while in general managed care 

health plans, enrollees often are required to 

see a primary care provider who can then 

refer them to a mental health care practitioner. MBHO contracts often include mechanisms such as enrollee education about benefits, limited maximum telephone wait times, 

and maximum wait times before an appointment is scheduled, which can increase access 

to care (Feldman, 1998). Nearly all Fortune 

500 companies that have a carve-out also 

have an EAP, which can be an easy and nonthreatening way for employees to receive care 

(Merrick et al., 2003). 

A review of one large MBHO, United 

Behavioral Health, found that while it frequently performed utilization reviews for 

appropriateness of services, the actual denial 

rate was only 0.8 percent. The authors noted 

that while the study indicates that service 

denial was not a common method of limiting 

care, MBHOs may use other processes to 

limit access to care, or providers may have 

learned how to get their requests authorized 

(Koike, Klap, & Unützer, 2000). 

Another study of the private sector by 

Goldman, McCulloch, and Sturm (1998) 

found that after an MBHO was contracted 

for mental health care services, the total 

number of persons using mental health care 

services increased, while the average number 

of outpatient visits per person decreased, 

probability of inpatient admission declined, 

and average inpatient length of stay was 

reduced. In managed behavioral health care 

arrangements, the use of intermediate care, 

such as residential treatment and partial hospitalization in place of hospital care, generally increases, which may allay concerns of 

overhospitalization and restrictive treatment 

settings (England & Vaccaro, 1991; Grazier 

& Eselius, 1999). A case study of a mediumsize firm of 1,943 employees that implemented managed behavioral health care found 

that MBHO enrollees had an increased likelihood of receiving outpatient mental health 

care and no difference in the level of care in 

terms of services received once the patient 

was under care (Grazier, Eselius, Hu, Shore, 

& G’Sell, 1999). According to a study by 

Buck, Teich, Umland, and Stein (1999), 

MBHOs are less likely than other types of 

plans (e.g., PPOs and HMOs) to impose 

special limits, with one-third of MBHOs 

having no special limits at all. The utilization 

management undertaken by MBHOs may 

allow them to set higher benefit limits without concern for cost. 

Some of the literature suggested that the 

structure, administrative techniques, and specialization of MBHOs may enable them to 

provide better mental health care to patients. 

In integrated medical plans with competing 

HMOs, HMOs have an incentive to avoid 

enrolling patients with behavioral health 

problems because their costs exceed their 

premiums. Employers can avoid this problem 

if all employees are enrolled in a single 

carve-out, which therefore cannot disenroll 

or avoid expensive patients (Frank, Koyanagi, & McGuire, 1997; Hodgkin, Horgan, 

Garnick, Merrick, & Goldin, 2000;). In this 

situation, employees with a mental illness are 

unable to choose health plans with greater 

benefits, eliminating the problem of adverse 

selection. Hodgkin, Horgan, Garnick, Merrick, and Goldin (2000) also hypothesized 

that a separate budget for behavioral health 
52 Special Report

services ensures that an HMO cannot divert 

funds from behavioral health to general 

health. One author commented that the 

intense case management capabilities of 

MBHOs can actually ensure quality care for 

patients as opposed to using the mechanism 

to deny care (Durham, 1995). MBHOs can 

improve care by developing specialized clinical practice protocols to guide care delivery, 

employing mental health professionals as 

case managers, and maintaining a comprehensive behavioral health service network 

(Teitelbaum, Rosenbaum, Burgess, & 

DeCourcy, 1999). MBHOs also have had 

success coordinating care between substance 

abuse and mental health services, which is 

crucial given the high prevalence of patients 

with dual diagnoses (Feldman, 1998). 

The American Medical Association (AMA) 

and the American Psychiatric Association 

(APA) are concerned that providing mental 

health services separately from physical 

health through an MBHO stigmatizes and 

discriminates against enrollees with mental 

illness. Another belief of some psychiatrists is 

that MBHOs impose onerous authorization 

requirements, inappropriately provide only 

limited authorizations, or provide insufficient 

reimbursements, which are disincentives for 

psychiatrists’ participation in MBHO networks (APA, 2002). 

Quality can be difficult to measure, but 

some common ways to measure it are hospital readmissions, appropriateness of medications, type of counseling received, access to a 

range of appropriate mental health providers, 

and adherence to clinical treatment guidelines. MBHOs are sometimes criticized for 

shifting patients away from the care of psychiatrists toward less expensive mental health 

providers like doctoral-level psychologists or 

master’s-level therapists. A study by Sturm 

and Klap (1999) found that the majority of 

MBHO enrollees with depressive disorders 

and almost all enrollees with psychotic disorders had contact with a psychiatrist. Merrick 

(1998) found that while inpatient service 

payments and lengths of stay decreased for 

MBHO enrollees, readmission rates did not 

change significantly, and the proportion of 

discharges receiving follow-up care increased 

significantly. A case study by Busch (2002) 

found that MBHO enrollees diagnosed with 

depression were 25 percent more likely to 

receive mental health treatment according to 

AHRQ and APA guidelines. Exhibit 4 summarizes the benefits and drawbacks of an 

MBHO carve-out.

Altman and Goldstein (1988) laid out 

the differences in clinical practices, management strategies, and benefit design across 

different HMO models, including group 

models, staff models, and individual practice 

associations (IPAs). The authors noted differences in cost sharing for outpatient visits 

(lower in staff models, incremental increases 

in IPAs) and alternative benefits (staff models providing additional day treatment, other 

models allowing substitution of day treatment for inpatient days). No systematic patterns in access were found in the model 

types; variation existed both within and 

between the models. In all types, plans provided more benefits than their specified benefit offerings would suggest. The six HMOs 

studied required a primary care physician 

referral for mental health services; however, 

half of them ignored this requirement and 

allowed self-referral for at least the initial 

visit. Staff and group model plans were 

more likely to extend benefits beyond plan 

limits to achieve other goals such as prevention of hospitalization, while none of the 

IPAs did so. 
Designing Employer-Sponsored Mental Health Benefits 53

ii) Contracts with Accredited MCOs and 

MBHOs

Employer purchasers have found that requiring contracted health plans such as carve-out 

MBHOs to be accredited by organizations 

such as the National Committee for Quality 

Assurance (NCQA), the Joint Commission on 

the Accreditation of Healthcare Organizations 

(JCAHO), or the Utilization Review Accreditation Committee (URAC) is an essential way 

to help ensure access to quality care (Scanlon 

& Hendrix, 1998). These organizations 

require that health plans meet a variety of 

performance measures that include standards 

for access to care, provider network composition, and improved health outcomes. NCQA 

and JCAHO, for example, have developed 

performance standards specifically for 

MBHOs. URAC has standards for utilization 

review, case management, and disease management programs. Quality is also measured 

through NCQA’s Consumer Assessment of 

Health Plans Survey (CAHPS®). A random 

sample of consumers is surveyed annually 

about their experiences and satisfaction with 

their health plans, and CAHPS publicly 

reports aggregate measures of their responses 

across health plans. Employer purchasers 

have found that plans with high scores provide high-quality care and have high consumer satisfaction. This information helps to 

inform employer purchasers’ decisions about 

the plans with which to contract.

iii) Care Management and Coordination

Carve-outs are thought to improve care management and health service delivery through 

more sophisticated networks and a high level 

of expertise on mental health care issues 

(Grazier & Eselius, 1999). This improved 

care management may help mitigate the 

effects of adverse selection and moral hazard. 

A carve-out also may curb adverse selection 

by shifting financial risk to the MBHO and 

by providing the same mental health benefits 

to members of different health plans offered 

by one employer. However, most employers 

using carve-outs do so for only some of their 

employees and do not create a single benefit 

for all mental health needs (Sturm & 

McCulloch, 1998). 

Exhibit 4. Benefits and Drawbacks 

of Carving Out to MBHO

Benefits

• Pooling of good and bad risks/elimination of 

adverse selection (if all members are in a 

single carve-out)

• Separate budget, which ensures funds will 

not be diverted

• Case management performed by mental 

health professionals

• Specialized clinical protocols to guide care 

delivery

• Comprehensive mental health network 

• Coordination of mental health and 

substance abuse treatments for patients 

with dual diagnoses 

• Access to psychiatrists

• Follow-up care after hospitalization

• Treatments more likely to be provided 

according to treatment guidelines

Drawbacks

• Separation of benefit, which may perpetuate 

stigma and lead to possible discrimination

• Onerous authorization requirements or 

frequent denials

• Insufficient reimbursement of clinicians

• Inhibition of creation of a fully integrated 

system of services intended to holistically 

address the medical and mental health 

needs of enrollees, which may not properly 

sensitize primary care providers to mental 

health issues of their patients

• Possible confusion for enrollees and 

providers if effective care coordination 

mechanisms are not in place

Sources: APA, 2002; Busch, 2002; Durham, 1995; Feldman, 1998; 

Frank, Koyanagi, & McGuire, 1997; Grazier & Eselius, 1999; 

Hodgkin, Horgan, Garnick, Merrick, & Goldin, 2000; Merrick, 

1998; Sturm & Klap, 1999; Teitelbaum, Rosenbaum, Burgess, 

& DeCourcy, 1999.
54 Special Report

Sturm and McCulloch (1998) reported 

substantial variety in mental health benefits, 

which the authors asserted is indicative of 

attempts to address moral hazard and 

adverse selection. Frank, McGuire, Bae, and 

Rupp (1997) also asserted that mental health 

carve-outs may help mitigate adverse selection and reduce the incentives for plans to 

compete to avoid “bad” risks or individuals 

with high mental health care needs (e.g., by 

offering a limited mental health benefits 

package). Salkever and Shinogle (2000) studied factors influencing employers’ decisions 

to use mental health carve-outs. They identified two ways in which carve-outs can mitigate adverse selection: (1) employing effective 

utilization management strategies for mental 

health services and (2) limiting employees’ 

choice of mental health benefits packages by 

using one carve-out arrangement across all 

health plans offered. The study ultimately 

was inconclusive regarding whether employers choose carve-outs specifically to control 

adverse selection.

On the related topic of care coordination, 

the experts interviewed for this project identified the coordination of mental and physical health services as a challenge, especially 

when mental health services are provided 

as a carve-out through a separate contract, 

because this severs the link between the 

benefits. Separation of the benefits was a 

common critique of behavioral health carveouts throughout the literature as well, 

although it was noted that there are no 

nationally accepted benchmarks for care 

coordination and that care coordination is 

a broader health care issue. While primary 

care providers are often the first and sometimes the only medical professionals who 

see patients with mental illness, they may 

not be as effective in delivering specialized 

mental health care as psychiatrists and 

other mental health clinicians (Goldberg, 

1999; Sturm & Klap, 1999; Varmus, 1998). 

According to one article, more than twothirds of all prescriptions for psychotropic 

medications are written by physicians who 

are not psychiatrists, and 50 percent of 

patients with mental disorders see a primary 

care provider only (Fagan, Schmidt, & 

Cook, 2002). In addition, according to 

members of the advisory panel, some new 

psychopharmaceuticals carry “black-box” 

warnings that require extensive follow-on 

care, and primary care providers may be 

reluctant to prescribe such drugs owing to 

these requirements.

Ideally, primary care providers should 

have a clear mechanism to refer patients to 

mental health specialists and to communicate with specialists about past and concurrent treatments. Administrative barriers 

between primary care physicians and mental 

health specialists could delay patients receiving the appropriate mental health care. 

Group Health Cooperative of Puget Sound 

in Seattle provided an example of a successful collaborative disease case management 

model in which primary care physicians and 

mental health providers worked together. A 

Group Health experiment found that 74 

percent of patients with major depression 

treated in a collaborative setting (a primary 

care physician and a psychiatrist) saw significant improvement in their condition, compared with 42 percent of patients who 

received care only from a primary care physician. Key elements of Group Health’s collaborative model included getting physicians 

and psychiatrists to work closely to share 

medical records if possible, and ensuring 

that the billing system encouraged collaboration (Katon et al., 1997; White, 1997). 
Designing Employer-Sponsored Mental Health Benefits 55

Rosenbaum, Mauery, and Kamoie (2001) 

addressed care coordination between physical and behavioral services in managed care 

contracts. The authors found that the movement toward physical and behavioral health 

service integration appears to be founded in 

the belief that integration is fundamental to 

the standard of primary care itself. NCQA 

includes standards for care coordination in 

its accreditation standards for both MBHOs 

and general MCOs. However, while purchasers identify care coordination as a performance standard of interest, few identify specific benchmarks for care coordination. The 

authors set forth sample purchasing specifications for care coordination in managed 

care contracts. They suggested that the contract language may be especially useful for 

purchasers considering contracting with 

MBHOs that are not NCQA-accredited or 

that wish to use standards exceeding those 

of NCQA. 

Another issue to consider in care coordination is the potential for medical cost offsets. Cost offsets may be achieved by appropriately treating diseases like depression or 

other mental health disorders, which often 

lead to general disability (Mechanic, 1998). 

Coordination of care between physical and 

mental health care gives MBHOs the incentive and ability to practice cost-offset and 

preventive measures, because the MBHO will 

reap the benefits (Hodgkin, Horgan, Garnick, 

Merrick, & Goldin, 2000; Mechanic, 1997). 

However, a study of eight large employers 

with generous mental health benefits found 

that employers choosing behavioral health 

carve-outs had concluded that the care quality and management offered by a behavioral 

health specialty benefit outweighed the 

reported advantages of integrated health care 

benefits (Apgar, 2001).

iv) Provision of Services to Vulnerable 

Populations

A concern associated with mental health 

carve-outs is that they limit care for those 

with special mental health care needs, such 

as children and adolescents and those with 

serious mental illnesses. The most dramatic 

reductions in costs have been among individuals with the highest expenditures and 

the most serious illnesses, raising concerns 

that necessary services may be cut along 

with unnecessary utilization (Grazier & 

Eselius, 1999).

Employer mental health benefits often 

extend to the families of employees, who 

therefore should be considered when designing the benefit. Adolescents are more likely 

to use both outpatient and inpatient mental 

health services than adults. Thus, limits on 

benefits have a greater effect on adolescents 

(Gresenz, Liu, & Sturm, 1998). In one study, 

the implementation of parity and managed 

care resulted in reduced inpatient use by children and adolescents, but it was not clear if 

this was the result of reducing unnecessary 

use or of cutting needed services (Zuvekas, 

Regier, Rae, Rupp, & Narrow, 2002). In a 

study of Medicaid beneficiaries, inpatient 

readmission of children and adolescents who 

received behavioral health services through a 

carve-out increased from less than 8 percent 

to more than 10 percent, and children’s 

inpatient providers were more critical of 

clinical decisions than other providers were. 

Researchers suggest that children may have 

more complex needs than adults and that 

carve-outs may not have the resources necessary to coordinate their care with family 

members, schools, and other agencies 

(Grazier & Eselius, 1999).

Several articles raised the concern that 

MBHOs limit inpatient care to the point of 
56 Special Report

hindering the care of the seriously mentally ill 

(Zuvekas, Regier, Rae, Rupp, & Narrow, 

2002). An article in the Archives of General 

Psychiatry concluded that while enrollment 

in an MBHO does not change the likelihood 

of an individual with schizophrenia receiving 

antipsychotic medication, it does negatively 

impact the use of individual therapy, group 

therapy, and psychosocial rehabilitation 

(Busch, Frank, & Lehman, 2004). Huskamp 

(1999) found, in a study of the Massachusetts 

State employee carve-out, that seriously mentally ill patients with unipolar depression or 

substance dependence experienced decreased 

inpatient and outpatient costs per episode. 

The author asserted that individuals with 

severe mental illness potentially experienced a 

decrease in necessary services. A study by 

Landerman, Burns, Swartz, Wagner, and 

George (1994) found that financial requirements such as copayments do reduce the use 

of mental health care by those with a psychiatric diagnosis. Finally, the Surgeon General’s 

Report on Mental Health noted that patients 

with serious mental illnesses and children are 

at greater risk for experiencing negative outcomes associated with benefits limits and 

quality concerns related to managed care 

(DHHS, 1999).

v) Costs

Researchers agree that MBHOs reduce costs 

for the purchaser and the enrollee at least in 

the short run (Frank & McGuire, 1997; 

Goldman, McCulloch, & Sturm, 1998; 

Grazier & Eselius, 1999; Grazier, Eselius, Hu, 

Shore, & G’Sell, 1999; Huskamp, 1999; Ma 

& McGuire, 1998; Teitelbaum, Rosenbaum, 

Burgess, & DeCourcy, 1999; Zuvekas, Regier, 

Rae, Rupp, & Narrow, 2002). Employers 

may realize savings ranging from 30 percent 

to 40 percent in their first year of contracting 

with an MBHO, with savings stabilizing after 

year three (Feldman, 1998). Much of these 

savings result from MBHO efforts to shift 

care from inpatient services to less intensive 

and less costly outpatient services. According 

to Feldman (1998), in the 10 years following 

the introduction of MBHOs in the late 1980s, 

the share of total mental health costs accounted for by inpatient services declined from 75 

percent to less than 50 percent. 

MBHOs also can reduce mental health 

care costs by negotiating lower fees with 

providers, creating economies of scale, supporting the use of lower cost services, and 

pro­viding better management and selection 

of services (Feldman, 1998; Grazier & 

Eselius, 1999; Ma & McGuire, 1998). However, researchers must consider confounding 

variables in their studies of mental health 

care costs in MBHOs. In some cases, the 

drastic cost savings associated with contracting with an MBHO may actually be 

attributable to switching from an indemnity 

plan to managed care, as opposed to the 

MBHO specifically (Hodgkin, Horgan, 

Garnick, Merrick, & Goldin, 2000). In 

addition, Goldman, McCulloch, and Sturm 

(1998) asserted that the particular risksharing contractual arrangements between 

an employer and an MBHO appear to have 

less impact on total cost savings than certain 

other factors, such as the competitive market for large employer contracts, management consistency between contracts within 

an MBHO, and professional values and 

commitments to patient care. 

On the other hand, as described in the 

above section on care management and coordination, because carve-outs eliminate the 

relationship between the physical and mental 

health elements of the health care benefit 

plan, they eliminate the incentive and ability 

of a health plan to achieve cost offsets 
Designing Employer-Sponsored Mental Health Benefits 57

between the two (Hodgkin, Horgan, Garnick, 

Merrick, & Goldin, 2000; Mechanic, 1997). 

2. Options for Meeting the Objective

To meet the objective of ensuring access to 

covered services, employers should consider 

the following options:

n	 Choose mental health carve-out vendors 

carefully and negotiate contracts to ensure 

access, quality of care, care management, 

and appropriate care for vulnerable 

populations.

n	 Incorporate approaches to coordinating 

mental and physical health care services.

Provide for communication between different provider types and specialties, to 

include sharing information about diagnoses, treatment plans, prescribed drugs, and 

prognoses.

n	 Take care in structuring mental health benefits as CDHB becomes more prevalent.

The literature regarding these consumerdirected plans and what they may mean 

for mental health care delivery is still in its 

infancy but is growing rapidly. More information is needed from the professional 

community regarding any special considerations that mental health should receive 

when establishing these types of plans.

n	 Encourage employees to consider mental 

health needs in funding HSAs or other 

types of accounts. Mental health treatments are clearly an issue for someone 

contemplating an HSA who has an existing mental health condition. It is not yet 

clear how individuals will finance HSAs to 

insure against the catastrophic costs of an 

unanticipated mental illness.

n	 Contract with health plans that are accredited by a national quality review organization. The accreditation standards of organizations such as NCQA, JCAHO, or 

URAC comprise quality performance indicators related to access and outcomes that 

help to ensure that mental health benefits 

are provided on a timely basis in safe and 

effective treatment settings.

n	 Assess care provided by primary care providers and referral procedures. At present, 

a substantial amount of treatment in the 

form of mental health screening and prescribing of psychopharmaceuticals occurs 

in primary care settings. Primary care physicians should monitor for “triggers” that 

indicate a need for specialty mental health 

providers (e.g., family therapists, case 

managers, psychologists, psychiatrists, 

and social workers) to engage in focused 

therapies such as short-term cognitive 

behavioral therapy. 

C.	 Include Evidence-Based Practices

and Treatment Guidelines as Available

in Mental Health Benefits

The mental health service system has been 

shaped more by historical tradition, political 

decisions, and conventions of practice, 

financing, and organization than by a body 

of research evidence about effectiveness and 

efficiency (Goldman, Thelander, & Westrin, 

2000). The effectiveness of mental health 

treatments and services must be taken into 

consideration when making decisions about 

what to provide through a benefit plan. Treatments and services that have been proven 

through research evidence or treatment 

outcomes to be effective should be among 

those that are included, as the provision of 

evidence-based practices can lead to positive 

outcomes. Evidence-based practices are those 

that are shown through consistent scientific 

evidence to be safe (although they may have 

side effects that have been judged to be 

acceptable, in light of the positive impacts of 
58 Special Report

the practices), efficacious, and effective for 

most persons with a given disorder (Center 

for Mental Health Services [CMHS], 2004). 

1. Current Practice and Evidence from the 

Literature 

To identify evidence-based practices, the literature specified several necessary characteristics of the practices, including consistent 

scientific evidence showing improved outcomes and permitting assessment of the 

quality of the practices (Drake et al., 2001). 

Evidence-based practices are a means of 

achieving the dual goals of quality and 

accountability in mental health services 

(Goldman et al., 2001). 

In order to ensure their effectiveness, these 

practices should be implemented with “program fidelity;” that is, they should adhere to 

the treatment parameters that were found to 

be effective. Health plan purchasers (i.e., 

employers) may wish to discuss evidencebased practices with their mental health 

benefit plans to ensure their provision; however, the lack of an evidence base for a treatment may not be a sufficient reason to 

exclude the treatment from a benefit package 

(Lehman, Goldman, Dixon, & Churchill, 

2004). Other standards must be used to evaluate the effectiveness of services for which 

there may be little scientific evidence, such as 

prevailing professional practice standards, 

community needs, and other pragmatic factors. Other services may be of self-evident 

value and not require additional evaluation, 

and some may continue to be offered with 

the caveat that an evaluation must be undertaken in the future. Health care systems are 

also urged to track indicators, outcomes, and 

costs to document efficacy and cost-efficiency 

of programs and to secure support of managers and fiscal officers for preventive services 

(Nitzkin & Smith, 2004). 

A.	Sources of Information about Evidence-Based

Practices

The Substance Abuse and Mental Health Services Administration (SAMHSA) Center for 

Mental Health Services (CMHS) identified 

several sources of information about 

evidence-based practices (CMHS, 2004): 

n	 Individual researchers undertake reviews 

or meta-analyses of clinical research. 

n	 Voluntary organizations of scientists, such 

as the Cochrane Collaborative and the 

Campbell Collaboration, use systematic 

reviews to synthesize the evidence around 

health care practices to help clinicians and 

patients make informed decisions. 

n	 Professional and trade organizations support the publication of reviews and metaanalyses in scientific journals and issue 

practice guidelines. Many of these guidelines are included in the National Guideline Clearinghouse (NGC), which is discussed later in this section. 

n	 The Evidence-Based Practices Project, 

which was initiated by the CMHS and the 

Robert Wood Johnson Foundation, is a 

national demonstration project in which 

States have developed centers for implementing evidence-based practices in mental 

health, and which has identified treatment 

practices that are strongly supported by 

research. 

n	 The following Federal agencies support 

the identification and dissemination of 

evidence-based practices in mental health:

n National Institute of Mental Health 

(NIMH)1

n Substance Abuse and Mental Health 

Services Administration, through the 

National Registry of Effective Programs and Practices (NREPP)2

n Another source of information on 

evidence-based practices is NREPP, 
Designing Employer-Sponsored Mental Health Benefits 59

created as a resource to help professionals in the field become better providers of prevention programs. NREPP 

reviews and screens the evidence base 

for substance abuse and mental health 

practices and programs and then rates 

them based on methodological rigor, 

program adoptability, and usefulness 

to communities. 

n Agency for Healthcare Research and 

Quality (AHRQ)—formerly the Agency 

for Health Care Policy and Research 

(AHCPR), through the Evidence-Based 

Practice Centers3 (EPCs) and the U.S. 

Preventive Services Task Force4

(USPSTF) 

– AHRQ-designated EPCs undertake 

systematic reviews of the scientific 

evidence on health care topics and 

publish reports to help guide practice 

in those areas.

– AHRQ-sponsored USPSTF conducts 

rigorous, impartial assessments of 

the scientific evidence regarding the 

effectiveness of a broad range of 

clinical preventive services and 

publishes recommendations in the 

Guide to Clinical Preventive Services. 

B.	 Issues in Implementing Evidence-Based

Practices

In a paper stemming from the national 

Evidence-Based Practices Project, Drake et al. 

(2001) described the rationale for and difficulty in implementing evidence-based practices in routine mental health service settings. 

The authors found that evidence-based 

practices are not provided to the majority 

of patients in routine mental health programs and that implementation is difficult. 

Issues include organizational structure and 

commitment, resource development, clarity 

of roles and responsibilities, and service 

boundaries. The authors recommended that 

mental health services for persons with severe 

mental illness reflect the goals of consumers, 

which include independence, employment, 

satisfying relationships, and good quality of 

life. They also asserted that evidence-based 

practices should be the minimum provisions 

in mental health settings for persons with 

severe mental illness and should not be displaced by interventions of unknown or 

lesser effectiveness. 

At the end of 2001, Goldman and colleagues reviewed articles published that year 

in a journal series on evidence-based practices. The authors asserted that the implementation of evidence-based practices supports the 

goals of quality and accountability in health 

care, as the practices represent quality 

improvements, and accountability is accomplished through the monitoring of programs 

for consistency with practices whose effectiveness has been demonstrated. The authors also 

found, however, that some treatments and services lack evidence, especially when patients 

with mental disorders suffer from comorbid 

conditions that have not been studied in the 

research on treatment effectiveness, thereby 

making applicability of the findings questionable. The authors pointed to the need for 

more research to determine the effectiveness 

of evidence-based practices in various subpopulations and asserted that, despite myriad 

studies on innovation and implementation of 

health and mental health services, definitive 

evidence is lacking to assist in implementing 

specific evidence-based practices. 

One of the concerns regarding the identification of evidence-based practices is that they 

may not be implemented with fidelity. In 

order to achieve expected outcomes from an 

evidence-based practice, it is important to 
60 Special Report

adhere to specific programmatic standards 

(Drake et al., 2001). Program fidelity or 

fidelity of implementation refers to the degree 

to which program implementation remains 

true to the program that was studied and 

found to be effective. Lehman, Goldman, 

Dixon, and Churchill (2004) asserted that 

“Fidelity in implementing programs is key to 

both effectiveness and costs.” These authors 

cited evidence showing that implementing a 

particular program with good fidelity led to 

cost reductions and improved outcomes, 

while implementing the same program with 

poor fidelity increased costs and led to poorer 

outcomes than if the program had not been 

implemented. Regular monitoring of programs and outcomes is essential, and program fidelity measures have been developed 

that permit monitoring and accountability for 

several evidence-based psychosocial interventions. Additional technologies need to be 

developed to motivate and train providers to 

implement practices with program fidelity 

(CMHS, 2004). 

In their synthesis of literature on evidencebased practices, Goldman et al. (2001) highlighted the importance of financing structures 

on the implementation of evidence-based 

practices. Every author in the reviewed series 

of articles identified financing policies as barriers to the implementation of evidence-based 

practices. The authors stated that services for 

which clinicians can get paid will take precedence, and evidence-based practices will be 

pushed aside if they are not covered. They 

asserted that in order for evidence-based, 

state-of-the-art treatments to be delivered, the 

necessary medications must be on a plan’s 

formulary, and the necessary interventions 

must be covered. Evidence-based practices 

must be covered services under the health 

plan if they are to be utilized or provided. 

C.	 Evidence-Based Mental Health Services

Research has identified the evidence base 

for several preventive behavioral health interventions with positive outcomes. A review of 

the literature published by CMHS in 2004 

(Nitzkin & Smith, 2004) found the following 

clinical preventive mental health services to 

be worthy of consideration for implementation in all health care settings: 

n	 Home visitation for selected pregnant 

women and some children up to age 5; 

n	 Supplemental educational services for 

vulnerable infants from disadvantaged 

families; 

n	 Screening of children and adolescents for 

behavioral disorders; 

n	 Screening of adolescents and adults for 

depression and anxiety; and 

n	 Psychoeducation for persons scheduled for 

major surgical procedures, persons with 

major chronic diseases, and selected other 

heavy users of health care services. 

Psychoeducation for selected patients and 

screening for depression in persons with 

chronic conditions have been shown to have 

the potential to reduce overall health care 

costs within 12 months of initiation of new 

or expanded preventive services. These services are likely to reduce the burden of 

behavioral illnesses but not prevent them 

completely (Nitzkin & Smith, 2004). 

Two earlier related reports published by 

SAMHSA also presented preventive behavioral interventions recommended for consideration by MCOs and found that the most 

expensive of the services would add less than 

1 percent to the average HMO premium. The 

average increase in premium would be less 

than 0.5 percent across all of their six recommended interventions (Broskowski & Smith, 

2001; Dorfman, 2000). The reports encouraged MCOs to consider implementing these 
Designing Employer-Sponsored Mental Health Benefits 61

behavioral interventions, as they were shown 

to improve medical outcomes, increase 

patient satisfaction, reduce medical use and 

costs, and require a very small increase in 

premium costs.

Lehman, Goldman, Dixon, and Churchill 

(2004) pointed to a substantial body of outcomes research showing the efficacy of a wide 

range of mental health services. The authors 

found that “the most effective services combine optimal medication management with 

psychosocial interventions that provide the 

patient and the family with information about 

the illness, ongoing supports, and rehabilitation services.” They offered examples of 

evidence-based practices for adults with 

schizophrenia, for adults with mild to moderate depression, for children with conduct 

disorders, for children with attention deficit 

hyperactivity disorder, and for those with 

specific other mental illnesses, such as severe 

mood disorders, bipolar disorders, anxiety 

disorders, posttraumatic stress dis­order, and 

borderline personality disorder. These authors 

recommended that a wide array of effective 

services be available. Choice and selection 

among effective services are essential, both to 

maximize treatment response and to encourage adherence to treatment, because many 

services are not equally effective for all individuals and varying subgroups and individuals respond differently to treatment. 

D.	Treatment Guidelines

As the development of the evidence base for 

treatment of mental health services grows, 

purchasers, health plans, and providers continue to rely on the use of treatment guidelines that have been developed and used in 

the field. Health plans often stipulate what 

levels of evidence are used for determining 

reimbursement of covered services in their 

medical necessity definitions and utilization 

review processes (Rosenbaum, Kamoie, 

Mauery, & Wallitt, 2003). Until such time as 

more mental health treatments have established evidence bases, one approach to treatment decision-making is to create a hierarchy 

of evidence within the medical necessity 

definition. One model for this is found in 

Hawaii’s State independent review statute, 

shown in Exhibit 5. 

AHRQ sponsors the NGC, a searchable 

database of clinical practice guidelines and 

related documents. The NGC aims to provide 

health care professionals and providers, 

health plans, integrated delivery systems, 

purchasers, and others access to objective, 

detailed information on clinical practice 

guidelines and to further the dissemination, 

Exhibit 5. Hawaii’s Medical 

Definition in State Independent 

Review Statute

A health intervention is medically necessary if it is 

recommended by the treating physician or treating 

licensed health care provider, is approved by the 

health plan’s medical director or physician designee, 

and is: 

(1) For the purpose of treating a medical 

condition;

(2) The most appropriate delivery or level of 

service, considering potential benefits and 

harms to the patient;

(3)	 Known to be effective in improving health

outcomes; provided that:

(A)	Effectiveness is determined first by

scientific evidence;

(B)	If no scientific evidence exists, then by

professional standards of care; and

(C)	If no professional standards of care

exist or if they exist but are outdated or

contradictory, then by expert opinion;

and 

(4) Cost-effective for the medical condition 

being treated compared to alternative health 

interventions, including no interventio­n. 

For the purposes of this paragraph, costeffective shall not necessarily mean lowest 

price (HRS § 432E-1.4(2000) (IRO Statute)).

Source: Rosenbaum, Kamoie, Mauery, & Wallitt, 2003
62 Special Report

implementation, and use of the guidelines. 

The NGC includes many guidelines pertaining to treatment recommendations for mental 

health disorders, submitted by a variety of 

organizations. Exhibit 6 shows the various 

behavioral health categories for which treatment guidelines are provided in the NGC and 

the number of guidelines in each category. 

In addition, the American Psychological 

Association’s Society of Clinical Psychology 

(Division 12) has developed an online guide 

to empirically supported treatments (ESTs) in 

the field of psychotherapy for various mental 

disorders. The resource is directed toward 

consumers to fulfill their needs for information about the benefits of psychotherapy in 

different situations. It describes various psychotherapies that have met basic standards of 

effectiveness. Separately, in 1999, the division 

also commissioned A Guide to Treatments 

That Work (CMHS, 2004). 

In a May 2002 update to the Guide to 

Clini­cal Preventive Services, the USPSTF recommended screening adults for depression in 

clinical practices with the capacity to ensure 

accurate diagnosis, effective treatment, and 

follow-up care (USPSTF, 2002). However, 

while medical literature supports the effectiveness of screenings, few MCOs require mental 

health screenings in primary care settings, 

leading to missed opportunities for diagnosis 

and treatment of disorders. Horgan et al. 

(2003) reported on data from a 1999 survey 

of 493 MCOs in 60 markets, including 

HMOs, PPOs, and POS plans. The survey 

asked about the organizations’ policies on the 

screening and treatment of mental health disorders in primary care settings and found that 

only 21 percent of commercial managed care 

products required primary care physicians to 

screen their patients for mental health disorders. Among those that required screening, 

85 percent or more distributed practice guidelines addressing treatment, referral, and 

patient education for the disorders. Among 

all commercial managed care products, 51 

percent provided practice guidelines for 

mental health treatment in primary care. 

Guidelines included provisions for brief interventions, consultations with specialty practitioners, patient education, and the prescribing 

and monitoring of psychotropic medications. 

E.	 Outcomes Management

A related consideration in developing a mental health benefit package and ensuring its 

Exhibit 6. NGC Mental Health 

and Substance Abuse Treatment 

Guideline Categories

Mental Disorder Categories in the 

National Guideline Clearinghouse

Number of 

Guidelines

Adjustment Disorders 2

Anxiety Disorders 6

Delirium, Dementia, Amnestic, Cognitive 

Disorders

28

Dissociative Disorders 1

Eating Disorders 9

Factitious Disorders 1

Impulse Control Disorders 1

Mental Disorders Diagnosed in 

Childhood

14

Mood Disorders (including depression) 18

Neurotic Disorders 1

Personality Disorders 2

Schizophrenia and Disorders with 

Psychotic Features

10

Sexual and Gender Disorders 4

Sleep Disorders 11

Somatoform Disorders 2

Substance-Related Disorders 19

Source: AHRQ, National Guideline Clearinghouse, 

www.guideline.gov, accessed on 9/13/2004.
Designing Employer-Sponsored Mental Health Benefits 63

effectiveness is the assessment and monitoring of treatment outcomes. Treatment outcomes may be an especially effective metric 

in the case of therapies for which program 

fidelity is difficult to measure or achieve 

(e.g., therapies other than pharmacotherapies). Outcomes management systems have 

been designed and implemented for large 

MCOs, and outcomes have been monitored 

in public-sector managed behavioral health 

benefit plans (Brown, Burlingame, Lambert, 

Jones, & Vaccaro, 2001; Hodges & Wotring, 

2004). Outcomes monitoring and selfreports of symptoms, quality of life, and 

level of functioning can be used to identify 

best practices and have become important in 

both clinical practice and policy making 

(Holcomb, Beitman, Hemme, Josylin, & 

Prindiville, 1998). Outcome-informed treatment (or outcomes management) utilizes 

outcomes data to improve treatment effectiveness (Brown, Burlingame, Lambert, 

Jones, & Vaccaro, 2001). 

A large MBHO implemented an outcomes 

management system to improve treatment 

outcomes for patients receiving outpatient 

behavioral health care services. The methodology of this outcomes management system 

involved brief standardized evaluations completed at frequent intervals by patients to 

assess their responses to treatment and to 

determine which patients are most in need of 

continued treatment. The system was implemented initially among a subset of providers 

in February 1999, and a recent study of the 

system assessed care provided by more than 

5,000 individual clinicians and 75 multidisciplinary behavioral health group practices 

(Matsumoto, Jones, & Brown, 2003). 

This outcomes management system identifies patients who need continued treatment 

and gives clinicians case-by-case feedback, 

which allows treatment dollars to be focused 

on those who will benefit most from additional therapy. The evaluations also help to 

identify effective clinicians, so that referrals 

may be directed toward those providers with 

the best outcomes (Matsumoto, Jones, & 

Brown, 2003). Brown, Burlingame, Lambert, 

Jones, and Vaccaro (2001) asserted that mental health treatment should ensure that 

patients achieve a given level of outcome 

rather than a specified duration of treatment; 

they found that the costs of additional treatment for the most ill patients are offset by 

discontinuing treatment for those who are 

unlikely to benefit, and that it is possible to 

focus resources on those at highest risk without increasing total costs of care. 

2. Options for Meeting the Objective

To meet the objective of including evidencebased practices and treatment guidelines as 

available in mental health benefits, employers 

should consider the following options:

n	 Include coverage of available evidencebased and effective practices and monitor 

fidelity with treatment guidelines. Employer health plan purchasers should require 

coverage of evidence-based practices, as 

well as assurances from health plans that 

covered services are effective, where appropriate. Plans could allow choice and selection among effective practices. In the 

absence of a scientifically established evidence base, the “evidence base” often is 

established by what works most effectively 

for the “average” individual with the condition. Allowing for a hierarchy of evidence in medical necessity definitions 

enables benefits to be more broadly available and accessible. Plans also should 

ensure that the prescription drug benefit 

covers a range of effective mental health 
64 Special Report

drugs. Fidelity with treatment guidelines 

can be monitored by incorporating reliable 

quality indicators as a component of performance measurement.

n	 Establish or contract with health plans 

with outcomes management systems.

These systems may be able to link the use 

of evidence-based standards and/or treatment guidelines to clinically desirable 

outcomes. As distinguished from medical 

services, often designed to lead to “cure” 

or “recovery,” the goal of some mental 

health treatments may be stabilization or 

maintenance of functioning. Health plans 

with outcomes management systems 

should be flexible enough to include coverage for treatments aimed at maintenance of functioning and prevention of 

deterioration as well as those focused on 

recovery from mental health disorders.
Designing Employer-Sponsored Mental Health Benefits 65

Conclusions

The costs associated with mental health 

care can be significant, so financial considerations influence employers’ decisions related 

to mental health benefit packages. Two key 

considerations are the cost of providing mental health benefits and the cost of mental illness in the workforce. The cost of providing 

mental health benefits grew significantly 

between the 1970s and early 1990s; however, costs have been moderated by the 

increased prevalence of managed mental 

health care and utilization management techniques. The potential cost of mental health 

parity was a major concern before the passage of the Federal MHPA in 1996, but studies indicate that Federal and State parity laws 

have contributed only modestly to premium 

growth, and in some cases have resulted in 

decreased health care costs. The cost of mental illness in the workplace typically is measured in terms of diminished productivity, 

absenteeism, presenteeism, and disability 

claims costs. However, these factors are difficult to quantify, as the methods for analyzing 

many of them, as well as the methods for 

quantifying ROI and medical cost offsets, are 

still being developed and refined. As the cost 

of untreated mental illness is likely to be significantly more than the cost of providing 

the benefit, investment in adequate mental 

health benefits appears to be a wise business 

decision. 

The literature on catastrophic costs was 

limited, but it was clear that while costs of 

that magnitude are rare, their effects can be 

devastating, and therefore they should be 

considered in designing a benefit program. 

Since the main purpose of health insurance 

generally is to protect individuals and families from financial ruin due to an illness, protection from catastrophic costs resulting 

from treatment for mental disorders is 

The high prevalence of mental disorders in the United States and 

the business costs to employers of having employees and dependents with mental disorders make a powerful case for employers 

to provide adequate mental health benefits. Adequate mental health benefits 

improve productivity and employee retention, and employers should encourage employees’ use of mental health care services in order to reduce the business costs associated with untreated mental disorders. Employers may see 

returns on their investment in mental health benefits in the form of medical 

cost offsets (which can save employers money by reducing overall health 

care costs), lower rates of disability program use, and a more productive 

workforce. Employers also have to consider their other goals in offering a 

mental health benefit, such as reduced absenteeism, increased productivity, 

and employee turnover; employee satisfaction; and a healthier workforce. 

V.
66 Special Report

arguably the most important objective in 

designing an adequate mental health benefit.

Other considerations include providing 

adequate care for patients of different ages 

(such as adolescent dependents, who have 

greater use of certain types of mental health 

care) and ensuring adherence to treatment in 

order to achieve good outcomes and any 

possible cost savings. The mode of benefit 

administration can determine the extent to 

which benefits, generous or not, are accessible to the enrollee. Benefit administration can 

influence access and quality of care as well as 

the cost of the plan. 

Employers and health plans can rely on 

the growing base of scientific evidence to aid 

in their benefit design decisions. The use of 

evidence-based practices, treatment guidelines, quality improvement mechanisms, and 

outcomes management systems promises to 

reduce waste in the mental health care system 

while increasing quality and accountability. 

The recommendations and findings in the 

literature varied greatly and did not provide 

a conclusive guide to the creation of an adequate mental health benefit. Many factors 

influence employer choices in designing or 

purchasing their mental health benefit plans, 

including employer characteristics and health 

plan types, financial implications, regulatory 

requirements, productivity goals, employee 

attraction and retention, and employee 

health and well-being. Mental health benefit 

plans may differ from one employer to 

another, and a variety of plans may be considered adequate.

Based on a synthesis of the literature 

reviewed, discussions with members of the 

advisory panel, and our actuarial analysis, we 

offer the following three objectives that 

employers (and the health plans with which 

they contract) should strive to meet in order 

to provide an adequate mental health benefit 

to their employees, along with suggested 

options that employers should consider for 

achieving each of the objectives. 

Objective: Provide protection from catastrophic costs, cover a wide array of treatments, and allow flexibility within plan.

n	 Combine the out-of-pocket maximums for 

mental and physical health care services.

n	 Provide coverage for a variety of treatment 

modalities.

n	 Provide a flexible mental health care benefit with generous or no limits.

Options include the following: 

n Eliminating limits for outpatient 

benefits;

n Combining coverage for outpatient 

and intermediate level services;

n Covering inpatient care with generous 

limits; and

n Providing a flexible benefit package. 

n	 Use the EAP for access and integrate it 

with the mental health benefit.

n	 Use treatment plans and prior 

authorization.

n	 Use a disease case management approach 

to improve outcomes and help manage 

costs.

Objective: Ensure access to covered services.

n	 Choose mental health carve-out vendors 

carefully.

n	 Incorporate approaches to coordinating 

mental and physical health care services. 

n	 Take care in structuring mental health 

benefits as CDHB becomes more 

prevalent.
Designing Employer-Sponsored Mental Health Benefits 67

n	 Encourage employees to consider mental 

health needs in funding HSAs or other 

types of accounts.

n	 Contract with health plans that are accredited by a national quality review 

organization.

n	 Assess care provided by primary care providers and referral procedures.

Objective: Include evidence-based practices 

and treatment guidelines as available in 

mental health benefits.

n	 Include coverage of available evidencebased and effective practices and monitor 

fidelity with treatment guidelines.

n	 Establish or contract with health plans 

with outcomes management systems.

Designing Employer-Sponsored Mental Health Benefits 69

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Notes

1 More information available at http://

www.nimh.nih.gov/nimhhome/index.cfm

2 More information available at http://

modelprograms.samhsa.gov/template.

cfm?page=nrepbutton

3 More information available at http://

www.ahrq.gov/clinic/epc/

4 More information available at http://

www.ahrq.gov/clinic/uspstfix.htm

More information available at http://

nmhicstore.samhsa.gov/cmhs/ManagedCare/

pubs.aspx
81

Relationship Between Benefits

and Premiums

In addition to including financial considerations as part of the literature review for this 

study, we performed an actuarial analysis of 

the costs of different levels of mental health 

benefits in a typical health care benefit package. Our analysis found that raising (or even 

eliminating) limits placed on mental health 

service use would increase plan costs by only 

a relatively small amount on a per-member 

per-month (PMPM) basis.

To estimate the costs associated with various mental health benefit packages, we performed a series of net premium calculations 

(i.e., excluding administrative costs) for a 

typical health care benefit package, assuming 

different levels of mental health benefits for 

each calculation. The plan design that we 

worked with is typical of what might be used 

for an HMO or for the in-network portion 

of a PPO or POS plan (after converting all 

flat-dollar copayments into coinsurance percentages). It includes a $100 combined annual deductible for all services, a 90 percent 

benefit rate (i.e., 10 percent beneficiary coinsurance) for physical health services, and a 

$1,000 out-of-pocket limit for all beneficiary 

cost sharing. We developed our cost estimates using a computer program that is 

based on commercial health insurance plans 

and populations, and we calibrated it to 

reflect average costs in the United States for 

calendar year 2005.

The first step was to develop baseline 

costs by calculating the net premium for a 

benefit plan that excludes coverage for mental health services but that otherwise reflects 

the benefits found in a typical in-network 

benefit plan. That is, we determined the 

PMPM benefit costs for the non-mental 

health benefits under this plan. Then we 

recalculated the net premium assuming the 

inclusion of various mental health benefit 

packages. We considered four types of mental health benefits: general mental health 

inpatient, substance abuse inpatient, general 

mental health outpatient (including office 

visits for talk therapy and/or medication 

management), and substance abuse outpatient. We added mental health benefits to the 

baseline plan in increments of 10 days (for 

Appendix A

Actuarial Analysis—

Relationship 

Between Benefits 

and Premiums

Designing Employer-Sponsored Mental Health Benefits
82 Special Report

inpatient services) or 10 visits (for outpatient 

services). Finally, to see the range of costs 

that can result from using different values for 

the benefit rate (i.e., one minus the member 

coinsurance percentage), we calculated the 

net premiums using two different benefit 

rates for inpatient benefits (80 percent and 

100 percent) and two different benefit rates 

for outpatient benefits (50 percent and 

90 percent).

The results of this analysis are shown in 

Exhibit A-1. For each of the four types of 

mental health benefits, for each level of coverage shown (i.e., number of inpatient days 

or outpatient visits covered), and for each 

benefit rate used, the exhibit shows (1) the 

total PMPM cost for all benefits (for both 

physical and mental health services), (2) the 

cost for the specified level of mental health 

benefits, and (3) the incremental cost per unit 

of additional mental health service.

Perhaps the key result of this analysis is 

that, as we increase the number of covered 

services, the cost per additional unit of service decreases substantially. For example, the 

cost of going from 0 general mental health 

inpatient days to 10 days (assuming an 80 

percent benefit rate) is $3.59 PMPM, or 

about 36¢ per additional day. Meanwhile, 

the cost of going from 20 days to 30 days is 

93¢ PMPM ($7.02 minus $6.09), or about 

9¢ per additional day. Note that going from 

a 90-day benefit to a 365-day benefit (i.e., to 

the point of parity with the physical health 

benefit) is practically free in terms of the cost 

per additional covered day (0.1¢ for general 

mental health inpatient benefits, and 0.02¢ to 

0.03¢ for substance abuse inpatient benefits). 

A similar result holds for outpatient benefits: 

The PMPM cost of covering 90 visits per 

year (essentially an unlimited benefit), compared to the cost of covering 70 visits, is 0.2¢ 

to 0.4¢ per additional covered visit (depending on the coinsurance rate) for general mental health outpatient benefits, and 0.02¢ to 

0.9¢ for substance abuse outpatient benefits. 

Note that these incremental costs already 

include the effect of induced utilization that 

results from providing more generous benefits (i.e., benefit packages with higher service 

limits). Even with this effect taken into 

account, health plan experience shows that 

most utilization will be concentrated in the 

first few days or visits, and that only a small 

proportion of the covered population will 

incur a high number of utilized services.

To show how the “a la carte” cost estimates presented in Exhibit A-1 relate to the 

benefit plans actually found in the employer 

marketplace, we developed cost estimates for 

typical PPO and HMO benefit packages 

(including mental health benefits) as determined by The Hay Group’s 1998 survey of 

employers. Exhibits A-2 and A-3 show the 

benefit provisions and our cost estimates for 

the typical and modified PPO and HMO benefit plans described in Tables 6 through 9 on 

page 25 of Sing, Hill, and Puffer (2001). 

Note that the benefit packages labeled as 

“more generous” are not necessarily designed 

in accordance with the “adequacy” criteria 

found in the literature and discussed throughout this report. Instead, they indicate the typical benefit design among plans that are at 

the 75th percentile of actuarial values for 

plans of that type (PPO or HMO), according 

to The Hay Group’s Mental Health Benefit 

Value Comparison model and 1998 survey of 

employers (as referenced in Sing, Hill, & 

Puffer, 2001). Note that the “actuarial value” 

of a benefit package is defined as the expected direct cost of providing that package of 

benefits, expressed as a per-member amount 

(i.e., spread over the entire population cov-
Designing Employer-Sponsored Mental Health Benefits 83

Exhibit A-1. Estimated PMPM Benefit Costs (excl. admin.) for Typical In-Network Health Care Plan with Varying Levels of Mental Health and Substance Abuse Benefits(U.S. average, 2005)

Total PMPM Cost Cost for IP MH Add’l Cost/Day

IP MH

Days

Ben. Rate = Ben. Rate = Ben. Rate =

80% 100% 80% 100% 80% 100%

10 $292.75 $293.65 $3.59 $4.49 $0.36 $0.45

20 $295.25 $296.77 $6.09 $7.61 $0.25 $0.31

30 $296.18 $297.94 $7.02 $8.77 $0.09 $0.12

45 $297.31 $299.35 $8.15 $10.19 $0.08 $0.09

60 $297.73 $299.87 $8.57 $10.71 $0.03 $0.04

90 $298.34 $300.64 $9.18 $11.48 $0.02 $0.03

365 $298.51 $300.85 $9.35 $11.69 $0.001 $0.001

Total PMPM Cost Cost for IP SA Add’l Cost/Day

IP SA

Days

Ben. Rate = Ben. Rate = Ben. Rate =

80% 100% 80% 100% 80% 100%

10 $290.60 $290.96 $1.44 $1.80 $0.14 $0.1820 $291.60 $292.21 $2.44 $3.05 $0.10 $0.13

30 $291.97 $292.67 $2.81 $3.51 $0.04 $0.05

45 $292.42 $293.24 $3.6 $4.07 $0.03 $0.04

60 $292.59 $293.45 $3.43 $4.29 $0.01 $0.01

90 $292.84 $293.76 $3.68 $4.60 $0.01 $0.01

365 $292.90 $293.84 $3.74 $4.68 $0.0002 $0.0003

Total PMPM Cost Cost for OP MH Add’l Cost/Visit

OP MH

Visits

Ben. Rate = Ben. Rate = Ben. Rate =

50% 90% 50% 90% 50% 90%

10 $290.90 $292.29 $1.74 $3.13 $0.17 $0.31

20 $291.44 $293.27 $2.28 $4.11 $0.05 $0.10

30 $291.61 $293.57 $2.45 $4.41 $0.02 $0.03

50 $291.71 $293.76 $2.55 $4.60 $0.005 $0.01

70 $291.77 $293.87 $2.61 $4.71 $0.003 $0.01

90 $291.82 $293.95 $2.66 $4.79 $0.002 $0.004

Total PMPM Cost Cost for OP SA Add’l Cost/Visit

OP SA

Visits

Ben. Rate = Ben. Rate = Ben. Rate =

50% 90% 50% 90% 50% 90%

10 $289.59 $289.93 $0.43 $0.77 $0.04 $0.08

20 $289.73 $290.18 $0.57 $1.02 $0.01 $0.03

30 $289.77 $290.26 $0.61 $1.10 $0.004 $0.01

50 $289.80 $290.30 $0.64 $1.14 $0.001 $0.002

70 $289.81 $290.33 $0.65 $1.17 $0.0006 $0.001

90 $289.83 $290.36 $0.67 $1.20 $0.0009 $0.002

PMPM Cost with no MH/SA benefit $289.16

Source: Lewin estimates, using HealthMAPS® 2005 Medical Rate Manual and Software.
84 Special Report

ered by the plan, not just those who utilize 

the benefit). It does not include administrative costs or any profit or contingency 

margins.

In developing these cost estimates, we used 

the same assumptions regarding the average 

in-network fee discount (15 percent) and—

for the PPO plans—the portion of claims that 

occur in-network (70 percent) as those used 

by The Hay Group in determining the relative actuarial values of the plans in their survey. One result of using these assumptions is 

that the PMPM cost of the HMO plans is 

higher than the cost of the comparable PPO 

plans: the lack of a 15 percent discount on 

out-of-network PPO services is offset by the 

considerably lower benefit rate for these services (in general, 20 percentage points less 

than the corresponding in-network benefit 

rate). A larger discount on in-network provider fees—say, 25 to 30 percent, which 

would not be unusual in the current health 

insurance marketplace—would result in 

lower costs for the HMO, because 100 percent of its utilization is in-network (versus 

70 percent for the PPO).

Exhibit A-2. Estimated PMPM Benefit Costs (excl. admin.) for Typical 

and Modified PPO Plans with Varying Levels of Mental Health/Substance 

Abuse Benefitsa

(U.S. average, 2005)

Typical PPO Plans Modified PPO Plansb

Less

Generous Median

More

Generous

Less

Generous Median

More

Generous

Inpatient day limit 28 30 30 28 30 30

Inpatient benefit rate

 In-network 90% 100% 100% 90% 100% 100%

 Out-of-network 70% 80% 80% 60% 80% 80%

Outpatient visit limit 20 30 30 15 25 30

Outpatient benefit rate

 In-network 50% 50% 90% 60% 50% 90%

 Out-of-network 30% 30% 70% 30% 30% 70%

Total PMPM Costc $296.23 $297.73 $299.93 $296.11 $297.80 $300.07

Cost for MH/SA Benefits $11.13 $12.63 $14.83 $11.01 $12.70 $14.97

Source: Based on plan designs described in Tables 6 and 7 on p. 25 of Sing, Hill, and Puffer (2001).

Notes: “Less generous” indicates the typical plan at the 25th percentile of the distribution of actuarial values among PPO plans, and “more generous” indicates the typical plan at the 75th percentile. All flat-dollar copayments have been converted to coinsurance rates. Source: The Hay 

Group’s Mental Health Benefit Value Comparison model and 1998 survey of employers, referenced in Sing, Hill, and Puffer (2001).

a

Substance abuse benefit limits are separate but numerically equal to the general mental health benefit limits.

b

Modified plans allow each in-network inpatient day to be traded for two days of crisis residential services, partial hospitalization, and/or psychosocial rehabilitation. This is assumed to increase in-network inpatient MH/SA costs by 2%.

c

PMPM costs based on Lewin estimates, using HealthMAPS® 2005 Medical Rate Manual and Software.
Designing Employer-Sponsored Mental Health Benefits 85

Exhibit A-3. Estimated PMPM Benefit Costs (excl. admin.) for Typical and 

Modified HMO Plans with Varying Levels of Mental Health/Substance 

Abuse Benefitsa

(U.S. average, 2005)

Typical HMO Plans Modified HMO Plansb

Less

Generous Median

More

Generous

Less

Generous Median

More

Generous

Inpatient day limit 30 30 30 30 30 30

Inpatient benefit rate 100% 100% 100% 100% 100% 100%

Outpatient visit limit 30 30 30 30 30 30

Outpatient benefit rate 50% 80% 90% 50% 80% 90%

Total PMPM Costc $302.21 $303.77 $304.29 $302.42 $303.98 $304.50

Cost for MH/SA Benefits $13.05 $14.61 $15.13 $13.26 $14.82 $15.34

Source: Based on plan designs described in Tables 8 and 9 on p. 25 of Sing, Hill, and Puffer (2001).

Notes: “Less generous” indicates the typical plan at the 25th percentile of the distribution of actuarial values among HMO plans, and “more generous” indicates the typical plan at the 75th percentile. All flat-dollar copayments have been converted to coinsurance rates. Source: The Hay 

Group’s Mental Health Benefit Value Comparison model and 1998 survey of employers, referenced in Sing, Hill, and Puffer (2001).

a

Substance abuse benefit limits are separate but numerically equal to the general mental health benefit limits.

b

Modified plans allow each in-network inpatient day to be traded for two days of crisis residential services, partial hospitalization, and/or psychosocial rehabilitation. This is assumed to increase in-network inpatient MH/SA costs by 2%.

c

PMPM costs based on Lewin estimates, using HealthMAPS® 2005 Medical Rate Manual and Software.

Designing Employer-Sponsored Mental Health Benefits 87

Jeffrey Akman, MD

Department of Psychiatry

George Washington University 

Laura S. Altman, PhD*

Consultant

Behavioral Health, Towers Perrin (Retired)

Ronald E. Bachman, FSA, MAAA

Healthcare Visions, Inc.

PricewaterhouseCoopers (Retired)

Becky J. Cherney

Florida Health Care Coalition

National Business Coalition on Health

Dennis Derr, MA, LPC, CEAP, SPHR

Integrated Human Solutions

United States Postal Service

Saul Feldman, DPA*

United Behavioral Health

Ron Finch, EdD

National Business Group on Health

Don Fowls, MD*

Rich Beland

Schaller Anderson, Inc.

Karen G. Graham*

Marriott International

Pamela Greenberg, MPP*

American Managed Behavioral Healthcare Association

Kimberly Hoagwood, PhD

Department of Clinical Psychology and Psychiatry

Columbia University

Ron Honberg, JD*

Joel Miller, MA

National Alliance for the Mentally Ill

Edward Jones, PhD

Charles Gross, PhD

PacifiCare Behavioral Health

Darrel Regier, MD, MPH

American Psychiatric Association

Kimberly Robinson, JD

Office of Maryland Insurance Commissioner

Chuck Zebrowski*

Federal Employee Program

Blue Cross Blue Shield Association

Sam Zuvekas, PhD

Agency for Healthcare Research and Quality

* Participated in initial expert interviews. 

Appendix B

Advisory Panel 

Members


DHHS Publication No. SMA-06-4177

Printed 2006