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The Costs and Effects of Parity for Mental Health
and Substance Abuse Insurance Benefits

EXECUTIVE SUMMARY

Background

Health plans offered by employers typically provide less coverage for mental health and substance abuse (MH/SA) treatment than for general medical and surgical services. States and the federal government have begun to require that mental health and/or substance abuse treatment be covered in the same way as other medical care. This concept is known as "parity."

In 1996, Congress passed and President signed the Mental Health Parity Act. Effective January 1, 1998, this law requires that health plans provide the same annual and lifetime limits for mental health benefits as they do for other health care benefits. The act does not affect service limits, such as limits on outpatient visits, or cost sharing, such as deductibles. Nor does it apply to substance abuse benefits.

States have mandated parity, as well. By September 1997, 12 states had passed laws that, to various degrees, require parity in mental health and/or substance abuse benefits. Others have enacted legislation conforming to the federal mandate.

Opinion differs as to the costs and effects of parity mandates. This study was designed to address these issues by:

• summarizing the characteristics of state parity laws,
• conducting detailed case studies of five states with such laws,
• analyzing previous actuarial estimates of the costs of parity, and
• providing updated estimates of premium increases due to full and partial parity.

Following are the key findings of the study. Please see the full text for the specific context of each finding.

Key Findings

• Most State parity laws are limited in scope or application. Few address substance abuse treatment, and many are limited to treatment for serious mental illnesses. Many exempt small employers or only apply to plans for government employees.
• State parity laws have had a small effect on premiums. Cost increases have been lowest in systems with tightly managed care and generous baseline benefits.
• Employers have not attempted to avoid parity laws by becoming self-insured, and they do not tend to pass on the costs of parity to employees. The low costs of adopting parity allows employers to keep employee health care contributions at the same level they were before parity.
• Costs have not shifted from the public to the private sector. Most people who receive publicly funded services are not privately insured.
• Previous actuarial predictions of premium increases due to MH/SA parity ranged from 3.2 percent to 11.4 percent, primarily due to differences in their assumptions. Some of these assumptions may have limited support. For instance, some estimates have assumed a cost shift from the public to the private sector as a result of a parity mandate. This study did not find support for this assumption, however.
• Based on an updated actuarial model, full parity for mental health and substance abuse services is estimated to increase premiums by 3.6 percent, on average. Mental health care accounts for most of this increase. Increases for mandates limited to parity in cost sharing or service limits will be lower (see table below).
• Premium increases vary by type of plan. Fee-for-service and preferred provider organizations would have a 5 percent premium increase. In contrast, health maintenance organizations that tightly manage care would have only a 0.6 percent premium increase.
• Projected premium increases do not reflect potential market responses. For example, employers might contract with more managed care firms to manage MH/SA benefits under a parity mandate. This employer response would result in lower premium increases.
• Premium increases are greater for plans that are limited to children. Under the Balanced Budget Act of 1997, states will receive block grant funds to fund health insurance for uninsured, low-income children. Including parity in these plans will likely increase premiums more than that for an equivalent plan for adults and families. However, these differences are minimal for services provided within health maintenance organizations.

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