How Does Managed Care Affect the Cost of Mental Health Services?
The U.S. health care system is changing rapidly. One area of especially
rapid change has been mental health care, where the market has been altered
by the growth of "carve-out" managed-care plans that provide separate,
specialized mental health coverage. The rapidity of this change has
outpaced analysts' ability to understand its effects. Adding to the climate
of change is a federal law passed in 1996 mandating that mental health
benefits offered by employers and insurers be on a par with physical health
benefits in dollar limits and reimbursement rates. This law recently went
into effect. Employers in particular now face a great deal of uncertainty
about the effects of such legislation and require accurate information about
the costs of mental health care in order to make informed decisions about
offering mental health benefits.
RAND conducted three studies examining issues surrounding mental health
benefits under managed care. The studies focused on the costs of mental
health services under managed care and the implications of the 1996 parity
legislation for cost and benefit design.
Costs of Unlimited Mental Health Coverage Under Managed Care
One study, published in the Journal of the American Medical
Association, looked at the cost implications of the 1996 parity
legislation. Assumptions used in the congressional debate over parity
legislation had suggested that unlimited mental health care benefits would
greatly increase costs. RAND researcher Roland Sturm tested these
assumptions by studying managed care plans that already implemented full
parity.
The study found that the assumptions used during the parity-legislation
debate had substantially overstated the actual cost of mental health
services under managed care. Unlimited mental health benefits under managed
care cost virtually the same as capped benefits: The average increase was
about $1 per employee compared with costs under a $25,000 cap, which was a
typical limit in other existing plans. As Figure 1 illustrates, costs for
each benefit-user group were virtually the same under unlimited plans as
they were for plans at each of the typical cap levels. A major reason for
the small differential in costs is the small number of high-cost episodes in
the data set examined.
FIGURE 1 Unlimited Mental Health Benefit Plans Do Not Cost Significantly More
Than Plans with Limits
The study concluded that benefit caps on mental health coverage had little
effect on employers' overall health care expenses.
Effects of Switching to Managed Care for Mental Health Services
A second study examined how the change from fee-for-service to managed care
affected costs and utilization patterns of a major West Coast employer. The
work was a collaborative effort between the RAND/UCLA Center on Managed Care
for Psychiatric Disorders and researchers from United Behavioral Health.
The study firm adopted a carve-out benefit plan that separated mental health
benefits from other health coverage at the same time that it expanded mental
health benefits. The study looked at claims data for the firm from 1988
through 1996. At the time of the carve-out in 1991, approximately 180,000
individuals were covered, 72 percent by managed care programs.
The study found that, despite increasing benefits, the switch to managed
care led to a substantial reduction in costs for mental health care. As
shown in Figure 2, costs per covered member between 1988 and 1990--during
fee-for-service coverage--were high and rising at a rate of 20 percent
annually.
FIGURE 2 Mental Health Care Costs Fell Under Managed Care Carve-Out
Plan
Following the transition in 1991, costs immediately fell dramatically (40
percent) and continued to decline slowly over the following years. Because
these numbers are in nominal dollars, the constant level of mental health
care costs from 1991 to 1996 implies a substantial decrease in costs when
adjusted for inflation.
Results also showed that the switch to managed care did not reduce access to
mental health care. In fact, the number of patients receiving any
mental-health specialty care increased. The main factors underlying the
cost reduction have to do with declines in inpatient care: Fewer patients
were hospitalized, the average length of stay was reduced, and the cost per
inpatient day fell drastically. All of these trends began before the
carve-out but were accelerated by managed care.
Implications for Benefit Design
Even though parity legislation is unlikely to have a significant effect on
employers' health care costs under managed care, it will require changes in
benefit plan designs.
A third study, also a collaboration between the RAND/ UCLA Center on Managed
Care for Psychiatric Disorders and United Behavioral Health, looked at the
compatibility of current benefit plans with the 1996 legislation. Using
data from 4,000 firms, the study analyzed the designs of carve-out mental
health benefit plans and compared them with the designs of those firms'
medical benefit plans.
The analysis found that almost 90 percent of the mental health plans were
inconsistent with the parity legislation and required revision. The
research concluded that the restructuring required by the parity act
provided a useful opportunity to make benefit designs more efficient by
remedying existing flaws. Many plans were unnecessarily complex and
inconsistent, often reflecting a legacy of past attempts to control costs in
a fee-for-service environment. Under managed care, the need for
deductibles, limits, or other demand-side cost-sharing mechanisms has
probably diminished. Therefore, restructuring outdated designs could
benefit both enrollees and employers.
However, better information on the influence of design mechanisms on access,
intensity of care, and costs is necessary before individual employers are
willing to abandon traditional cost-control mechanisms in mental health
plans. Future RAND research will provide this information.
Research briefs summarize research that has been more fully documented
elsewhere. This brief describes work supported by grants from the National
Institute of Mental Health and by the Robert Wood Johnson Foundation through
the study "Healthcare for Communities." It is documented in Roland Sturm,
"How Expensive Is Unlimited Mental Health Care Coverage Under Managed Care?"
Journal of the American Medical Association, Vol. 278, No. 18,
November 12, 1997, pp. 1533-1537 (also available as RAND reprint RP-659); William
Goldman, Joyce McCulloch, and Roland Sturm, "Costs and Use of Mental Health
Services Before and After Managed Care," Health Affairs, Vol. 17, No.
2, 1998, pp. 40-51; and Roland Sturm and Joyce McCulloch, "Mental Health and
Substance Abuse Benefits in Carve-Out Plans and the Mental Health Parity Act
of 1996," Journal of Health Care Finance, Vol. 24, No. 3, 1998, pp.
82-92. RAND reprints may be ordered from RAND Distribution
Services--Telephone: (310) 451-7002; Fax: (310) 451-6915; Internet:
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