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Section 3: Status of Mental Health Services at the MillenniumChapter 8. The Mental Health Economy and Mental Health EconomicsRichard G. Frank, Ph.D.,* and Thomas McGuire, Ph.D.* *Harvard University; *Boston University Introduction The mental health economy in the year 2000 looks much more like the rest of the U.S. economy than it did in 1960 or even in 1980. Resource allocation of mental health care has been decentralized over the past 35 years. In the 1950's, roughly 75 percent of episodes of treatment were provided by public mental hospitals, whereas in the 1990's, less than a quarter of treatment episodes are provided by publicly owned mental hospitals. In the 1950's through the 1970's the mental health system operated as a planned economy. Today, markets for insurance, services, and even management of mental health systems are common features of mental health care delivery. The vast majority of people in the United States obtain their care for mental health problems from private providers that compete for customers. Their care is most often paid for by a public or privately funded health insurance plan (e.g., Medicaid, Medicare, or an employer-sponsored health maintenance organization [HMO]). Only a modest segment of treatment delivered in the year 2000 is directly paid for and provided by government-owned providers. Finally, in many States, administrative functions in the mental health delivery system have been delegated to private managed care organizations by State government, using competitive procurement methods. Accompanying the dramatic structural changes in mental health care has been the emergence of a line of scholarship that applies economics to the problems of efficiently and effectively providing treatment for mental disorders. Research on economics and mental health has addressed a number of key mental health policy issues, including the design of insurance, methods for reimbursing providers, the use of incentive contracts in public mental health systems, the organization and financing of managed behavioral health care organizations, the cost-effectiveness of new mental health treatments, competition between mental health professionals, and equity in access to care for special populations. In this chapter, we will review a number of important lessons that have been learned from applying economic analysis to a rapidly changing mental health delivery system. We will begin by briefly reviewing the transformation of the mental health system and then touching on four major lessons from research on economics and mental health. The Transformation of the Mental Health Economy As noted above, two of the most significant aspects of the transformed mental health economy have been the altered role of government and the emergence of private markets for mental health care. The Role of the Public Sector Rashi Fein (1958) estimated the direct costs of spending on mental health care in 1955 and 1956 to be approximately $1.14 billion. Government spent the vast majority of the money, 84 percent, on publicly owned providers. The other 16 percent of those funds was spent on private psychiatrists and private psychiatric hospitals. These figures highlight the fact that the mental health economy of the 1950's was largely centrally planned and did not use the market to allocate resources. It also shows the narrow range of providers and modalities in use at the time. McKusick and colleagues (1998) estimated that by 1996, $66.7 billion was being spent on mental health care. They also estimated that roughly 53 percent of that total spendingoriginated from public sources. Clearly, the relative role of government as a payer for mental health care has been reduced. The nature of how government pays for care has also changed. For example, in Fein's analysis, about 15 percent of spending in 1956 came from private sources (insurance and out-of-pocket payments), 58 percent from State government, and the remaining 27 percent from the Federal government (largely through the Veterans Administration). Neither States nor the Federal government had any significant insurance programs paying for mental health care in the 1950's. Utilization patterns reflect the financing arrangements. Kramer (1977) estimated that 49 percent of all treatment episodes were provided by public psychiatric hospitals. An additional 5 percent of episodes were supplied by the Veterans Administration and 23 percent by outpatient psychiatric services, many of which were publicly owned and operated. The enactment of the Amendments to the Social Security Act in 1965 created a major shift in financing and altered the method by which funds would be allocated to providers. Funds for mental health care of many poor and medically indigent people were linked to choices of providers made by patients for the first time. Thus, resource allocation began to rely on decisions made by patients, even if they were poor. No longer would centralized choices be the dominant factor in determining the flow of public funds to providers. McKusick and colleagues (1998) show that by 1996, 63 percent of public spending on mental health care originated from the insurance-like programs Medicare and Medicaid. The majority of public mental health care funds were allocated through market mechanisms by the 1990's. During the 1980's and 1990's, there was also significant change in the methods used for allocating resources within the traditional segments of the public sector. Beginning in the 1980's, the Reagan Administration ushered in a new period of fiscal federalism. The division of labor and the financial relationships between levels of government were altered by Federal policy and reconsidered in many States. In the mental health area, categorical programs were consolidated into the so-called Alcohol, Drug Abuse, and Mental Health Block Grant. While this change involved relatively modest pools of funds, the change in the conceptual frame of policy was large. Freed to use funding in a more flexible manner, States began experimenting with "contracting out" to private organizations for mental health services and the use of incentive contracts within intergovernmental transfer arrangements (Frank & Gaynor, 1994b, 1995). States as diverse as Arkansas, California, Ohio, and Texas restructured the financial relationships with local community mental health programs and the State mental health authority. In most cases, the new financial arrangements served several purposes. First, they created incentives for local mental health programs to exercise care in making referrals to public mental hospitals by making them pay for State hospital services. Second, the new arrangements allowed dollars to follow patients to a greater degree than had been the case previously. Third, community programs typically realized greater flexibility in using State funds. Finally, localities often were forced to bear a larger share of the costs of providing public mental health care. Finally, governments at all levels became increasingly reliant on privately owned organizations to supply mental health services to low-income individuals in need of treatment. This trend has frequently been referred to as privatization. The trend toward privatization has meant that government increasingly defined its role as payer and regulator and less as provider of services. This meant structuring arm's-length relationships between government and providers of care that increasingly took on features of market relations. The Emergence of Private Markets: The Modern Mental Health System The period 1965 to 1985 represented a time of rapid expansion of markets for mental health care. During this period individuals needing and seeking mental health care were increasingly placed in the role of the consumer. The diffusion of private insurance coverage for mental health care, along with the creation of Medicare and Medicaid, opened up the possibility of individuals exercising choice regarding the provider and setting in which they obtained treatment for a mental health problem (McGuire, 1981). The creation of Medicare and Medicaid in 1965 often enabled large numbers of low-income people with mental health care needs, whose previous treatment options would have been limited to State mental hospitals and public clinics, to choose from a number of private and publicly owned providers (Frank & Lave, in press). Medicaid in particular was designed in a manner similar to a voucher system, allowing consumers to choose among participating providers at no out-of-pocket cost. Accompanying the new possibilities for consumers to exercise choice was a proliferation of providers seeking to supply services to people with mental health problems (President's Commission on Mental Health, 1978). As a result, in the year 2000 a great variety of organizations and professionals supply mental health services, and these are not limited to traditional providers of medical care. For example, in Massachusetts one could obtain office-based psychotherapy from any of the following licensed providers: primary care physicians, psychiatrists, psychologists, social workers, counselors, and nurses. Inpatient care is also provided by a number of different provider types. One could receive hospital-based care for a mental disorder in a medical-surgical ward of a general hospital, a general hospital psychiatric unit, a private psychiatric hospital, or a State mental hospital. In addition, there is a broad array of residential treatment facilities, partial hospital organizations, and psychosocial rehabilitation programs. In some cases the functions of these various professions and organizations are differentiated, while in others they offer services that appear to be close substitutes (Goldman & Skinner, 1989). Psychiatrists and psychologists account for less than half of mental health professionals. There were about 33, 500 psychiatrists and nearly 70,000 psychologists in 1995; social workers, counselors, and family therapists accounted for 94,000, 61,000, and 46,000 practitioners respectively. Individuals with higher incomes and private health insurance are most likely to receive mental health care from psychiatrists, psychologists, and social workers specializing in mental health care. Most providers and professionals must compete for patients. That is, they must offer combinations of prices and quality of services that are attractive to buyers. In the presence of insurance, consumers do not face the full price, so the market functioning differs from the textbook market. Nevertheless, in 2000 managed care organizations establish networks and make patient referrals in part on the basis of price (in fact, many critics suggest that price is overemphasized). Thus, much of the work of allocating patients to providers has been delegated to markets. Data on spending and utilization patterns for mental health care (McKusick, Mark, King, Harwood, Buck, et al., 1998) reveal that the share of resources accounted for by providers not subject to market forces is quite modest. Veterans Administration Health Centers, State mental hospitals, and publicly owned and operated clinics typically do not compete in markets. We estimate that these organizations account for about 23 percent of inpatient and residential treatment and 20 percent of outpatient care. The implication is that the vast majority of mental health care is allocated via markets. The treatment of mental illnesses evolved dramatically during the last half of the 20th century. This evolution is in part due to scientific advances in treatment technology such as pharmaceutical innovation (Berndt, Cockburn, et al., 1996), new methods of organizing elements of treatment (Stein & Test, 1980), and improved approaches to brief psychotherapy (USDHHS, 1999). Changes in the organization and financing of mental health services also have contributed to changing treatment patterns (Mechanic, 1989). In particular, limits on inpatient days and outpatient visits covered under public and private insurance plans, financial incentives to reduce hospital stays, and payment arrangements that reward health plans for reducing overall health care spending have contributed to shifts in the treatment of mental disorders (Harrow & Ellis, 1992). Various types of mental health services have been posited to be substitutes. Research based in HMOs and publicly funded treatment systems provides evidence that community-based outpatient treatments are substitutes in production for inpatient psychiatric care (Callahan, Shepard, Beinecke, Larson, & Cavanaugh, 1995; Weisbrod, 1983). Similarly, for psychotherapy services, outcomes evaluations suggest that a number of professions trained in psychotherapy produce comparable clinical gains to particular classes of patients (Knesper, 1989). There is also evidence suggesting that for certain illnesses pharmaceutical treatments can substitute (at least partially) for psychotherapy (Elkin et al., 1989; Kupfer et al., 1992). Managed care has had an enormous influence on delivery of health services in the United States. The impact on mental health care has been especially profound. Employers, government, and other payers are insisting on paying less for health insurance and health services and obtaining more data on the performance of health plans. The result of this drive for greater value in purchasing has been the acceleration in the growth of managed care organizations. Preferred provider organizations (PPOs), point of service (POS) plans, and HMOs accounted for over 75 percent of the insured population in 1998. Public insurance programs have also sought to make use of managed care arrangements. Medicare and State Medicaid programs are experiencing growth in enrollment in health plans that assume financial risk and responsibility for managing health care. In the mental health sector a new institution, the managed behavioral health care carve-out, has taken a central position in the delivery system with respect to Medicaid and private insurance plans. Traditionally, a purchaser, usually an employer, contracted with health plans to cover a full range of health risks and services. Health plans would manage the risk and organize professionals and hospitals to provide care. Purchasers and health plans in the year 2000 often choose to "carve-out" certain benefits, which means they separate the health insurance function by disease or service category and contract separately for the management of those risks. There are two major forms of carve-outs found in the mental health sector. The first may be referred to as a payer carve-out and the second as a health plan subcontract carve-out. A payer carve-out is an arrangement whereby the payer contracts directly with specialty vendors to insure and manage some or all of the mental health benefit (a payer may separate mental health from all health plans it does business with or only a subset of plans). A health plan subcontract carve-out occurs when a health plan such as an HMO chooses to delegate risk and care management for mental health care to a specialty vendor. Mental health carve-out contracts have been a growing feature of health insurance at the turn of the century. Roughly 35 percent of large employers (5,000 employees or more) and 3 percent of smaller employers (fewer than 500 employees) make use of payer carve-out contracts. Recent estimates suggest that more than 50 percent of health plans make use of subcontract carve-outs. The evidence to date shows clearly that managed behavioral health care carve-outs result in substantial reduction in specialty mental health spending (Frank & Lave, in press; Sturm et al., 1998). The evidence on the impact on total health care spending has been less well developed. Managed behavioral health care is the most recent development in the evolution of the mental health care marketplace. What Has Been Learned About Economics and Mental Health? The emergence of markets for mental health care and the central role they have come to play in allocating resources for mental health treatment has created opportunities for economic analysis to make contributions to the formulation of mental health policy. Since the late 1970's there has been an energetic and growing research program on economics and mental health. The emergence of markets for mental health care has made the nature of exchanges between payers, providers, and consumers objects of public policy. Moreover, the regulation of insurance markets and providers of care affects the terms of competition in markets for mental health care. These are issues that the tools of economic analysis are well suited to address. Economists have studied the design of insurance coverage for mental health care, methods of paying providers and health plans, incentives contained in intergovernmental transfers used to finance public mental health care, efficiency and fairness of insurance regulation, and the productivity of treatment for major mental disorders, among many other topics. Economic analysis has played a major role in debates over parity in insurance coverage, the design of Medicaid managed behavioral health care, the implementation of the prospective payment system, and the regulation of reimbursement for mental health professionals. Over the past 25 years, important lessons have been learned from the application of economic analysis to the mental health sector. In the remainder of this section, we highlight four sets of lessons derived from the research program on economics and mental health. These are meant to be illustrative of the contribution of economics to mental health, not a comprehensive review. Incentives Matter The mental health sector existed as a planned economy for many years. The conceptual underpinnings to resource allocation policy had their foundation in health care planning. Financial incentives embedded in key institutions governing the terms of exchange between providers and consumers were not accorded much attention before the latter half of the 1970's. In fact, viewing people with mental health problems as consumers making choices in a market for mental health services was foreign to most concerned with mental health policy and repellent to many. When the terms of insurance coverage for mental health care were first debated in the 1950's and again in connection to Medicare and national health insurance, insurers claimed that the increased cost of the coverage for mental health care was too great. Insurers argued that mental health care should be treated differently in benefit design because the demand response to the incentives in insurance led to larger increases in service use for mental health than other types of medical care. This made the cost of risk spreading higher for mental health care than other types of services. Advocates for mental health care argued that the demand for mental health services was no more responsive to cost-sharing provisions than were other services. The demand response to the terms of insurance coverage for mental health care thereby became a central issue in the earliest appearances of the "parity" debate (McGuire, 1981). A number of observational studies were undertaken to examine the demand response of ambulatory mental health care to cost-sharing in insurance. These studies all found larger demand responses to cost-sharing for mental health services than for other medical services. The observational nature of these studies meant that selection bias posed a threat to the validity of their results. The RAND Health Insurance Experiment (HIE) (Newhouse & Insurance Experiment Group, 1993) studied demand response in the context of a controlled experiment where individuals were randomly assigned to cost-sharing arrangements. The results from the HIE showed that the demand response to cost-sharing for ambulatory mental health services was roughly twice as large as for general ambulatory services. Hence in a fee-for-service-indemnity insurance context, the increases in spending were proportionately greater for mental health care than for other services. The results showed that response to the demand-side incentives in insurance needed to be taken into account in the formulation of efficient insurance designs for mental health care. Financial incentives contained in payment systems affect the behavior of providers of care. Again, the idea that providers would respond to factors other than the clinical circumstances of their patients ran counter to much prevailing ideology. In 1983 the Federal government adopted a method of prospective payment for hospital care under the Medicare program. Inpatient psychiatric care was exempted from most of the initial implementation of Medicare's Prospective Payment System (PPS), largely because insufficient analysis had been conducted on psychiatric hospital stays. A desire by Congress to consider the inclusion of psychiatric care within the PPS set off an active research effort on the behavior of providers of inpatient psychiatric care. A number of parallel research efforts made use of "natural experiments" in payment arrangements for inpatient psychiatric care (see Harrow & Ellis, 1992, for a review). Overall, the research consensus was that supply of inpatient psychiatric care, as measured by length of stay, was considerably more responsive to prospective payment than was hospital care for other types of patients. The greater response to payment incentives raised concerns that PPS might result in undertreatment of psychiatric patients, an especially vulnerable population. Some research, showing elevated rates of rehospitalization and transfers to public mental hospitals in response to incentives to reduce length of stay, supported these concerns. The research on hospital payment systems led to the development of alternative payment strategies that attempted to balance the aim of cost control with a desire to attenuate the response by providers to "high-powered" financial incentives such as PPS. Specific applications of these ideas were realized in modifications to the alternative to PPS used by Medicare, in the TEFRA approach (Cromwell et al., 1992), and in proposals for a model mental health benefit (Frank, Goldman, & McGuire, 1992). Incentives also matter within the public-funded mental health system. As noted above, the 1980's saw important changes in the fiscal relationships between levels of government. States created incentives to reduce the use of State mental hospitals and allowed dollars to follow patients into the community. This was in part justified by longstanding observations that organizational arrangements and financial rigidity in public mental health systems stood in the way of people with mental illnesses receiving quality community-based care (Mechanic, 1989). Economic theory bolstered these claims (McGuire & Riordan, 1995). State initiatives in altered intergovernmental financing offered "experiments" that could inform mental health policy. Research on these arrangements indicated that when local mental health programs were given new funds previously linked to State hospitals along with responsibility to pay for any State hospital services used, they significantly reduced their reliance on State mental hospitals (Frank & Gaynor, 1994a). Research on economics and mental health has illuminated the importance of incentives within the institutions of the mental health delivery system. Econometric analysis has estimated the magnitude of responses to financial incentives by consumers, providers, and government agencies operating within the mental health care delivery system. Markets Can Fail A second important lesson from the application of economics to mental health care is that markets can fail and therefore cannot always be counted up-on to deliver efficient resource allocations. Moreover, markets do not guarantee fair outcomes. This is most clearly seen in the research on insurance markets and coverage of mental health care. Research on demand response of ambulatory mental health services helps to explain why copayments for ambulatory mental health services are set higher than those for ambulatory medical services. That research does not offer much insight into the prevalence of coverage limits (visits and days) for mental health services (Buck & Umland, 1997). Adverse selection is often pointed to as a key factor explaining coverage limits. Research has shown that high-cost enrollees are attracted to health plans with relatively attractive coverage provisions for mental health services. This phenomenon creates an incentive for health plans that are paid a premium that does not fully account for the health status of enrollees to adopt measures that discourages people with mental illnesses from joining. This is because payments will tend to reflect the average spending for a population and therefore health plans that enroll a less expensive than average population will profit independent of their efficiency in supply. Competition between health plans, under these conditions, is oriented toward providing coverage and services that attract healthy (low-cost) enrollees and discourages sick (high-cost) enrollees from joining. Competition between indemnity insurance plans may have resulted in inefficiently low levels of coverage (market failure) because of these market forces. The economic analysis of adverse selection in insurance markets shows the possibility that competition can result in the collapse of insurance markets. In the mental health context, a great deal of attention has focused on the impact of adverse selection on insurance coverage for mental health care. Theoretical and empirical research has pointed to unique features of mental illness that make mental health coverage especially prone to market failure. These features include high costs, persistence of need, and use of specialized services. Empirical analysis of choice of health plans by individuals with histories of mental health treatment reveals that they seek out health plans with the most generous coverage for mental health services. The studies of adverse selection reported in the literature suggest that users of mental health care tend to have greater health care expenditures in subsequent years than otherwise similar individuals. This means that health plans that attract mental health users are likely to be placed at a financial disadvantage. Hence, competition between health plans appears to result in excessively limited insurance provisions for treatment of mental disorders. It is this set of market outcomes that provides an efficiency justification for public intervention in insurance markets such as parity legislation and mandated benefit laws. Managed Care Can Control Spending Without Limiting Insurance Coverage Managed care in general and its application to mental health and substance abuse (known as managed behavioral health care) has fundamentally altered resource allocation in the mental health sector. Managed care arrangements use a variety of techniques unrelated to benefit design to control utilization of services and spending. These techniques include prior authorization of high-cost services, concurrent review of service use, provider price negotiation, financial incentives to providers, network structure, provider profiling, and clinical guidelines. There is strong evidence showing that managed behavioral health care (MBHC), which applies these methods, has a strong effect on the level of spending on specialty mental health care (inpatient, outpatient, and intensive outpatient services). There have been at least five rigorous evaluations of the application of MBHC carve-out programs to private insurance in recent years. In all cases the analyses reported substantial reductions in the level of spending on specialty services relative to the pre-MBHC period. The estimated spending reductions ranged from about 20 percent to 50 percent of pre-MBHC spending levels (Ma & McGuire, 1998; Sturm, Goldman, & McCulloch, 1998). A number of State Medicaid programs have used MBHC carve-out arrangements. Several of these State initiatives have been subjected to research evaluations. The State programs in Colorado, Massachusetts, North Carolina, and Utah have each been studied. As in the case of private insurance, the introduction of MBHC resulted in important decreases in spending levels for specialty mental health services. The estimated reductions in spending ranged from 17 percent to 33 percent of pre-MBHC spending (Bloom et al., 1998; Burns, Teagle, Schwartz, Angold, & Holtzman, 1999; Callahan, Shepard, Beinecke, Larson, & Cavanaugh, 1995; Christianson et al., 1995). In addition to affecting levels of mental health spending, some evidence suggests that MBHC also reduces the response to insurance coverage. Two studies in particular provide some empirical clues on this point. Huskamp (1998) studied the introduction of a MBHC carve-out that occurred alongside a benefit expansion in the State of Massachusetts employee population. Her results showed a reduction in total spending for the segments of the benefit that were expanded (outpatient services). Her inference was that introduction of the MBHC carve-out dominated any demand response to the terms of coverage. The results contrasted sharply with the predictions from actuarial and economic models of expected spending in this population that used estimates of demand response from the fee-for-service era. Sturm and his colleagues (1998) studied the implementation of unlimited coverage and equal cost-sharing for mental health and general medical care for the State of Ohio employees. Overall, for all health plans there was a reduction in spending for mental health care. In areas where benefit design was most constrained there were no spending increases. Again, the inference from the results is that the impact of MBHC dominates the effect of expanded benefits. These results are important because they change the policy debate about the design of mental health coverage. Nearly all proposals for expanding mental health coverage in the fee-for-service era faced concerns over the costs of enhanced benefit largely because of the demand response noted above. The early experiences with MBHC point to the possibility that coverage expansions will be accompanied by smaller demand responses than in the past. Hence, the terms of the trade-off between insurance coverage and costs for mental health care have been redefined under managed care. If these results hold up, this makes the traditional argument against parity for mental health lose force (Frank & McGuire, 1998). Returns to Spending on Mental Health Care Are Substantial and Improving In the early 1980's, McGuire and Weisbrod (McGuire, 1981) observed that there was a "lack of consensus about the effectiveness of various forms of therapy" (p. 2). They further observed that "( p) rogress in understanding mental illness and treatment is coming slowly; public policy is unlikely to be rescued by 'breakthroughs' in knowledge." These views represent a readily understandable view of the mental health system. This view also is consistent with a basic view of the health sector in the early 1980's. That is, the health sector was accounting for a large and growing share of our national resources, as measured by gross domestic product (GDP) for which the improvements in the health of the population was modest a phenomenon known as "flat-of-the-curve medicine." The result was cost inflation. Mental health was long viewed as a particular problem with respect to growth in costs and spending. Recent economic and clinical research, especially on the treatment of depression and schizophrenia, has begun to produce evidence that challenges these longstanding perceptions. Discovery in the understanding of mental disorders has led to some monumental advances in treatment (USDHHS, 1999). The development of new generations of anti-depressant and antipsychotic medications has improved the safety, tolerability, and ultimately the effectiveness of pharmacotherapeutic treatments for mental illnesses. The development of new forms of psychotherapy and psychosocial treatments has created new options for offering effective care and support to people with mental illness. Recent research on new models for treating depression in the context of primary care medical practices shows improvements in patient well-being as well as improvements in workplace outcomes for people treated for depression (Wells et al. 2000). Cost-effectiveness analysis of preferred treatments for depression show that those technologies meet the standards for cost-effectiveness used by other nations (Canada, Australia) (Lave, Frank, Schulberg, & Kamlet, 1998). Lehman (1999) has compiled similar evidence for treatment of schizophrenia. Economic research on productivity of mental health treatments has examined the expected outcomes associated with spending on treatment for depression in a large insured population. That research examines changes over time in two productivity indicators: the expected cost per successful treatment (as measured by remissions) and the spending associated with treatments that adhere to published guidelines. In both cases, the research showed that spending per successful treatment has been declining since the early 1990's (Frank, McGuire, Normand, & Goldman, 1999). While this entire line of research on the economic productivity of treatment is very new, it is already raising challenges to conventional thinking about the productivity and the value of spending on mental health care. It is no longer safe to simply assume that returns to spending on mental health care are small or nonexistent. Economic research in the year 2000 is raising the possibility that spending on illnesses such as depression is cost-effective and is getting more so over time. Conclusions Looking back 30 or 50 years, the changes in the mental health delivery system are no less dramatic than the recent economic transitions experienced by many nations in Eastern Europe. The mental health system has been transformed from one in which most decisions about how to spend money to advance the welfare of people with mental disorders were made centrally by State governments and a few Federal agencies to one in which decisionmaking is decentralized and most often made by private organizations. The types of providers, treatments, and modalities available to "patients" in 1960 or 1970 were quite modest by today's standard where-by mental health consumers face a wide array of choices with respect to modalities, providers, and treatment technologies. Mental health delivery in 2000 is very much the product of market forces. Markets typically bestow a variety of benefits related to choice, innovation, and efficiency. They also can fail, causing inefficiencies. Markets also do not guarantee fairness or justice in the provision of mental health care. The mental health economy of the year 2000 would be hardly recognizable by someone who knew only the mental health system of the 1950's. These developments have placed questions of economics at the center of policy debates about mental health care in America. The discipline of economics has responded by developing an active program of research. Economic theory and econometrics have been put to work in the service of better understanding the role of public policy in the context of markets for mental health care. Economic analysis has provided important input into many of the most pressing public debates over mental health policy. New research on fairness in delivery of mental health care, cost-effectiveness, productivity of treatments, managed care for mental health services, incentives for quality care, and technological change in the field is evidence of a dynamic research enterprise that is addressing the latest problems challenging policymakers. Mental health economics is a healthy and forward-looking area of scholarship that is actively engaged in the very human challenges of a rapidly evolving treatment system of care. References Berndt, E., Cockburn, R. I., et al. (1996). Pharmaceutical innovations and market dynamics: Tracking effects on price indexes for antidepressant drugs. Brookings Papers on Economic Activity: Microeconomics 1996. Washington, DC: Brookings Institute, Inc., 133188. Bloom, J., Hu, T., Wallace, N., Cuffel, B., Hausman, J., & Scheffler, R. (1998). Mental health costs and outcomes under alternative capitation system in Colorado early results. 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