Insurance: Those With and Those Without

In 1798 Congress established the U.S. Marine Hospital Services for seamen. It was the first time an employer offered health insurance in the United States. Payments for hospital services were deducted from the sailors' salaries.

In the twenty-first century many factors affect the availability of health insurance, including employment, income, personal health status, and age. As a result, an individual's or family's health insurance status often changes as circumstances change. In 2006 nearly six out of ten (59.7%) Americans were covered during all or some part of the year by private insurance through their employers. (See Figure 6.1.) Medicare, the federal health insurance program for older adults and people with disabilities, covered 13.6% of Americans, and Medicaid, the federal health insurance program for the poor, covered 12.9%. Another 15.8% of Americans were without health coverage.

In 2006 the 15.8% of the American population without health coverage was up from 2005, and was equal to the peak in 1998. (See Figure 6.2.) In Income, Poverty, and Health Insurance Coverage in the United States: 2006 (August 2007, http://www.census.gov/prod/2007pubs/p60-233.pdf), Carmen DeNavas-Walt, Bernadette D. Proctor, and Jessica Smith of the U.S. Census Bureau report that after the 1998 high, the rate dropped slightly. From 2002 it varied little before stabilizing at about 16%.

According to Robin A. Cohen, Michael E. Martinez, and Heather L. Free of the National Center for Health Statistics (NCHS), in Health Insurance Coverage: Early Release of Estimates from the National Health Interview Survey, January—September 2007 (March 2008, http://www.cdc.gov/nchs/data/nhis/earlyrelease/insur200803.pdf), 2007 marked the sixth consecutive yearly rise in the number of American adults without health insurance coverage. The researchers indicate that from January through September 2007 there were 54.5 million (18.4%) people who were uninsured for at least part of the twelve months preceding the survey. Approximately 43.7 million (14.7%) people of all ages were uninsured adults, and 43.4 million (16.7%) were under age sixty-five. About 36.7 million (19.6%) people aged eighteen to sixty-four were uninsured, as were 6.8 million (9.2%) children under age eighteen. Figure 6.3 shows the percentages of children and adults aged eighteen to sixty-four that were uninsured at the time of the survey, at least part of the year, and for more than a year, as well as the percentages of children and adults covered by public and private insurance.

WHO WAS UNINSURED IN 2006?

Not surprisingly, in 2006 people with lower household incomes—below $25,000 and from $25,000 to $49,999—were more than twice as likely as to be uninsured than those with higher incomes. In 2006, 24.9% of people with an income less than $25,000 and 21.1% of those with earnings between $25,000 and $49,999 lacked insurance, compared to 14.4% of those with incomes ranging from $50,000 to $74,999 and just 8.5% of those with incomes more than $75,000. (See Table 6.1.)

The proportion of people who did not have health insurance in 2006 varied by geography. It was greatest in the South (19%) and West (17.9%), and less in the Northeast (12.3%) and Midwest (11.4%). (See Table 6.1.) Hispanics (34.1%) and African-Americans (20.5%) were more likely to have been uninsured in 2006 than Asian-Americans (15.5%) or whites (10.8%).

The Uninsured by Gender and Age

Among people under sixty-five years old, the percentage of people without insurance in 2007 was highest among young adults aged eighteen to twenty-four (28.1%) and lowest among young people less than eighteen years old (9.2%). (See Figure 6.4.) Among adults aged eighteen to forty-four, men were more likely than women to be uninsured.

LACK OF INSURANCE HAS SIGNIFICANT CONSEQUENCES

In Sicker and Poorer: The Consequences of Being Uninsured (May 2002, http://www.kff.org/uninsured/upload/Full-Report.pdf), a landmark report prepared for the Kaiser Commission on Medicaid and the Uninsured, Jack Hadley of the Urban Institute discusses an exhaustive review of the literature detailing the major findings of more than twenty-five years of health services research on the effects of health insurance. Hadley notes that the uninsured receive less preventive care, are diagnosed at more advanced stages of disease, and receive less treatment as measured in terms of pharmaceutical and surgical interventions.

Besides receiving less medical care and treatment, uninsured people often pay more for medical care. Lara Jakes Jordan reports in “Uninsured Patients Pay Far More for Care” (Associated Press, June 25, 2004) that hospitals routinely overcharge people without health insurance—as much as four times more than insured hospital patients are charged. The overcharging is attributed to hospitals' efforts to recoup the costs of providing care to people who are poor.

Hadley concludes that if the uninsured were provided with health insurance, their mortality rates would be reduced by between 10% and 15%. The reduction in mortality would largely result from improved access to timely and appropriate care. This finding supports the Institute of Medicine, which estimates in Insuring America's Health: Principles and Recommendations (2004) that eighteen thousand Americans die each year because they lack health insurance. Furthermore, Hadley notes that better health would enable uninsured people to improve their annual earnings by 10% to 30% and would also act to increase their educational attainment.

In Dying for Coverage (April 2008, http://familiesusa.org/issues/uninsured/publications/dying-for-coverage.html), Families USA, a national health care advocacy organization, provides the first-ever state-level estimates of the number of deaths attributable to the lack of health insurance. For example, the organization asserts that at least 8 Californians die each day because they are uninsured and that between 2000 and 2006 an estimated 19,900 Californians aged twenty-five to sixty-five died from lack of health insurance. During this same period over sixty-one hundred people between the ages of twenty-five and sixty-four in Illinois and ninety-nine hundred New Yorkers of the same age died because they had no health care coverage. Ron Pollack, the executive director of Families USA, observes in the press release “Reports Shows How Many People Are Likely to Die in Each State Due to Lack of Health Coverage” (April 8, 2008, http://www.familiesusa.org/resources/newsroom/press-releases/2008-press-releases/dying-4-coverage-nat.html) that “health insurance really matters in how people make their health care decisions. We know that people without insurance often forgo checkups, screenings, and other preventive care.” Pol-lack laments the reports' tragic conclusion, that “a lack of health coverage is a matter of life and death for many people.”

SOURCES OF HEALTH INSURANCE

People under Age Sixty-Five

For people under age sixty-five, there are two principal sources of health insurance coverage: private insurance (from employers or private policies) and Medicaid. From 1997 to 2007 the proportion of those covered by private insurance declined from 70.8% to 66.4%. (See Table 6.2.) During this same period the percentage covered by public health plans grew from 13.6% in 1997 to 18.4% in 2007.

DeNavas-Walt, Proctor, and Smith report that the percentage of people covered by employment-based health insurance dropped from 60.2% in 2005 to 59.7% in 2006. (See Figure 6.1.) In contrast, during the 1980s close to 70% of workers obtained private insurance through their employers. This decline is consistent with the continuing decline in all forms of private health coverage, which dropped from 68.5% in 2005 to 67.9% in 2006. For people under age sixty-five, the overall decline in private health insurance coverage between 1997 and 2005 was just 4.4%, from 70.8% to 66.4%, but among people who were near poor the percentage covered by private insurance fell 16.6%, from 53.5% to 36.9%. (See Table 6.3.)

Two major factors contributed to the long-term decline in private health insurance. The first is the rising cost of health care, which frequently leads to greater cost sharing between employers and employees. Some workers simply cannot afford the higher premiums and co-payments (the share of medical bills the employee pays for each health service). The second factor is the shift in U.S. commerce from the goods-producing sector, where health benefits have traditionally been provided, to the service sector, where many employers do not offer health insurance.

People Aged Sixty-five and Older

There are three sources of health insurance for people aged sixty-five and older: private insurance, Medicare, and Medicaid. Medicare is the federal government's primary health program for those sixty-five years old and older, and all people in this age group are eligible for certain basic benefits under Medicare. Medicaid is the federal program for the poor and people with disabilities. In 2006 a scant 1.5% of adults aged sixty-five and older went without some type of health insurance. (See Table 6.1.)

Older adults may be covered by a combination of private health insurance and Medicare, or Medicare and Medicaid, depending on their income and level of disability. Almost all adults over age sixty-five are covered by Medicare. In Health, United States, 2007 (2007, http://www.cdc.gov/nchs/data/hus/hus07.pdf), the NCHS reports that in 2005, 36.4% of older adults obtained their private insurance through the workplace. Fourteen and a half percent were covered by a Medicare health maintenance organization (HMO), and 10.1% were covered by Medicaid as well as Medicare.

Older adults may be covered by a combination of private health insurance and Medicare, or Medicare and Medicaid, depending on their income and level of disability. In Health, United States, 2007 (2007, http://www.cdc.gov/nchs/data/hus/hus07.pdf), the NCHS reports that in 2005, 36.4% of older adults obtained their private insurance through the workplace. Fourteen and a half percent were covered by a Medicare health maintenance organization (HMO), and 10.1% were covered by Medicaid as well as Medicare.

MEDICARE C

Medicare C, also known as Medicare+Choice, became available to Medicare recipients on January 1, 1999. Medicare C came about as a result of the Balanced Budget Act of 1997 and was designed to supplement Medicare Parts A and B. Medicare C offers beneficiaries a wider variety of health plan options than previously available. These options include traditional (fee-for-service) Medicare, provider-sponsored organizations, preferred provider organizations (PPOs), Medicare HMOs, and medical savings accounts (MSAs).

Medicare provider-sponsored organizations are organized and operated the same way that HMOs are. However, they are administered by providers—physicians and hospitals. PPOs are similar to HMOs but permit patients to see providers outside the network and do not require their members to choose a network primary care physician to coordinate their care. Patients in PPOs may seek care from any physician associated with the plan. Medicare HMOs are more like traditional Medicare, except patients may pay more out-of-pocket expenses. MSAs have two parts: an insurance policy and a savings account. Medicare pays the insurance premium and deposits a fixed amount in an MSA each year to pay for an individual's health care.

CHANGING MEDICARE REIMBURSEMENT

Medicare reimbursement varies in different parts of the country, although everyone pays the same amount to Medicare through taxes. As a result, older adults in some geographic regions have access to a more comprehensive range of services such as coverage for nursing home care and eyeglasses, whereas those in other areas do not receive these benefits.

Describing this practice as unfair and outdated, legislators have repeatedly called for more equitable reimbursement formulas. For example, since 2002 the Medi-Fair Act (previously called the Medicare Fairness in Reimbursement Act), intended to improve the provision of items and services provided to Medicare beneficiaries residing in rural areas in part by improving reimbursement, has repeatedly failed to pass. Senator Patty Murray (1950—; D-WA) and Representative Adam Smith (1965—; D-WA) reintroduced the legislation in May 2008 in an effort to raise Washington State's Medicare reimbursement rates to the national average and ensure that all states receive at least the national average of per-patient spending. The Medicare Improvements for Patients and Providers Act of 2008 aimed to stem declining reimbursement by postponing a provision to reduce some

Medicare reimbursement rates. On July 15, 2008, President George W. Bush (1946—) vetoed the act; however, on the same day the U.S. House of Representatives and the U.S. Senate voted to override the president's veto of the bill.

Medicare Prescription Drug, Improvement, and Modernization Act

In December 2003 President Bush signed the Medicare Prescription Drug, Improvement, and Modernization Act into law. Heralded as landmark legislation, the act provides older adults and people with disabilities with a prescription drug benefit, more choices, and improved benefits under Medicare. On June 1, 2004, seniors and people with disabilities began using their Medicare-approved drug discount cards to obtain savings on prescription medicines. Low-income beneficiaries qualified for a $600 credit to help pay for their prescriptions. Besides providing coverage for prescription drugs, this legislation offers seniors the opportunity to choose the coverage and care that best meets their needs. For example, some older adults may opt for traditional Medicare coverage along with the new prescription benefit. Others may wish to obtain dental or eyeglass coverage or to enroll in managed care plans that reduce their out-of-pocket costs.

The legislation stipulated that as of 2005 all newly enrolled Medicare beneficiaries would be covered for a complete physical examination and other preventive services, such as blood tests to screen for diabetes. The new law also aimed to assist all Americans in paying outof-pocket health costs by enabling the creation of health savings accounts, which allow Americans to set aside up to $4,500 every year, tax free, to save for medical expenses.

Medicare Drug Plans Face Rising Costs

In “Should Drug Prices Be Negotiated under Part D of Medicare? And If So, How?” (Health Affairs, vol. 27, no. 1, January—February 2008), Richard G. Frank and Joseph P. Newhouse of Harvard University question whether drug purchasing for the millions of older adults enrolled in Medicare Part D (the prescription drug benefit) is cost-effective. The researchers report that the prices of medicines heavily used by older adults have risen more than 24% since June 2006 and that as a result many Medicare enrollees are facing higher costs. For example, many Part D plans assign selected drugs to a “specialty tier,” which means the enrollee must pay from 25% to 33% of the price of the drug. Medicare also feels the pinch of higher prices because after enrollees reach their cap of $5,726 out-of-pocket, they pay just 5% of the price. The drug plan bears 15% of the cost and Medicare bears the brunt—80%.

Frank and Newhouse suggest there is strong evidence that some Part D drug prices need to be renegotiated. They assert the government should be negotiating prices with pharmaceutical manufacturers, and they even provide a proposal, which includes terms for arbitration to resolve disputes, for how to improve purchasing of prescription drugs in Medicare.

CHILDREN

In 2007, 9.2% of children under the age of eighteen were uninsured at the time of the National Health Interview Survey (NHIS), 12.9% had been uninsured for part of the year preceding the interview, and 5.1% had been uninsured for more than a year. (See Figure 6.3.) Children living in poverty were much more likely to be uninsured—19.3% compared to the 11.7% of all children who were uninsured in 2006. (See Figure 6.5.) Hispanic children (22.1%) were the most likely to be uninsured, followed by African-American children (14.1%) and Asian-American children (11.4%). Just 7.3% of non-Hispanic white children had no health care coverage, making them the least likely children to be uninsured in 2006. Older children aged twelve through seventeen (12.6%) were more likely to be uninsured than children under age six (11.3%) and children aged six to eleven (11.1%).

In 2007, 59% of American children were insured under private health insurance plans, either privately purchased or obtained through their parents' workplace. (See Table 6.3.) According to Cohen, Martinez, and Free, from January through September 2007 about one-third (33.3%) of American children were covered by public health coverage. More than three-quarters (77.8%) of poor children and 54.2% of near-poor children were covered by a public health plan at the time of the NHIS.

Some health care industry observers believed the 1996 welfare reform law, the Personal Responsibility and Work Opportunity Reconciliation Act, would reduce enrollment in Medicaid. Under the 1996 law, federal money once dispensed through the Aid to Families with Dependent Children program was now given as a block grant (a lump sum of money) to states. In addition, the law no longer required that children who received cash assistance were automatically enrolled in the Medicaid program. The law gave states greater leeway in defining their requirements for aid, and in a few states some families were no longer eligible for Medicaid. Regardless, Table 6.4 shows that enrollment in Medicaid actually increased, rather than decreased, from 26.6 million in 1995 to 33.2 million in 2005. During this same period the percentage of children covered by Medicaid also rose, from 21.5% to 27.2%.

Some industry analysts attributed the declining proportion of uninsured children and children covered by Medicaid in the late 1990s to expansion of the State Children's Health Insurance Program, which targeted children from low-income families and was instituted during the late 1990s. Others believed the economic boom of the late 1990s may have played a role in preventing enrollment growth in Medicaid and predicted that the economic downturn and uncertainty of the early years of the twenty-first century would reverse the downward trend in both the share of the population without health insurance and Medicaid enrollment.

In 2008 many health care advocacy groups, including the American Academy of Pediatrics, continued to agitate for federal legislation such as the MediKids Health Insurance Act (S.1303/H.R.3055) to provide health insurance for all children in the United States by 2012 regardless of family income level.

HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996

In August 1996 President Bill Clinton (1946–) signed the Health Insurance Portability and Accountability Act (HIPAA). This legislation aimed to provide better portability (transfer) of employer-sponsored insurance from one job to another. HIPAA ensured that people who had employer-sponsored health coverage would be able to maintain their health insurance even if they lost their job or moved to a different company. They would, of course, have to continue to pay for their insurance. However, they no longer had to fear that they would be denied coverage because of preexisting medical conditions, or be forced to go without health insurance for prolonged waiting periods.

Industry observers and policy makers viewed HIPAA as an important first step in the federal initiative to significantly reduce the number of uninsured people in the United States. Besides its portability provisions, HIPAA changed tax laws to make it easier for Americans to pay for medical care, and initiated a pilot program of MSAs that would grow into a significant new initiative in paying for health care.

HEALTH SAVINGS ACCOUNTS

The Health Insurance Portability and Accountability Act of 1996 authorized a pilot program–a five-year demonstration project designed to test the concept of MSAs, which are similar to individual retirement accounts.Beginning on January 1, 1997, about 750,000 people with high-deductible health plans (HDHPs; high-deductible plans were defined as those that carried a deductible of $1,600 to $2,400 for an individual or $3,200 to $4,800 for families) could make tax-deductible contributions into interest-bearing savings accounts. The funds deposited into these accounts could be used to purchase health insurance policies and pay co-payments and deductibles. People using MSAs could also deduct any employer contributions into the accounts as tax-deductible income. Any unspent money remaininginthe MSAatthe endofthe year wascarried over to the next year, thereby allowing the account to grow.

To be eligible to create an MSA, individuals had to be less than sixty-five years old, self-employed, and uninsured or had to work in firms with fifty or fewer employees that did not offer health care coverage. Withdrawals to cover out-of-pocket medical expenses were tax free and the money invested grew on a tax-deferred basis. Using MSA funds for any purpose unrelated to medical care or disability resulted in a 15% penalty. However, when MSA users reached age sixty-five, the money could be withdrawn for any purpose and was taxed at the same rate as ordinary income.

Supporters of MSAs believed consumers would be less likely to seek unnecessary or duplicative medical care if they knew they could keep the money left in their accounts for themselves at the end of the year. Experience demonstrated that MSAs could simultaneously help contain health care costs, allow consumers greater control and freedom of choice of health care providers, enable consumers to save for future medical and long-term care expenses, and improve access to medical care.

In February 2001 President Bush advocated more liberal rules governing MSAs and proposed making them permanently available to all eligible Americans. Congress reviewed the president's proposed reforms and during its 2001–02 session lowered the minimum annual deductible to increase the number of eligible Americans, allowed annual MSA contributions up to 65% of the maximum deductible for individuals and 75% for families, and extended the availability of MSAs through December 31, 2003.

The Medicare Modernization Act of 2003 included provisions to establish health savings accounts (HSAs) for the general population. Like the MSA program it replaced, HSA accounts offer a variety of benefits, including more choice, greater control, and individual ownership. Specific features of HSAs include:

• Permanence and portability
• Availability to all individuals with a qualified high-deductible plan
• Minimum deductible of $1,000 per individual plan and $2,000 per family plan
• Allowing annual contributions to equal 100% of the deductible
• Allowing both employer and employee contributions
• Not placing a cap on taxpayer participation
• Allowing tax-free rollover of up to $500 in unspent flexible spending accounts

As of 2008, HSAs enable individuals to deposit up to $2,900 ($5,800 for families) per year in the accounts tax-free, and the funds roll over from year to year. Funds can be withdrawn to pay for medical bills or saved for future needs, including retirement.

Pros and Cons of HSAs

Catherine Hoffman and Jennifer Tolbert of the Henry J. Kaiser Family Foundation reveal in Health Savings Accounts and High Deductible Health Plans: Are They an Option for Low-Income Families? (October 2006, http://www.kff.org/uninsured/upload/7568.pdf) that most low-income families do not benefit from consumer-directed coverage such as HSAs linked to high-deductible health plans because they already have low levels of tax liability. Furthermore, greater cost sharing may reduce health care utilization among people with low incomes, especially those with chronic conditions or disabilities and others with high-cost medical needs.

Nonetheless, America's Health Insurance Plans (AHIP), an industry trade association, indicates in January 2008 Census Shows 6.1 Million People Covered by HSA/High-Deductible Health Plans (April 2008, http://www.ahipresearch.org/pdfs/2008_HSA_Census.pdf) that by 2008, 6.1 million people had opened an HSA. This was an increase of 1.6 million since January 2007 and twice the number predicted in 2006. The AHIP notes that 27% of new enrollees in HDHPs paired with HSAs previously had been uninsured. HSA plan enrollment also varied by geography with the highest percentages in Minnesota (9.2%), Louisiana (9%), Washington, D.C. (8.7%), Vermont (7.5%), and Colorado (7.1%).

In Health Savings Accounts: Participation Increased and Was More Common among Individuals with Higher Incomes (April 2008, http://www.gao.gov/new.items/d08474r.pdf), the U.S. Government Accountability Office (GAO) confirms that in 2006 the number of U.S. residents enrolled in consumer-directed health plans combined with HSAs accounted for a small (2%) but growing share of the 202 million Americans with private health insurance. In 2005 people enrolled in HDHPs with HSAs had an average adjusted gross income of $139,000, compared to $57,000 for other taxpayers. The GAO also finds that more than four out of ten people who purchased high-deductible plans did not open HSAs, even though they were eligible to do so. People who did not open HSAs said they lacked information, could not afford to open them, or felt they did not need the accounts. The GAO attributes the rise in growth and popularity of consumer-directed plans to the rising cost of health care coverage.

Advocates of HSAs include not only President Bush but also the AHIP. They believe that by having consumers assume an increasing burden of escalating medical care costs, HSAs will stimulate comparison shopping for health care providers and services and competition that will ultimately reduce the rate at which costs are rising. According to M. P. McQueen, in “HSA Users Find Hassles Amid Savings” (Wall Street Journal, May 1, 2008), Karen Ignagni, the president and chief executive officer of AHIP, explains that “newer data indicate that individuals are not storing assets in these account but using them for health-care services.”

However, other industry analysts question whether employer cost savings are the result of HSA enrollees' decisions to forgo needed medical care. According to McQueen, Michael Thompson, a principal at PricewaterhouseCoopers, asserts that “there is a lot of evidence that suggests that when patients pay a higher percentage of the cost of their care they get less of it.”

Eric Sabo reports in “A Million Little Health Savings Accounts” (February 1, 2006, http://globalrph.healthology.com/healthcare/article788.htm) that Uwe Reinhardt, a health economist at Princeton University, believes HSAs will not solve the problems of the U.S. health care system. To date, shifting more expenses to consumers has neither reduced medical costs, nor has it substantially reduced the numbers of uninsured Americans. HSAs will not help the poor or near poor, which means that county hospitals, emergency departments, and the government will have to underwrite their care. The GAO confirms that as of 2008 the low- and middle-income Americans (who are the most likely to be uninsured) were not using HSAs. Instead, those with average incomes that are nearly three times those of average tax filers had embraced them.

HEALTH INSURANCE COSTS CONTINUE TO SKYROCKET

According to the Kaiser Foundation, in Employer Health Insurance Costs and Worker Compensation (March 2008, http://www.kff.org/insurance/snapshot/chcm030808oth.cfm), health insurance premiums continued to increase much faster than inflation and wages, growing a cumulative 78% between 2001 and 2007 and far outpacing cumulative wage growth of 19% during the same period. Premiums averaged $4,479 for individual coverage and $12,106 for family coverage. Accord-ingtoGaryClaxtonetal.,in Employer Health Benefits: 2007 Annual Survey (2007, http://www.kff.org/insurance/7672/upload/76723.pdf), in 2007 the average annual premium for a family was $12,106. Workers paid an average of $694 per year toward the premium for individual coverage and $3,281 per year toward the premium for family coverage, significantly higher than the amounts reported in 2006.

Claxton et al. find that most covered workers incur a separate deductible, co-payment, or coinsurance for each hospital admission. Annual deductibles for individual coverage ranged from $401 for HMO members to $1,729 for those in HDHPs. The majority (79%) of covered workers incurred co-payments for office visits and prescription drugs. Three-quarters of workers were enrolled in plans with co-payments for prescription drugs.

This increase was attributed to larger insurance claims resulting from higher prices for hospital care and prescription drugs, coupled with increasing consumer demand for, and utilization of, health care services. Claxton et al. indicate that 10% of employers offered workers a high-deductible plan in 2007. Firms with 1,000 or more workers were more likely to offer high-deductible plans (18%) than those with 3 to 999 employees (10%).

According to Claxton et al., 45% of firms said they were likely to increase the amount workers contribute to premiums, 42% would increase office visit cost sharing, 41% wanted to increase the amount employees pay for prescription drugs, and 37% planned to increase deductible amounts. Claxton et al. and other industry analysts observe that even though employers and employees benefited from continued moderation in the rate of premium increases, if there is no relief from premium increases soon, despite employers' stated reluctance to drop employee health care coverage, many may stop offering health benefits to their employees and some workers may be forced to drop their coverage because they are unable to contribute their share of the costs. Between 2000 and 2007 the percentage of employers offering health coverage declined from 69% to 60%. Industry observers and policy makers fear that this trend, fueled by rising insurance premiums, will swell the ranks of Americans without insurance coverage.

MENTAL HEALTH PARITY

In terms of mental health care, parity refers to the premise that the same range and scope of insurance benefits available for other illnesses should be provided for people with mental illness. Historically, private health insurance plans have provided less coverage for mental illness than for other medical conditions. Coverage for mental health was more restricted and often involved more cost sharing (higher co-payments and deductibles) than coverage for medical care. As a result, many patients with severe mental illness, who frequently required hospitalizations and other treatment, quickly depleted their mental health coverage.

The Center for Policy Alternatives explains in “Mental Health Parity” (2007, http://www.cfpa.org/issues/issue.cfm/issue/MentalHealthParity.xml) that during the 1990s there was growing interest in parity of mental health with other health services. The Mental Health Parity Act of 1996 sought to bring mental health benefits closer to other health benefits. The act amended the 1974 Employee Retirement Income Security Act and the 1944 Public Health Service Act by requiring parity for annual and lifetime dollar limits but did not place restrictions on other plan features such as hospital and office visit limits. It also imposed federal standards on the mental health coverage offered by employers through group health plans. By 2007 thirty-six state laws governing mental health parity were more comprehensive in scope than the federal legislation, and one-third of the states required full parity.

Attempts to Legislate Mental Health Parity in 2007 and 2008

On September 18, 2007, the Mental Health Parity Act of 2007 (S. 558) was unanimously passed by the U.S. Senate. The act would prohibit group health plans and group health insurance companies from imposing treatment limitations or financial requirements for coverage of mental health that are different from those used for medical and surgical benefits. On October 17, 2007, it was sent to the House Education and Labor and referred to the Subcommittee on Health, Employment, Labor, and Pensions. In the U.S. House of Representatives comparable legislation, the Paul Wellstone Mental Health and Addictions Equity Act (H.R. 1424), was passed on March 5, 2008.

In Cost Estimate: S. 558 Mental Health Parity Act of 2007 (March 20, 2007, http://www.cbo.gov/ftpdocs/78xx/doc7894/s558.pdf), the Congressional Budget Office (CBO) estimates that passage of S. 558 would reduce federal tax revenues by $1 billion from 2009 to 2012 and by $3 billion from 2009 to 2017. The CBO further estimates that implementation of the bill would cost $322 million from 2008 to 2017.

The CBO estimates in Cost Estimate: H.R. 1424 Paul Wellstone Mental Health and Addiction Equity Act of 2007 (November 21, 2007, http://www.cbo.gov/ftpdocs/88xx/doc8837/hr1424ec.pdf) that enactment of H.R. 1424 would reduce federal tax revenues by $1.1 billion from 2008 to 2012 and by $3.1 billion from 2009 to 2017. The bill would produce higher premiums for employer-sponsored health benefits, and higher premiums would result in more of an employee's compensation taking the form of nontaxable employer-paid premiums and less taxable wages. This in turn would reduce federal income and payroll tax revenues. The CBO estimates that implementation of the bill would cost $820 million from 2008 to 2017. Social Security payroll taxes would account for about 35% of these totals.

Opinions about the Costs of Parity

Critics of parity legislation express concern that the Mental Health Parity Act of 1996 will sharply increase costs. However, several studies, including those performed by the CBO, and projections made by private actuarial and accounting firms, forecast cost increases of about 1% for parity in terms of dollar limits.

Research conducted before the implementation of parity legislation estimated that the cost of providing the same level of outpatient mental health care would be about twice as much as for general medical care. As a result of these estimates, traditional indemnity (fee-for-service) insurers projected that providing insurance protection against the risks of mental illness would be substantially more costly than for other medical problems. Insurers also feared “adverse selection”—that plans with comprehensive mental health benefits would attract a disproportionate number of people with severe mental illness who would be costly to treat. Similarly, in the absence of mandated minimum mental health benefits, insurers could offer poor mental health benefits to deter people in need of treatment from enrolling in their plans.

Managed care plans may be as compelled as indemnity insurers to discourage people with potentially costly illnesses from enrolling in their plans; however, they have different utilization and cost controls than indemnity insurers. Rather than reducing the demand for services by increasing cost sharing, managed care regulates treatment decision making. For example, managed care plans may direct consumers to outpatient services as opposed to inpatient services or to peer counseling programs instead of mental health professionals. By controlling treatment and related services, managed care plans are able to extend coverage and benefits to more people at little or no additional cost.

Access to Care under Parity

In Insurance Parity for Mental Health: Cost, Access, and Quality (June 2000, http://www.nimh.nih.gov/publi cat/nimhparity.pdf), Ruth L. Kirschstein of the National Institutes of Health considers the effects of parity on costs, utilization, and access for employers with more than 150,000 employees. The four-year study that began one year before parity went into effect finds that by the third year of parity the proportion of people receiving mental health services grew from less than 5% to more than 7% and costs were reduced by half. The cost reductions were attributed to substantial declines in inpatient utilization, reduced lengths of stay, lower per diem (by the day) costs, and lower costs for mental health care for children and adolescents.

Kirschstein asserts that parity does not necessarily improve access to mental health care because managed care and behavioral health plans control access and counter some of the gains made as a result of parity. Managed behavioral health “carve-out” arrangements appear to influence access by offering more people access to basic mental health care than what is available through traditional fee-for-service practice. To offset the costs of this increased access, these plans generally reduce the intensity of more costly services, primarily inpatient treatment and long-term psychotherapy.

PARITY MAY NOT SOLVE ALL ACCESS PROBLEMS . According to Richard G. Frank, Howard H. Goldman, and Thomas G. McGuire, in “Will Parity in Coverage Result in Better Mental Health Care?” (New England Journal of Medicine, vol. 345, no. 23, December 6, 2001), parity alone will not eliminate all obstacles to gaining access to mental health care. The researchers opine that most private insurance does not cover vital components of effective mental health services. For example, private insurance does not usually cover day-hospital programs, case management, psychosocial rehabilitation, or residential treatment, nor does it cover services such as supervised housing or supported employment. Frank, Goldman, and McGuire contend that true parity would require an expanded concept of health insurance and would necessitate coverage of all services deemed necessary for optimally effective mental health care.

Actual Effects of Federal Mental Health Parity Legislation on Employers

Howard H. Goldman et al. confirm in “Behavioral Health Insurance Parity for Federal Employees” (New England Journal of Medicine, vol. 354, no. 13, March 30, 2006) that costs are not likely to increase when workers are given the same coverage for mental health and substance abuse treatment as they are for other medical care. The researchers consider seven Federal Employees Health Benefits plans that offer mental health and substance abuse benefits on a par with medical benefits beginning in January 2001. Among people who used mental health services, spending attributable to parity decreased significantly for three plans and did not change significantly for the four remaining plans. The institution of parity was also associated with significant reductions in out-of-pocket spending in five of the seven plans. Goldman et al. conclude that offering parity “can improve insurance protection without increasing total costs.”