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Depression: Implications for State and Local Healthcare Programs

Alternative Reimbursement Strategies


Richard G. Frank, Margaret T. Morris Professor of Health Economics, Department of Health Care Policy, Harvard Medical School, Boston, Massachusetts

Care for persons suffering from depression represents a significant portion of expenditures incurred under both public and private health insurance coverage. However, the scope, reimbursement, and delivery-system-related aspects of such coverage have likely had an impact on the extent and manner in which depression-related care is provided.

For example, because of concerns about the perception of or potential for mental health-related costs to increase more rapidly than overall healthcare spending, coverage for such services has traditionally been subject to special limits and/or cost-sharing requirements. This has occurred despite the fact that cost-effective strategies for treating depression do exist and that studies analyzing the costs associated with achieving remission have indicated that it now costs less to treat a person until remission than it did in 1986.

Dr. Frank discussed issues related to the early identification and appropriate treatment of depression in the context of the variety of managed care models that have emerged in the marketplace. He suggested that it was important for policymakers to consider the designs of these different models in the context of two important sets of dynamics.

This first set are two key economic factors affecting individuals' service utilization and plan choice:

  • Moral hazard, which leads to higher utilization of services covered by health insurance plans and which therefore has a lower price to the patient.
  • Adverse selection, a market dynamic through which health plans that are known for providing access to high-quality care for persons with certain conditions tend to enroll a large number of persons who have these conditions, which are usually disproportionately more costly to care for than the general population.

The second set of factors refers to the incentives that the design of these different managed care models provide to the plans and providers themselves with respect to the care they render to persons with depression.

Dr. Frank illustrated this point by discussing the design features and incentives associated with the managed care carve-out model, the predominant form of managed care arrangement in the marketplace today. He noted that, currently, 50 percent of health plans, 50 percent of Medicaid programs, and 35 percent of large employers rely upon some form of carve-out model to manage their mental health benefits.

He explained that two types of carve-out models exist in the marketplace:

  • Payer carve-outs are payment arrangements where an employer provides several healthcare plans for enrollees to choose from, but only one mental healthcare plan for all enrollees.
  • Subcontracting carve-outs are arrangements wherein an employer contracts with different health plans to provide general medical coverage to enrollees, and each plan subsequently contracts with a behavioral health plan.

The first of these alternative designs reduces the problem of adverse selection that exists when subcontracting occurs with multiple behavioral health plans.

From a health plan perspective, carve-out models provide incentives to promote the identification and referral of patients with depression to the behavioral health plan, thereby shifting the burden of caring for these individuals to that plan. However, while research has shown that carve-out arrangements in many cases can be effective in managing utilization for these individuals, these arrangements do not provide any incentives for coordinating care between primary care providers and mental health providers. Such coordination is extremely important to improving the overall effectiveness of the care provided, regardless of whether the patient is seen by a primary care provider or a specialist.


Frank R, et al. Some economics of mental health 'carve outs.' Arch Gen Psychiatry 1996 Oct;53:933-7.

IMS America. Depressive disorder '93 market view. National Disease and Therapeutic Index. Plymouth Meeting, PA: IMS America; 1993.

Pincus H, et al. Psychiatric patients and treatments in 1997: findings from the American Psychiatric Practice Research Network. Arch Gen Psychiatry 1999 May;56:441-9.

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