Mental Health Parity: What Employers Need to Know

After more than a decade of discussion, Congress finally enacted legislation mandating full parity for mental health and substance abuse benefits. The Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act (MHPAEA) became law on Oct. 3, 2008, as part of the Emergency Economic Stabilization Act. The law, which generally becomes effective in 2010, affects insured and self-insured group health plans provided by employers.

Under MHPAEA, employer group health plans may not impose steeper financial requirements or stricter treatment limitations on mental health and substance abuse benefits than on medical and surgical benefits. The act does not require employers to provide mental health/substance abuse benefits. Rather, if employers provide them, the benefits must be equivalent to medical and surgical benefits. If a plan offers two or more benefit packages, the MHPAEA applies separately to each.

While the Congressional Budget Office estimates the legislation’s cost as moderate, many employers worry that enhancing mental health benefits will push their costs considerably higher. Given that employers are already burdened by the cost of their health plans, critics argue that the act could prompt employers to pare back — or even discontinue — medical coverage or mental health and substance abuse coverage. Others, however, believe putting mental health and substance abuse benefits on a par with medical benefits would enable employees to access appropriate and cost-effective treatments that otherwise would have been unavailable or too expensive. These earlier interventions could avert more serious medical problems and costlier claims, thereby ultimately reducing costs. Arguably, providing treatment for these problems could enhance workforce productivity as well.

Lack of full parity in earlier law
The Mental Health Parity Act of 1996 prohibited health plans from imposing lower annual or lifetime dollar limits on mental health benefits than on medical and surgical benefits. But it did not prohibit different treatment limitations or financial requirements, such as higher co-payments or deductibles, or restrictions on covered mental health visits. Moreover, the 1996 act did not apply to substance abuse benefits, and its effective date had to be extended annually. Parity supporters have been pushing for more effective laws ever since the 1996 act took effect.

New parity for treatment limitations and financial requirements
As noted above, health plans are not required to offer mental health or substance abuse benefits, but those that do cannot treat them differently from medical and surgical benefits. Plans with different treatment limitations or financial requirements for various medical and surgical benefits must apply the most frequent or common (“predominant”) of them to mental health and substance abuse benefits. Under the statute, a predominant financial requirement or treatment limit is the most common or frequent limit or requirement of its type. Additionally, plans cannot impose separate treatment limitations or financial requirements exclusively for mental health or substance use disorders.

Treatment limitations include limits on frequency of treatment, number of visits, days of coverage or similar restrictions on the scope or duration of treatment. Many plans currently restrict the scope or duration of mental health coverage, such as limiting the number of inpatient hospital days or outpatient visits covered. Under the old law, for example, plans could limit inpatient coverage for mental health treatment to 60 days, even if there were no similar limits for medical or surgical coverage. The new law does not allow mental health and substance abuse benefits to be singled out for such restrictions.

Financial requirements include deductibles, co-payments, co-insurance or other out-of-pocket expenses, as well as annual and lifetime dollar limits. A plan that charges a $15 co-payment for an in-network medical or surgical visit can no longer charge $30 for a visit with an in-network mental health provider. The plan will have to lower its mental health co-payment, raise the medical co-payment or some combination of the two.  

Plans can continue to use utilization review and other authorization and medical management practices. They may also continue to verify the medical necessity of mental health and substance abuse services before paying claims.

All mental health parity requirements apply equally to substance abuse benefits.

An earlier version of the legislation would have required plans that provided any mental health coverage to cover all disorders listed in the “Diagnostic and Statistical Manual of Mental Disorders.” That provision was dropped from the final bill, so plans can continue to control the benefits they cover as long as they comply with federal and any applicable state laws. Any stronger state parity law will continue to apply to insured plans.

Employer considerations

Parity for out-of-network benefits

One of the most consequential changes made by MHPAEA is mandating parity for out-of-network coverage. Plans that cover out-of-network medical or surgical treatments must provide comparable coverage for out-of-network mental health and substance abuse benefits. Many employer health plans currently control mental health and substance abuse costs by providing only in-network coverage or by prescribing less favorable financial terms for out-of-network mental health and substance abuse services.

New disclosure provisions

Upon request, plan administrators must disclose the criteria used to evaluate the medical necessity of mental health and substance abuse treatment, and the reasons for claim denials.

Opt-out provisions

Plans may opt out of the new requirements for one year if compliance would increase their total costs by at least 2 percent during the first year or by 1 percent during any subsequent year. The higher cost must be verified by an actuary, and plans must comply with the new requirements for at least six months before opting out.

In addition, non-federal, self-funded governmental plans can opt out of the mental health parity requirements by following specific procedures. The plan sponsor must file an election with the Centers for Medicare & Medicaid Services (CMS) prior to the beginning of each plan year. Plan sponsors must also notify participants in writing, annually and at the time of enrollment, of their decision to opt out and its consequences for participants.

Affected plans and effective date

The act does not apply to small employers — defined generally as those with between two and 50 employees in the prior calendar year. Nor do the parity requirements apply to group health plans with fewer than two participants who are current employees on the first day of the plan year. Thus, these provisions will not apply to certain stand-alone retiree medical plans.   

The provisions take effect for plan years beginning after Oct. 3, 2009. For calendar-year plans, the requirements take effect on Jan. 1, 2010. Collectively bargained plans have a delayed effective date.

Regulations

The act directed the Departments of Labor, Health and Human Services (HHS), and the Treasury to issue implementing regulations by October 2009, but in a letter to Senator Al Franken (D-Minn.), HHS Secretary Kathleen Sebelius said the agencies hope to issue regulations by January 2010. The implications of MHPAEA are quite complex and far-reaching, and we understand that the agencies have been struggling with the regulations. It is not clear whether the regulations released in January will be complete. However, the act specifies that the new parity requirements will take effect Jan. 1 even without implementing guidance. 

Steps to compliance
Employers will benefit from taking steps now to consider the effects of the new law on their health plans, and making any appropriate and/or required changes.

1. Perform a gap analysis to quantify the effect of the law on health plan costs.
   • Will earlier intervention in the form of mental health and substance abuse services reduce total medical claims and thus overall medical costs?  
   • Is the existing provider network sufficient or is better plan integration warranted?
   • Are the plan administrator(s) and appropriate vendors in place and up to speed on the new law (e.g., coordination of medical, employee assistance program [EAP] and disability vendors)?
   • Will new plan designs be necessary?
   • Are insured plans in compliance with state law?
      

2. Analyze the plan’s predominant treatment limitations and financial requirements, and identify any terms that could violate the new law:

   • Lifetime or annual limits
   • Limits on number of visits, days of coverage and frequency of treatment
   • Differences in co-payments and co-insurance
   • Deductibles and out-of-pocket maximums
   • Differences between in-network and out-of-network benefits (if the plan provides out-of-network benefits for medical/surgical coverage, it must also provide them for mental health/substance abuse benefits)
   • Differences between mental health and substance abuse benefits
      
3. Based on the preceding analysis, lift or modify limitations or requirements the plan currently imposes as necessary to ensure that mental health, substance abuse and medical/surgical benefits are in parity.
    
4. Update all plan documents and communications to reflect changes to the plan. These documents could include:
   • Contracts with health care providers, insurers and administrators
   • Official plan documents
   • Summary plan descriptions
   • Employee handbooks
   • Enrollment materials
   • Claims procedures and communications (e.g., the criteria used to determine the medical necessity of mental health/substance abuse treatment, which must be disclosed upon request by a plan participant or beneficiary, a potential participant or beneficiary, or a contracting health care provider)
      
5. Modify administrative systems as necessary or appropriate.

Other considerations

Sponsors must determine whether to apply for the “increased cost exemption” — although plans must comply with the new requirements for at least six months to be eligible for the opt-out. Plans sponsored by a non-federal governmental employer should consider whether opting out of the act would be appropriate or feasible (this opt-out option is available only for non-federal governmental employers who meet the requirements).

When government guidance is released, it should clarify issues such as:

• The permissibility of separate but equal deductibles for mental health/substance abuse and medical/surgical benefits. Some have interpreted the statutory provisions as permitting separate-but-equal deductibles for medical/surgical and mental health/substance abuse benefits. In some circumstances, separate-but-equal deductibles could be more beneficial to plan beneficiaries. For example, two lower, separate-but-equal deductibles could be more advantageous than a combined, higher deductible. However, a conservative reading suggests that permitting separate-but-equal deductibles might violate legislative intent and thus be prohibited. From informal conversations with agency personnel, it appears the agencies are still mulling over this issue. While the agencies initially appeared disinclined to support separate (but equal) deductibles, their position is no longer certain. Some employers might decide to apply separate deductibles and then make adjustments as necessary when clarifying regulations come out.
   
• Acceptability of a stand-alone plan for mental health/substance abuse benefits, offered separately from the major medical plan (e.g., with its own Form 5500 filing). With mental health/substance abuse benefits offered through a separate plan (or even as a separate benefit option), one could argue that the parity provisions apply independently to each plan. It’s not certain, however, that the government would agree — the arrangement could be viewed as violating the statutory requirements. Moreover, redesigning the plan to separate out mental health/substance abuse benefits could violate congressional intent and provoke Congress to prohibit such a transaction.
   
• Definition of “predominant” and “substantially all” in the language about treatment and financial limitations. The act prohibits group health plans that provide mental health or substance abuse benefits from applying financial requirements or treatment limitations that are more restrictive than the predominant financial requirements or treatment limitations that apply to substantially all medical and surgical benefits. The law defines predominant as the most common or frequent financial requirement or treatment limit, but does not define substantially all. It is not apparent how to perform this analysis or whether it can be based on service categories, such as inpatient, outpatient and surgical.
   
• Workability of the cost exemption. The statutory language appears to require employers attempting to invoke the cost exemption to shift in and out of compliance with the act, which would create administrative difficulties for employers and confusion for employees.
   
• Permissibility of excluding certain conditions, treatments or terms of treatment as a matter of plan design. For example, excluding a particular mental health illness or some or all substance use conditions appears to be permitted, but plans would benefit from clarity in the regulations.  

Before taking any definitive action, sponsors should confer with their benefits counsel. The ambiguity about the content and effective date of upcoming guidance has left a regulatory void, in which some plans are taking a more aggressive approach to the statutory requirements, while others are adopting a more conservative stance. 

Conclusion

Plan designs vary, and thus it is impossible to say how these provisions will affect all employers. For some employers, the new law represents an opportunity to redesign a plan that was due for improvement. Others may change their plans only as required for compliance. While some plans will need only minor and few changes, others might need substantial modifications.

With the effective date just around the corner, employers cannot afford to wait for government guidance. Rather, they should analyze their plan designs based on a good-faith interpretation of the act’s requirements now and prepare to implement any required changes by the effective date.