Economics of Private Insurance for Substance Abuse Treatment

1. Economics of Private Insurance for Substance Abuse Treatment Colleen L. Barry and Jody L. Sindelar Yale School of Public Health October 25, 2005

2. Motivation • Examine trends in private insurance benefits for SAT over 25-year period • Comparison with mental health • Does design of private SAT benefits make economic sense? • Moral hazard and adverse selection • If not, what is the role for government in regulating private SAT benefits? • Substance abuse parity? • Other policy responses? • Aim – to align employer incentives with societal goals

3. Table 1: % of Privately Insured with SAT Benefits, 1981-2002

4. Table 2: % of Privately Insured with Any Special Benefit Limits on SAT, 1988-2002

5. Table 3: % Privately Insured with Outpatient Visit Limits, 1988 - 2002

6. Table 4: % of Privately Insured with Special Annual and Lifetime Dollar Limits, 1998 - 2002

7. Evaluating Benefit Trends • Higher % of privately insured with access to some SAT benefits • But, limits increasing on SAT benefits over time • A trade off? • SAT benefits appear to move with mental health benefits • Why? Is it because SAT costs are comparatively small? • Is it because SA and MH are similar to each other?

8. Does design of SAT benefits make economic sense? Strategy: Use evidence from mental health insurance literature (since we know less about SA.. insurance for illicit drugs in particular)

9. Insurance Theory • Optimal coverage protects against high-end expenses • Private coverage for substance abuse and mental health takes the opposite form → Relatively generous front-end coverage → Limits leave families unprotected against high costs

10. Economic Reasons for Limits on Mental Health Benefits • Moral hazard: health plan incentive to control consumer demand for services • Selection: incentive to avoid ‘bad risks’ • employer incentive - in hiring employees • health plan incentive – in providing insurance This is the story pre-managed care

11. Pre-Managed Care Demand Response Evidence for Mental Health

12. Pre-Managed Care Selection Evidence for Mental Health

13. Do these same economic explanations for prevalence of benefit limits apply to SAT?

14. Moral Hazard and SAT • No RAND HIE to evaluate demand response to lower cost sharing for SAT • But, certain characteristics of drug and alcohol addiction may lead to less demand response to insurance changes…… • Some modes of treatment (eg. rapid opiate detoxification) physically unpleasant • Reluctance to enter treatment – some level of coercion usual (legal, family member etc.) • High drop out from treatment, higher for those with more severe SA problems

15. Moral Hazard and SAT (2) Societal perspective: • Reduction in negative externalities of addiction (via treatment) arguably offset any moral hazard concerns • Evidence on value of addiction TX for: • Public safety/reducing crime • Employment and family stability • Reducing spread of HIV (contrast with benefits of mental health TX) Cost perspective: • SAT a very small portion of total private health care spending • Therefore, eliminating benefit limits on SAT will have a small absolute effect on overall insurance costs

16. Adverse Selection and SAT For SAT, we might think about: • employer risk selecting in the employment context • insurer risk selecting in the insurance context

17. Adverse Selection and SAT (2) In choosing a health plan: • Lack of perceive need – generosity of SA benefits may not be key determinant • Worker concern about employment repercussions of seeking SAT • Especially among those with drug addictions • Less of an issue with dependents

18. Adverse Selection and SAT (3) However… • Some limited evidence that those in SAT are high cost (Sturm, 1999) • A parent might select insurance with a dependent in mind • No direct evidence of selection into plans with more generous alcohol tx benefits (Harris & Sturm, 2002) In choosing workers: • Signaling value -- strong incentive to discourage hires with SA problems

19. Other Reasons for Patterning SAT Benefits After Mental Health? • Highly co-morbid • Both have a genetic component • Both are often chronic • Both may threaten workplace attachments (and employer-based private insurance) • Both have large (though fragmented) public safety-net systems • Public systems may help to explain the persistence of private insurance limits

20. Economic Rationale Shifts in a Managed Care Environment FFS: Benefit limits used to control moral hazard (on the demand side) Managed Care: Either benefit limits (demand side) or managed care (supply side) can be used to control moral hazard Implication→ Benefits limits not needed for controlling demand response for mental health (and we arguably never needed them for SAT)

21. Government Policy Responses Rationale for Regulation • Efficiency (to curb adverse selection) • Equity (increase fairness) Some Policy Responses • Mandated benefit laws – coverage floors • SA Parity laws – coverage equivalent • 1996 federal partial parity law (excludes SAT) • 37 state parity laws (12 include SAT) • FEHB Program parity directive (includes SAT) • Other regulatory policies? • Encouraging managed care?

22. One Form of Government Regulation: State SA Parity Laws *6 of 12 states enacted SA parity through expansion legislation

23. Politics of Substance Abuse Benefit Regulation • SA parity much less successful political effort to date. Why? • Views about deservingness • Interest group power • Identity politics – politicians less likely to make the case for SA parity based on personal experiences (Wellstone counter-example) • Objections to SA parity much less likely to be based on total cost or demand response

24. What Can Parity Achieve? • Parity laws provide risk protection by lowering the OOP financial burden of seeking SAT • Not so good at accomplishing other goals: • Improving quality of care (eg. disseminating EBPs) • Addressing unmet need • Substance abusers not interested in seeking TX or dropouts

25. What is Role for Governmental Policy Beyond Parity? • With regard to private coverage • Public coverage provides a more central role for SAT • Interaction of private and public insurance

26. Future Work • How does society finance substance abuse services differently in the public and private sector – what are we buying? • Integration of SAT financing: • Horizontally – federal, state and local • Vertically – across private and public sources (eg. Medicaid, criminal justice, welfare and child welfare, etc.)