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Director’s Blog: The Economics of Health Care Reform

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As we begin a new decade, the need to control costs — while improving the quality of care — is vitally important to all sectors of health care. The annual economic costs of mental illness in the United States are enormous. The direct costs of mental health care represent around 6 percent of overall health care costs1. Among all Americans, 36.2 million people paid for mental health services totaling $57.5 billion in 2006 — the most recent year we have this type of data available2. This places mental health care expenditures as this nation’s third costliest medical conditions, behind heart conditions and trauma, and tied with cancer. Of course, the costs of mental health care are only a fraction of the costs of mental illness, which can result in substantial costs for co-morbid medical conditions as well as social costs due to disability, unemployment, and incarceration.

Cost control issues are central to the Patient Protection and Affordable Care Act (PPACA) of 2010, which set in motion a dramatic expansion of health insurance coverage and the creation of a new long-term care insurance program. It also calls for the evaluation of different approaches to restrain health care costs. Such sweeping changes and complex challenges cannot be successfully implemented without reliable research to tell us how to go about it. NIMH-supported research will be a key component in determining what can be done to control mental health care costs while expanding access to high-value care, fostering technological innovation, and maximizing public health.

Health care economics research is not new to NIMH. We have been facilitating mental health economics research since 1979, when, in response to President Carter’s Commission on Mental Health, the institute created a program to stimulate and support research on the economic aspects of the delivery, accessibility, use and cost of mental health services. This economic research has yielded important results. For example, it has been instrumental in understanding the impact of reimbursement policies which have influenced Medicare payment policy changes for inpatient psychiatric care3,4. It has been critical to the development of the theory of managed care and methods for adjusting payment for services based on individual risk factors. These methods guide mental health, substance use and general medical insurance benefit design in both private and public health care systems5. Empirical studies also demonstrated that the continuity of care for the severely mentally ill covered by the Medicare/Medicaid system would be negatively impacted by the “donut hole” coverage gap in the Medicare Part D medication benefit. These findings contributed to the closing of the donut hole as part of the PPACA by 20206.

Mental health economic researchers meet regularly to discuss the most relevant findings of their studies and the research currently in progress. At this year’s Biennial Research Conference on the Economics of Mental Health, participants focused on the challenges associated with health care reform and mental health care financing. Participants discussed comparative effectiveness research and its influence on how health insurance companies will likely design their benefit packages.

The identification of essential benefits is especially important in light of the Mental Health Parity and Addiction Equity Act of 2008, which requires that mental health benefits be on par with other medical benefits within an insurance plan. Researchers are exploring ways to thoughtfully implement these changes. In a special section of the November 2010 issue of Psychiatric Services, experts highlighted opportunities for improvement, as well as challenges, in the financing and delivery of mental health care as PPACA is implemented in this new era of parity. The articles, which should be read by anyone interested in mental health care policy, point out how improving quality while containing costs will require reorganization of care, such as disease management and medical homes.

To facilitate health economics research, NIH created the Common Fund Health Economics program , which I co-chair with Richard Hodes, M.D., director of the National Institute on Aging. This trans-NIH Common Fund initiative aims to foster the collection of health economic data that will be most useful for policy makers as they work to implement health care changes. We are beginning to solicit research applications on topics such as: the economics of preventive medicine; how to design, deliver and maximize an efficient and effective health care system; how to fairly integrate comparative effectiveness research findings into care delivery systems through economic incentives; and the economics associated with a market for long-term care insurance.

The results of these research projects will be instrumental in guiding both public and private health care decision-making.


  1. Mark TL, Levit KR, Coffey RM, McKusick DR, Harwood HJ, King EC, Bouchery E, Genuardi JS, Vandivort-Warren R, Buck JA, Ryan K. National Expenditures for Mental Health Services and Substance Abuse Treatment, 1993-2003. SAMHSA Publication No. SMA 07-4227. Rockville, MD: Substance Abuse and Mental Health Services Administration, 2007. http://www.samhsa.gov/spendingestimates/SAMHSAFINAL9303.pdf 
  2. Agency for Healthcare Research and Quality. Medical Expenditure Panel Survey . 2006
  3. Frank RG and Lave JR. The Psychiatric DRGs: Are They Different? Medical Care. Oct.1985. 23(10): 1148-1155.
  4. Lave JR. Developing a Medicare Prospective Payment System for Inpatient Psychiatric Care, Health Affairs. 2003.22(5): 97-109.
  5. Ma CA and McGuire TG. Network Incentives in Managed Health Care, Journal of Economics and Management Strategy. Spring 2002. 11(1):1-35.
  6. Donohue, J, Huskamp, HA, Zuvekas SH. Dual Eligibles with Mental Disorders and Medicare Part D: How Are They Fairing? Health Affairs. May 2009. 28(3): 746-759.