Administration and Policy in Mental Health Vol. 17, No. 3, Spring 1990

MENTAL HEALTH ECONOMICS

Richard G. Frank, Ph.D.

Richard G. Frank is an associate professor in the Depart- ment of Health Policy and Management at the Johns Hopkins University. His research has focused primarily on the economics of mental health. His specific interests include: Payment systems for mental health providers, public financing arrangements for the severely mentally ill and the economic consequences of mental disorders. Prof. Frank has published frequently in the health services re- search, economics and community mental health literatures. He often serves as consultant to the National Institute of Mental Health and currently serves on the Hospital Rate Setting Commission in the State of Maryland.

Resource allocation in this sector is fundamen- tally different from that found in many markets for goods and services. Exchanges between providers and users of mental health services seldom involve simple bilateral transactions. Third party payors, public regulations, and government mental health agencies are all involved in a large portion of the exchanges that take place in the mental health sector. The additional complexities found in mar- kets for mental health services stem from a variety of deficiencies that arise when "free markets" are relied upon to allocate resources for mental health care (see Klevorick 1981 and Frank 1989 for more extensive discussion of these issues). The most obvious shortcomings relate to: 1) the difficulty

The author is grateful to Frances Lynch for helpful comments.

of judging quality, price, outcome, and appropri- ate quantity of services; 2) the presence of insur- ance coverage and public health care programs; and 3) the fact that many treatment benefits ex- tend to parties not involved in treatment (e.g., family, friends, neighbors, and society at large).

One outcome of these features of the mental health care system is that various parties with an interest in the consequences of mental health treat- ment select representatives to further their inter- ests. Government acts to represent the interests of society at large (voters) whether or not they di- rectly receive services. This is due partly to altruis- tic concerns regarding the care of a highly vulner- able segment of the population and partly because many service delivery decisions have implications for use of scarce tax dollars. Third party payors often represent the interests of both employees (who are covered by insurance) and employers (who pay the largest share of the premium) and sometimes share holders (when insurers are pro- prietary). Providers often represent their own in- terests (economic, professional, ideological) as well as serving as advocates for their patients.

The set of relationships briefly described suggest that multiple parties have multiple interests in ex- changes in the mental health sector. Providers of treatment, and the managers and clinicians they employ, may often view their goals as 1) providing quality services to their clients; 2) maximizing revenues (or profits in the case of proprietary pro-

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190 Administration and Policy in Mental Health

viders); and 3) creating an environment that is professionally rich and results in career growth for employees. Pursuit of these objectives are reason- able and even laudatory. However, unchecked pursuit of the goals of providers may not result in socially desirable allocations of resources (e.g., too much quality or too many resources devoted to professional development and amenities).

Typically, excessive pursuit of provider goals is constrained by relying on market forces. But, as pointed out earlier it is very difficult to rely on consumers through their "shopping" behavior to discipline the market. Even those parties that rep- resent consumer interests (third party payors and government) face a difficult and costly task of monitoring quality, outcome, and quantity of care. This set of circumstances underlies one of the most fundamental (and unique) set of tensions found in the health and mental health sectors of the economy. That is, providers view regulations, payment methods, and external quality control as costly incursions into their enterprises. Payors and government are interested in assuring that dollars for which they are responsible are appropriately spent. These opposing perspectives inevitably re- sult in conflict.

Since payors and governments cannot easily ob- serve the content of what is exchanged between clients and providers, they seek to set up mecha- nisms that will increase their confidence that what is promised is being delivered at a "reasonable cost." Since quality is difficult to judge, rules gov- erning the treatment process that are consistent with "good care" are imposed. Because it is unclear what the "right" amount of care is for the treatment of any particular mental problem, payment and reporting systems are set up to guard against "overuse." All of these policies are techniques for fulffltng the responsibilities that various parties have been charged with by those they represent. In sum it is easy to forget that every dollar of revenue to one party is a cost to another and vice versa.

The mental health sector has been a very regu- lated and "managed" sector of the economy since the mid 1800s. One might consider the mental health sector prior to the 1970s as being "social- ized." Today it remains "public" although the roles of markets and private ownership have expanded dramatically. The transformation of the mental health services system has been characterized by expansion of private providers of all types of care. Specifically, many services that were formerly paid for and produced by government, continue to be publicly financed but are now privately pro- duced. The specific forms of this trend towards

private provision are quite varied and continue to be the focus of experimentation. There has also been much growth in the numbers and types of providers that serve the private sector (those with insurance or those who can afford to pay out of pocket [McGuire, 1985]. This expansion and de- centralization of mental health care has led to a rapid proliferation of new forms of control.

Many institutions other than state government are now involved in the regulation and financing of mental health care. The federal role is substan- tial in the form of Medicaid and Medicare; insur- ance coverage for mental health care continues to be widespread (although generally more limited than other forms of health insurance); Health Maintenance Organizations, Preferred Provider Organizations, and Managed Care Organizations are all increasingly involved in shaping the man- ner in which mental health care is delivered. Each of these institutions and organizations has devel- oped unique approaches to managing resource use for treatment of mental disorders. Some rely on payment mechanisms such as per case prospective payment, prospective per diem payment, prospec- tively set budgets, capitation and fee schedules. Others rely on regulations such as prior authoriza- tion, concurrent review and second opinions. Still other organizations make use of selective contract- ing and incentive contracts. Finally, some organi- zations combine a number of these management tools in order to control use of mental health ser- vices.

Most providers deal with a variety of different payors, government agencies and regulators. Thus providers are often faced with a myriad of rules, payment methods, regulations and report- ing procedures. The goal of this column in the coming issues will be to explore the rationales, responses to, and impacts of the various ap- proaches to exerting control over the resources devoted to mental health care. The discussions will explicitly take account of the competing interests and the resulting conflicts that arise between inter- ested parties in a sector that requires the involve- ment of so many groups in the exchange process. This column will occasionally feature invited guest columnists with special expertise. Attempts will be made to synthesize existing bodies of empirical research and place them into the context of practi- cal challenges being posed to managers in the mental health services system. Cases will touch on issues unique to the private and public sectors as well as on those common to both. The goal is to keep readers abreast of new developments in regu- lations and financing of mental health services and

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their practical consequences. Assessments of new policies will be presented in a balanced fashion that will inform even if they do not always please.

REFERENCES

Frank, R.G. (1989). Regulatory policy and infor- mation deficiencies in the market for mental health services. Journal of Health Politics Policy and Law, 14, 477-502.

Klevorik, A.K. (1981). Regulation and cost con- tainment. In Mental health services system reports: Economics and mental health. Washington, DC: U.S. Government Printing Office.

McGuire, T.G. (1985). Economics of mental health. In Psychiatry, Vol. 3. New York: Basic Books.