Federal Legislative Trends Affecting Parity in Mental Health Insurance Coverage
Although Federal legislative initiatives on parity in mental health insurance coverage dates from the 1960s, the 1996 Mental Health Parity Act represents the first Federal parity legislation. Implemented in 1998, this legislation focused on only one aspect of the difference in mental health insurance coverage -- catastrophic benefits. It prohibited using lifetime and annual limits on coverage for mental health care that were different from general medical care.5
The Parity Act was limited in a number of important ways. For example, companies with fewer than 50 employees were exempt. Parity provisions did not apply to other forms of benefit limits, such as per-episode limits on length of stay or visits, copayments, or deductibles, which could remain different for mental health treatment. Substance abuse was not covered by the provisions of the legislation. And if an insurer experienced more than a 1% rise in premium as a result of implementing parity, it could apply for an exemption.
The Federal Employees Health Benefits Program
The FEHB Program is the largest employer-sponsored health insurance program in the Nation. As of 2002, the Program was serving more than 8 million Federal employees, annuitants, and their dependents. To understand the process of implementing parity in the FEHB Program, it is critical to understand how the program operates.
The OPM as Purchaser
OPM administers the FEHB Program, which offers a substantial degree of choice to its enrollees and provides them with relatively detailed information on the characteristics, cost, and performance of participating health plans. Health plans compete for enrollees based on benefits, cost, and quality. OPM manages the enrollment process for FEHB Program enrollees and negotiates specific benefit packages and associated premiums with individual carriers.
To qualify as an FEHB participating plan, a carrier must be licensed to sell group insurance within every area it proposes to operate as an FEHB plan. OPM requires participating health plans to establish an internal quality assurance program that meets the OPM’s contract standards, administer a uniform patient satisfaction survey, and implement patient safety improvement programs. OPM also requires health maintenance organizations (HMOs) to provide data from the Health Plan Employer Data and Information Set (HEDIS) and credential/re-credential providers (DHHS, 2000).
OPM pays health plans in one of two ways: Fee-for-service and some HMO plans are paid an experience-rated premium. The basic premium or subscription fee consists of three components: claims costs, administrative costs, and profit. Most HMO plans are paid on a community-rated capitation basis. Community rates are set on the basis of the two largest non-FEHB Program groups within the “community.” Adjustments are made through annual benefit and rate negotiations for differences between specific FEHB plan requirements and prevailing community benefit packages. Large HMOs must provide documentation of premiums from large non-Federal employers in the community. HMOs can also adjust rates based on factors such as the age and sex of enrolled populations.
Parity in the FEHB Program
Historically, the FEHB Program has worked toward improved MH/SA benefits. For example, President Kennedy asked the Civil Service Commission (OPM’s predecessor agency) to modify the FEHB Program to treat mental illnesses in the same manner as general medical illnesses (Hustead et al., 1985). In response, from 1967 to 1975, the FEHB Program’s two nationwide health insurance plans offered parity benefits. Beginning in 1975, however, when more flexibility in benefit design was permitted, MH/SA coverage began to erode, with diminution of benefits continuing into the early 1980s. From 1980 to 1997, the share of total claims accounted for by MH/SA claims declined from 7.8% to 1.9% (Foote and Jones, 1999). This trend reflects MH/SA coverage in the larger health care market. It should be noted, however, that other health care costs (e.g., prescription medications) escalated during this time period.
In its annual “call letter” to carriers each spring, OPM issues benefits policy guidance on negotiations for the next contract year. The “call letter” issued by the OPM in 2000 stated that beginning in January 2001, the aim of parity would be to provide insurance coverage for MH/SA services the same as that for general medical care with respect to benefit design features, such as deductibles, copayments, and limits on visits and inpatient days.
Services to be covered under the parity arrangements are identified as “clinically proven treatment for mental illness and substance abuse… conditions listed in the Diagnostic and Statistical Manual of Mental Disorders, Fourth Edition” (American Psychiatric Association, 1994). The descriptions of covered services and benefits imply and encourage “management” of the care process. Specifically, this takes the form of developing treatment plans, applying medical necessity criteria, employing utilization management methods, and creating networks of providers, among other techniques.
Other key features of the FEHB Program’s parity benefit include the following:
- Parity benefits may be limited to in-network providers only,
- Plans may limit the parity benefit if the beneficiary does not comply with the treatment plan, and
- MH/SA benefit levels are based on the benefit category for comparable medical treatment.
It should be noted that the prescription medication benefit was not subject to the FEHB parity policy in that in most FEHB plans, there was already parity between prescription medications used to treat MH/SA disorders and prescription medications used to treat general medical conditions.
Before the parity policy, FEHB plans offered mental health benefits with coverage limits that resembled other plans in the private health insurance market.6 As reported in Mental Health, United States, 2002, the following 1999 data obtained from the FEHB plan brochures provide average benefit information for the subset of health plans (152) continuously participating in the FEHB Program over the four-year study period (1999 to 2002) and having benefit design information available (Hennessy and Barry, 2004).7
The 152 plans included in the analysis and described in chapter II, Design of the Evaluation, cover about 95% of the beneficiaries from the baseline year. Ninety-eight percent of plans continuously participating in the FEHB Program over the four-year study period contained at least one benefit feature in 1999 that was more restrictive for MH/SA care than for general medical care. For example, in 1999, some health plans limited annual outpatient mental health care to 28 visits and inpatient mental health care to 38 days on average.
Substance abuse benefits were similarly limited. For example, 9% of FEHB plans placed annual dollar limits ranging from $3,000 to $50,000 on substance abuse coverage, and 15% of plans used lifetime limits most often in the form of two 28-day inpatient stays. Dollar limits on substance abuse were more common among fee-for-service plans compared with health maintenance organizations (HMOs). Sixty-eight percent of plans also required higher cost-sharing for outpatient MH/SA services and 23% of plans required higher cost-sharing for inpatient services in 1999.8
Adverse Selection in the FEHB Program
A number of analysts have pointed to adverse selection problems in the FEHB Program over the years (Price and Mays, 1985). Adverse selection refers to the tendency for individuals who expect to use particular health care services to select insurance coverage that meets their anticipated service needs. Mental health care is an area in which adverse selection appears to exert a strong impact. Mental disorders tend to be persistent, and individuals with these disorders expect to spend more on mental health care than other individuals. As a result, they are attracted to health plans with generous mental health care coverage. Health insurers have a financial incentive to avoid enrolling these individuals. For example, in the early 1980s, the use of mental health services was two to three times higher in the FEHB Program’s Blue Cross High Option plan than in the standard option, even though only minor differences existed in the actuarial value of benefits in the two options.
Figure I-1 illustrates the selection incentives in the FEHB Program. The left panel compares inpatient utilization in the two plans, while the right panel compares ambulatory utilization. The grey segments of the bars represent base-level use in the standard or low option plan. The black segments reflect the demand response to the reduced cost-sharing provisions (i.e., reduced deductibles or co-payments) of the high option plan. These were calculated by applying the demand response parameters estimated in the RAND Health Insurance Experiment (Newhouse, 1993).
Figure I-1. Decomposing the differences in use in a health plan with a high and low option for Federal employees, 1983
The white segments of the high option bars represent the estimated utilization differences that are due to selection. The implication is that offering slightly more generous cost-sharing provisions attracted a significantly higher utilizing group of enrollees. Therefore, plans could gain financially by avoiding such enrollees via limited benefits.
Selection incentives may cause health plans to alter plan features other than the nominal benefits described in plan brochures. These so-called effective benefits involve a host of utilization management techniques (Frank, Glazer, and McGuire, 2002). For example, the Plan brochure may state that 30 outpatient visits are offered as nominal benefits. Plans may also use other mechanisms, such as managed care, to bring about the intended change in the effective benefits. These changes may then lead consumers to change plans or use their benefits differently, such as by going to a primary care doctor for services.
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