Effects of the Vermont Mental Health and Substance Abuse Parity Law

Introduction

Insurers historically have been reluctant to cover mental health and substance abuse (MH/SA) services on par with general medical and surgical services because of concerns about adverse selection and moral hazard (McGuire, 1981).¹ During the 1980s, many States enacted mandates requiring insurers to cover mental health services and to offer freedom of choice among providers. Concerns about underutilization of MH/SA services persist, however, because many insurance policies impose higher cost sharing or more restrictive benefit limits for MH/SA services than for general medical and surgical services.

In recent years, legislative activity designed to introduce parity in insurance coverage for MH/SA treatment has experienced a resurgence. The Federal Mental Health Parity Act of 1996 (P. L. 104-204), a limited parity law, prohibits different dollar limits for mental health services and general health care. It does not mandate that insurers provide mental health coverage, nor does it affect the terms and conditions of mental health coverage, such as coinsurance, cost sharing, deductibles, or service limits. Further, while the law covers mental illnesses, as defined by each health plan, it excludes substance abuse. The Federal law exempts health plans purchased directly through the individual market, businesses with 50 or fewer employees, and businesses that demonstrate that the law resulted in a cost increase of at least 1 percent. Currently, the Federal law is scheduled to expire at the end of 2003.

As of August 2002, 33 states had enacted parity laws that surpassed the provisions of the Federal parity law (Exhibit 1.1). Of these, 19 require full parity, while 14 call for limited parity (GAO, 2000; NCSL, 2001). Full parity laws mandate that mental health benefits be included in all group plans and require parity in all respects - dollar limits, service limits, and cost sharing. As displayed in Exhibit 1.1, Vermont has the most comprehensive parity law in the Nation and is the only State that exceeds the Federal law on every dimension. (See Appendix A for the text of the Vermont parity law.) The Vermont law defines mental health conditions broadly (that is, coverage is not limited to selected conditions); covers substance abuse; and requires equal terms and conditions with general health care for service limits and cost sharing.² Vermont's law covers its entire commercially insured population, with no exemptions for small businesses. The sole exception is self-insured groups, due to the Federal preemption under the Employee Retirement Income Security Act. In addition, the Vermont parity law does not apply to Medicare or Medicaid beneficiaries.

The Vermont law permits health plans to use managed care for coverage of MH/SA treatment, even if the plans continue to cover medical/surgical treatment on an indemnity basis. In addition, the law exempts out-of-network benefits provided through a point-of-service option from complying with the terms of parity. Thus, enrollees who go out of network may be subject to visit limits for MH/SA services, separate deductibles, and higher copayments or coinsurance.

A. Why Study the Effects of Parity in Vermont?

The enactment of full parity statutes remains controversial for several reasons. Employers and health plans are concerned that a more generous benefit package for MH/SA services may result in significant increases in health insurance costs. Providers and consumers are concerned that the introduction of parity benefits may accelerate the trend toward increased management of behavioral health services. Legislators, for their part, require more definitive information on the effects of parity on health care access, utilization, and spending to make sound decisions.

Implementation of the Vermont Parity Act provides an important opportunity to study the effects of a full parity law on access, utilization, and spending for MH/SA services. As discussed earlier, Vermont has the most comprehensive parity law in the Nation. Moreover, the State presents an interesting context for studying the effects of parity because of the contrasting health plan environments in which parity is being implemented. Between the two dominant commercial health plans in Vermont, one had managed care both before and after parity, and one shifted a large share of its members from an indemnity plan to a managed care carve-out when parity was implemented. Previous literature has shown that the effects of benefit expansions vary across health plan arrangements and, in particular, that health plans switching from indemnity to managed care arrangements often experience net savings despite the expanded benefits (Goldman, McCulloch, & Sturm, 1998; Sturm, Goldman, & McCulloch, 1998).

This report presents the results of an evaluation of the effects of the Vermont Parity Act, sponsored by the Substance Abuse and Mental Health Services Administration. The Vermont Department of Banking, Insurance, Securities, and Health Care Administration, the agency charged with overseeing the implementation of MH/SA parity in Vermont, provided extensive in-kind support to this evaluation. This evaluation had three major objectives:

Document implementation of the Vermont parity law through a case study;
Quantify the effects of the parity law on access to, utilization of, and spending for MH/SA services through an analysis of claims/encounter data for two health plans; and
Assess the effects of parity on employers through a survey of Vermont employers.

The three components of the evaluation - case study, claims/encounter data analysis, and employer survey - provide a multifaceted view of the implementation and effects of the Vermont parity law from the perspective of key stakeholders.³

B. Conceptual Framework for This Evaluation

Exhibit 1.2 presents a conceptual framework that guided the evaluation design and analysis. The framework illustrates the potential behavioral responses and outcomes of various stakeholders. Following implementation of parity, insurers and employers jointly determine the characteristics of employer-sponsored insurance, including care management strategies and financial provisions. Employers may respond to parity in various ways. They may decide not to offer coverage. They may shift to self-insured coverage to avoid the state parity provisions, pass additional premium costs on to employees, or choose a managed care product. Alternatively, they may change employee compensation levels to account for the costs of parity or change the structure of their workforce (such as downsizing) to reduce costs. The direction and magnitude of employer responses is a function of the actual or anticipated effects of parity on their health care costs.

The effect of parity on providers depends on how insurers restructure provider networks, reimbursement policies, and utilization controls. These changes may affect provider treatment patterns that, in turn, may have a direct effect on health care spending and utilization, as well as an indirect effect on consumer experience.

Consumer access and use is a function not only of enrollee characteristics (such as health status and risk) but also of such external factors as provider availability (as structured by the insurers) and employee cost sharing (as determined by the employer). Although parity is hypothesized to raise consumer demand by expanding insurance coverage, in reality, the effect on access to and use of services will depend on how insurers respond, particularly in terms of care management protocols. The conceptual framework identifies two intermediate consumer outcomes - access and satisfaction - and two ultimate outcomes - health status and productivity.

Finally, the framework incorporates effects on the public MH/SA system. Parity can affect public system costs if patients who would have been treated by publicly funded providers now are treated by privately funded providers, thus freeing up public resources, either for other MH/SA services (such as prevention) or for other public programs (health or nonhealth), or resulting in budget savings.

C. Questions Addressed in This Evaluation

The evaluation addresses both qualitative questions on the parity implementation process and quantitative questions on the effects of parity. The evaluation questions are organized around six domains: (1) implementation process; (2) employer issues; (3) insurer/health plan issues; (4) provider issues; (5) consumer issues; and (6) effects on health care access, utilization, and spending. Exhibit 1.3 presents the questions addressed by the evaluation. Although the evaluation addresses a wide range of issues, some questions could not be addressed due to resource constraints. For example, this evaluation does not address the effects of parity on the quality of care or on health status and functioning. In addition, this study was unable to quantify the effects of parity on the public system, such as whether improved commercial benefits have resulted in fewer transitions to Medicaid or whether there have been any spillover effects on the State corrections system.

Findings from this study reflect experiences during the first two to three years of parity in Vermont. It is possible that a longer study period might yield different results, especially as the effects of managed care transitions stabilize. This study also is limited to a single State, and the results may not be generalizable to other States in which the mix of providers or services differs.

D. Organization of This Report

This report contains four additional chapters. Chapter II describes the implementation of the Vermont parity law. Chapter III presents the results of the claims/encounter data analysis showing the effects of parity on access, utilization, and spending, and Chapter IV discusses the results of the employer survey. Chapter V synthesizes the major findings of this evaluation across the various study components.

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