Economics Of Psychiatric Care Research Paper

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A discussion of the economics of mental health care cannot take place without considering the epidemiological characteristics of mental illness and its cost to society.

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1. Epidemiology Of Mental Illness

1.1 The Burden Of Mental Illness

Mental disorders are among the most prevalent and disabling illnesses worldwide. Unipolar major depression is the leading cause of disability globally in 1990, both in high-income and in low-and middle-income countries. It has been estimated that depressive and anxiety disorders account for 20–30 percent of all primary care visits worldwide. Approximately 29.5 percent of the US population is estimated to experience a diagnosable mental or addictive disorder in a 12-month period, which is comparable to the 20 percent rate for cardiovascular disorders (Kessler et al. 1994). Prevalence estimates of schizophrenia from studies in low-income countries vary from 0.8 per thousand reported from rural China to 5.9 per thousand in Calcutta, India. There were about 23 million people with schizophrenia in the world in 1985, three quarters in the less developed countries. Severe and persistent mental illnesses (as defined by diagnosis, disability, and duration) affect about 4 percent of the population each year. These disorders are long lasting, produce significant level of disability, reduce an individual’s ability to function in major social roles, and interfere with the creation and maintenance of social networks (Desjarlais et al. 1995).

These national and international statistics do not reflect the enormous toll of misery from mental disorders. Neuropsychiatric conditions have been ignored for a long time as they are absent from cause of death lists. However, disease priorities change dramatically as measurement of disease burden shifts from simple mortality indicators to indicators that incorporate disability. When disease-burden measurement includes time lived with disability, several of the neuropsychiatric disorders become a leading cause of disease burden worldwide. The World Bank estimates that neuropsychiatric diseases account for 6.8 percent of the Global Burden of Disease (GBD), measured in disability adjusted life years (DALYs), a toll greater than that exacted by tuberculosis, cancer, or heart disease. For adults aged 15–44 in developing economies, neuropsychiatric diseases account for 12 percent of the GBD. When intentional, self-inflicted injuries are added, the total constitutes 15.1 percent of the GBD for women and 16.1 percent for men. Because of the limited mortality consequences, this burden has been previously underestimated (World Bank 1993).

According to a 1999 estimate, neuropsychiatric conditions account for 10 percent of the burden of disease measured in DALYs in low and middle-income countries and 23 percent of DALYs in high-income countries. In comparison, cardiovascular diseases are responsible for 10 percent of DALYs in low and middle-income countries and 18 percent of DALYs in high-income countries. In high-income countries, one out of every four DALYs is lost to a neuropsychiatric condition. Of the ten leading causes of disease burden in young adults (in the 15–44 year age group) four are neuropsychiatric conditions. Alcohol dependence, bipolar disorder, and schizophrenia are among the leading causes of disease burden in this age group in 1998 (World Health Organization 1999).

1.2 The Social And Treatment Costs Of Mental Illness

Society pays a high price for mental and addictive disorders—in both direct and indirect costs. Indirect costs (lost productivity, lost earnings due to illness or premature death, accidents, absenteeism) are twice the direct costs of care, adding to the actual economic impact of mental and addictive disorders. The total costs for the United States for 1990 for all mental disorders was $148 billion (Rice et al. 1990). The direct cost of care for all mental disorders was $67 billion, which represents 10 percent of the total $670 billion direct cost of all health care in the Unites States in 1990 (Levitt et al. 1991). In comparison, the total cost for all cardiovascular system diseases in US for 1990 was $159 billion. More recent estimates show the full economic cost of alcohol and drug abuse in USA in 1992 to be $246 billion. The cost burden from depression is about the same as that from heart disease. In the experience of one Fortune 100 company, mental health was ranked number two in the company’s 10 most costly diseases, topped only by ischemic heart disease in terms of direct cost. If the same 10 diseases were ranked according to the full burden of disease, indirect costs drove mental health to the number one position and ischemic heart disease to the number 10 position (NAPHS 1999).

Spending on treatment is concentrated on those people with the most disabling conditions. Although individuals with severe and persistent mental illness represent only 5–10 percent of all the individuals who have mental illness, they account for approximately 40 percent of the specialty care expenditures (Steinwachs et al. 1992). Another estimate shows that 30 percent of the spending on mental health and substance abuse care is accounted for by 5 percent of the users of care (Frank et al. 1994). The total cost of severe and persistent mental illness in 1990 was estimated to be $74 billion (accounted for by the dollar costs of treatment, lost productivity, shortened lives, and the costs incurred in the criminal justice and social services systems), with $44 billion of the total being indirect cost (Rice at al. 1990).

However large, the dollar cost of mental illnesses does not account for the enormous emotional cost and pain that these illnesses exert not only on the affected individual but also on their family and on society. Mental disorders are often chronic conditions that create substantial disability. It is estimated that approximately 20–25 percent of the single adult homeless population suffers from some form of severe and persistent mental illness (Jencks 1994). Mental illness is correlated with other costly social problems: unemployment, crime and violence (Steadman et al. 1998), child abuse and neglect (Kelleher et al. 1994), and auto accidents (Rice at al. 1990).

1.3 Utilization Of Services

It is not clearly established what proportion of individuals with mental disorder need, or want, treatment. Unlike other physical illnesses, not everyone with diagnosable mental illness perceives a need for treatment, and not all who seek treatment have a diagnosable disorder. Thus the under treatment and the over treatment of mental health problems can coexist within the same system (Regier et al. 1998).

In the United States, of the 30 percent of the population that has a mental illness at some point during the year, only 17.3 percent get some treatment in the health care sector with an additional 7.4 percent getting their only treatment from a human service agency or a self-help group. Thus, only about 25 percent of those with a diagnosable condition get some form of treatment over a twelve-month period. Low rates of treatment characterize the most severely ill. Only 36 percent of the people diagnosed with bipolar disorder or major depression in a year are treated in any health sector, only 25 percent of those with substance abuse are treated, and 57 percent of the patients with schizophrenia are treated. At the same time 4.5 percent of individuals with no disorder, as assessed with a diagnostic instrument, receive mental health care (Kessler et al. 1997). According to Frank and McGuire (1999) nearly 38 percent of the users and 28 percent of all visits for mental health are not associated with a diagnosable disorder.

Two conclusions particularly relevant to the economic analysis of mental health care can be drawn from the above data on the epidemiology of mental illness and it’s cost to the society. First, mental and addictive disorders are prevalent and disabling and associated with a variety of social costs. Second, the social costs of mental and addictive disorders are concentrated in the 4 percent of the population that experiences severe and persistent mental illness, making this subgroup of people with mental illness ‘undesirable’ to insurers, employers, and neighbors.

2. The Market For Mental Health Care Services

Economics is the science and art of the distribution and allocation of scarce resources. The allocation of resources and rationing of scarce goods and services are guided by the market economy prices. The appropriate price for a product is determined by the relationship between demand and supply for this product. In the context of the market economy, health care in general and mental health care in particular can be conceptualized as a product. The classic relationship between the demand and the supply can be applied to mental health care as well. However, mental health care does not conform to the traditional rules of a marketplace. Several factors account for this. The nature of mental illness, the use of treatment services, and the supply side of the market differ from the general health sector. Plus, there are a greater variety of organizations and professionals with different theoretical orientation that supply mental health services. These include the specialty mental health sector (psychiatrists, psychologists, psychiatric social workers, psychiatric nurses, and counselors), the general medical sector (primary care physicians), self-help groups, and the clergy. Despite efforts to quantify mental health services and make them more objective, there is greater clinical uncertainty compared to the rest of medical care. Many mental disorders affect a person’s ability to make decisions in their own best interest. Markets for other goods normally consist of a straightforward transfer of goods between the provider and the consumer. However, in the health sector, in addition to this arrangement, funds from patients often flow through an intermediate funding body (either the government or an insurance agency). Market economics in mental health care are strongly influenced by externalities, that is the value that society derives from the health of its individual members.

Health care markets suffer from some kind of market failure but the mental health care market is subject to more failure than most. The most common market failures affecting the health care sector are due to lack of incentive to supply ‘public goods,’ neglect of externalities, and absence of well informed consumers. Failures in the market can be explained also by adverse selection (persons more likely to use coverage choose better coverage) and moral hazard (those who are insured will tend to overuse insured services). Evidence suggests that the forces of adverse selection and moral hazard work are at work in mental health (Frank and McGuire 1999). The special effort that is needed to reduce moral hazard and adverse selection in mental health care markets is one of the reasons why mental health services are organized and paid for differently than other types of health care (for review see Sharfstein et al. 1992, 1995).

3. Financing Of Mental Health Services

Health care in general and mental health care in particular can be financed by public or private sources, the funds can be managed by public or private entities. Funds can be raised through taxes, mandates, private health insurance, out-of-pocket payments, grant assistance, charitable contributions, and borrowing. Funds can be managed by government, for-profit or not-for-profit private organizations, or consumers. Funds are then used to purchase health services that can be publicly or privately provided. A number of issues related to both public and private sources of financing are predicated on government’s goals (allocational, distributional, and economic) and the policies utilized to correct market failures and instabilities.

3.1 Relationship Between Finance And Provision Of Mental Health Care

It is important to distinguish between financing and provision of services. There is no absolute connection between the way mental health care is paid for and the way it is delivered. Public finance does not imply public provision. It is possible for services to be publicly financed yet privately provided or vice versa. Three major forms of relationships exist between the providers of mental health care and those who finance it, reimbursement, contract, and integrated approaches. Under the reimbursement approach, providers receive retroactive payments for services that they have supplied. Reimbursement can be found in systems with multiple private and public insurers and multiple suppliers as in the United States. In lowand middle-income countries reimbursement is rarely combined with public finance with the exception of Chile. Contract involves an agreement between third-party payers (insurers) and health care providers. It is found in social insurance systems. Preferred provider organizations (PPOs) in the United States also use this form. In integrated health care systems the same agency controls the funding and the provision of health services. Medical providers are paid salaries and the budget is the main instrument for allocating resources. Integrated public systems are used in the Nordic countries and in developing countries as well. Health maintenance organizations (HMOs) in the United States are an example of an integrated private system. In countries with national health systems, the purchaser of care and the provider are commonly one and the same, namely, the government. In Europe there has been increasing interest in separating provider and financing functions in national health systems in order to promote competition.

3.2 Inequities In The Financing Of Mental Health Care Services

A key characteristic of the mental health care service system is the inequity in financing mental health services compared to the coverage for other disorders. Resources available to mental health care have been eroding over the past decade (Buck and Umland 1997). Discriminatory limits on treatment of mental disorders characterize both the public and private sector. This discrimination against mental illness is based on arbitrary and often artificial distinctions between mental and physical illness.

3.3 Insurance And Managed Care

Health insurance is a system in which the prospective consumers of care make payment to a third party, which in the event of future illness will pay for some or all of the expenses incurred. Health insurance is a mixed source of finance, as it often draws contributions from both employers and employees, and sometimes from government. The existence of risk is the fundamental rationale for insurance. Insurance reduces risk by improving the predictability of adverse events through the pooling of a large number of similar risks. The few who become ill are covered for care by the many who remain well. Thus, risks that are unpredictable for the individual become predictable for the group and can be estimated.

Insurance markets are characterized by inherent instability. Adverse selection occurs in private insurance markets. Private insurance markets attempt to counter adverse selection by excluding the riskier customers and adjusting premiums which undermines the value of insurance altogether. This is one of the main arguments in favor of public insurance which can be made universal and force everyone to share the risks. Cost sharing (deductibles, copayment), limits of benefits, total expenditures limits on policies, all are ways to deal with moral hazard. Despite the use of these mechanisms, the increased cost of health care and mental health care in particular has led to the introduction of other cost-containment mechanisms known as managed care. Managed care includes various organizational arrangements, such as HMOs and PPOs in the Unites States. Managed care organizations integrate the three functions of managing, financing and providing care. Managed care also includes financing mechanisms (capitation and risks-haring contracts) that have strong incentives to reduce the amount of mental health care provided. The essence of managed care is its ability to ration care without imposing undue financial risk on consumers. Managed care principles can be utilized by public and private financing entities (see Mechanic 1997, 1998).

Managed care mechanisms are intended to affect rationing through establishment of a network of selected providers, contracts with providers that include incentives to limit care, introduction to the concept of medical necessity, and directing individuals to levels of care. Managed care plans also use various strategies to select good (profitable) risks from an insurance pool thus undermining the very existence of insurance and precluding effective risk pooling (Cutler and Zeckhauser 1998). They may prevent or discourage high-cost individuals from joining the plan or distort the services they provide in order to attract good and deter the bad risks. Supply-side management mechanisms to reduce costs include preauthorization requirements, utilization review, case-management for high utilizers, reducing access to specialty care providers, and substituting low cost providers for high cost providers.

Managed care has been shown to reduce overall mental health and substance abuse costs and service utilization. However, there has been concern about how the cost-containment strategies affect the access to care and the quality of care for patients. Cost-containment strategies can lead to excessive denial of care and under utilization of services, thus limiting access to care. Financial incentives to providers to reduce specialty referrals, hospital admissions, and length and amount of treatment can ultimately contribute to lowered quality of care.

Some demand-side cost-containment mechanisms, such as higher deductibles, copayments, visit and day-limits, used by managed care can be reduced by introducing parity for mental health services with all other medical services. However, the introduction of parity generates incentives for insurance plans to replace the demand side cost-containment mechanisms with such mechanisms on the supply side. According to Frank and McGuire (1998) parity in insurance benefits for mental health care is not sufficient to guarantee equality in access to mental health services if managed care-rationing devices such as ‘medical necessity’ denials cannot be controlled. Nevertheless, introducing parity for mental health services is a step towards overcoming the discrimination of mentally ill, reducing the financial barriers to treatment of mental disorders and improved access to services. Parity in private insurance benefits may result in some public-to-private sector cost shifting.

3.4 Private Financing

Private financing can be direct (personal payments) or indirect (payments for health services by employers). Private insurance, out-of-pocket payments for direct purchase of services, medical savings accounts, and charitable contributions are all sources of private financing of health services. Private financing is an essential part of health care financing given government’s limited ability to raise enough resources to finance health services. Reliance on private financing is a necessity in many low-income countries.

The combination of price competition and the ownership incentives that the private sector offers may contribute to improved efficiency in the sector as a whole. However, instabilities in private insurance markets necessitate public financing of services or, in some cases, government regulation of private insurance markets. Except for a few countries (Switzerland, the United States) private health insurance is a minor source of finance. In developing countries this is because most of the population cannot afford private insurance. In high-income countries it is because the state has assumed most of the insurance function (Schieber and Maeda 1997).

No industrial country relies exclusively on free markets to produce and allocate health care in general and mental health care in particular. Government intervention is justified, in order to improve the efficiency and equity with which the private market produces and allocates its services. Public regulation of private markets is also essential to ensure effective risk pooling, affordability, informed choice, and continuity of coverage.

3.5 Public Financing

The main argument for public financing of health services is the achievement of universal access. This argument is based on efficiency (arising from market failures of the private market) and equity considerations (financing should be according to the ability to pay, and the distribution according to need). Public financing of health services can be of two types, a national health-service approach and social insurance funds. In both models collective risk pooling is achieved through compulsory taxation. There are a few major differences between the two systems. National health services are usually financed by general taxes and other public revenue sources and thus they are subject to annual budget processes. Social insurance funds are generally financed through payroll taxes and tend to be more independent of annual political machinations. Public finance accounts for 75 percent of health care financing in high-income countries with the exception of The United States where public finance covers about 50 percent of the overall health care financing. In developing countries public finance is less important and accounts for about 20 percent of the total health care financing with out-of-pocket payments accounting for most of it. The composition of public finance varies in high-income countries. France, Germany and The Netherlands rely on social insurance while Canada, the Nordic countries and the United Kingdom use general taxation. United States operates both kinds of publicly financed systems (Johnson and Musgrove 1997).

3.6 Financing Of Services For Severe And Persistent Mental Illness

Direct public services for the most severely ill people is a common feature of health systems that may otherwise be organized to provide and pay for other health care with a range of approaches (Hollingsworth 1992). The public mental health system in the United States, Germany, Canada, UK, and France are quite similar despite vast differences in their approaches to health care financing. The responsibility for mental health care is assigned to sub-national government and tends to rely on local tax funding. The role of local government-provided mental health care tends to emphasize providing care to the poor and disabled. The commonality can be explained partially by the fact that provision of mental health care has a public safety component and, therefore, the locality has a greater interest in assuming more direct control over the delivery of certain forms of mental health care to fulfill its obligation of public protection. Most countries have laws that tend to favor society’s interests (externalities) over individual liberties of the mentally ill. This can explain partly the greater role of the government in provision of mental health care, including public hospitals and clinics.

Treatment programs aimed at people with severe and persistent mental illness are concerned not only with the acute care of symptoms but address also housing needs, income support, rehabilitation, social contacts, and social control of the affected individuals. The nature of severe and persistent mental illness requires coordination of services from various providers. Many of the successful innovations in the treatment of this group of people with mental illness involve new ways of organizing and coordinating the various elements of care.

4. Setting Priorities And The Role Of The Government

There is little consensus or empirical evidence as to the right level of financing for health care and for mental health care in particular. Policymakers face the perpetual challenge of raising sufficient revenue for the health sector in an equitable and efficient way. Decisions about health spending cannot be isolated from a country’s political, social, and economic characteristics. People’s values, the responsiveness of the political system to public preferences, and the resources available are all reflected in the pattern of financing of health care. In the context of scarcity, mental health services are seldom given high priority by national governments or by international aid programs. Despite changing public attitudes towards mental illness and trends towards integration of the mentally ill into the mainstream of the health care system, the fact remains that, in terms of public and private policy, mental illness and substance abuse are not treated the same as other illnesses. In most countries today priorities are set in ways that exclude large numbers of people from access to organized care. Ability to pay appears increasingly to be the mechanism rationing access to care. In middle and upper income countries, health-financing policy is driven frequently by the need to increase coordination, reduce fragmentation, and exert better control over total health care costs. Countries in this group are often worried that their level of health spending will threaten economic growth and competitiveness by making their labor force, and therefore goods and services, more expensive. If universal access to affordable and effective mental health care is to be achieved, priorities have to be agreed upon and implemented. Choosing public priorities is how economic reality becomes an integral part of mental health system development and reform.


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