Evaluation of Parity in the Federal Employees Health Benefits (FEHB) Program: Final Report. I. Background to the Policy of Parity

In a speech in Albuquerque, New Mexico, on April 29, 2002, announcing the creation of the President’s New Freedom Commission on Mental Health, President George W. Bush reiterated the importance of mental health parity. President Bush said, “Americans with mental illness…deserve a health care system that treats their illness with the same urgency as a physical illness.” While noting the importance of “full mental health parity,” he emphasized that it must be accomplished without significantly raising health care costs. In July 2003, the Commission issued its final report, Achieving the Promise: Transforming Mental Health Care in America (2003), in which it observed that mental health benefits have traditionally been more restricted than general medical benefits. The Commission stated its support for parity and cautioned,

“Insurance plans that place greater restrictions on treating mental illnesses than on other illnesses prevent some individuals from getting the care that would dramatically improve their lives.”

President Bush has often pointed to the Federal Employees Health Benefits (FEHB) Program as a model for health insurance. The FEHB Program is the largest employer-sponsored health insurance program in the Nation, serving more than 8 million Federal employees, annuitants, and their dependents. The U. S. Office of Personnel Management (OPM) administers the FEHB Program, which currently offers about 250 health plan choices, providing over $29 billion in health care benefits annually.

At the White House Conference on Mental Health in June 1999, former President Bill Clinton directed OPM to institute a policy of parity, expanding mental health and substance abuse (MH/SA) coverage within the FEHB Program. OPM and the Office of the Assistant Secretary for Planning and Evaluation (ASPE) of the Department of Health and Human Services (HHS) contracted with ROW Sciences (now Northrop Grumman Information Technology, Inc., Federal Enterprise Solutions/Health Solutions [HS]) to lead an evaluation of the implementation and impact of the new parity policy in the FEHB Program. With investigators from the Harvard Medical School, University of Maryland Medical School, Westat, and the RAND Corporation, HS established the Parity Evaluation Research Team (PERT) as the vehicle for conducting this evaluation.

The term parity refers to a policy in which specified MH/SA insurance benefits are equal to the benefits for general medical services. Typically, this means expanding the coverage for MH/SA services by removing special limits on care (such as annual and lifetime ceilings on expenditures for MH/SA care or limits on the number of outpatient visits or inpatient days) or reducing copayments or deductibles for MH/SA care.

Historically these types of limits and higher cost-sharing provisions have led to MH/SA insurance benefits that differed from those for general medical care and have been considered a barrier to accessing adequate MH/SA care and treatment. Several national and State efforts have initiated MH/SA parity policies. The following sections of the report describe these efforts.

• History of Mental Health Benefits and Parity Experiences in the Federal Government

  • 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.

• State Experiences with Parity

  • A series of efforts at parity legislation has also occurred at the State level (Hennessy and Stephens, 1997). Some States target their parity legislation narrowly to include only people with severe mental disorders, while others cover a broader range of mental illnesses that may also include substance abuse disorders. Experiences with parity policy at the State level are derived primarily from two sources:

    • parity laws enacted by State governments , and
    • State employee plans that design a parity MH/SA benefit for their health plans.

    Valuable lessons can be gleaned from each set of experiences.

    State Parity Laws

    To date, 37 States have enacted statutes that might broadly be characterized as parity laws. However, these statutes vary substantially in terms of the:

    • type of benefits covered,
    • diagnoses included,
    • populations eligible, and
    • level of explicit regulatory direction with regard to the use of managed care.

    Some of these statutes are quite limited in scope. For example, South Carolina currently has a parity policy that applies only to the health insurance of State and local public-sector employees. North Carolina and Arizona have mandates that mirror the Federal parity law by requiring that insurers eliminate special annual or lifetime dollar limits for mental health coverage. Finally, some State parity laws essentially copy the 1996 Mental Health Parity Act and thus do not expand a State’s parity policy beyond the Federal parity law.

    Twenty-six States have passed more comprehensive parity statutes that prohibit imposing special inpatient day limits, outpatient visit, and/or dollar limits, and differential cost sharing for mental health conditions. These policies differ in terms of the mental health conditions they cover. For example, 17 of these States have limited parity for diagnoses designated as severe mental illnesses or biologically based disorders. Illnesses frequently characterized as severe tend to include schizophrenia, schizoaffective disorder, bipolar disorder, and major depression.

    Nine of these more comprehensive policies require parity in coverage for all medically necessary services to treat MH/SA conditions listed in the Diagnostic and Statistical Manual of Mental Disorders, 4th Edition (DSM-IV; American Psychiatric Association, 1994). Nine States include coverage for substance abuse treatment under the terms of their parity statutes.⁹

    State statutes also differ regarding:

    • whether the law applies to both individual and group plans,
    • if the law mandates coverage or simply requires parity if mental health benefits are offered,
    • whether the law includes a small business exemption, or
    • if the law exempts employers experiencing cost growth attributable to parity.

    Below we describe three of the more comprehensive state parity laws, as well as parity regulations for State employees in two States, each of which has been evaluated in terms of outcomes.

    Vermont State Parity Law

    In 1998, Vermont implemented the nation’s most comprehensive parity law. Vermont parity legislation includes both mental health and substance abuse treatment, defines mental illnesses broadly, and requires that mental illnesses and general medical conditions be accorded the same service limits and cost-sharing.

    California State Parity Law

    In 2001, California implemented a parity statute covering a limited set of diagnoses that focus on serious mental illnesses for adults and serious emotional disturbances for children and youth. The California State parity law prohibited more restrictive benefit limits and higher deductibles and copayments than those for general medical care. Substance abuse disorders were excluded in this legislation.

    Maryland State Parity Law

    Maryland enacted a parity law in 1994 that prohibits using separate annual and lifetime dollar limits, special deductibles, and special inpatient day and outpatient visit limits for MH/SA disorders. However, it retains a tiered outpatient coinsurance structure of coverage, with higher copayment rates after five visits, which increase again after 30 visits.

    State Employee Parity Regulations

    Experiences with parity for MH/SA have been studied systematically among two privately insured populations--Massachusetts and Ohio State employees. Experiences reported in those evaluations might predict the likely impacts of the FEHB Program parity initiative.

    Massachusetts

    State of Massachusetts employees enrolled in PPO and indemnity plans had a parity benefit implemented at the same time as a behavioral health carve-out, i.e., MH/SA care was managed separately from general medical care.

    Ohio

    Again, parity was introduced after or at the same time as the implementation of a behavioral health carve-out. All health plans serving State of Ohio employees implemented parity (in 1990 for employees in the Ohio indemnity medical plan and in 1995 for all other employees) by expanding the scope of a carve-out program to cover all MH/SA services in all health plans (Sturm, Goldman, and McCulloch, 1998).

    Findings from State Parity Laws and Regulations

    Vermont State Parity Law

    The implementation and effects of the Vermont State parity law are also the most systematically studied (Rosenbach, Lake, Young, et al., 2003). Very few Vermont employers (0.3%) dropped health coverage due to the parity law, and out-of-pocket expenses for MH/SA services declined after the parity implementation. For example, among people with serious mental disorders, the proportion of individuals spending more than $1,000 out of pocket annually was reduced by more than 50%. The implementation of parity was characterized by an increase in managed care for MH/SA services, which was a major factor in controlling costs and may have reduced access and utilization for some services and beneficiaries.

    California State Parity Law

    One year after California’s State parity implementation, researchers found no evidence of adverse consequences in the State’s health insurance market, such as large premium increases (Lake, Sasser, Young, and Quinn, 2002). Examining the effects of California’s parity law on two large employers in the first year of implementation, Branstrom and Sturm (2002) reported that the parity law was generally producing the intended effects in that “…plans with high costs and high service use show stable or declining spending, and lower-cost plans show increases at tolerable levels (less than 1%).”

    Maryland State Parity Law

    The National Advisory Mental Health Council (1998) reported on the implementation of parity in the State of Maryland using data from carve-out programs. The Council’s main finding was that parity could be implemented without excessive cost increases.

    Ohio State Employees

    First, the results for seven years after implementing parity for State of Ohio employees (1990 through 1997 for those in the indemnity plan and 1995 through 1997 for those in other plans) showed no increase in spending within the preferred provider organization (PPO) and indemnity health plans that were part of a carve-out program. The implication is that managed care responds to benefit design to control “moral hazard” effects, i.e., the increase in use and cost of benefits resulting from the price-lowering effect of insurance coverage.

    Second, MH/SA spending increased slightly in the health maintenance organization (HMO) plans in response to the benefit expansion, but those plans had very constrained MH/SA benefits before implementing parity.

    The Ohio evaluation indicates that the impact of parity is likely to differ across health plans depending on the pre-parity benefits and the organization of the health plan. Moreover, even with a large increase in coverage, the cost increases were modest compared to what one might have expected on the basis of demand response under indemnity insurance (Newhouse and the Insurance Experiment Group, 1993). The Ohio study, however, did not examine changes in enrollment patterns across health plans that may have resulted from the parity benefit.

    Massachusetts State Employees

    Ma and McGuire (1998) showed that for Massachusetts State employees, the overall impact of managed care exceeded the impact of parity with respect to per person spending on MH/SA. Huskamp (1999) focused her analysis on the outpatient benefits for which the benefit expansion was greatest. She showed that the managed care effect exceeded the moral hazard effect of a benefit expansion. Spending per person fell significantly for MH/SA care, and the statistical analysis also showed a sizable reduction in the probability of use. Her work used a continuously enrolled population and thereby minimized any effects of biased selection due to coverage changes.

    Implications of State Parity Experiences for the Evaluation of Parity in the FEHB Program

    Because of the variation in the scope of State parity laws and regulations, caution is necessary in drawing inferences from State experiences to the FEHB Program parity initiative. Evidence on the effects of State parity laws comes from both multi-State analyses and single-State case studies. The Health Care for Communities (HCC) and Community Tracking Study (CTS) national household surveys have been used to study effects of parity across States (Sturm, 2000; Capula and Sturm, 2000; Gitterman, 2001; and Bao and Sturm, unpublished manuscript). These studies generally found little overall impact on either access or use due to State parity laws, although some improved access was found for more seriously ill subpopulations. But again, these results must be interpreted with great care.

    In addition, Maxfield, Achman, and Cook (2004) found that less than half of Americans in 1999 were affected by either State of Federal parity laws. The Employee Retirement Income Security Act (ERISA) provides the biggest exemption of health plans from State parity laws. ERISA exempts self-insured employer-sponsored health plans, meaning that these health plans are subject only to Federal parity regulations, but exempt from any State parity policy that goes further than the 1996 Mental Health Policy Act. The impact of this exemption is substantial in that Maxfield and colleagues found that 39% of those in employer-sponsored health insurance plans are in self-insured plans. In addition, many states and the Federal parity law also exempt small employers (most States define a “small employer” as one with 50 or fewer employees) for compliance with State parity laws.

    This set of studies suggests that the State context may be quite important for assessing the impact of parity in the health plans included in the FEHB Program evaluation. If a State parity law is broad and affects many insured populations, including FEHB enrollees, the subsequent FEHB parity policy may have little effect. If a State parity law is narrow and does not affect many plans, however, the impact of the FEHB parity policy may be larger. Case-studies on the implementation of more comprehensive State parity laws have been conducted in a number of States, including Vermont, California, and Maryland, and are discussed further below.

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