Mental health and substance abuse benefits in carve-out plans and the Mental Health Parity Act of 1996.

Legislation passed in the fall of 1996 required employers and insurers offering mental health benefits to raise dollar coverage limits on mental health services to the level of medical services. We analyze the benefit designs of 4,000 current behavioral health carve-out plans and contrast them to medical benefits. We find that almost 90 percent of all plans are inconsistent with the current legislation and need to be rewritten in the coming year. The restructuring of designs required by the Parity Act provides a unique opportunity because plans often are inconsistent and unnecessarily complex, a legacy of past attempts by employers to contain costs and control adverse selection and moral hazard in an unmanaged fee-for-service environment. Under managed care, the need for deductibles, limits, or other demand-side cost-sharing mechanisms may have diminished and restructuring outdated designs could benefit both enrollees and employers.