Managed Care and Psychiatry

John B. Taylor, MD, MBA, and J.Niels Rosenquist, MD, PhD

KEY POINTS

The finance of mental health care in the US has evolved from primarily a
state-run asylum system to a mix of inpatient and outpatient care that is paid

for by public and private funds.

The US system of mental health care delivery is financed by a variety of
public and private sources (including Medicare, Medicaid state and local

funds, and private insurance).

Rising cost and problems inherent in the health care market led to the
development of managed care plans and carve-outs: managed care plans

designed specially for mental health care.

Laws introducing mental health parity, which seek to equalize mental health
care benefits with traditional medical insurance for low-income populations
have been promoted as a way to improve funding of, and access to, mental
health services; however, the long-term effects of such legislation are unclear.
OVERVIEW
The main message to the world is that the academy says mental illness is just
like cancer, nothing special.
Noted economist Ariel Rubinstein, upon the awarding of the Nobel Prize to
the economist John Nash in 19941
Mental health economics is like health economics only more so: uncertainty
and variation in treatment are greater; the assumption of patient selfinterested behavior is more dubious; response to financial incentives such as
insurance is exacerbated; the social consequences and external costs of
illness are more formidable.
Economics Richard Frank and Tom McGuire in the introduction to their essay
on Economics and Mental Health2
These two quotes outline the inherent dilemma in financing mental health care
in the US. On the one hand, mental illness is just like other corporeal diseases;
it stems from biological underpinnings, it cause tremendous suffering, and it is
(increasingly) responsive to treatment. On the other hand, mental illness is
decidedly different in terms of its presentation, its patient population, and its

perception by society. These differences from other medical conditions have

led to the formation of a separate and sometimes unequal system of care
delivery. This inherent dichotomy is at the root of current debates over the
future of financing of mental health care (MHC).
In order to fully appreciate the forces guilding the financing of MHC, it is
useful to consider the mix of social, medical, and financial dynamics that have
led to the MHC system as we know it today. This interplay of forces has been
particularly evident over the latter half of the twentieth century, with new
treatments, deinstitutionalization, and rising costs leading to profound changes
in how MHC is financed. Conversely, the rise of new institutional
arrengements for the finance and delivery of services (such as managed
behavioral health carveout plans) have precipitated major changes in how
patients are treated, both in the MHC delivery system and in the community.
While these changes have led to significant reductions in inpatient psychiatric
hospitalizations, access to outpatient MHC has remained limited compared
with general care, prompting advocates to call for mental health parity laws.
Parity policies aim to equalize insurance coverage for mental illness and other
medical conditions.
This chapter will discuss the history of MHC financing (including the
formation of public and private health insurance in the US), the evolution of
managed MHC and the reasons for its growth, the current structure and
attributes of MHC financing in the US, and the controversy over MHC parity
laws and their impact on the future of MHC delivery.
THE HISTORY OF MENTAL HEALTH CARE FINANCE IN THE
UNITED STATE
Throughout the history of the US, social movements relating to the care of the
mentally ill have altered the delivery and financing of MHC 3 (Table 68-1).
After the revolutionary war, increasing urbanization led to the development of
asylums for the mentally ill, most notably in Philadelphia (Pensylvania) and
Williamsburg (Virginia). Before the establishment of these state-run, statefinanced psychiatric hospitals, local communities and families bore the brunt
of the responsibility for caring for the mentally ill, initially through local
almshouses (poorhouse) and then through more formalized financing methods.
As the financial burden on localities increased over time, an effort was made

to shift the costs of financing MHC to the states. A corollary goal supported by
the psychiatric profession involved separating the financing of care for the
mentally ill from local, charity-based indigent care.
Reform Movement
Moral Treatment

Era
1800-1850

Setting
Asylum

Mental Hygiene

1890-1920

treatment
Mental hospital or Prevention,

1955-1970

clinic
orientation
Community mental Deinstitutionalization, so

1975-present

health center
Community support

Community Mental Health

Community Support

Focus of Reform
Humane,
restora

scien

integration
Mental illness as a so
welfare

prob

(e.g.,housing employmen
A group of reformers (led by Horace Mann, among others) led the moral
treatment movement, which advocated for the institutionalization of patients
with the hopes that early treatment would lead to a resolution of their mental
illness. The activist Dorthea Dix, in particular , was instrumental in lobbying
state legislatures for the establishment of osychiatric hospitals. Eventually,
each state developed its own asylum system in response to the movement.
Over the course of the nine tenth century, asylums did not increase with the
rise in the patient population. State and local goverments were in conflict as to
how to fund mental health services, with the latter often choosing to place the
mentally ill in jail or in almshouses rather than pay for care at asylums.4 In the
latter half of the nineteenth century, a new movement known as the mental
hygiene movement sought to improve the conditions of patients in asylums.
Reformers from the national committee on Mental Hygiene also advocated for
treatment of mental illness in medical hospitals, as well as in outpatient
settings.
TABLE 68-1 Historical Reform Movements in Mental Health Trearment in the
United States
From Overview of Mental Health Services. In Mental health: a report of the Surgeon
General, Washington, DC, 1996, Department of Health and Human Service.

Bringing MHC more into the medical model of care. This continued to be the case
into the 1930s when a new method of private-employer-based health insurance
financing was born.5
THE RISE OF PRIVATE HEALTH INSURANCE
The current system of employer-based health insurance, while accidental in its
conception, has become entrenched as the primary way by which health care is
financed in this country. Until the 1930s, private individuals paid out-ofpocket for health care services on a fee-for-service basis. 6 During the 1930s,
non-profit Blue Cross/Blue Shield (BCBS) health insurance plans were
developed and, despite skepticism as to their viability, were successful. Once
health insurance was shown by the BCBS plans to be a financially-feasible
endeavor, a number of private for-profit health insurance companies were
founded. During World War II, when the government allowed employers to
offer health insurance in lieu of wage increases, private health insurers grew in
both size and number, with the number of covered individuals rising from 20.6
milllionto 142 million between 1940 and 1950. 6 Coverage expanded even
further and became more tightly linked to employment contracts when, in
1954, the Internal Revenue Service (IRS) ruled that employer-based health
insurance should not be considered as taxable income. While coverage was
expanded for general medical care, MHC coverage was substantially more
limited. Insurance policies did not include mental health services until after
World War II, when insurers began covering some hospital-based psychiatric
care. Before the deinstitutionalization movement (discussed in the next
section), there was little incentive for private insurers to cover services that
were already paid for through the public sector.7
THE COMMUNITY MENTAL HEALTH CENTER MOVEMENT AND
DEINSTITUTIONALIZATION
In the 1950s, a third movement in US MHC began, referred to as the
Community Mental Health Center Movement. It was founded on the belief
that, with the advent of new and improved pharmacological and somatic
treatments, MHC was best delivered in the community. Movement advocates
pointed to continued poor conditions in asylums as evidence that
deinstitutionalization of patients would best serve their interests.5 Federal
legislation in the early 1960s targeted federal funds for the development of

community mental health centers (CMHCs) across the country. According to

historian Gerald Grob, the deinstitutionalization of patients was not simply an
en masse exodus from mental hospitals to the community, but rather a shift in
emphasis from long-term care to management of more acute episodes, driven
by the expansion of outpatient services through CMHCs.5
During this time, funding for MHC services became more complex.
Services (such as medical care housing and meals that were at one time
contained in mental hospitals) were no longer provided within a single
context. Federal programs (such as the Social Security Disability Insurance
[SSDI] program) would become increasingly mentally ill. Additionally, new
public health insurance programs in the 1960s would further change the way
MHC was financed.
THE RISE OF PUBLIC HEALTH INSURANCE: MEDICARE AND
MEDICAID
With MHC becoming increasingly fragmented in the 1960s, a number of
federal government insurance programs were established that would come to
play a large role in providing care for the mentally ill.
Medicare was established in 1965 in response to the countrys growing
number of senior citizens. Financed through federal prayroll taxes, subsidized
premiums, and general tax revenues, Medicare was designed to cover both
inpatient (Part A) and outpatient (Part B) care. All individuals above age 65
were covered by Part A (regardless of income), and Part B, while optional, was
quickly adopted by most beneficiaries given its relatively generous outpatient
coverage for a relatively small fee. While there have been some changes in
which treatments Medicare pays for (most notably the introduction of
prescription drug coverage in 2003) and how it pays for them, its basic
structure and benefits have stayed relatively consistent.
Medicaid was enacted through the same federal legislation that saw the
enactment of Medicare. Its mission and structure were quite different from
those of Medicare, however. One major difference was that Medicaid was
designed to provide medical care to categorically eligble low-income children
and adults as opposed to the elderly, who were covered by Medicare. Funding
also differs between Medicaid and Medicare, with Medicaid being funded in
part by states, with the federal government matching state contributions.
Although Medicaid enrollment is optional for states, all states have

participated since 1982. Within broad federal guidelines, states have a

significant amount of control over eligibility as well as what services are
covered. Medicaid offers enrolles a somewhat richer mental health benefit
than Medicare.
The creation of Medicaid and Medicare had the practical effect of shifting
a large number of ederly state mental hospital patients into federally-financed
general

hospitals

and

nursing

homes,

there

by

accelerating

deinstitutionalization; since patients were often transferred to other types of

institutions rather than to the community, this transition has been called
transhospitalization. Medicare and Medicaid would come to account for more
than one-third of all spending on mental health by 1991. While state hospitals
would continue to serve as a last resort for the chronically mentally ill, their
impact on MHC would pale in comparison to Medicaid, Medicare, and private
health insurances as sources of support for the mentally ill.
Gross Spending on Mental Health Care
Total domestic spending on MHC in the US in 2005 was $112.8 billion. 34
MHC expenditures were estimated at 6.1% of total spending on health care
and 0.89% of the GDP. Frank and Glied35 compared estimates of health care
spending in 2001 with those from 1971, controlling for changes in treatment
over that period. They found that in 1971 total expenditures on MHC were
$8.96 billion, 11.1% of the total spending was 0.84% of the GDP at the time.35
While total spending on MHC has increased slightly in terms of the GDP,
relative spending on different treatment modalities has changed dramatically.
Following on the heels of the CMHC movement and changes in financing, the
number of institutionalized patients decreased from 433,000 people in 1971 to
170,000 in 2000. This shift in care affected financing of MHC, and the burden
shifted from state goverments to insurance-based mechanisms, both public and
private. While the numbers of institutionalized patients fell, there was a sharp
increase in MHC provided to non-institutionalized patients. The number of US
citizens receiving MHC has increased by 50% since 1977. 35 Total spending on
non-institutionalized patients has also increased. From 1986 to 2005, inpatient
hospitalization expenditures increased from $13.3 billion to $21.7 billion,
while outpatient expenditures increased from $7.6 billion to $37.2 billion.34
It is also important to note that many of the costs associated with long-term
care of the chronically mental ill (such ashousing and board) were transferred

to other programs considered outside the realm of MHC. The expansion of

public insurance programs considered outside the realm of MHC. The
expansion of public insurance programs, such as Supplemental Security
Income (SSI), Social Security Disability Insurance (SSDI), public housing,
and food stamps in the 1970s helped cover the cost of community-based living
for patients.
Sources of Health Care Expenditures
Over 58% of MHC-related expenses in the US in 2005 were paid for by public
funding sources.34 table 68-2 and figure 68-2 describe and exhibit some of the
major public funders of MHC (including Medicare, Medicaid, and nonMedicaid state-spending programs). As shown in Table 68-2, federal sources
of funding (Medicaid and Medicare) increased from 16.8% of total MHC
spending in 1971 to over 28% in 2005, while state spending decreased from
30.4% in 1971 to 28.9% in 2005.34
Private insurance was also a significant source of MHC financing in 2005,
accounting for $30.4 billion, or 27% of total spending on MHC. 34 This is an
increase from 1971 when it accounted for only 12,3% of expenditures. This is
contrast with out-of-pocket spending, which has declined as a percentage of
total MHC spending from 35.6% in 1971 to 12.2% in 2005.
PARITY, EXPANSION OF COVERAGE, AND THE FUTURE OF
MENTAL HEALTH CARE IN THE UNITED STATES
Insurance parity has been the stated objective mental health advocates since
differences in mental and general health coverage first arose in the early days
of private health insurances.36 Parity policies require health plans operating in
the private health insurances market to provide an equivalent level of coverage
for mental health and general health care. The case for parity has primarily
been based on the fairness argument that insurances should not discriminate
against those with mental illness.
In 1996, the United States Congress passed the Mental Health Parity Act
(P.L. 104-204) prohibiting the use of annual or lifetime dollar limits on
coverage for mental illnesses. This law did not apply to other kinds of benefit
limits, such as special annual day or visit limits and higher cost-sharing.
Companies with fewer than 50 employees and those that offered no mental
health benefit were exempt from the federal parity law. Payers experiencing

more than a 1% increase in premiums as a result of federal parity could apply

for an exemption. Insurers found numerous ways to evade the intentions of
this legislation, including limiting the number of outpatient visits and inpatient
hospitalization days and charging patients higher co-pays and deductibles.
Coverage of addiction services was not addressed in the Mental Health Parity
Act. Employers who provided coverage as self insured entities (i.e., who
assumed the financial risk of the coverage they were providing) were exempt
from the requirements.
In 2008, in an attempt to close loopholes in the Mental Health Parity Act,
Congress passed the Paul Wellstone and Pete Domenici Mental Health Parity
and Addiction Equity Act (MHPAEA). Implamented in 2010, the MHPAEA
creates numerous standards intended to equalize coverage of mental health
services with coverage of medical and surgical services. All financial
requirements and treatment limits for behavioral health disorders must now
equal the limits for medical and limitations on quantities of inpatient
treatment. Treatment for substance use disorders is now mandated to
TABLE 68-2 Mental Health Spending (billions of dollars), by Payer Class,
1971, 1991, and 2001

Note : Numbers might not add to 100% because of the exclusion of other
categories.
From Authors calculations based on U.S. Department of Health and Human Services:
The cost of mental illness1971, Washington, DC, 1975. U.G. Government Printing

Office; Mark TL, Coffey RM, Vandivort-Warren R, et al. U.S. spending for mental
health and substance abuse treatment 1991-2001, Health Affairs Web Exclusive,
March 29, 2005; Mark TL, Levit KR, Vandivort-Warren R, Buck JA, Coffey C.
Changes in US spending on mental health and substance abuse treatment, 1986-2005,
and implications for policy, Health Affairs 30(2):284-292, 2011.

Have coverage equal to that of other behavioral health disorders. Out-ofnetwork benefits for psychiatric care must be equal to those for medical and
surgical care. Self-insured employers are no longer exempt from providing
equal coverage. Similar to the Mental Health Parity Act, the MHPAEA does
not apply to organizations with fewer than 50 employees, not does it apply if
the organization does not offer any coverage of mental health services.
Some health insurers and employers were opposed to improving mental
health insurance coverage due to the previously discussed concerns related to
moral hazard and adverse selection driving up costc for mental health
coverage. A recent, frequently cited review article summarizing the studies on
demand-response to costs-sharing provisions for outpatient mental health
services published between 2001 and 2006 noted, as did the RAND health
experiment, that higher cost-sharing for psychotherapy was a necessary step to
ensure efficiency.37 These early studies contrasted with a second generation of
research conducted in the late 1990s on mental health benefit expansions in
the era of managed care. The second-generation studies did not find large
mental health spending increases attributable to parity, and all studies that
addressed risk protection identified significant decreases in consumer out-ofpocket MHC spending under managed care. The absence of quantity increases
due to parity across these studies is consistent with more recent actuarial
estimates of the effect of parity on premiums.

These more recent studies provide evidence that parity implemented in the
context of managed care would have little impact on mental health spending
and would increase risk protection for those with mental health conditions.
Although the MHPAEA is too new to have produced any substantial research
about its effects, studies have been done about other iterations of parity policy.
A study examining parity implementation in the Federal Employees Health
Benefits (FEHB) Program found that following the enactment of parity, total
spending (including out-of-pocket spending) and utilization among patients
with major depressive disorder and bipolar disorder was unchanged, while
spending and utilization for patients with adjustment disorder declined.38
Access to care was not compromised while patients paid less for an amount of
care comparable to before the parity enactment. The introduction of parity has
also seen a significant reduction in suicides.39
Following the implementation of mental health parity, President Barack
Obama sponsored a sweeping health care bill, the Patient Protection and
Affordable Care Act (ACA). Passed in 2010, the intent of this legislation was
o dramatically expand health insurance through an expansion of Medicaid,
largely through state-run exchanges, where insurance of varying coverage
levels can be purchased for prices based on a persons income relative to the
federal proverty line. In addiction to numerous other changes, accountable
care organizations (ACOs) organizations of providers who attempt to meet
quality thresolds in an effort to improve patient care and share in cost-savings
with Medicarewere introduced.
The ACA affects mental health coverage in several ways. Plans offered
through the state-run exchanges are required to cover behavioral health,
resulting in expansion of access to care. The ACAs emphasis on integrated
care, through ACOs and patient-centered medical homes, aims to improve the
coordination of all types of care. For patients with mental illness, whose care
is often fragmented and whose illnesses frequently go undiagnosed, the
improved coordination of care is expected to produce improved outcomes and
to set new quality benchmarks. In addition, it is hoped that payment reform
bundled payments instead of episodicwill incent large organizations to
address care as continuous with an emphasis on prevention rather than simply
attending to acute episodes. It has been forecasted that by 2019, as a results of

the ACA, there will be 4.3 million more users of mental health services, 2.3
million through Medicaid and 2 million through private insurance.40
CONCLUSION
The financing of MHC continues to be a challenge for policy makers and for
society. The traditional mix of state and local funding of mental hospitals has
changed into a system that has focused on deinstitutionalization and an
increasing level of federal support for care. Moral hazard and adverse
selection concerns have led to the development of a separate industry of
managed care for mental health that has been successful in limiting utilization,
with unclear effects on patient outcomes. Recent legislation has suggested that
the pendulum is beginning to swing in the opposite direction. Improved,
stricter parity legislation combined with the expansion of Medicaid in the
ACA should lead to broader distribution of MHC and, potentially, diminished
stigma. Further research examining whether the intended effects of the
MHPAEA and ACA are borne out will be needed to inform continued
legislative refinements and future policy endeavors.
Access the complete reference list and multiple choice questions (MCQs)
online at https://expertconsult.inkling.com
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