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

1132 Pages·2000·39.62 MB·English
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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.

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