Handbook of Health Economics : Volume 1B (Handbook of Health Economics)

1132 Pages·2000·39.62 MB·English

by  A.J. Culyer

INTRODUCTION TO THE SERIES
The aim of the Handbooks in Economics series is to produce Handbooks for various
branches of economics, each of which is a definitive source, reference, and teaching
supplement for use by professional researchers and advanced graduate students. Each
Handbook provides self-contained surveys of the current state of a branch of economics
in the form of chapters prepared by leading specialists on various aspects of this branch
of economics. These surveys summarize not only received results but also newer devel-
opments, from recent journal articles and discussion papers. Some original material is
also included, but the main goal is to provide comprehensive and accessible surveys.
The Handbooks are intended to provide not only useful reference volumes for profes-
sional collections but also possible supplementary readings for advanced courses for
graduate students in economics.
KENNETH J. ARROW and MICHAEL D. INTRILIGATOR
PUBLISHER'S NOTE
For a complete overview of the Handbooks in Economics Series, please refer to the
listing on the last two pages of this volume.
v
CONTENTS OF THE HANDBOOK
VOLUME 1A
Introduction
The State and Scope of Health Economics
ANTHONY J. CULYER and JOSEPH P. NEWHOUSE
PART 1 - OVERVIEWS AND PARADIGMS
Chapter 1
International Comparisons of Health Expenditure
ULF-G. GERDTHAM and BENGT JONSSON
Chapter 2
An Overview of the Normative Economics of the Health Sector
JEREMIAH HURLEY
Chapter 3
Medical Care Prices and Output
ERNST R. BERNDT, DAVID M. CUTLER, RICHARD G. FRANK, ZVI GRILICHES,
JOSEPH P. NEWHOUSE and JACK E. TRIPLETT
Chapter 4
Advances in CE Analysis
ALAN M. GARBER
Chapter 5
Information Diffusion and Best Practice Adoption
CHARLES E. PHELPS
Chapter 6
Health Econometrics
ANDREW M. JONES
PART 2 - DEMAND AND REIMBURSEMENT FOR MEDICAL SERVICES
Chapter 7
The Human Capital Model
MICHAEL GROSSMAN
Chapter 8
Moral Hazard and Consumer Incentives in Health Care
PETER ZWEIFEL and WILLARD G. MANNING
vii
viii Contents of the Handbook
Chapter 9
Physician Agency
THOMAS G. McGUIRE
Chapter 10
Insurance Reimbursement
MARK V. PAULY
PART 3 - INSURANCE MARKETS, MANAGED CARE, AND CONTRACTING
Chapter 11
The Anatomy of Health Insurance
DAVID M. CUTLER and RICHARD J. ZECKHAUSER
Chapter 12
Health Insurance and the Labor Market
JONATHAN GRUBER
Chapter 13
Managed Care
SHERRY GLIED
Chapter 14
Risk Adjustment in Competitive Health Plan Markets
WYNAND P.M.M. VAN DE VEN and RANDALL P. ELLIS
Chapter 15
Government Purchasing of Health Services
MARTIN CHALKLEY and JAMES M. MALCOMSON
VOLUME lB
PART 4 - SPECIFIC POPULATIONS
Chapter 16
Economics and Mental Health
RICHARD G. FRANK and THOMAS G. McGUIRE
Chapter 17
Long-Term Care
EDWARD C. NORTON
Chapter 18
The Economics of Disability and Disability Policy
ROBERT HAVEMAN and BARBARA WOLFE
Chapter 19
Child Health in Developed Countries
JANET CURRIE
Contents of the Handbook ix
PART 5 - THE MEDICAL CARE MARKET
Chapter 20
The Industrial Organization of Health Care Markets
DAVID DRANOVE and MARK A. SATTERTHWAITE
Chapter 21
Not-For-Profit Ownership and Hospital Behavior
FRANK A. SLOAN
Chapter 22
Economics of General Practice
ANTHONY SCOTT
Chapter 23
Waiting Lists and Medical Treatment
JOHN G. CULLIS, PHILIP R. JONES and CAROL PROPPER
Chapter 24
Economics of Dental Services
HARRI SINTONEN and ISMO LINNOSMAA
Chapter 25
The Pharmaceutical Industry
EM. SCHERER
PART 6 - LAW AND REGULATION
Chapter 26
Liability for Medical Malpractice
PATRICIA M. DANZON
Chapter 27
Antitrust and Competition in Health Care Markets
MARTIN GAYNOR and WILLIAM B. VOGT
Chapter 28
Regulation of Prices and Investment in Hospitals in the U.S.
DAVID S. SALKEVER
PART 7 - HEALTH HABITS
Chapter 29
The Economics of Smoking
FRANK J. CHALOUPKA and KENNETH E. WARNER
Chapter 30
Alcohol
PHILIP J. COOK and MICHAEL J. MOORE
x Contents of the Handbook
Chapter 31
Prevention
DONALD S. KENKEL
PART 8 - HEALTH
Chapter 32
The Measurement of Health-Related Quality of Life
PAUL DOLAN
Chapter 33
Economic Epidemiology and Infectious Diseases
TOMAS PHILIPSON
PART 9 - EQUITY
Chapter 34
Equity in Health Care Finance and Delivery
ADAM WAGSTAFF and EDDY VAN DOORSLAER
Chapter 35
Equity in Health
ALAN WILLIAMS and RICHARD COOKSON
ACKNOWLEDGMENTS
Several of the chapters in this Handbook were discussed at a conference at the Univer-
sity of Chicago sponsored by Pfizer and the NIA Center for Aging at the University of
Chicago. We are grateful for their having made this opportunity available.
Anthony J. Culyer
Joseph P. Newhouse
xi
Chapter 16
ECONOMICS AND MENTAL HEALTH*
RICHARD G. FRANK
HarvardM edical School
THOMAS G. McGUIRE
Boston University
Contents
Abstract 894
Keywords 894
1. Introduction 895
2. The institutional context 897
2.1. Mental illness and persons with mental illness 897
2.2. Who is treated for mental illness 900
2.3. Who pays for mental health care 901
2.4. The supply of mental health services 902
2.5. Managed behavioral health care 905
3. Private insurance markets, moral hazard, and mental health care 907
3.1. Evidence of moral hazard 908
3.2. Rationing in managed care 912
3.3. Managed care, supply side incentives and moral hazard: evidence 918
3.3.1. Research on hospital payment systems 920
3.3.2. Research on managed care and capitation 921
4. Insurance markets, adverse selection and mental health care 925
4.1. Evidence of selection in MH/SA 926
4.2. Policy responses to selection: fee-for-service-indemnity contracts 927
4.3. Selection and managed care: distorting "quality" 928
4.4. Policy responses and managed care 931
4.4.1. Risk adjustment 932
4.4.2. Behavioral health carve-outs 935
5. The public mental health and substance abuse treatment system 936
*We are grateful for financial support from the Robert Wood Johnson Foundation (#23498), the National
Institute of Mental Health (MH3703 and K05-MH01263), and the Alfred P. Sloan Foundation. We thank
Maggie Alegria, Randy Ellis, Jacob Glazer, Sherry Glied, Haiden Huskamp, Joe Newhouse, and Meredith
Rosenthal for comments on earlier versions of this chapter.
Handbook of Health Economics, Volume 1, Edited by A.J. Culyer and J.P.N ewhouse
© 2000 Elsevier Science B. V All rights reserved
894 R. G. Frank and T G. McGuire
5.1. The technology of treatment for the severely mentally ill 937
5.2. Fiscal federalism and public mental health care 938
5.3. Externalities and public mental health care 941
6. Conclusions 943
References 945
Abstract
This paper is concerned with the economics of mental health. We argue that mental
health economics is like health economics only more so: uncertainty and variation in
treatments are greater; the assumption of patient self-interested behavior is more dubi-
ous; response to financial incentives such as insurance is exacerbated; the social con-
sequences and external costs of illness are more formidable. We elaborate on these
statements and consider their implications throughout the chapter. "Special character-
istics" of mental illness and persons with mental illness are identified and related to
observations on institutions paying for and providing mental health services. We show
that adverse selection and moral hazard appear to hit mental health markets with special
force. We discuss the emergence of new institutions within managed care that address
longstanding problems in the sector. Finally, we trace the shifting role of government in
this sector of the health economy.
Keywords
mental health, insurance, moral hazard, adverse selection, carve-out, risk adjustment
JEL classification: I10
Ch. 16: Economics and Mental Health 895
1. Introduction
In 1994, The Nobel Prize in Economics was awarded to the game theorist John Nash,
who, in the early 1950s, formulated elegant mathematical models for the strategic in-
teraction among small numbers of decision-makers in situations involving elements of
both conflict and cooperation. The "Nash equilibrium" remains the most widely used
equilibrium concept in game theory. Soon after his pioneering work was published,
it was discovered that Nash suffered from schizophrenia. In the last thirty-five years,
Nash has done little productive work, living in the care of hospitals, family, and friends.
Many doubted that Sweden's Royal Society would award the Nobel Prize to a person
with severe mental illness. When they did, Ariel Rubenstein, himself a prominent game
theorist, expressed in a New York Times interview his admiration for Nash's work and
his pleasure that the Royal Society acknowledged by their decision that there was noth-
ing disqualifying about mental illness. Schizophrenia was, in Rubenstein's words, "just
like cancer."
Public attitudes about mental illness have changed since the 1950s when Nash be-
came ill, and the mentally ill have in many ways been integrated into the mainstream of
the health care system. The fact remains, however, that in terms of public and private
policy in the US, mental illness and substance abuse are not treated the same as other
illnesses. In comparison to physical illness, governments pay for more of mental health
and substance abuse (MH/SA) care, and private insurance pays for less. Treatment for
mental and addictive disorders is often involuntary. This is rare for physical illness.
The public mental health care system has had quality problems that are regarded as
scandalous. The public system in mental health has a role as protector of public safety.
When efforts have been made to reform the health care sector in the US, mental health
and substance abuse care are usually handled separately. President Clinton's proposed
health care reform in 1993, to take the most recent example, did not include long-term
treatment for mental illness in the required services to be offered in health plans.
This chapter is concerned with the economics of mental illness and mental health
care. Following convention, we will use the term "mental illness" to include substance
abuse disorders such as drug or alcohol abuse and dependence. Mental health has been
an active and distinct subfield of health economics for some time. Though mental health
economics can claim no special methodology, it has its own conferences, training pro-
grams, and journals.1 Mental health economics is like health economics only more
so: uncertainty and variation in treatments are greater; the assumption of patient self-
interested behavior is more dubious; response to financial incentives such as insurance is
exacerbated; the social consequences and external costs of illness are more formidable.
We will elaborate on these statements and consider their implications throughout this
t Much of this is due to support from the National Institute of Mental Health in various forms. The late Carl
Taube was the official of the NIMH who was most responsible for promoting the field of economics of mental
health.
896 R. G. Frank and T G. McGuire
chapter. "Special characteristics" of mental illness, and the persons with mental illness,
will be identified and related to the observance of institutions paying for and providing
mental health care. When Pauly (1978) asked, "Is Medical Care Different?", he was
contrasting health care with the rest of the economy. Here we explore the question: "Is
mental health care different from health care?"
The first reaction for many people is to answer "yes" to this question, and give the
reason as stigma. Literally, a "mark" or a "stain", stigma sets persons with mental ill-
ness apart as undesirable. Nunnally (1961) found that regardless of the respondent's
education, the mentally ill were regarded as dangerous, unpredictable, and socially of
little value. In one of the few studies comparing attitudes over time, Matas et al. (1986)
analyzed treatment of mental illness in the press, concluding that in spite of some "mi-
nor, cosmetic changes", overall, "content and attitudes had changed little".2 One hopes
that national educational campaigns such as the NIMH's Depression Awareness initia-
tive have had some effect, but the degree is hard to judge. It seems safe to say that some
part of the public's fear of the mentally ill remains irrational and misplaced.3 The his-
torical importance of stigma calls attention to the salient point, important to the rational
as well as the irrational side of the story, that differential treatment of mental health
care for purposes of policy will be driven not just by differences in the disease and its
treatment (e.g., demand is more responsive), but differences in the people who have
the disease (e.g., they are more costly in other ways). This chapter, using methods of
economics, will be concerned with the more "rational" reasons why mental illness is
treated differently than other illnesses, without claiming that this is the full picture.
The core issues in mental health and health economics include:
* Adverse Selection and Moral Hazard: These are traditional concerns in health eco-
nomics. We will argue that these features of insurance markets apply with particular
force for mental health care.
* Non-contractable Provider Actions. The term "noncontractable" was not in use when
Arrow wrote his overview of health economics, but he clearly had this in mind when
he discussed the ways health markets adapt to ensure that physicians put sufficient
effort into caring for patients. Maintaining effort in a managed care environment is
a problem for all areas of care. We will argue that it may be especially problematic
in mental health due to the severity of selection-related incentives. At the same time
it appears that special institutions are arising (a la Arrow) that may be capable of
contending with some of these unwanted consequences.
* Externalities: Mental disorders are often chronic conditions that create substantial
disability and strike people early in life (ages 15 to 30). These illnesses are correlated
2 Prejudice against the mentally ill on the part of the nominating committee of the prestigious Economet-
ric Society thwarted Nash's induction in 1988, according to Nasar (1998). Two years later the nominating
committee was bypassed and Nash was elected directly by the members in an overwhelming vote.
3 Link and Cullen (1986) demonstrate that the more people have direct contact with persons with mental
illness, the less dangerous they are regarded, supporting this conclusion.