The (Unintended) Consequences of Mental Health Parity Policy

February 1, 1998

On the surface, mental health parity does not appear to be controversial. Why should insurance companies and government insurance discriminate against patients with psychiatric problems? Making an artificial separation between psychiatric and medical illness makes little clinical sense. It is also clear that the treatment of psychiatric disorders often decreases physical symptoms, resulting in fewer visits to nonpsychiatric physicians. Cost estimates for mandating parity, although widely divergent, have generally been thought to be low. However, many seemingly benign regulations can often result in unforeseen costs and negative effects.

Support for the American Psychiatric Association's position on mental health parity has been almost unanimous among psychiatrists. There is, however, reason to explore the possible adverse consequences of mandating insurance regulations like parity.

On the surface, mental health parity does not appear to be controversial. Why should insurance companies and government insurance discriminate against patients with psychiatric problems? Making an artificial separation between psychiatric and medical illness makes little clinical sense. It is also clear that the treatment of psychiatric disorders often decreases physical symptoms, resulting in fewer visits to nonpsychiatric physicians. Cost estimates for mandating parity, although widely divergent, have generally been thought to be low. However, many seemingly benign regulations can often result in unforeseen costs and negative effects.

For example, well-meaning legislatures in New York, New Jersey and Washington states felt it was discriminatory that patients in the individual medical insurance market could be charged different rates because of preexisting conditions. They mandated a form of community rating requiring everyone to pay the same premium. Unfortunately, it is now more difficult to get individual insurance in those states than before the legislation was enacted. How could their good intentions fail? Many patients who were guaranteed, by law, to get insurance once they became ill, opted out of buying insurance when they were well, and the cost of insuring patients with preexisting conditions drove up everyone's rates. The insurance companies were forced to raise premiums to, at times, four times the rate of neighboring noncommunity-rated states or stop writing individual insurance policies altogether. Fewer people, not more, had the opportunity to purchase affordable insurance.

Mental health parity can be divided into two parts. "Catastrophic parity," already passed into law, removes yearly and lifelong insurance reimbursement caps for psychiatric treatment. These goals are reasonable and straightforward, do not discriminate against "mental illness," and do not expose people to the risk of destitution by psychiatric disease.

However, some insurance companies have responded by dropping psychiatric benefits rather than comply with the legislation. Clearly, those insurance companies felt that their insurance products would become too expensive and noncompetitive. Even though "catastrophic parity" is reasonable, it is naive to think that insurance companies would increase benefits without raising premiums, cutting back elsewhere or attempting to insert more control over reimbursement. Is it wise to support a policy that may result either in fewer people being covered for psychiatric illness or more managed psychiatric care?

"Non-catastrophic parity" proposes equal reimbursement rates for "mental" and "physical" illness, an equal number of reimbursable visits per year, and extends coverage to all DSM-IV diagnoses. It seems uncontroversial as it ends discrimination and increases coverage at potentially low cost. However, mandating parity for non-catastrophic expenses only compounds existing problems: low-deductible comprehensive insurance is expensive; part mandated parity invites insurance company interference and controlling costs is difficult.

Advocating for "non-catastrophic parity" makes an incorrect assumption about how insurance operates. Simply put, people buy insurance to reduce their financial liability for expensive, infrequently occurring events. In other words, insurance is a means of pooling risk so that a single person does not suffer severe economic damage. Paying the premium for an insurance policy amounts to a bet: Is the cost of the premium worth the reduction in risk? For example, it makes little sense to buy collision insurance for a very inexpensive car, because the cost to insure it would be disproportionately high compared to the cost of fixing or replacing the car. Similarly, it makes eminent sense to insure one's life at a young age when the family's financial resources are not great-premium cost is low compared to the risk of financial ruin.

Is medical insurance any different? Not necessarily. Yet due to many factors over the years (especially, the fact that medical insurance became a tax-free benefit to employees), medical policies became comprehensive (insuring not only infrequently occurring expensive events, but also commonly occurring inexpensive events). This is one of the reasons that insurance premiums are so expensive. As 80% to 90% of people in a given year do not have catastrophic medical expenditures, it is inexpensive to insure these infrequently occurring events. Most people's insurance is expensive, because it provides non-catastrophic as well as catastrophic coverage.

Valuable premium dollars are now being used to cover expenses most people could pay for out of pocket. The effect of parity would be to make an already unnecessarily comprehensive and expensive (because of covering multiple low-cost medical expenses) insurance policy more costly. Advocates argue that it will cost only a few dollars extra a month. Yet, it is already too expensive. It is also likely that podiatrists, dentists, chiropractors-all with reasonable claims for parity-may also advocate for parity. Those few dollars could then add up to hundreds of dollars a year.

In addition, as much as we may believe everyone would benefit from having comprehensive mental health or medical benefits, there are many people who do not feel they need them or want to pay for them. For example, we may think it is reasonable that everyone must have dental insurance because dental health is important and should not be distinguished from medical health. This would result in many people being forced to pay for benefits they do not want, and would make insurance less affordable for all. The cost of insuring only catastrophic medical events (over $1500 to $2000 per person per year) is often 50% less than insuring with a low-deductible policy. The money saved from the premium ($2000 to $3000 per year) could be used for out-of-pocket medical expenses. Without legislation, parity could be achieved for most non-catastrophic psychiatric illness, as patients would have money available to pay for medical or psychiatric conditions.

Many physicians have been skeptical that patients would pay for their services without a third-party payer present. Over the years, doctors and patients have been conditioned that the patient should assume little or no risk: $250 deductibles and $5 co-pays. However, patients have money to pay dentists, chiropractors, plastic surgeons and car mechanics. They all provide needed services at an affordable cost.

Mandating "non-catastrophic parity," however, will have the effect of creating more dependency on third parties for payment, resulting in greater demand for services, greater cost-control mechanisms by the insurance company, less control over treatment by the doctor and patient, and escalating costs.

Non-catastrophic parity makes little sense for most outpatient psychiatric treatment. The average number of visits to a psychiatrist (pre-managed care) was about eight visits. Assuming $125 per visit, the $1000 cost is well within a patient's cost savings generated by buying only catastrophic insurance. In addition, only about 15% of patients have more than 20 visits in a year, and most of these conditions are non-recurring. Where is the need, then, for comprehensive non-catastrophic medical insurance, whether traditional indemnity or managed care in outpatient psychiatric treatment?

What should the APA do about this issue?

1) The APA should educate insurers, physicians and patients about the frequency of mental illness, the cost savings when patients are treated for their psychiatric conditions and the relatively low cost of providing coverage for psychiatric conditions. Mandates, because of increased cost and increased third-party involvement, however, will probably result in fewer people having access to psychiatric care.

2) The APA should advocate for the goal of having medical insurance treated like other insurance policies: owned by individuals, no tax discrepancy between employer-provided and self-provided insurance, and a reduction in insurance regulations and legal barriers which limit basic affordable catastrophic medical insurance. With fewer regulations, insurance companies will probably respond to consumer demand for an affordable catastrophic policy with no yearly or lifelong caps on psychiatric illness.

3) Begin an educational campaign for doctors and patients to discuss the differences between catastrophic insurance and traditional low-deductible or managed care insurance. Stress that parity can be achieved for most psychiatric events by patients keeping the premium savings in their own pockets to spend as they wish.

4) The APA should advocate for patients being able to choose from a variety of medical insurance products (like federal employees), according to the amount they want to spend, the risk tolerance they are comfortable with, and the comprehensive nature of the policy. "Non-catastrophic parity" insurance policies should be offered as one of the choices.