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This paper considers the role of statistical discrimination as a potential explanation for racial and ethnic disparities in health care. The underlying problem is that a physician may have a harder time understanding a symptom report from minority patients. If so, even if there are no objective differences between Whites and minorities, and even if the physician has no discriminatory motives, minority patients will benefit less from treatment, and may rationally demand less care. After comparing these and other predictions to the published literature, we conclude that statistical discrimination is a potential source of racial/ethnic disparities, and worthy of research. [ABSTRACT FROM AUTHOR]

Health plans paid by capitation have an incentive to distort the quality of services they offer to attract profitable and to deter unprofitable enrollees. We characterize plans' rationing as a "shadow price" on access to various areas of care and show how the profit maximizing shadow price depends on the dispersion in health costs, individuals' forecasts of their health costs, the correlation between use in different illness categories, and the risk adjustment system used for payment. These factors are combined in an empirically implementable index that can be used to identify the services that will be most distorted by selection incentives. [ABSTRACT FROM AUTHOR]

Nearly ten years after the implementation of Medicare's Prospective Payment System (PPS), some of its major impacts remain hard to explain using existing economic models. We develop a simple model of the hospital's choice of intensity of care, which affects demand for admissions. The model suggests an important role for the level of prospective payment, independent of the effect of marginal incentives. Predictions from the model are compared first with aggregate utilization data from Medicare's PPS experience, and then with various hospital-level studies which control for interhospital differences in reimbursement rates. [ABSTRACT FROM AUTHOR]

This paper describes the prevalence of formal risk adjustment of payments made to health plans by Medicare, Medicaid, state governments, and private payers. In this paper, 'formal risk adjustment" is defined as the adjustment of premiums paid to health plans based on individual-level diagnostic or demographic information. We find that formal risk adjustment is used for about one-fifth of all enrollees in capitated health plans. While the Medicare and Medicaid programs rely on formal risk adjustment for virtually all their health plan enrollees, the practice is used for only about 1% of privately insured health plan enrollees. Ourfindings raise the question of why regulators have adopted formal risk adjustment, but private purchasers for the most part have not.

This paper lays down a set of hypotheses to explain why private employers do not use formal risk adjustment. The theme running through these hypotheses is simple: private employers don't need formal adjustment because they have better tools for dealing with adverse selection than formal risk adjustment provides. Open enrollment provisions, premium negotiations, and restricting employees' choices of health plans are mechanisms superior to formal risk adjustment for dealing with problems caused by adverse selection.

Objective: To compare the performance of various risk adjustment models in behavioral health applications such as setting mental health and substance abuse (MH/SA) capitation payments or overall capitation payments for populations including MH/SA users., Data Sources/study Design: The 1991-93 administrative data from the Michigan Medicaid program were used. We compared mean absolute prediction error for several risk adjustment models and simulated the profits and losses that behavioral health care carve outs and integrated health plans would experience under risk adjustment if they enrolled beneficiaries with a history of MH/SA problems. Models included basic demographic adjustment, Adjusted Diagnostic Groups, Hierarchical Condition Categories, and specifications designed for behavioral health., Principal Findings: Differences in predictive ability among risk adjustment models were small and generally insignificant. Specifications based on relatively few MH/SA diagnostic categories did as well as or better than models controlling for additional variables such as medical diagnoses at predicting MH/SA expenditures among adults. Simulation analyses revealed that among both adults and minors considerable scope remained for behavioral health care carve outs to make profits or losses after risk adjustment based on differential enrollment of severely ill patients. Similarly, integrated health plans have strong financial incentives to avoid MH/SA users even after adjustment., Conclusions: Current risk adjustment methodologies do not eliminate the financial incentives for integrated health plans and behavioral health care carve-out plans to avoid high-utilizing patients with psychiatric disorders.

The authors present a study on expenditures by state mental health, substance abuse, and developmental disability agencies in the United States for the period between 1981 and 1993. The relationship between agency spending and organizational structure of state bureaucracy was examined. Results indicate that organizational structure is a determinant of agency spending. The more independent an agency, the higher its spending; conversely, the more independent its competitor, the lower the agency's spending. The number of levels between an agency and the governor's office was not significant in explaining agency expenditures.

The value of mental health services is regularly questioned in health policy debates. Although all health services are being asked to demonstrate their value, there are special concerns about this set of services because spending on mental health care has grown markedly over the past twenty years. We propose a method for using administrative data to develop a comprehensive assessment of value for mental health care, which we call systems cost-effectiveness (SCE). We apply the method to acute-phase treatment of depression in a large insured population. Our results show that SCE of treatment for depression has improved during the 1990s.

Objective: To determine the cost-effectiveness of Assertive Community Treatment (ACT) in comparison to Standard Case Management (SCM) for persons with severe mental illness and substance use disorders., Data Sources and Study Setting: Original data on the effectiveness and social costs of ACT and SCM that were collected between 1989 and 1995. Seven community mental health centers in New Hampshire provided both types of treatment., Study Design: Persons with schizophrenia, schizoaffective disorder, or bipolar disorder and a concurrent substance use disorder were randomly assigned to ACT or SCM and followed for three years. The primary variables assessed were substance use, psychiatric symptoms, functioning, quality of life, and social costs., Data Collection Methods: Effectiveness data were obtained from interviews at six-month intervals with persons enrolled in treatment and with their service providers. Social cost and service utilization data came from client reports; interviews with informal caregivers; provider information systems and Medicaid claims; law enforcement agencies; courts; and community service providers., Principal Findings: Participants in both groups showed significant reductions in substance use over time. Focusing on quality of life and substance use outcomes, ACT and SCM were not significantly different in cost-effectiveness over the entire three-year study period. Longitudinal analyses showed that SCM tended to be more efficient during the first two years but that ACT was significantly more efficient than SCM during the final year of the study., Conclusions: In an adequately funded system, ACT is not more cost-effective than SCM. However, ACT efficiency appears to improve over time.

This study used 1992 and 1993 data from private employers to compare the performance of various risk adjustment methods in predicting the mental health and substance abuse expenditures of a nonelderly insured population. The methods considered included a basic demographic model, Ambulatory Care Groups, modified Ambulatory Diagnostic Groups and Hierarchical Coexisting Conditions (a modification of Diagnostic Cost Groups), as well as a model developed in this paper to tailor risk adjustment to the unique characteristics of psychiatric disorders (the "comorbidity" model). Our primary concern was the amount of unexplained systematic risk and its relationship to the likelihood of a health plan experiencing extraordinary profits or losses stemming from enrollee selection. We used a two-part model to estimate mental health and substance abuse spending. We examined the R2 and mean absolute prediction error associated with each risk adjustment system. We also examined the profits and losses that would be incurred by the health plans serving two of the employers in our database, based on the naturally occurring selection of enrollees into these plans. The modified Ambulatory Diagnostic Groups and comorbidity model performed somewhat better than the others, but none of the models achieved R2 values above .10. Furthermore, simulations based on actual plan choices suggested that none of the risk adjustment methods reallocated payments across plans sufficiently to compensate for systematic selection.

A carve-out of mental health and substance abuse services initiated in 1993 by the Group Insurance Commission (GIC) of the Commonwealth of Massachusetts resulted in changes in the costs of those services. Those changes were related to incentives in the contract between the GIC and its managed behavioral health vendor. Total and plan costs were reduced by 30-40 percent after adjusting for trends. Incentives to produce savings of this magnitude not only were a consequence of the payer/vendor contract but, we speculate, derive from the growth potential facing companies in the managed behavioral health care market.

Objective: To describe an innovation in performance contracting for substance abuse services in the State of Maine and examine data on measured performance by providers before and after the innovation. DATA SOURCES AND COLLECTION: From the Maine Addiction Treatment System (MATS), an admission and discharge data set collected by the Maine Office of Substance Abuse (OSA). The MATS data for this study include information on clients of programs receiving public funding from October 1, 1989 through June 30, 1994. Additional data are drawn from the contracts between the state and providers, and from service delivery reports submitted to OSA., Study Design: Client-level performance measures were calculated directly from MATS using OSA's formulas and standards, and then aggregated to the treatment program level. Multivariate regression analysis was done for each performance indicator as a dependent variable with performance contracting, time, extent of state funding, and provider characteristics as independent variables., Principal Findings: Performance contracting is positively related to better performance for effectiveness indicators overall. Individual effectiveness indicators that showed improvement include drug use indicators (abstinence and reduction in use) and social functioning indicators. In addition, performance contracting is associated with an increase in efficiency performance, defined as delivery of the contracted amount of service, for agencies that depend heavily on OSA for funding. Finally, performance contracting appears unrelated to the special populations indicators that measure services to target populations that OSA considers harder to treat., Conclusions: There is tentative evidence of a relationship between provider performance and the introduction of performance contracting. More definite conclusions await more detailed analyses of client-level data.

Objective: The study examined the financial performance of a managed behavioral health care organization responsible for mental health and substance abuse services under the Massachusetts Medicaid program. Financial performance is considered in light of incentives in the contract between the managed care firm and Medicaid., Methods: Data on the financial performance of the managed care organization were obtained from documents related to a recent rebidding of the contract and other publicly available documents. Financial incentives associated with claims costs and administrative services are also reported., Results: Spending by the managed care organization was about 25 percent lower than projected expenditures adjusted for inflation. Explicit financial incentives associated with cost reduction did not give the managed care organization strong inducements to attain these savings. The profit and loss features based on cost targets were quite limited. The organization had a much greater incentive and opportunity to make profits by conserving its administrative costs rather than by controlling Medicaid claims costs., Conclusions: In light of the contract's weak cost-saving incentives, it may be surprising that so much was saved. One explanation is that it was easy to achieve such savings in a state with high expenditures. However, in examining the particular amounts saved, it is clear that the organization came close to contract targets even when incentives to achieve them were weak. The authors label this behavior "managing to the contract" and discuss some reasons why a managed care organization might behave in this way and the implications this behavior has for contract design.

The enactment of the Domenici-Wellstone amendment in September 1996, which calls for the elimination of certain limits on coverage for mental health care under private insurance, is being hailed as a major step forward in the quest for "parity" in mental health coverage. Parity legislation is being introduced in a number of state legislatures and is finding new enthusiasm in Congress. In this paper we consider the efficiency rationale for these laws and examine their likely impact in the era of managed care. We conclude that although such successes represent important political events, they may offer only small gains in the efficiency and fairness of insurance markets.

Health plans have incentives to discourage high-cost enrollees (such as persons with mental illness) from joining. Public policy to counter incentives created by adverse selection is difficult when managed care controls cost through methods that are largely beyond the grasp of direct regulation. In this article, the authors evaluate three approaches to dealing with selection incentives: risk adjustment, the carving out of benefits, and cost- or risk-sharing between the payer and the plan. Adverse selection is a serious problem in the context of managed care. Risk adjustment is not likely to help much, but carving out the benefit and cost-sharing are promising directions for policy.

Using insurance claims data from nine large self-insured employers offering 26 alternative health benefit plans, we examine empirically how the composition and utilization for the treatment of depression vary under alternative organizational forms of insurance (indemnity, preferred provider organization networks, and mental health carve-outs), and variations in patient cost-sharing (copayments for psychotherapy and for prescription drugs). Although total outpatient mental health and substance abuse expenditures per treated individual do not vary significantly across insurance forms, the depressed outpatient is more likely to receive anti-depressant drug medications is preferred provider organizations and carve-outs than when covered by indemnity insurance. Those individuals facing higher copayments for psychotherapy are more likely to receive anti-depressant drug medications. For those receiving treatment, increases in prescription drug copayments tend to increase the share of anti-depressant drug medication costs accounted for by the newest (and more costly) generation of drugs, the selective serotonin reuptake inhibitors.

With renewed interest in block grants as a way to channel federal funds to states, several questions arise about the effect of block grants on state spending. A central question about the block grant form of intergovernmental aid is whether states spend the funds on the intended services or use budgetary strategies to appear to be in compliance with maintenance-of-effort provisions but then reallocate block grant funds from the targeted program. We studied the effect of the Alcohol, Drug Abuse and Mental Health block grant program on state substance abuse expenditures by analyzing spending data from the fifty states between fiscal years 1987 and 1992. Our findings suggest that this block grant has stimulated state spending, but this effect may be relevant only since 1990, and differs among states.

We discuss the rationale for benefit carve-out contracts in general and for mental health and substance abuse in particular. We focus on the control of adverse selection as a principal explanation and find that this is consistent with the wide-spread use of sole-source contracting with periodic rebidding. We also find that some degree of risk sharing is common; we interpret this as a method of balancing cost-containment incentives with incentives to maintain access and quality on unmeasured dimensions.

In response to a change in reimbursement incentives, hospitals may change the intensity of services provided to a given set of patients, change the type (or severity) of patients they see, or change their market share. Each of these three responses, which we define as a moral hazard effect, a selection effect, and a practice-style effect, can influence average resource use in a population. We develop and implement a methodology for disentangling these effects using a panel data set of Medicaid psychiatric discharges in New Hampshire. We also find evidence for the form of quality competition hypothesized by Dranove (1987).

Disability is discussed in terms of three categories: conditions that result from biomedical conditions and chronic, lifelong illnesses; role or social functioning difficulties that result from behavioral, developmental, or brain disorders; and conditions that limit physical functioning. The range and depth of services needed by the disabled result in higher costs of health care for this population. Because their service needs vary so widely, no single program can address all of the needs equally. Currently, no integrated public policy or program is specifically designed to serve people with disabilities. Rather, they are served by a range of programs that provide specific benefits (e.g., health, social services, and income). Section 1 of this chapter provides an overview on extending the concept of managed care to disabled populations. Special attention is paid to the financing of health care, the delivery of care, reforming the health care system, the cost-containment potential of managed care, and the need to align care with the nature of the individual disability. In sections 2 and 3, the current status of managed care for two special populations--children and the mentally ill--is discussed in greater detail. Section 2 addresses the characteristics of chronically ill and disabled children, public and private health insurance coverage of children with disabilities, other public programs for chronically ill children, and current directions and strategic choices for managed pediatric care. Section 3 describes the mentally ill and the system of providers that currently supplies care to them, offers some conclusions regarding how managed care is changing the policy debate in mental health care, assesses the key factors affecting policy choices in managed care, and considers prospects for the future shape of managed behavioral health care.

Private employers and state Medicaid programs are increasingly writing risk contracts with managed behavioral health care companies to manage mental health and substance abuse benefits. This paper analyzes the case for a carve-out program and makes recommendations about the form of the payer-managed behavioral health care contract. Payers should consider using a "soft" capitation contract in which only some of the claims' risk is transferred to the managed behavioral health care company. To avoid incentives to underserve seriously ill persons, we recommend that payers not allow choice by enrollees among risk contractors.

The cost of expanding mental health and substance abuse treatment coverage is a major impediment to reforming insurance coverage for these types of conditions. The recent experience with national health care reform offers a case study in cost estimation for mental health and substance abuse coverage. The impact of managed care and the cost of expanding coverage to currently uninsured persons introduced uncertainty into predictions. This paper critically reviews that experience and draws lessons for estimating future costs of policy initiatives.

Major differences exist among states in the level of spending on mental health care, in the magnitude and direction of changes in those levels, and in the share of resources devoted to state hospital and community-based services. Using data collected by the National Association of State Mental Health Program Directors (NASMHPD) Research Institute, this article describes those differences and examines their relation to a set of state-level fiscal determinants of mental health spending. Levels of spending in 1990 and rates of change in those levels between 1985 and 1990 show virtually no correlation. Changes in spending between 1985 and 1990 are decomposed into several components. States with high growth tend to have high growth in tax capacity and high growth in mental health spending as a share of health and welfare spending.

Current health care reform proposals will expand coverage and alter the delivery of mental health services. Much of the debate has focused on the cost of coverage rather than on the question "Who will pay?" This paper analyzes the consequences of redistribution of the financial burden of care. The analysis reveals two concerns. First, current employer-based proposals are somewhat regressive because premium costs fall disproportionately on lower-income workers. Second, the increase in federal government subsidies may lead to a significant decline in state and local government financing for mental health services. Both of these concerns have been partly addressed in reform proposals, but there are political barriers to more progressive, non-employer-based approaches and to strategies to retain state and local dollars for mental health services. These distributional issues are critical for a mental health system serving the poor and depending so heavily on state and local resources.

In healthcare reform the evolution toward capitated payment systems raises many questions that are unique to behavioral healthcare providers. These issues include how to structure risk contracts, how to set appropriate prices and how to price and cover the severely mentally ill and uninsured. Two possible solutions to the pricing dilemma are described in this article: using prior-use experience for setting prices, with a DRG-type classification formula, and using a combination of past-use formulas and current utilization data.

Fifty-four billion dollars was spent on alcohol/drug abuse and mental health treatment in 1990. These expenditures were concentrated in the area of inpatient psychiatric care and on persons with severe mental health and substance abuse problems. The data on expenditure patterns for mental health and substance abuse care suggest that successful health care reform in this area must implement mechanisms for controlling inpatient utilization and managing the care of persons with the most severe disorders.

President Clinton's health care reform proposal articulates a complete vision for the mental health and substance abuse care system that includes a place for those traditionally served by both the public and the private sectors. Mental health and substance abuse services are to be fully integrated into health alliances under the president's proposal. If this is to occur, we must come to grips with both the history and the insurance-related problems of financing mental health/substance abuse care: (1) the ability of health plans to manage the benefit so as to alter patterns of use; (2) a payment system for health plans that addresses biased selection; and (3) preservation of the existing public investment while accommodating in a fair manner differences in funding across the fifty states.

Actuarial and economic methods are combined to predict the costs of mental health and substance abuse benefits in insurance. Costs are predicted for two employers under alternative benefit plans that contain some of the features proposed under national health reform. The cost of a given benefit differs greatly across population groups. In order to make accurate cost forecasts, data on the group's experience must be combined with research data on the impact of plan changes. Application of employers' experience and research from mental health economics can contribute to better public and private decisions, including those that are part of current health reform.

This paper studies the efficiency effects of physician fees when the insurer (possibly the government) pays a fee for each procedure, and the doctor may supplement the fee by an extra charge to the patient, a practice known as 'balance billing.' Monopolistically competitive physicians can discriminate among patients on the basis of both price and quality. Equilibria with and without balance billing are compared. The paper analyzes and recommends a new fee policy, a form of payer 'fee discrimination.'

An estimated 70 percent of illicit drug users are in the workforce. This paper studies workplace policies relating to drug abuse treatment and testing in a labor market with asymmetric information about worker proclivities to abuse drugs and to incur costs of workplace accidents. Drug abuse has a moral hazard component related to worker choice of treatment or other deterrent activities, and a selection component related to drug testing. We characterize the type and frequency of workers treated and tested in labor market equilibrium. Labor market incentives will generally lead to too little treatment and too much testing.

This paper presents a policy analysis of options for making a state's mandated mental health benefit more flexible while maintaining insurance premiums at a constant level. The analysis illustrates the difficult choices facing legislatures that attempt to balance improved coverage for mental health care with concerns about rising health care costs. A sophisticated simulation model is used to assess the costs of four alternative insurance benefit design options.

This paper develops a general model of physician behavior with demand inducement encompassing the two benchmark cases of profit maximization and target-income behavior. It is shown that when income effects are absent, physicians maximize profits, and when income effects are very strong, physicians seek a target income. The model is used to derive own and cross-price expressions for the response of physicians to fee changes in the realistic context of more than one payer under the alternative behavior assumptions of profit maximization and target income behavior. The implications for public and private fee policy, and empirical research on physician response to fees, are discussed.