Department of Health and Human Services

National Institutes of Health

National Institute of Mental Health

INSURANCE PARITY

FOR MENTAL HEALTH:

COST, ACCESS, AND QUALITY 

Final Report to Congress by the

National Advisory Mental Health Council

_________________

 Ruth L. Kirschstein, M.D.

National Institutes of Health

 June 2000
2

CONTENTS

EXECUTIVE SUMMARY................................................................................... 3

I. INTRODUCTION.......................................................................................... 5

II. STATE PARITY LEGISLATION: CURRENT STATUS (1991-2000) ................ 8

III. UPDATE ON COST OF PARITY FOR ADULTS AND CHILDREN ..................10

IV. ACCESS AND QUALITY UNDER PARITY ....................................................14

V. DEVELOPMENT OF OUTCOME MEASURES OF QUALITY..........................16

VI. WORKPLACE ISSUES................................................................................18

VII. PUBLIC-PRIVATE SECTOR INTERFACE ...................................................21

VIII. KNOWLEDGE GAPS.................................................................................23 

APPENDIX A: Legislative Charge to NAMHC ..................................................27

APPENDIX B: NAMHC Parity Workgroup Members and Consultants .............28

APPENDIX C: National Advisory Mental Health Council Roster......................29

APPENDIX D: Comparing Parity Cost Estimates

 Using Actuarial Models..........................................................32

APPENDIX E: States with Mental Health Parity Statutes ................................41 
3

Insurance Parity for Mental Health: Cost, Access, and Quality

Final Report to Congress by the National Advisory Mental Health Council

EXECUTIVE SUMMARY1

In Senate Report No.105-300, the Senate Appropriations Committee observed, "The 

Committee has recently received from the National Advisory Mental Health Council 

[NAMHC] the report requested in its fiscal year 1998 appropriations report and notes 

the impact of managed care on keeping costs of parity at a low level." The Committee 

requested from the NAMHC an additional report on its findings from emerging health 

services research data that would, where possible "...address both employer direct 

costs, and the impact of indirect cost savings from successful treatment of 

employees." The NAMHC was also asked to "consider the costs and quality of 

coverage for children, and the development of outcome measures of quality for all 

mental health coverage." This report was developed in response to the Committee's 

request. 

Building upon a body of knowledge developed in the course of three prior NAMHC 

reports on parity to the Senate Appropriations Committee, an analysis of recent 

studies reveals the following major findings: 

• What is the current status of parity legislation in the US? Thirty-one of the 50 

States have now passed some form of parity legislation, with benefits that 

range from limited to comprehensive. The 1996 Mental Health Parity Act (which 

is now being considered for reauthorization) appears to have accelerated the 

passage of State-level parity legislation. And in mid-1999, President Clinton 

announced that a parity-level benefit would be implemented for 8.7 million 

beneficiaries of the Federal Employees Health Benefit Program (FEHB) 

beginning in calendar year 2001.

• Does implementing parity increase the total cost of health benefits? Recent 

research supports and expands earlier findings that implementing parity 

benefits results in minimal if any increase in total health care costs. A recently 

updated simulation model estimates an approximately 1.4 percent increase in 

total health insurance premium costs when parity is implemented. In addition, 

data from a large State show that total health care costs decreased after the 

implementation of parity. 

• Does implementing parity cause cost shifting between different health system 

sectors? The issue is complex. Data are not available under parity, but recent 

research indicates that high-cost consumers may not shift completely to 

coverage under the public system; rather, some may be covered by both the 

private and public systems. The implications of this finding remain unclear.

 

1

 NOTE: This report does not necessarily reflect the views of the Department of Health and Human 

Services.
4

• How does parity affect access and quality? A recent study with a large State 

database shows that when parity mental health benefits are introduced with 

managed care, an increased proportion of adults and children used some 

outpatient mental health services. However, the intensity of services (number 

of visits) did not increase and inpatient use declined. Although the reduction in 

inpatient use was most pronounced for children, there was evidence that their 

access to specialty mental health services increased. What is unknown is the 

quality of care and impact of these changes. 

• How can the quality of mental health services be measured and improved? 

Although research in this area offers the promise of new and feasible 

measures, no currently available quality measures provide all the answers that 

consumers, providers, employers and policy makers want. Even with 

appropriate measures of quality and the ability to put them into place, 

interventions need to be developed that actually improve the quality of mental 

health care. Some recent evidence suggests that even small-scale 

interventions can ensure the delivery of appropriate services.

• How does parity or managed care affect disability and productivity in the 

workforce? Data are not yet available to assess the impact of parity in these 

areas. However, studies under non-parity conditions suggest that mental 

health services can decrease the amount of lost wages and reduce lost days 

from work and the number of disability claims. 

In summary, mental health parity is now the law in the majority of States. The cost 

of parity in combination with managed care is less than initially anticipated, and it 

has some beneficial effects on access. Yet, it is still unclear what impact parity has 

on the quality of mental health services and the well-being of people with mental 

illnesses. As Mechanic and McAlpine note in a recent issue of Health Affairs:

"The challenge for the coming decade is to develop clear standards based on 

the best evidence and clinical judgment so that parity has substance in 

implementation as well as in concept. Parity is not simply some match in 

service limits to what a medical or surgical patient experiences. It should be a 

configuration of management strategies fitted to careful assessment of patients' 

needs and a response that is consistent with our best scientific knowledge." 

(Mechanic and McAlpine1999)

It remains to be seen how the balance will be struck over the next few years between 

State legislation, large employer initiatives (public and private), and federal legislative 

expansions of the 1996 Mental Health Parity Act.
5

I. INTRODUCTION

A. Charge

This report is one of a series developed by the NAMHC in response to requests by the 

Senate Appropriations Committee.2 In Senate Report No.105-300, the Senate 

Appropriations Committee observed:

 "The Committee has recently received from the National Advisory Mental Health 

Council the report requested in its fiscal year 1998 appropriations report and notes the 

impact of managed care on keeping costs of parity at a low level." The Committee 

requested from the NAMHC an additional report on its findings from emerging health 

services research data that would, where possible "...address both employer direct 

costs, and the impact of indirect cost savings from successful treatment of employees. 

The NAMHC was also asked to "consider the costs and quality of coverage for 

children, and the development of outcome measures of quality for all mental health 

coverage." (For the full Senate language, see Appendix A.) 

The prior NAMHC report (1998) presented the results of research studies that focused 

on the indirect effects of managed mental health care on general medical care and 

disability as well as the quality of mental health services in the primary care setting. 

That report also summarized the efforts at that time to develop clinically based quality 

information systems in managed care. In addition, the report reviewed the existing 

research findings that evaluated the quality of managed mental health services both 

on the basis of administrative claims data and clinical outcome data. This report 

updates, refines, and expands those earlier findings, often with much larger 

databases.

B. Background: The Changing Policy Context 

Since 1993 when the first NAMHC report was published, the U.S. health care system 

has undergone many changes that profoundly affect both mental health and general 

health care. Of particular importance is the ongoing search for ways to control the 

costs of health care while maintaining quality and accessibility. One major structural 

change intended to contain costs has been the shift to managed care after decades of 

predominance by fee-for-service insurance. Intertwined with this change have been 

increasing efforts at the State and federal levels to mandate health insurance 

coverage for treatment of mental illness that is comparable to that for other illnesses--

also known as "parity."3 

 

2

 The prior reports are contained within one document: National Advisory Mental Health Council 

(1998): Parity in Financing Mental Health Services: Managed Care Effects on Cost, Access, and 

Quality: An Interim Report to Congress by the National Advisory Mental Health Council , Bethesda, 

NIH Publication No. 98-4322.

3

 The term "parity" or "mental health parity" refers generally to insurance coverage for mental health 

services that is subject to the same benefits and restrictions as coverage for other health services. 

"Comprehensive" parity legislation eliminates the use of different annual and lifetime dollar limits, 

inpatient day and outpatient visit limits, deductibles, and out-of-pocket maximums in mental health 

compared to general health benefits. The Mental Health Parity Act of 1996 affects annual and lifetime 

dollar limits, so that day and visit limits and higher co-payments and deductibles may still be applied to 
6

In the 1990s, a growing number of States enacted their own parity legislation. In 

addition, the Mental Health Parity Act (MHPA) of 1996 (P.L. No. 104-204), 

implemented on January 1, 1998, provided an important step toward parity for all 

States. The MHPA amended the Public Health Service Act (PHSA) and the Employee 

Retirement Income Security Act of 1974 (ERISA) to provide for parity in applying dollar 

limits on certain mental health benefits when limits are placed on medical and surgical 

benefits. The MHPA stipulates that when a group health plan--or health insurance 

coverage offered in connection with a group health plan--provides both medical and 

surgical benefits as well as mental health benefits, it may not impose an aggregate 

lifetime dollar limit or annual dollar limit on mental health benefits if it does not also 

impose such a limit on substantially all of the medical and surgical benefits. The 

MHPA also provides two exemptions from these requirements: the first is for small 

employers (defined as an employer with at least two but not more than 50 employees); 

the second is for group health plans if the application of these provisions results in an 

increase in the cost under the plan or coverage of at least 1 percent. In theory, the 

new national parity legislation provides an opportunity to make mental health services 

more accessible to those who need them. Actual experience has shown that the 

majority of mid- to large-sized corporations eliminated outpatient and inpatient dollar 

limits but instituted visit or bed-day limits (Hay Group 1999). 

Another important step on the road to parity was President Clinton's announcement in 

mid-1999 that a parity-level benefit would be implemented for 8.7 million beneficiaries 

of the Federal Employees Health Benefit Program (FEHB) beginning in calendar year 

2001.4 In doing so, the President noted, "We must make it clear once and for all: 

mental illness is no different from physical illness--and our nation's health plans should 

provide both with the same quality coverage." Research findings contained in the 

previous NAMHC reports contributed to the decision by the Office of Personnel 

Management (OPM) to recommend that such a step was financially feasible. 

The feasibility of expanding mental health benefits to parity levels without dramatically 

raising costs has gained increasing acceptance among policymakers over the course 

of the Workgroup's reports. This is due in part to the containment of costs by managed 

care organizations. In response, the impact of managed care on the accessibility and 

quality of mental health care is a continuing source of attention and concern. As 

elaborated in this report, efforts are intensifying to develop uniform measures of 

quality for use in administration and research, and to find cost-effective ways to obtain 

data essential for evaluating quality in mental health services. However, these 

developments are still, for the most part, at an early stage. 

The interactions of cost, quality, and access to mental health care under various 

conditions of parity and managed care have been the primary foci of the three prior 

NAMHC reports. These interactions are also at the heart of this report, which builds 

 

those with mental illnesses. In some State legislation, although not in the Mental Health Parity Act, 

mental health parity may only apply to a subgroup of the population (e.g., those with specific mental 

illnesses).

4

 The FEHB parity-level benefits include coverage for substance use disorders. Although the current 

report focuses on parity for mental health, coverage for substance use disorders is an important issue, 

especially since many people with mental illness have comorbid substance use disorders.
7

upon the growing experience of public and private mental health care systems with 

parity and managed care. The NAMHC Parity Workgroup has both stimulated and 

benefited from studies in progressively larger populations. These new data provide an 

increasingly reliable research base for future policy projections and decisions.
8

II. STATE PARITY LEGISLATION:

CURRENT STATUS (1991-2000) 

A. Background

Prior to 1996, only five States had successfully passed parity legislation. The passage 

of the federal 1996 Mental Health Parity Act gave significant momentum to this 

movement. After 1996, the number of bills introduced increased dramatically, with 26 

additional States ultimately passing mental health parity. However, State parity laws 

are not homogenous, and most offer more benefits than the 1996 MHPA. In addition, 

the Federal Employee Health Benefits Program and five State-employee health 

programs (Ohio, North Carolina, Texas, Indiana, and Massachusetts) have initiated 

parity. The brief overview below of the current status of parity across the States 

indicates that the concept of parity is gaining widespread acceptance.

B. Recent Analyses 

Scheffler and Gitterman (2000a) found significant statutory variation in how States 

regulate mental health insurance parity in the United States. That variation can be 

classified along six dimensions: type of mental health mandate; definition of mental 

illness; coverage of substance abuse; terms and conditions; and small-employer and 

cost-increase exemptions (see Appendix D, Table II.) 5 The investigators also found 

significant differences in how States define "mental illness." They may use a broadbased definition6

 or definitions based on serious mental illness, on biologically based 

mental illness, or mental illness as defined by the health plan (see Appendix D, Tables 

IA-ID) 

As of May 15, 2000, 31 State legislatures have enacted mental health parity

statutes (10 State legislatures passed parity statutes in 1999). Before the 1996

federal Mental Health Parity Act (MHPA), only five State legislatures had enacted

parity statutes: Maryland (1994), New Hampshire (1994), Rhode Island (1994),

Maine (1995), and Minnesota (1995).

After the 1996 MPHA, 26 State legislatures enacted mental health parity statutes 

between 1997 and May 2000: in 1997, six States (Arkansas, Colorado, Connecticut, 

Missouri, Texas, Vermont); in 1998, five States (Delaware, Georgia, Pennsylvania, 

South Dakota, Tennessee); and in 1999, 10 States (California, Hawaii, Indiana, 

Louisiana, Montana, Nebraska, Nevada, New Jersey, Oklahoma, Virginia). In 1999, 

two States revisited and broadened their original parity statute: Connecticut and 

Missouri. The 1999 legislative session recorded the greatest number of parity 

enactments during any single year during the 1990s. In 2000, five States enacted 

 

5 Note that in Appendix E, Tables I A-D focus on how States define mental illness under parity 

legislation, while Table II focuses on differences among State policies regarding parity. 

6 Broad-based coverage was defined to include all mental disorders listed in the American Psychiatric 

Association's Diagnostic and Statistical Manual (4th edition) and/or the mental disorders in the World 

Health Organization's International Classification of Disease.
9

parity requirements (Alabama, Kentucky, Massachusetts, New Mexico, Utah) by early 

May. 

Following the 1996 MHPA, 14 States also enacted statutes to match the federal parity 

statute including: in 1997, Alaska, Arizona, Delaware, Indiana, Kansas, Louisiana, 

Montana, Nevada, North Carolina, South Carolina, Tennessee, and West Virginia; and 

in 1998, Florida and New Mexico. Of the 14, seven States matched the federal statute 

in 1997 or 1998, and then opted to have a "stronger" State parity statute: Delaware 

(1998), Indiana (1999), Louisiana (1999), Montana (1999), Nevada (1999), New 

Mexico (2000) and Tennessee (1998). In addition, five States included mental health 

parity for their State employees: Ohio (1990), Texas (1991), North Carolina (1991), 

Massachusetts (1994), and Indiana (1997). 

A preliminary econometric analysis by the same investigators (Scheffler and Gitterman 

2000b) revealed a number of factors that influence the likelihood of passage of State 

parity legislation. They found that economic factors are important in influencing a 

State's decision to enact mental health parity. A State is more likely to enact mental 

health parity if it has higher levels of per-capita mental health spending; a higher 

proportion of the population under managed care; a higher level of mandated health 

benefits; and higher levels of education. Conversely, States with a higher percentage 

of small business firms are less likely to enact mental health parity. In an earlier study, 

Sturm and Pacula (1999) found that States with below-average mental health care 

utilization were more likely than other States to enact State parity legislation for mental 

health insurance. 
10

III. UPDATE ON COST OF PARITY FOR 

ADULTS AND CHILDREN

A. Background

The Senate Appropriations Committee's data requests to the NAMHC reflect a 

continuing concern about the potential costs and consequences of implementing 

mental health parity. In response, the NAMHC Parity Workgroup, assisted by staff of 

NIMH and other federal agencies, as well as nonfederal consultants (see Appendix B), 

has provided systematic analyses of empirical data and economic models to clarify the 

costs of implementing such benefits (see National Advisory Mental Health Council 

1998).7 This report presents findings on the cost of parity from three types of studies: 

1) predictions based on an updated simulation model; 2) an empirical case study 

using a pre-post parity design; and 3) other studies based on State-level data sets. 

The findings for both adults and children are summarized below. 

B. Predictions Based on an Updated Simulation Model

Actuarial and economic forecasting models used to predict the differential cost of 

parity for mental health coverage under private insurance have continued to evolve, 

although their role is gradually being supplanted by empirical data from evaluations of 

actual State or company parity experience. Major improvements have been made in 

the data used to create a baseline for making projections. In addition changes created 

by managed care have been incorporated into the models used to project costs.

In May 1996, the Congressional Budget Office (CBO) issued a report entitled CBO’s 

Estimates of the Impact on Employers of the Mental Health Parity Amendment in H.R. 

3103.8 The CBO provided its own analysis predicting that the cost increases of total 

health benefits associated with mental health parity benefits in a pure indemnity (feefor-service) plan would be 5.3 percent, with the aggregate estimate lowered to a 4 

percent increase to reflect the influence of managed behavior health care plans on the 

market (Congressional Budget Office 1996). In a subsequent review of multiple 

estimates of mental health parity costs, Sing and colleagues (1998), based on Hay 

Group models, lowered the overall parity cost estimate to a 3.6 percent increase of 

total health benefits.

The NAMHC parity workgroup recently asked the Hay Group to update its simulation 

model for estimating the average annual premium increase with the implementation of 

parity. Using this new model and standard assumptions (see Appendix D that take into 

consideration the impact of managed care on baseline cost data led to a further 

reduction of the previously predicted cost increase with parity--from 3.6 percent to 1.4 

 

7Note that the proprietary data in this report on managed care costs, utilization, and quality derive from 

a small number of managed behavioral health care companies, without whose cooperation this report 

could not have been written. However, the reliance of the NAMHC parity workgroup on these data 

sources may have introduced an unavoidable bias: Managed care companies willing to share their 

data with federal researchers are not necessarily representative of the industry at large. They may 

provide better funding for mental health benefits and data systems, and be more thorough in their 

record keeping. 

8

 H.R. 3103 was an earlier full-parity amendment consistent with the Senate Parity Bill sponsored at the 

time by Senators Domenici and Wellstone.
11

percent of total health benefits. This recent estimate is based on using new data in 

the Hay model, including actuarial data from the Federal Employees Health Benefit 

Program, complemented by cost and utilization data from several large managed 

behavioral health care companies as well as the experience of a large State 

employees health plan (described in Section III of this report.)9 Nevertheless, even 

models such as the newest one developed by the Hay Group may overestimate the 

cost of parity because they do not account adequately for many of the recent changes 

in the mental health care delivery system.

 

Research on interactions between managed care and mental health services points to 

“disconnects” between empirical research on managed care and the structure of 

models projecting costs. New findings in several key areas of study have not yet been 

incorporated into projection models. These include: 1) the response of managed care 

to changes in budgets and benefits; 2) the impact of managed care on demand 

responses to changes in benefits; and 3) the impact of managed behavioral health 

care carve-outs above and beyond existing managed care arrangements.

Nearly all current projection models adjust the level of predicted costs under a given 

benefit design according to the type of managed care arrangement within which the 

benefit is administered. For example, cost-reduction parameters are specified for 

various types of managed care arrangements (e.g., health maintenance organizations 

(HMOs), preferred-provider organizations (PPO), and point-of-service (POS) plans). 

Although these parameters are assumed to be fixed at levels estimated in the 

research literature, they may vary depending on the benefit design, the available 

budget for mental health, and other management responses (Huskamp 1999; Brisson 

et al. 1999). Current forecasting models do not take into account the evidence that 

management responds to budgets and benefits.

Most projection models continue to rely on estimates of demand response to 

copayment levels that are derived from the RAND Health Insurance Experiment (Wells 

et al. 1992). Those estimates are based on unmanaged fee-for-service indemnity 

arrangements. Research has shown repeatedly that the impact of management 

dominates the impact of benefit design. More specifically, managed care has led to 

reduced use of hospital care for any given insurance benefit arrangement. These 

findings suggest that both admissions and duration of hospital stays respond 

differently to insurance coverage in the presence of managed care (Ma and McGuire 

1998; Goldman et al. 1998). 

Similarly on the outpatient side, current evidence suggests that demand response to 

copayment levels is different under managed care than in the context of fee-forservice plans. Some actuarial models, such as the updated Hay Group (2000) model, 

have recently begun to offer some sensitivity analysis to differing assumptions about 

demand response for outpatient mental health care. Preliminary results from the 

sensitivity analysis indicate that different assumptions about the demand/consumer 

response for outpatient mental health care have minimal impact on the cost increase 

under parity.

 

9

 The assumptions of this model are described in Appendix D.
12

Finally, projection models view the cost-control potential of health plans as depending 

entirely on the general model of care (e.g., HMO, PPO). Thus, an HMO that carves 

out its mental health care to a specialty vendor under a capitated premium is treated 

the same way analytically as an HMO with a fee-for-service network of providers and 

no carve-out. Recent research suggests that the use of specialty vendors within a 

general model of managed care will yield additional costs savings (Brisson et al. 1999; 

Sturm et al. 1998). 

Hence, even with the improved empirical base of the recent Hay Group model, 

forecasting models that project mental health costs under private insurance lag behind 

the existing base of knowledge about modern mental health care delivery. (Both the 

rapid pace of research advances and the difficulty of incorporating such findings into 

forecasting models contribute to this lag.) Sensitivity analyses of forecasts using a 

range of assumptions about management, demand response, and organizational 

structure of markets are therefore needed to understand more fully the likely 

consequences of parity initiatives. However, as more results from State and largeemployer parity experiences are being published, the need to use projection models to 

predict the cost of parity becomes less critical. 

.

C. Cost Impact of Parity under Managed Care: Case Study Based on Pre/Post 

Parity Design 

A very recent analysis requested by the NAMHC parity workgroup (Zuvekas et al. 

2000) examined the actual effects of a State mental health parity mandate (combined 

with "carve-out" managed care) on costs, utilization, and access for a large employer 

group (over 150,000 employees) subject to parity. The 4-year study extended from 1 

year before parity to 3 years after parity was implemented. Overall, the study 

demonstrated that, compared with the pre-parity period, per-member costs were 

halved by the third year of parity, while the proportion of the population receiving some 

mental health services increased (from less than 5 percent to more than 7 percent), 

What accounts for the cost reductions associated with parity combined with carve-out 

management? Although per-member costs declined only modestly (about 9 percent) 

between Year 1 and Year 4 for employees and their spouses, plan costs declined 

dramatically (by 75 percent) for dependents (especially for their inpatient treatment--

see Subsection D, below). In fact, children and adolescents accounted for more than 

90 percent of the overall cost decline. Increases in outpatient use and costs were 

offset by substantial declines in inpatient costs, by a factor of 4 or 5 to 1. (Most of the 

overall increases in outpatient costs came from an increase in the number of people 

receiving outpatient treatment.) Three-quarters of the declines in inpatient costs 

stemmed from reduced lengths of stay; decreases in inpatient admissions and per 

diem costs account for the rest of the decline.

This case study also compared the experience of the large-employer group to other, 

smaller groups who were covered by the same insurance carrier but not subject to the 

parity benefit. These groups experienced increases in costs over the same period, 

suggesting that the large decrease in costs observed in the large-employer group was 

not simply an artifact of a general trend over time.
13

D. Costs and Coverage for Children

Background: 

The need for better mental health services for children and adolescents is widely 

recognized. As researchers have often observed, "most children and adolescents 

who need mental health/substance abuse (MH/SA) services do not receive them" 

(Burns et al. 1999). However, during the mid-1990s, employment-based health 

insurance for children increased (Fronstin 1999). A growing amount of research has 

been clarifying how improved coverage combined with parity and managed care 

affects the cost and use of mental health services for children and adolescents.

 

Case Study 1: Single State Pre and Post Parity

The study by Zuvekas and colleagues (2000) described in Section IIIC showed that, in 

the experience of one large State, access to specialty mental health services 

increased by 50 percent for children and adolescents (as it did for adults) under parity 

with carve-out managed care. But, as noted above, the costs for children declined 

much more than they did for adults (75 percent for children vs. about 9 percent for 

adults) with 6- to -17-year-olds accounting for most of the decline. Because of very 

high inpatient utilization among children and adolescents in the large-employer group 

prior to parity, carve-out management was able to effectively reduce costs, despite 

improved benefits, while still increasing overall access. The same level of cost 

reductions might not necessarily be expected with other populations when 

simultaneously introducing parity and more intensive managed care; however, the 

experience described for the employees and their spouses suggests that costs would 

not dramatically increase. 

Case Study 2: Multiple States

An analysis of the impact of parity legislation on the use and cost of mental health 

services for children and adolescents in 12 States was prepared by Cuffel and 

colleagues (1999a). Adolescents have had relatively high mental health costs, 

primarily because of their use of inpatient care. This study revealed that parity 

legislation has widely varied effects on the use and cost of mental health services for 

adolescents across States. In some, such as Minnesota and Rhode Island, the 

increased benefits were associated with increases in costs, while in others, such as 

Colorado, the greatest decreases in cost and utilization after parity occurred among 

adolescent populations. These findings generally suggest that cost reductions for

children and adolescents under parity legislation stem primarily from reduction of 

inpatient services.

In both case studies, the decline in cost for children reflects a reduction in inpatient 

care, although outpatient use increased. It is not clear if this decrease in inpatient use 

is good or bad for adolescents. If appropriate outpatient services are available it may 

be a positive shift. However, the impact of such changes on the long-term mental 

health of children remains to be determined.
14

IV. ACCESS AND QUALITY

UNDER PARITY

A. Background

By using various cost-control methods, managed behavioral health care has made it 

possible to offer expanded parity-level benefits without dramatic cost increases. 

However, those same controls are also sufficiently powerful to prevent access to 

mental health services. During the last 2 years, more data sets became available for 

evaluating access and refining its measurement. While researchers were initially only 

able to measure the probability of any mental health use in a given year, they can now 

also identify the intensity (volume) of access. In addition, a very recent study was able 

to differentiate between the population with severe mental illness (SMI) and the nonSMI population while evaluating access to care. 

B. Case Studies

Case Study 1: 

Concerns that cost containment and price competition among managed care 

companies might have unduly restricted access to specialty treatment led the NAMHC 

Parity Workgroup to request a preliminary study to examine the relationship between 

insurance companies' expenditures on mental health (measured by cost per member 

per month, PMPM) and the probability of receiving any specialty mental health 

treatment. The analysis indicates that, in general, access to specialty treatment 

decreases as mental health expenditures fall (Weissman et al. 2000). 

Case Study 2:

The pre- and post-parity study described in Subsection III C (Zuvekas et al. 2000) 

provides extensive data on the impact of parity and carve-out managed care on 

access to and use of inpatient and outpatient mental health services by adults and 

children. Overall treated prevalence (for employees, spouses, and dependents) rose 

from 4.9 percent pre-parity (Year 1 of the study) to 7.3 percent after 3 years of parity 

(Year 4). 

As noted earlier, this case study also compared the experience of the large-employer 

group to other smaller groups who were not subject to the parity benefit. Treated 

prevalence also increased in these smaller groups over the same period, suggesting 

that factors other than parity and carve-out management may have contributed to 

better access to services. However, it is also clear that parity and carve-out 

management did not lead to reduced access at the same time that costs were 

dramatically reduced.

 
15

Inpatient Admissions: Between Year 1 and Year 4 of the Zuvekas et al. study, 

inpatient admissions for employees and their spouses rose by a little over one quarter. 

However, for dependents, inpatient admissions fell 40 percent overall, with admissions 

down 65 percent for 6- to 12- year-olds and down 45 percent for 13- to-17-year-olds, 

while admissions rose slightly for dependents 18 and older.

 During the same period the average number of inpatient nights decreased 

substantially for employees from 83 nights per 1000 enrollees to 47 nights, and from 

98 nights to 71 for spouses. Among children and adolescents, the number of inpatient 

nights decreased by 80 percent, with most decreases occurring among 6- to 17- yearolds. The average length of stay for these dependents fell from more than 30 nights 

per admission to about 10 nights per admission.

Although overall inpatient admissions for dependents, employees, and spouses fell 

slightly with parity (8 percent), the number of inpatient nights was reduced almost 70 

percent. As noted above, dependents experienced the most dramatic changes. In the 

pre-parity period, 77 percent of dependents receiving inpatient treatment during the 

year spent more than 30 nights in the hospital, and 61 percent spent more than 60 

nights. By the third year of parity, 52 percent of dependents receiving inpatient 

treatment spent more than 30 nights during the year as inpatients, and only 34 percent 

spent more than 60 nights. As noted in Section III, it is unclear if the decrease in 

inpatient use has a positive or negative impact, especially since outpatient use 

increased (see below). The long-term effect on mental health remains to be 

determined.

Outpatient Utilization: Overall, both the proportion of enrollees with any outpatient use 

and number of outpatient visits per 1000 increased by 50 percent under parity. 

Dependents were less likely than employees or spouses to use outpatient mental 

health and substance abuse services; they also tended to have slightly fewer visits 

when they did use them. In general, although a greater proportion of enrollees were 

using mental health services after parity, the mean number of visits for those with any 

use remained virtually unchanged. 

C. Studies Based on National Data Sets

In theory, implementing parity for mental health can reduce financial barriers to access 

to mental health care (Rupp and Lapsley 2000). Research based on national data 

sets confirms that more people have access to mental health care under parity, but 

there is not necessarily more use per individual (Sturm and Sherbourne 2000). 

Another national study, which examined how parity affects the use of mental health 

services by people in poor mental health vs. those not in poor mental health, revealed 

a small increase in number of visits among the former group (Sturm and Wells 2000). 

Despite some limitations in the generalizability of this study, it suggests that even 

limited reductions in co-insurance rates and deductibles can increase access for those 

in greatest need for mental health services. 
16

V. DEVELOPMENT OF OUTCOME MEASURES OF QUALITY 

A. Background

As noted in previous NAMHC reports on parity (National Advisory Mental Health 

Council 1998), the ability to measure the quality of health and mental health services 

is crucial for achieving the real intent of parity (i.e., providing the best and most 

appropriate services for those who need care). Various efforts have been launched, 

ranging from clinical measures for specific illnesses applied at the individual level to 

global performance measures applied to the health care system. Although the ability 

to measure quality has improved in recent years, there is still a long way to go (Dickey 

et al. 1998). Below we discuss recent developments in this area. Although no current 

data reveal the impact of parity on quality, these efforts should make it possible as 

data become available for care under parity.

B. Recent Developments

There are many ways to measure quality, but most are based on a model outlined by 

Donabedian many decades ago (Donabedian 1966). This model separates quality 

into three domains: structure, process, and outcome. Most current measures use 

some aspect of each of these, although the most popular is outcome assessment. 

Newer measures have expanded to incorporate other aspects, such as access to 

specific health services, and to include a more comprehensive view of the health 

system as well as education and caregiver support. Recently there have been efforts 

to move beyond simply measuring aspects such as structure and process to 

determine ways to reduce variation in health care by ensuring provider adherence to 

"evidence-based" guidelines.

Earlier studies showed that the quality of care for mental illnesses is not often good, 

especially in the general medical sector (Wells 1994; Wells et al. 1994). However, 

even in the specialty sector there are quality problems, as shown by recent reports 

from the Schizophrenia Patient Outcomes Research Team (Lehman and Steinwachs 

1998). Although some earlier studies raised concerns about the quality of mental 

health care in managed care settings, there are no consistent data to indicate that 

managed care settings are any less likely than non-managed care settings to deliver 

appropriate treatment services (Durham 1998).

No currently available quality measures provide all the answers that consumers, 

providers, employers, and policymakers want. Some, such as the currently popular

Health Plan Employer Data and Information Set (HEDIS) measures are not sufficient 

in the mental health area (Druss and Rosenheck 1997). In addition, outcomes of 

health care may be affected by factors that are not under the control of the medical 

system, or their relevance to a particular treatment may not become apparent for 

years. Thus, it is crucial to be able to link what is done in a particular patient 

encounter to the ultimate impact of that intervention. One way to do this is to show 

through research which interventions work for particular illnesses in specific

populations. This is the basis for what is called “evidence-based practice.” 
17

The National Institute of Mental Health recently launched several major clinical 

treatment trials that will determine the effectiveness of treatment interventions in 

community populations with various mental illnesses. These studies will provide 

evidence about which interventions are best for the varied populations seen in 

everyday community practice. The first trials are in bipolar disorder, schizophrenia, 

depression in adolescents, and treatment-resistant depression in adults. Future 

studies will focus on other major mental illnesses.

Even with adequate measures, it is essential to have access to data that can be used 

to assess the quality of care delivered. This requires that a variety of data sources, 

such as clinical and survey data, be available. For example, information on access to 

care can be obtained through surveys of consumers, but use of specific services is 

best determined through administrative databases. The need for these different 

sources of information presents a multitude of feasibility problems, however. 

Population surveys are often costly and require a great deal of effort to enlist a 

representative sample, while medical records and administrative data raise 

confidentiality concerns.

Because many of the factors that affect health are social and their relationship to 

health status is unclear, more research is needed at the interface between social 

sciences and clinical treatment. Acting without such data, or on the bases of imperfect 

data, could increase costs, disenfranchise groups who have special needs, and even 

put excellent health plans out of business.

Even with appropriate measures of quality and the ability to put them into place, 

interventions need to be developed that actually improve the quality of mental health 

care in places where it is now not optimal. Efforts to improve quality have focused on 

regulation, competition, quality-improvement programs, and economic incentives 

(Chassin 1997). Clearly, no single approach is sufficient; multiple approaches are 

needed. For example, regulation can set the groundwork for what is expected and 

make it possible to collect data that could be used to formulate risk adjustment. 

Competition is a powerful tool, but without valid measures of quality, the wrong factors 

may form the basis for competition among plans. Thus, consumers and health plans 

may segregate themselves to take advantage of the most positive results that relate to 

them. This might improve some specific areas of health care but might result in 

poorer general health care. Financial incentives can certainly influence what care is 

delivered, but it is unclear how much impact they have on quality and how to use them 

to improve the quality of care. A number of quality-improvement programs have been 

tried, and some recent evidence suggests that it is possible to improve the quality of 

care without major efforts (Wells et al. 2000). However, it still is unclear what 

programs will work and what other incentives will be needed to ensure that they last.

Current efforts are focused on finding ways to ensure that providers and consumers 

use the treatments that are considered best. We need to understand how providers, 

consumers, and systems will change their behavior to ensure that the best care is 

delivered and used. The NIMH is currently encouraging research that seeks to 

address these issues.
18

VI. WORKPLACE ISSUES 

A. Background

Comprehensive analyses of the impact in the workplace (including employer 

concerns) of broadened mental health coverage under parity need to take into account 

parity's effect on the costs of general health care, and costs of disability and work 

productivity. Potential shifts of employees with mental illness into primary care to 

obtain mental health treatment, changes in workplace performance and attendance, 

and movement of workers between the employment and disability rolls are of 

particular interest to employers. No data are available on the impact of parity in these 

areas. However, previous research discussed below provides some insight into the 

potential effect of providing expanded mental health services under parity. 

B. Indirect Effects of Mental Health Care on General Medical Care Costs

The interactions of somatic and psychological factors in health and illness--and their 

impact on health care use and costs--are gaining increasing recognition in a climate of 

greater management and cost control. There is widespread agreement that people 

with mental illness are high users of general medical services. For example, people 

diagnosed with depression have nearly twice the annual health care costs of those 

without depression, while those with somatization disorder have nine times greater 

annual health care costs than those without the disorder (Simon et al.1995). There 

has been considerable interest in the effect of providing mental health and substance 

abuse treatment on the use and cost of general medical care.

In the classic research review and meta-analysis of how mental health care affects 

medical care costs (Mumford et al. 1984), most of the 58 studies under review 

demonstrated a medical cost offset, that is, a compensatory reduction in the cost of 

general health services, usually resulting from provision of short-term psychotherapy 

or supportive counseling. But many of the studies were difficult to interpret because of 

methodological flaws, such as lack of randomization or of a well-matched comparison 

group. 

Two studies that used random assignment examined the effect of providing psychiatric 

consultation to primary care physicians for people with somatization disorder or 

somatization syndrome (Smith et al. 1986; Simon et al. 1995) Both studies 

demonstrated reductions in health care expenditures (53 percent and 33 percent 

respectively) for the two illness groups. 

Zhang and colleagues (1999) followed 435 people with depression over a 1-year 

period. Among those receiving depression treatment, individuals treated in the mental 

health sector had significantly higher depression treatment costs and significantly 

lower lost earnings than those treated in the primary care sector. The investigators 

concluded that the annual net economic costs are lower for people treated within the 

mental health sector than for those treated by primary care providers.
19

Concern has been expressed in the field that restricting access to specialty mental 

health services might shift the cost of caring for the mentally ill into the general health 

system. This concern is based in part on findings of cost shifting to the general health 

system, such as that identified by Rosenheck and colleagues (1999) described in 

Section C below. However, a recent study of the transition of a large employer from an 

unmanaged indemnity plan to a managed behavioral health carve-out did not show 

any evidence of cost shifting (Cuffel et al.1999b). This study compared the use and 

cost of behavioral health care and medical care services during a 2-year period before 

the carve-out and 3 years afterward. Medical care costs decreased for those using 

behavioral health care services during a period when such costs were generally 

increasing.

England (1999) has proposed that medical cost offset data could be very valuable for 

identifying people who are underserved and for developing better coordination of 

medical and mental health care. She underscores the importance of linking employer 

databases of aggregate data on health, mental health, disability, workers' 

compensation and employee absenteeism to comprehend fully how changes in mental 

health coverage and policy affect the system as a whole, rather than the mental health 

specialty sector alone. It is important to remember, however, that the idea of a 

medical cost offset presents enormous conceptual and methodological challenges that 

make it difficult to study. 

C. Indirect Effects of Mental Health Care on Disability 

The World Health Organization (WHO) Report on the Global Burden of Disease 

(Murray and Lopez 1996) highlights the substantial impact of disability resulting from 

several major mental and addictive disorders--especially major depressive disorder--

compared to physical disorders. Among the 10 leading causes of disability worldwide, 

four are mental disorders, and unipolar major depression leads the entire list. It is well 

known from the clinical and disability literatures that severe mental disorders tend to 

have earlier ages of onset and are more persistent than many other disabling 

conditions; thus they tend to result in longer periods of disability. Even among those 

able to work, the severity of illness affects both productivity at work and the ability to 

tolerate the stress of the workplace. However, current treatments for depression and 

other mental illnesses offer appreciable benefits for workers and their employers. For 

example, the effectiveness of treatments for depression in improving work 

performance, satisfaction, and work relations has been convincingly demonstrated in 

meta-analyses of several randomized clinical trials (Mintz 1992). 

The economic impact of effective treatment can be considerable, given the high toll of 

disability exacted by certain mental disorders. Kessler and colleagues (1999) recently 

estimated the short-term work disability associated with a diagnosis of major 

depression over a 1-month period, based on an analysis of two national surveys (the 

National Comorbidity Survey and the Midlife Development in the United States 

Survey). Such short-term work disability is much more prevalent among workers with 

major depression (affecting 37 to 48 percent) than among those without depression 

(affecting 17 to 21 percent). Within a 30-day period, workers with depression 

experienced between 1.5 and 3.2 more short-term work-disability days than workers 

without depression. This differential represented "a salary-equivalent productivity loss 

averaging between $182 and $395 [during the 30-day period]." The researchers 
20

showed that this amount was nearly comparable to the direct costs of treatment of 

depression for that period of time, thus providing support for the cost-effectiveness to 

employers of providing mental health treatment.10 

How does managed care affect the workplace and the work-related benefits of 

treatment? In a recent Yale study, Rosenheck and colleagues (1999) examined the 

impact of managed care (not under parity) on employees of a large national 

corporation. During the 3-year study period mental health expenditures decreased, 

due to a large decrease in the use of specialty mental health services. At the same 

time, however, there was greater employee absenteeism and poorer work 

performance; in addition, increased general health costs offset any savings in mental 

health specialty costs among users of mental health services. 

Researchers at Johns Hopkins University (Salkever et al. 2000) have found that in 

general, having greater access to outpatient specialty care and increased mental 

health coverage reduces the number of mental health disability claims. Plans with the 

highest financial barriers (first dollar costs and coinsurance) experienced more 

psychiatric disability claims. By contrast, front-line disability management (e.g., 

providing alternative employment and offering Employee Assistance Program 

services) was associated with reduced numbers of claims, as was having greater 

organizational access to specialty care through carve-outs. 

 

10 This study only examined the cost of short-term work disability for employed persons; it did not 

include the costs to employers of long-term depression-related disability for those no longer in the work 

force. Thus, it underestimates the total disability impact associated with this illness
21

VII. PUBLIC-PRIVATE SECTOR INTERFACE

A. Background

Concern about parity's potential for shifting mental health care costs to the general 

medical sector is paralleled by concern about parity's potential to shift some 

expenditures for mental health/substance abuse care from the public sector to the 

private sector. The latter shift may lower overall mental health/substance abuse 

expenditures as a result of efficiency gains in the private sector, but higher private 

insurance premiums may also result. (Another potential shift of particular concern to 

people with severe mental illness is that from the private to the public sector due to 

exhaustion of private insurance benefits--especially for inpatient care.) Studies 

delineating differences in utilization and cost between the public and private sectors, 

as well as the effects of parity and managed care in encouraging cost shifting between 

the sectors are at an early stage of development. A few recent findings are reported 

here. 

B. Single-State Case Studies

Case Study 1: Public-Private Sector Comparisons: Utilization and Expenditures

A 1-year study was recently conducted of utilization patterns and expenditures for a 

single managed care company providing mental health and addictive services to a 

State population of almost 2 million enrollees; of these, approximately 650,000 were in 

the public sector (Goldman H. et al. 2000). The study provides a more complete 

picture of a single State mental health system--in both private and public sectors--than 

previously available. Preliminary data from the study indicate that all service use 

(except rarely used and usually noncovered substance abuse services) is higher in the 

public sector than in the private sector. This difference does not seem to change 

dramatically when managed care is implemented in both the public and private sectors 

by the same managed behavioral health care company. 

Case Study 2: Public-Private Sector Cost Shifting 

A recent study using a longitudinal data source (pre-parity) from the mid-1990s 

(containing individuals with private insurance who also use public-sector services, as 

well as privately insured individuals who do not use publicly financed services) is 

contributing to understanding interactions and cost shifting between the public and 

private mental health care systems (Siegel et al.1997, 2000). Major findings of this 

case study indicate that during a year, only a small proportion (< 1 percent) of those 

with private insurance directly shifted to the public sector; a larger proportion (< 2.2 

percent) of those with private insurance shifted to a mixture of private and publicsector services. 

During the first year of the study, the latter group had the highest costs within the 

private group. There is a high likelihood of remaining in the mixed private/public pay 

category; approximately 55 percent of people in that group remain in it over 2 years, 

and have consistently high costs. People who shift from private to public sector or to a 

mixture of public and private sectors tend to be dependents (with subsidized income) 

of employed individuals. This study demonstrates empirically that the public and 
22

private insurance sectors are not mutually exclusive, and individuals are not purely in 

one sector or the other. There is a small group of high-use, high-cost patients who are 

being financed by both sectors, and about 13 percent of them moved to the public 

sector after being in the mixed sector for 2 years.
23

VIII. KNOWLEDGE GAPS

Since the first NAMHC report on parity to the Senate Appropriations Committee, a 

substantial body of research knowledge has developed concerning the impact of parity 

on mental health care and its costs. However, many gaps in knowledge remain as the 

focus of inquiry shifts from the cost of parity to its short-term and long-term effects--in 

combination with managed care. These include:

• What is the long-term effect on continued access to appropriate mental health 

services?

• What is the impact on particularly vulnerable populations, such as children and 

adolescents, the elderly, the severely mentally ill, and traditionally underserved 

populations?

• What is the effect on disability and work productivity in insured populations?

• How is the quality of treatment affected?

• What is the long-term impact on public mental health?

• How do health care systems respond to parity?

• What is the impact on the types of co-morbid problems seen in the general health 

care sector?

Both the implementation of a parity-level benefit in the Federal Employees Health 

Benefit plan in 2001 and the implementation of parity in 31 States offer unique 

opportunities to study many of these issues and build on a strong foundation of 

baseline data.
24

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27

APPENDIX A:

Workgroup Charge from Senate Report No.105-300

"Research has provided clear evidence that mental illnesses are diagnosable, 

treatable, and real diseases affecting the brain. The Committee has recently received 

from the National Advisory Mental Health Council [NAMHC] the report requested in its 

fiscal year 1998 appropriations report and notes the impact of managed care on 

keeping costs of parity at a low level. The Committee requests that the NAMHC 

prepare an additional report on its findings from emerging health services research 

data from both the private and public sectors and submit it under the provisions of 

section 406g of the Public Health Service Act. Where possible, the report should 

address both employer direct costs, and the impact of indirect cost savings from 

successful treatment of employees. This report should, to the extent possible, also 

consider the costs and quality of coverage for children, and the development of 

outcome measures of quality for all mental health coverage."
28

APPENDIX B:

NAMHC Parity Workgroup Members and Consultants

NAMHC LIAISON

Mary Jane England, M.D.

Mary L. Durham, Ph.D.

Roy C. Wilson, M.D.

WORKGROUP STAFFING

National Institute of Mental Health

Darrel Regier, M.D., M.P.H.

Agnes Rupp, Ph.D.

Donald Rae, M.A.

Michael Feil, M.B.A.

William Narrow, M.D.

Grayson Norquist, M.D., M.S.P.H.

Anne Rosenfeld

Stuart Sotsky, M.D., M.P.H. 11

Agency for Healthcare Research and Quality 

Samuel Zuvekas, Ph.D.

SPECIAL CONSULTANT

Richard Frank, Ph.D.

 

11 Note: Dr. Sotsky served on detail from George Washington University to NIMH from 1998 to 1999.
29

APPENDIX C:

National Advisory Mental Health Council Roster

CHAIRPERSON

Steven E. Hyman, M.D.

Director

National Institute of Mental Health

Bethesda, Maryland

EXECUTIVE SECRETARY

Jane A. Steinberg, Ph.D.

Acting Director

Division of Extramural Activities

National Institute of Mental Health

Bethesda, Maryland 

MEMBERS

Thomas J. Coates, Ph.D. 

Professor 

Director, UCSF AIDS Research 

Institute 

 and Center for AIDS Prevention 

Studies

University of California, San Francisco

San Francisco, California 

Kathy Cronkite

Mental Health Advocate

Austin, Texas

Mary L. Durham, Ph.D. 

Vice President/Research

Kaiser Foundation Hospitals

Portland, Oregon

Mary Jane England, M.D. 

President

Washington Business Group on Health

Washington, DC

Javier I. Escobar, M.D. 

Professor and Chairman

University of Medicine and Dentistry of 

New Jersey

Robert Wood Johnson Medical School

Piscataway, New Jersey

Ellen Frank, Ph.D. 

Professor of Psychiatry and Psychology

Department of Psychiatry

School of Medicine

University of Pittsburgh

Pittsburgh, Pennsylvania

Apostolos Georgopoulos, M.D., Ph.D.

Professor, Department of Physiology, 

 Neurology and Psychiatry

University of Minnesota Medical School

Director, Brain Sciences Center 

Veterans Administration Medical Center

Minneapolis, Minnesota 

Henry Lester, Ph.D. 

California Institute of Technology

Division of Biology 

Pasadena, California

James McClelland, Ph.D. 

Professor

Humanities and Social Sciences

Carnegie Mellon University

Pittsburgh, Pennsylvania

Charles B. Nemeroff, M.D., Ph.D. 

Reunette W. Harris Professor and 

Chair

Department of Psychiatry and 

Behavioral Sciences

Emory University School of Medicine

Atlanta, Georgia 
30

Anne C. Petersen, Ph.D. 

Senior Vice President for Programs

W. K. Kellogg Foundation

Battle Creek, Michigan

A. John Rush, M.D. 

Professor, Betty Jo Hay Distinguished 

Chair

Department of Psychiatry

Southwestern Medical Center

University of Texas

Dallas, Texas 

Edward Scolnick, M.D. 

President

Merck Research Laboratories

West Point, Pennsylvania

Joseph S. Takahashi, Ph.D. 

Investigator, Howard Hughes Medical 

 Institute

Walter and Mary E. Glass Professor

Department of Neurobiology and 

Physiology

Northwestern University

Evanston, Illinois 

James G. Townsel, Ph.D. 

Professor and Director

Center for Molecular and Behavioral

 Neuroscience

School of Medicine

Meharry Medical College

Nashville, Tennessee 

Myrna M. Weissman, Ph.D. 

Professor

Department of Clinical and Genetic

 Epidemiology 

New York State Psychiatric Institute

Columbia University

New York, New York 

Roy C. Wilson, M.D. 

Director

Missouri Department of Mental Health

Jefferson City, Missouri

EX OFFICIO MEMBERS

Office of the Secretary, DHHS

Donna E. Shalala, Ph.D.

Secretary

Department of Health and Human 

 Services

Washington, DC 

National Institutes of Health

Ruth Kirschstein, M.D.

Acting Director

National Institutes of Health

Bethesda, Maryland 

Department of Defense

Robert A. Mays, Jr., Ph.D.

Colonel, U.S. Army

Office of the Inspector General

North Atlantic Regional Medical 

 Command

Walter Reed Army Medical Center

Washington, DC 

Department of Veterans Affairs

Thomas B. Horvath, M.D., F.R.A.C.P.

Chief of Staff 

Veterans Affairs Medical Center

Houston, Texas 
31

LIAISON REPRESENTATIVE

Thomas H. Bornemann, Ed.D.

Deputy Director, Center for Mental Health Services

Substance Abuse and Mental Health

Services Administration

Rockville, Maryland
32

APPENDIX D: Comparing Parity Cost Estimates

Using Actuarial Models

The new NAMHC estimate of a 1.4 percent cost increase in total health insurance 

premiums due to parity is lower than previously reported estimates based on Hay 

Group actuarial models (all were of similar magnitude). Previous estimates include 

the 1996 Congressional Budget Office (CBO)/Congressional Research Service (CRS) 

4.0 percent increase, the 1998 Substance Abuse and Mental Health Services 

Administration (SAMHSA) estimate of 3.6 percent, and estimates from the previous 

NAMHC report, as shown in the Table below. Because each of the Hay Group modelbased estimates uses the same basic methodology it is important to understand what 

drives the latest estimate.

Table. Cost of Full Parity Estimates Based on Hay Group Actuarial Models

Increase in Total Premium

Estimate Model Version* FFS Plans All Plans

CBO/CRS (1996) HCBVC 6.5 5.3% 4.0%

NAMHC (1998) MHBVC1.7 4% to 5% <1 to 4%

SAMHSA (1998) MHBVC1.7 5.0% 3.6%

NAMHC (2000) MHBVC2.0 1.4% 1.4%

* Principal model for mental health/substance abuse cost estimates (separate model 

used to calculate non-mental health costs for HMOS in all but CBO/CRS study).

The different Hay Group models (HCBVC 6.5, MHBVC1.7, MHBVC2.0) work 

essentially the same way. The Hay Group uses actuarial methods to develop an 

expenditure grid, which represents the extent of medical, mental health, and 

substance abuse service use by plan enrollees if they paid nothing out of pocket (i.e., 

if the plan paid 100 percent). Combinations of induction factors (which measure how 

responsive enrollees are in reducing their health care use when faced with higher outof-pocket costs) and management factors (which measure how costs are reduced with 

utilization review and other managed care practices) are then used to estimate how 

much care enrollees would use when faced with a particular set of copayments. 

Administrative loading factors are used to multiply these costs to determine the 

estimated premium for a particular health care benefit package. 

The cost of a change in the health care benefit package, such as mental health parity, 

is simulated by first estimating the cost with existing benefits in the Hay model and 

then estimating the cost with the new benefits. All other assumptions are held 

constant (except, of course, for benefits). Because both baseline costs and benefits 

differ in fee-for-service (FFS), preferred-provider organization (PPO), point-of-service 

(POS), health maintenance organization (HMO), and managed behavioral carve-out 

plans, the Hay models were used to compute separate estimates of the cost of parity 
33

for these different types of health plans. The 1998 SAMHSA and the 2000 NAMHC 

estimates then combine these separate estimates (using assumptions about the 

distribution of enrollees across types of plans) to produce a single estimate of the total 

cost impact of mental health parity. The previous NAMHC (1998) report did not 

present a single cost estimate, but rather a range of estimates based on the different 

plan types. The CBO/CRS estimated a typical FFS plan and then made an ad hoc 

adjustment downwards to reflect managed care. 

The major difference between the current NAMHC estimate of 1.4 percent and 

previous estimates appears to be driven by the evolution of the Hay Group model as it 

is updated to reflect changes in the underlying distributions of mental health and 

health care expenditures. The most recent version of the Hay Group model 

(MHBVC2.0) assumes an average mental health and substance abuse cost per 

enrollee (with no out-of-pocket costs) that is fully one-half that of the Hay Group model 

used for the 1998 SAMHSA and the previous NAMHC report estimates, and one-third

that of the model used for the 1996 CBO/CRS estimate (NAMHC calculations from 

Hay Group models). The most recent Hay Model incorporates new data from the 

FFS/PPO plans of the Federal Employees Health Benefit Program (FEHBP), several 

large managed behavioral health care companies, and the FFS plan of a large State 

employees health plan (described in Section III of this report). The experience of the 

FEHBP program, along with other evidence, suggests that mental health and 

substance abuse costs have declined substantially during the 1990s, mainly due to 

sharply reduced inpatient utilization even in FFS/PPO plans. Because mental health 

costs have declined, especially as a proportion of total health care costs, the 

estimated impact of a mental health parity benefit in terms of the increase in total 

premiums has correspondingly declined. 

There are other much smaller differences in the assumptions used between current 

NAMHC estimate and previous estimates. The assumptions are discussed in more 

detail below, but in general these explain little of the differences between the 

estimates. (A useful companion to this discussion of the estimates is the report by 

Sing and Hill (1998) detailing the assumptions used to generate the 1998 SAMHSA 

estimates.) This is illustrated by the fact that when the NAMHC (2000) assumptions 

are applied to the previous version of the Hay Model (MHBVC1.7) used to produce the 

1998 SAMHSA estimate, the estimated impact of parity is 3.7 percent instead of 1.4 

percent (preliminary NAMHC calculations from the MHBVC1.7 model). That is, when 

the same assumptions are applied to mental health treatment patterns prevailing 

several years ago, the estimated cost of parity is 3.7 percent, but taking into account 

recent trends in mental health costs reduces the estimated cost of parity to a current 

level of 1.4 percent. 

Other Differences in Basic Assumptions

Family vs. single premiums: The current NAMHC estimate is for singles only, while 

the other estimates represent the percent increase in total family premiums. 

Preliminary calculations using the new Hay model suggest that increase in total family 
34

premiums would be approximately 1.6 percent, a slight increase from the 1.4 percent 

for the single premiums. 

Distribution of Health Plans: The 1998 SAMHSA and the current NAMHC estimates 

assume different distributions of types of health plans, but this difference has no effect 

on either estimate. That is, applying the 1998 SAMHSA distributions to the current 

NAMHC estimate produces the same estimate, and vice versa. (The 1998 SAMHSA 

estimate assumes a distribution in which 20 percent of plans are FFS, 30 percent 

PPO, 20 percent POS, and 30 percent HMO, compared to a distribution of 14 percent, 

40 percent, 20 percent, and 26 percent respectively in the 2000 NAMHC estimate.) 

The CBO/CRS estimate contains an unknown adjustment for managed care plans 

from their base FFS estimate.

Carve-outs: The current 1.4 percent NAMHC estimate includes an adjustment that 

assumes that 20 percent of FFS, PPO and POS plans have carved out their mental 

health and substance abuse benefits. This 20 percent factor is the same for both the 

current and parity benefit cost estimates. Several surveys estimate that in at least 20 

percent (KPMG Peat Marwick, Hay Group) of these types of plans among medium 

and large employers, the employer separately contracts (carves-out) with a managed 

behavioral health firm. This 20 percent is a conservative estimate of carve-out 

management since FFS, PPO, and POS health plans may themselves subcontract 

(carve-out) behavioral benefits, but there are no good estimates of the extent of these 

indirect carve-outs. The 20 percent carve-out adjustment has a negligible impact on 

the current NAMHC estimate—without it the estimate is 1.5 percent—because the 

difference between cost increases in carve-out plans and non-HMO plans have 

decreased considerably. However, applying the 20 percent carve-out adjustment to

the 1998 SAMHSA estimate would considerably reduce it from 3.6 percent to around 

3.0 percent.

Benefits: All of the estimates use the same basic assumptions about existing mental 

health and substance abuse with one exception. The CBO/CRS estimates assumed 

that a $50,000 lifetime maximum applied to mental health benefits, while all the other 

estimates occurred after the federal parity legislation that removed this limit. There 

were slight differences across the different estimates in the assumed medical/surgical 

benefits, but these differences likely had little impact on any of the estimates. 

Management Factors: The Hay Group models all incorporate a management factor to 

account for the effect of use of utilization review and other managed care techniques 

in reducing costs. The factors were, for the most part, the same across all of the 

estimates and the same factor was used to estimate both the cost under current 

benefits and under a parity benefit. The 1998 SAMHSA estimate includes a 

management factor for FFS, PPO, and POS plans that implies a reduction of 25 

percent in mental health and substance abuse costs compared to unmanaged costs, 

but no reduction for HMO costs because the tighter management in HMOs are already 

reflected in the HMO expense grids. The current NAMHC estimate uses the same 25 

percent management factor adjustment for FFS, PPO, POS, HMO and carve-out 

plans to estimate costs under current and under parity benefits. Preliminary NAMHC 

calculations suggest that if the 25 percent adjustment for HMOs and PPO is 
35

eliminated, the current NAMHC estimate of 1.4 percent overall increase in premium 

costs due to parity would change slightly to 1.5 percent. 

Induction (Demand Response): All the estimates based on the Hay Group model use 

the same induction factors, which are derived from the RAND Health Insurance 

Experiment, with one small exception. The 1998 SAMHSA estimates used slightly 

lower induction factors for HMO plans. However, this makes little difference in the 

overall estimates.

Administrative Factors: The Hay Group model multiplies the base claims costs in their 

models by an administrative loading factor, which represent a fixed percentage of the 

total claims costs for administrative costs and profit (where applicable), to obtain the 

total premium cost. The current NAMHC estimate uses the same administrative factor 

of 1.11 for all types of health care plans (carve-outs, HMO, FFS, PPO, POS). The 

1998 SAMHSA estimate used the same administrative factor of 1.11 for FFS, PPO, 

and POS plans but higher loading factors of 1.15 for medical/surgical expenses and 

1.2 for behavioral coverage. However, because these administrative load factors 

multiply both the numerators and denominators, the effect of differing administrative 

load factors tends to be canceled out when examining changes in premium costs. 

References:

Hay Group (1999): Employer Mental Health Coverage Features and Compliance with the 

Mental Health Parity Act. Hay Report for NIMH, June 1999. (unpublished).

KPMG Peat Marwick, Health Benefits in 1997, June 1997. 

Sing M. and Hill S. (1998): Predicted Premium Increases Due to Full and Partial Parity for 

Mental Health and Substance Abuse Insurance Benefits. Report Submitted to the 

Substance Abuse and Mental Health Services Administration. Washington, DC: 

Mathematica Policy Research, Inc. 
36

APPENDIX E:

States with Mental Health Parity Statutes

As of May 15, 2000, 31 States now prohibit discrimination in insurance and managed 

care coverage of mental illnesses: 

Alabama

Arkansas

California

Colorado

Connecticut

Delaware

Georgia

Hawaii

Indiana

Kentucky

Louisiana

Maine

Maryland

Massachusetts

Minnesota

Missouri

Montana

Nebraska

New Hampshire

New Mexico

New Jersey

New Mexico

North Carolina

Oklahoma

Rhode Island

South Dakota

Tennessee

Texas

Utah 

Vermont

Virginia

Source: Richard M. Scheffler, Daniel P. Gitterman, Marcia C. Peck, University of California, 

Berkeley, The Political Economy of Mental Health Insurance in the United States, NIMH grant 

(MH-18828-11).
37

TABLE IA: DEFINITION OF “BROAD-BASED” MENTAL ILLNESS IN 

STATE PARITY STATUTES

(Updated as of May 15, 2000)

"Broad-Based 

Coverage"

DSM-IV1ICD2 DSM-IV and ICD

Alabama X

Arkansas X

Georgia X

Connecticut (99) X

3

Kentucky X

4

Maryland5

Missouri (97) X

Tennessee X

Utah X

6

Vermont X

1DSM-IV includes disorders contained in the American Psychiatric Association’s Diagnostic 

and Statistical Manual, fourth edition.

2

ICD includes disorders contained in the World Health Organization’s International 

Classification of Disease, latest edition (current edition is 10th edition).

3 Connecticut includes coverage for all mental disorders in the most recent edition of the DSMIV excluding mental retardation, learning disorders, motor skills disorder, communication 

disorders, caffeine-related disorders, relational problems, additional conditions that may be a 

focus of clinical attention, that are not otherwise defined as mental disorders in the most 

recent edition of the DSM-IV.

4 Kentucky includes coverage for all disorders in the most recent edition of the Diagnostic and 

Statistical Manual or the International Classification of Disease but excludes coverage for 

conduct disorders (except ADHD), pervasive developmental disorder (except autism), learning 

disabilities, behavioral disorders, personality disorders, and mental retardation.

5 Maryland parity statute covers “mental illness and emotional disorders” and is considered a 

broad-based statute. However, the statute does not specify DSM or ICD criteria.

6 Utah includes coverage for all disorders in the most recent edition of the Diagnostic and 

Statistical Manual but excludes the following when diagnosed as the primary or substantial 

reason or need for treatment: marital or family problems; social, occupational, religious or 

other social maladjustment; conduct disorder; chronic adjustment disorder; psychosexual 

disorder; chronic organic brain syndrome; personality disorder; specific developmental 

disorder or learning disability; or mental retardation.

Source: Richard M. Scheffler, Daniel P. Gitterman, Marcia C. Peck, University of California, 

Berkeley, The Political Economy of Mental Health Insurance in the United States, NIMH grant 

(MH-18828-11).
38

TABLE IB: DEFINITION OF "SERIOUS MENTAL ILLNESS" IN PARITY STATUTES

(Updated as of May 15, 2000)

SchizophreniaSchizoaffective disorderBipolar disorderMajor depressive disorderObsessivecompulsivePanic disorder AutismParanoia/ psychoticDelusional disorderChildhood depressionADHDAnorexia/ bulimia PostTraumatic 

NAMHC1 X X X X X X X

California2 X X X X X X X X

2 X2 X

Louisiana3 X X X X X X X X X

Nevada X X X X X X

Penn. X X X X X X X X

Delaware X X X X X X X X

Texas (97) X X X X X X X X

Montana X X X X X X X

Maine4 X X X X X X X

Rhode 

Island

X X X X X X

Nebraska X X X X X X

Oklahoma X X X X X X

Hawaii X X X

1NAMHC: Definition as operationalized by National Advisory Mental Health Council (1993).

2 Definition also includes serious emotional disturbances of a child, defined as a child who has 

one or more mental disorders included in the Diagnostic and Statistical Manual of Mental 

Disorders, other than a primary substance abuse disorder or developmental disorder. In 

addition, child must meet certain functional criteria (see text for details). Theoretically, all 

DSM-IV disorders are covered for children under 18 who meet the above criteria. ADHD is 

covered when diagnosed before age 18, as is true in the majority of cases.

3 Definition also includes intermittent explosive disorder, psychosis NOS under 17, Rett’s 

disorder, and Asperger’s disorder.

4 Maine statute does not specifically use the term “serious mental illness,” but the disorders 

covered fit best with this classification.

Source: Richard M Scheffler, Daniel P. Gitterman, Marcia C. Peck, University of California, 

Berkeley, The Political Economy of Mental Health Insurance in the United States, NIMH grant 

(MH-18828-11)
39

TABLE IC: DEFINITION OF “BIOLOGICALLY-BASED” MENTAL ILLNESS IN 

STATE PARITY STATUTES

(Updated as of May 15, 2000)

SchizophreniaSchizoaffective disorderBipolar disorderMajor depressive disorderObsessivecompulsivePanic disorder AutismParanoia/ psychoticDelusional disorderChildhood depressionADHDAnorexia/ bulimia nervosa PostTraumatic Stress 

Literature1 X X X X X X X X X X X X

Massachusetts2 X X X X X X X X

2 X2

Missouri (99)3 X X X X X X X X X X

Virginia X X X X X X X X X

Connecticut 

(97)

X X X X X X X X

New Jersey X X X X X X X X

New 

Hampshire

X X X X X X X X

Colorado X X X X X X

South Dakota X

4 X X X4 X5

1

Literature indicates what disorders recent medical literature claims as having possible genetic 

basis. List also includes Tourette’s and conduct disorder. 

2Massachusetts statute also provides nondiscriminatory coverage for delirium and dementia, 

affective disorders, and any biologically based mental disorders appearing in the DSM that are 

scientifically recognized and approved by the Commissioner of the Department of Mental 

Health in consultation with the Commissioner of the Division of Insurance. Coverage also 

includes non-biologically based mental disorders for children and adolescents, defined as 

persons under age 19 having disorders described in DSM-IV that substantially interfere with or 

limit functioning and social interactions (see text for details). Medically necessary care is 

mandated for the diagnosis and treatment of all other mental disorders in the DSM-IV.

3Missouri statute does not specifically use the term “biologically based,” but the disorders 

covered fit best with this classification. Missouri statute also covers other affective psychoses. 

4Removed by H 1264 (1999).

5Added by H 1264 (1999).

Source: Richard M. Scheffler, Daniel P. Gitterman, Marcia C. Peck, University of California, 

Berkeley, The Political Economy of Mental Health Insurance in the United States, NIMH grant 

(MH-18828-11).
40

TABLE ID: HEALTH PLANS SET THE DEFINITION OF MENTAL ILLNESS 

COVERAGE IN STATE PARITY STATUTES1

(Updated as of May 15, 2000)

State Individual Plan2

Indiana (99) X

Minnesota X

New Mexico X

1 Does not include State statutes that match the federal 1996 MHPA or cover State employees 

only.

2

Individual plan indicates determined by individual health plans, usually subject to approval by 

the respective Departments of Insurance.

Source: Richard M. Scheffler, Daniel P. Gitterman, Marcia C. Peck, University of California, 

Berkeley, The Political Economy of Mental Health Insurance in the United States, NIMH grant 

(MH-18828-11).
41

TABLE II: VARIATION IN STATE MENTAL HEALTH PARITY STATUTES

(Updated as of May 15, 2000)

State Year 

Enacted

MH Benefit 

Mandate A

Broad 

Definition 

Mental 

IllnessB

Covers 

Substance 

Abuse C

Set = terms 

and 

conditionsD

Covers 

individual 

and group 

plansE

Small 

employer 

exemptF

Cost 

ExemptG

Federal MHPA 96 M(ifoff) X X X

Alabama 2000 MO X X X

Arkansas 97 MB X X (opt 

out)i

X X X

California 99 MB X X

Colorado 97 MB X

Connecticut 

(A)

97 MB X X

Connecticut 

(B)

99 MB X X X X

Delaware 98 MB X X

Georgia 98 MO X X X-group 

plans

X

Hawaii 99 MB X X X

Indiana (A) 97 M(ifoff) X SE 

only1

X

Indiana (B) 99 M(ifoff) X X X X

ii

Kentucky 2000 M(ifoff) X X X X

Louisiana 99 MB

MOiii

X

(MO 

only)

Maine 95 MB

MOiv

X X

(MO 

only)

X

Maryland 94 MB X X X

Mass (A) 93 MB X X SE 

only1

Mass (B) 2000 MB X

v Xvi X Xvii

Minnesota 95 MB

M(ifoff)

viii

X X X

Missouri (A) 97 MO X X X

Missouri (B) 99 M(ifoff) X X
42

Montana 99 MB X X

Nebraska 99 M(ifoff) X X

Nevada 99 MB X X X

New 

Hampshire

94 MB X

New Jersey 99 MB X X

New Mexico 2000 MB X X

ix

North Carolina 

(A)

91 MB X X SE 

only1

North Carolina 

(B)

97 MB X X X SE 

only1

Ohiox

90 MB X X X SE 

only1

Oklahoma 99 MB X X X

Pennsylvania 98 MB HMO 

group

X

Rhode Island 94 MB X

xi X

South Dakota 98 MB xii X X

Tennessee 98 MB X X X

Texas (A) 91 MB X SE 

only1

Texas (B) 97 MB X

Utah 2000 MO X X X

xiii

Vermont 97 MB X X X X

Virginia 99 MB X X X X

1State employees only.

Italicized States also enacted statutes to match the 1996 Federal Mental Health Parity Act.

Source: Richard M. Scheffler, Daniel P. Gitterman, Marcia C. Peck, University of California, 

Berkeley, Center for Mental Health Services Research, The Political Economy of Mental 

Health Insurance in the United States, NIMH grant (MH-18828-11). 
43

TABLE II: DEFINITIONS/VARIATION IN STATE MENTAL HEALTH PARITY 

STATUTES/REGULATION (X)

AMental Health Benefit Mandate: There are three types of mental health benefit 

mandates: 

MB: “mandatory inclusion” mandates—minimum coverage standards—require

insurance policies to include certain provisions. A statute that includes a "mandated 

inclusion" provision typically states that a plan shall provide benefits for diagnosis and 

mental health treatment under the same terms and conditions as provided for covered 

benefits for the treatment of other physical illnesses;

MO: “mandated benefit offerings” require sellers to offer certain mental health coverage, 

with the decision of whether to purchase coverage left to the buyers. A statute that 

includes a "mandated benefit offering" provision typically states that insurers must make 

available coverage for the treatment of mental illness, and the coverage must be at 

least as extensive and provide at least the same degree of coverage as that provided 

for any other physical illness; 

M (if off): “mandated if offered” does not require employer/insurer to offer mental health 

coverage. However, if employer offers coverage, then the coverage must comply with 

parity provisions. A statute that includes a "mandated, if offered" provision typically 

states that in the case of a group health plan that provides mental health benefits, those 

benefits must be provided on par with benefits for other physical illnesses and insurers 

shall not establish any rate, term or condition that places a greater financial burden on 

an insured for treatment of mental illness than for treatment of other physical illnesses.

BDefinition of Mental Illness: “Broad-based mental illness coverage” is defined as 

encompassing all disorders listed in the American Psychiatric Association’s Diagnostic 

and Statistical Manual of Mental Disorders and/or the International Classification of 

Diseases Manual. Some States allow health plans to define the scope of the mental 

health benefit. Several States narrow the scope of the statute by requiring coverage for 

"serious mental illness," most commonly defined as including schizophrenia, bipolar 

disorder, obsessive-compulsive disorder, major depressive disorder, panic disorder, 

schizo-affective disorder, and delusional disorder.

CCovers Substance Abuse (X): indicates the statute covers drug and alcohol disorders 

as listed in the American Psychiatric Association’s Diagnostic and Statistical Manual or 

as defined in the statute.

D Set terms and Conditions (X): indicates that the statute requires rates, terms, and 

conditions to be the same for mental illness coverage as for the coverage for all other 

physical illnesses. Those States that do not have an "X" permit a disparity in the terms 

and conditions required for mental health coverage compared to other physical health 

conditions. For example, the parity statute may set a cap on the number of inpatient 

and/or outpatient days required by insurers for mental health coverage, without setting 

the same cap on coverage for other physical illnesses.
44

E

Individual and Group Plans (X): specifies the statute apply to all policies, including 

individual and group. 

FSmall employer exemption (X): indicates the statute allows small employers an 

exclusion from compliance. The statutes most commonly define small employers as 

those with either 25 or fewer employees or those with 50 or fewer employees.

GCost exemption (X): indicates that the statute allows employers that experience a 

premium increase at or above a specified percentage are excluded from the parity 

requirements.

 

iArkansas: An "X" is marked for substance abuse coverage, however, the statute does not 

require parity for substance abuse because it states that "[h]ealth care insurers providing 

chemical dependency treatment -- may, but are not required to, comply with -- the terms of this 

act ..."

iiIndiana (A) and (B): The existing parity statute that matched the 1996 MHPA and the statute 

applicable to State employees were amended in 1999. The MHPA match was expanded beyond 

annual and lifetime limitations to prohibit individual or group plans from permitting treatment 

limitations or financial requirements for mental illness if similar limitations or requirements are 

not imposed on coverage for other physical conditions. The federal match and State employee 

provisions were amended to increase the cost exemption from 1% to 4%.

iiiLouisiana: The statute mandates coverage of serious mental illness and requires a mandated 

offering for other mental illnesses.

ivMaine: The statute mandates coverage for group plans and requires a mandated offering for 

individual policies.

v

 Massachusetts: Existing limitation ($500/ year for outpatient and 30 days for inpatient 

treatment) for alcoholism or chemical dependency shall not apply when treatment is rendered in 

conjunction with treatment for mental disorders.

vi Massachusetts: The statute requires equal terms and conditions for biologically based mental 

illnesses as defined in the statute, however, does not require parity for other mental disorders.

vii Massachusetts: The statute exempts businesses with 1 to 50 employees and non-group 

health plans from compliance until 1 year after effective date of the statute.

viiiMinnesota: The statute mandates coverage for HMOs and a "mandated, if offered" 

requirement for individual and group plans.

ix New Mexico: The cost exemption included in the statute requires employers with at least 2 

but not more than 49 employees to do one of the following if premiums increase more than 

1.5% per year: (1) pay the premium increase; (2) reach agreement with the employees to costshare the amount of the premium above 1.5%; (3) negotiate a reduction in coverage, but not 

below the coverage existing before the renewal, to reduce the premium increase to no more 

than 1.5 %; or (4) after demonstrating a premium increase above 1.5 %, receive an exemption. 

For employers with at least 50 employees, if premiums increase more than 2.5% per year, they 
45

 

have the same options as are available for employers with 2 to 49 employees, except the 

premium increases in the four options must be above 2.5% instead of above 1.5%.

xOhio: The State did not enact a statute. Parity is applicable to State employee mental health 

coverage through the collective bargaining agreement between the state and the Ohio Civil 

Service union. The current agreement containing the parity provision is effective 1997-2000.

xi Rhode Island: The statute includes one limitation that may not result in setting equal terms 

and conditions: "[i]npatient coverage in cases where continuous hospitalization is medically 

necessary shall be limited to ninety (90) consecutive days."

xiiSouth Dakota: The Governor signed HB 1264 in March (1999) to clarify the meaning of the 

term "biologically based" mental illness. The 1998 statute required parity for biologically based 

mental illness, defined as "any mental illness which current medical research affirms is caused 

by a neurobiological disorder of the brain and which substantially impairs perception, cognitive 

function, judgment, and emotional stability and which limits the life activities of the person with 

the illness. The term includes schizophrenia; schizo-affective disorder; bipolar affective 

disorder; major depression; obsessive-compulsive disorder, and other anxiety disorders which 

cause significant impairment of function; and other disorders proven to be biologically-based 

mental illnesses." The 1999 amendment to the statute narrowed the definition of biologically 

based mental illness to "schizophrenia and other psychotic disorders, bipolar disorder, major 

depression, and obsessive-compulsive disorder."

xiii The statute has a unique approach to small-employer exemptions: It requires insurers to offer 

an additional option for small employers that insurers need not offer to large employers. 

Specifically, the statute requires insurers to offer small employers (2-50 employees) "50/50 

mental health coverage" — meaning coverage in a health insurance policy or health 

maintenance organization contract that pays at least 50% of covered services for the diagnosis 

and treatment of mental health conditions. The "50/50" coverage may include a restriction on 

episodic limits, inpatient and outpatient service limits, or maximum out-of-pocket limits.
46

 

NOTE: THE REPORT ENDS HERE. 

THE REMAINING TEXT IS 

SUPERFLUOUS. IT CANNOT BE 

ERASED, SO PLEASE TOSS THIS 

AND SUBSEQUENT PAGES.

APPENDIX D: Comparing Parity Cost Estimates

Using Actuarial Models

The new NAMHC estimate of a 1.4 percent cost increase in total health insurance 

premiums due to parity is lower than previously reported estimates based on Hay Group 

actuarial models (all were of similar magnitude). Previous estimates include the 1996 

Congressional Budget Office (CBO)/Congressional Research Service (CRS) 4.0 

percent increase, the 1998 Substance Abuse and Mental Health Services 

Administration (SAMHSA) estimate of 3.6 percent, and estimates from the previous 

NAMHC report, as shown in the Table below. Because each of the Hay Group modelbased estimates uses the same basic methodology it is important to understand what 

drives the latest estimate.

Table. Cost of Full Parity Estimates Based on Hay Group Actuarial Models

Increase in Total Premium

Estimate Model Version* FFS Plans All Plans

CBO/CRS (1996) HCBVC 6.5 5.3% 4.0%

NAMHC (1998) MHBVC1.7 4% to 5% <1 to 4%

SAMHSA (1998) MHBVC1.7 5.0% 3.6%

NAMHC (2000) MHBVC2.0 1.4% 1.4%

* Principal model for mental health/substance abuse cost estimates (separate model 

used to calculate non-mental health costs for HMOS in all but CBO/CRS study).

The different Hay Group models (HCBVC 6.5, MHBVC1.7, MHBVC2.0) work essentially 

the same way. The Hay Group uses actuarial methods to develop an expenditure grid, 

which represents the extent of medical, mental health, and substance abuse service 
47

 

use by plan enrollees if they paid nothing out of pocket (i.e., if the plan paid 100 

percent). Combinations of induction factors (which measure how responsive enrollees 

are in reducing their health care use when faced with higher out-of-pocket costs) and 

management factors (which measure how costs are reduced with utilization review and 

other managed care practices) are then used to estimate how much care enrollees 

would use when faced with a particular set of copayments. Administrative loading 

factors are used to multiply these costs to determine the estimated premium for a 

particular health care benefit package. 

The cost of a change in the health care benefit package, such as mental health parity, is 

simulated by first estimating the cost with existing benefits in the Hay model and then 

estimating the cost with the new benefits. All other assumptions are held constant 

(except, of course, for benefits). Because both baseline costs and benefits 

differ in fee-for-service (FFS), preferred-provider organization (PPO), point-of-service 

(POS), health maintenance organization (HMO), and managed behavioral carve-out 

plans, the Hay models were used to compute separate estimates of the cost of parity 

for these different types of health plans. The 1998 SAMHSA and the 2000 NAMHC 

estimates then combine these separate estimates (using assumptions about the 

distribution of enrollees across types of plans) to produce a single estimate of the total 

cost impact of mental health parity. The previous NAMHC (1998) report did not present 

a single cost estimate, but rather a range of estimates based on the different plan types. 

The CBO/CRS estimated a typical FFS plan and then made an ad hoc adjustment 

downwards to reflect managed care. 

The major difference between the current NAMHC estimate of 1.4 percent and previous 

estimates appears to be driven by the evolution of the Hay Group model as it is updated 

to reflect changes in the underlying distributions of mental health and health care 

expenditures. The most recent version of the Hay Group model (MHBVC2.0) assumes 

an average mental health and substance abuse cost per enrollee (with no out-of-pocket 

costs) that is fully one-half that of the Hay Group model used for the 1998 SAMHSA and 

the previous NAMHC report estimates, and one-third that of the model used for the 

1996 CBO/CRS estimate (NAMHC calculations from Hay Group models). The most 

recent Hay Model incorporates new data from the FFS/PPO plans of the Federal 

Employees Health Benefit Program (FEHBP), several large managed behavioral health 

care companies, and the FFS plan of a large State employees health plan (described in 

Section III of this report). The experience of the FEHBP program, along with other 

evidence, suggests that mental health and substance abuse costs have declined 

substantially during the 1990s, mainly due to sharply reduced inpatient utilization even 

in FFS/PPO plans. Because mental health costs have declined, especially as a 

proportion of total health care costs, the estimated impact of a mental health parity 

benefit in terms of the increase in total premiums has correspondingly declined. 

There are other much smaller differences in the assumptions used between current 

NAMHC estimate and previous estimates. The assumptions are discussed in more 

detail below, but in general these explain little of the differences between the estimates. 
48

 

(A useful companion to this discussion of the estimates is the report by Sing and Hill 

(1998) detailing the assumptions used to generate the 1998 SAMHSA estimates.) This 

is illustrated by the fact that when the NAMHC (2000) assumptions are applied to the 

previous version of the Hay Model (MHBVC1.7) used to produce the 1998 SAMHSA 

estimate, the estimated impact of parity is 3.7 percent instead of 1.4 percent 

(preliminary NAMHC calculations from the MHBVC1.7 model). That is, when the same 

assumptions are applied to mental health treatment patterns prevailing several years 

ago, the estimated cost of parity is 3.7 percent, but taking into account recent trends in 

mental health costs reduces the estimated cost of parity to a current level of 1.4 

percent. 

Other Differences in Basic Assumptions

Family vs. single premiums: The current NAMHC estimate is for singles only, while the 

other estimates represent the percent increase in total family premiums. Preliminary 

calculations using the new Hay model suggest that increase in total family premiums 

would be approximately 1.6 percent, a slight increase from the 1.4 percent for the single 

premiums. 

Distribution of Health Plans: The 1998 SAMHSA and the current NAMHC estimates 

assume different distributions of types of health plans, but this difference has no effect 

on either estimate. That is, applying the 1998 SAMHSA distributions to the current 

NAMHC estimate produces the same estimate, and vice versa. (The 1998 SAMHSA 

estimate assumes a distribution in which 20 percent of plans are FFS, 30 percent PPO, 

20 percent POS, and 30 percent HMO, compared to a distribution of 14 percent, 40 

percent, 20 percent, and 26 percent respectively in the 2000 NAMHC estimate.) The 

CBO/CRS estimate contains an unknown adjustment for managed care plans from their 

base FFS estimate.

Carve-outs: The current 1.4 percent NAMHC estimate includes an adjustment that 

assumes that 20 percent of FFS, PPO and POS plans have carved out their mental 

health and substance abuse benefits. This 20 percent factor is the same for both the 

current and parity benefit cost estimates. Several surveys estimate that in at least 20 

percent (KPMG Peat Marwick, Hay Group) of these types of plans among medium and 

large employers, the employer separately contracts (carves-out) with a managed 

behavioral health firm. This 20 percent is a conservative estimate of carve-out 

management since FFS, PPO, and POS health plans may themselves subcontract 

(carve-out) behavioral benefits, but there are no good estimates of the extent of these 

indirect carve-outs. The 20 percent carve-out adjustment has a negligible impact on the 

current NAMHC estimate—without it the estimate is 1.5 percent—because the 

difference between cost increases in carve-out plans and non-HMO plans have 

decreased considerably. However, applying the 20 percent carve-out adjustment to the 

1998 SAMHSA estimate would considerably reduce it from 3.6 percent to around 3.0 

percent.
49

 

Benefits: All of the estimates use the same basic assumptions about existing mental 

health and substance abuse with one exception. The CBO/CRS estimates assumed 

that a $50,000 lifetime maximum applied to mental health benefits, while all the other 

estimates occurred after the federal parity legislation that removed this limit. There 

were slight differences across the different estimates in the assumed medical/surgical 

benefits, but these differences likely had little impact on any of the estimates. 

Management Factors: The Hay Group models all incorporate a management factor to 

account for the effect of use of utilization review and other managed care techniques in 

reducing costs. The factors were, for the most part, the same across all of the estimates 

and the same factor was used to estimate both the cost under current benefits and 

under a parity benefit. The 1998 SAMHSA estimate includes a management factor for 

FFS, PPO, and POS plans that implies a reduction of 25 percent in mental health and 

substance abuse costs compared to unmanaged costs, but no reduction for HMO costs 

because the tighter management in HMOs are already reflected in the HMO expense 

grids. The current NAMHC estimate uses the same 25 percent management factor 

adjustment for FFS, PPO, POS, HMO and carve-out plans to estimate costs under 

current and under parity benefits. Preliminary NAMHC calculations suggest that if the 

25 percent adjustment for HMOs and PPO is eliminated, the current NAMHC estimate 

of 1.4 percent overall increase in premium costs due to parity would change slightly to 

1.5 percent. 

Induction (Demand Response): All the estimates based on the Hay Group model use 

the same induction factors, which are derived from the RAND Health Insurance 

Experiment, with one small exception. The 1998 SAMHSA estimates used slightly 

lower induction factors for HMO plans. However, this makes little difference in the 

overall estimates.

Administrative Factors: The Hay Group model multiplies the base claims costs in their 

models by an administrative loading factor, which represent a fixed percentage of the 

total claims costs for administrative costs and profit (where applicable), to obtain the 

total premium cost. The current NAMHC estimate uses the same administrative factor 

of 1.11 for all types of health care plans (carve-outs, HMO, FFS, PPO, POS). The 1998 

SAMHSA estimate used the same administrative factor of 1.11 for FFS, PPO, and POS 

plans but higher loading factors of 1.15 for medical/surgical expenses and 1.2 for 

behavioral coverage. However, because these administrative load factors multiply both 

the numerators and denominators, the effect of differing administrative load factors 

tends to be canceled out when examining changes in premium costs. 

References:

Hay Group (1999): Employer Mental Health Coverage Features and Compliance with the 

Mental Health Parity Act. Hay Report for NIMH, June 1999. (unpublished).

KPMG Peat Marwick, Health Benefits in 1997, June 1997. 

Sing M. and Hill S. (1998): Predicted Premium Increases Due to Full and Partial Parity for 

Mental Health and Substance Abuse Insurance Benefits. Report Submitted to the 
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Substance Abuse and Mental Health Services Administration. Washington, DC: 

Mathematica Policy Research, Inc.