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8 Private Coverage Although the public tier admits the great majority of drug-abusing and drug-dependent individuals who receive treatment each year and their treatment is paid for mainly with public funds, there is a private tier of treatment providers as well that serves a significant proportion of the individuals seeking treatment and that uses an even larger proportion of treatment funding. Most of the support for the private tier depends on insurance reimbursements, and most private health insurance in the United States is obtained through employer-sponsored health insurance plans. Moreover, most if not all of the premium is treated as a fringe benefit rather than a part of wages or salaries. As a result, health insurance purchases are constrained in ways that purchases of other consumer goods, such as food, cars, or housing, are not. Employers, whether private firms or public agencies, are the primary payers on behalf of their employees and immediate families. Consequently, employers have a major influence on and financial responsibility for the extent and nature of insurance coverage for drug treatment. This influence is especially felt when the benefit package is not developed by collective bargaining agreements, which give workers greater leverage over the terms of coverage. Although employer-sponsored health insurance was devel- oped originally in bargained (that is, union-management) contracts, most employees are not represented by unions. This chapter therefore considers the provision of coverage largely from the perspective of employers vis-a-vis employees and insurers. 273

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274 TREATING DRUG PROBLEMS The chapter first discusses the logic of private coverage by health insur- ance and out-of-pocket payments. In Chapter 7 the committee estimated the number of individuals who would probably need to rely on the public system for coverage in the event they sought drug treatment. Here, the dis- cussion simply reviews the principle that treatment effectiveness, cost, and the price sensitivity of potential consumers of treatment jointly contribute to determining the socially optimal level of private coverage. The next issue is the actual extent of private coverage. There are data to respond to this question, but they are less than satisfactory. The first source of information is ostensible coverage, that is, the written details of health insurance policies or comparable health plan benefits. Surveys of coverage provisions, however, are generally limited to medium- and large-scale employers. Moreover, this information, although useful, is of uncertain application because actual coverage may vary under the same ostensible provisions. The usual survey practice is to index coverage ac- cording to whether drug treatment benefits are explicitly defined. But the written provisions may understate that coverage if the plan implicitly con- siders drug dependence to be just another standard medical diagnosis. In that case, without making specific reference to it, the plan would cover drug treatment to the full extent that any other health services delivered by recognized therapeutic professionals are covered. On the other hand, the plan may overstate coverage because the coverage policy does not play out in practice, owing to the denial of certification to drug treatment seekers by managed care personnel, retrospective denial of benefits by utilization review personnel, or a refusal to make referrals. The second source of data on coverage is claims experience, from the point of view of insurers paying or of providers receiving these payments. Regarding claims payments, there are many anecdotes and short-term trend statistics for particular companies, but this information is virtually always in terms of combined alcohol/drug or alcohol/drugJmental health benefit utilization. The committee has been unable to access or assemble any systematic payer-based data on claims payments for drug treatment that are reasonably representative of national experience. From the provider end, the various National Drug and Alcoholism Treatment Utilization Survey (NDATUS) efforts are good indicators of provider insurance receipts despite some weaknesses in that data base (see Chapter 6~. Unfortunately, the NDATUS has been too sparse (only two surveys since 1980) and too limited in its queries to yield a detailed picture of changing private coverage experience. Explicit coverage certainly expanded in the 1980s, and the NDATUS indicates that insurance payments expanded as well, but there is no way to peer deeply enough into the overall process to be completely certain

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PRIVATE COVERAGE 275 of the relationship. For these reasons, this chapter lays out the available information but proceeds cautiously to conclusions. An important issue in the drug and alcohol treatment fields concerns the setting of treatment services, especially inpatient versus outpatient and hospital versus nonhospital residence. The committee could be considered to be basically agnostic regarding the specific setting of care, but it is far from indifferent to quality and cost considerations. The quality of care offered under private coverage is not easy to assess because so much of it is provided in the outpatient nonmethadone and chemical dependency modalities, about which the effectiveness data (not to be confused with effectiveness as such) are, respectively, highly variable and poor. Managed care personnel are conversant with and justify certification and review decisions based on research reports that are virtually all alcohol specific. Although it is true that chemical dependency treatment for alcohol or drug problems is similar and that there is some suggestion that it may be less effective for drug than for alcohol problems, this information is a weak reed on which to rest clinical care decisions. One can understand the rationale of payers that, absent outcome data, general medical care providers such as hospitals at least employ a credentialing and quality management system with which payers are familiar and in which they have some confidence. Moreover, medical necessity exists in some cases in the form of serious psychiatric disturbances or somatic illnesses, and it is best to err on the side of safety although that margin has become much less elastic since the advent of managed care. Nevertheless, the committee believes it would be far better to insist that drug treatment providers begin to provide solid outcome data as a basis for recruitment and reimbursement. This policy is not only in the treatment buyer's interests but also in the interests of the providers—more and more sellers will find it worthwhile if not necessary to participate in evaluation research to reestablish credibility with the private coverage community. Cost management is at the core of most health care issues today, and drug treatment is no exception. It is important to remember that cost-containment schemes have proven much more successful at curbing utilization rates for expensive services such as hospitalization than at re- ducing unit costs. Nevertheless, there is clearly an opportunity if not a necessity to curb the unit costs of private care for drug treatment. The final private coverage question concerns state mandates for drug treatment. In 19 states, the law requires private insurance to include drug treatment as a covered service. These statutes are an offshoot of the movement since 1970 to mandate private insurance coverage of alcohol treatment. Considered in their own right, the committee does not find a strong case for the value of further such mandates in other states or at a

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276 TREATING DRUG PROBLEMS national level. In part, the lack of impetus for additional required coverage can be ascribed to data that show that drug treatment coverage is now much more extensive than the mandates would suggest; in part, it is because mandates have such a narrow application. In the competitive environment of private health coverage, in which commercial indemnity insurers, third- party administrators of self-insured company plans, Blue Cross/Blue Shield carriers, and health maintenance organizations are fighting for market share, mandates that apply only to some of these segments hobble their competitive position in ways that seem inefficient and inequitable. THE LOGIC OF PRIVATE COVERAGE The rationale behind mandating private health insurance coverage of drug treatment parallels the argument for public coverage: even among the privately insured population, there are negative external costs to drug abuse and dependence that may be reduced by drug treatment, and access to treatment is influenced by the price of treatment. Coverage of drug treatment by private insurance can make the effective price of treatment, at the time it is needed, significantly lower (for example, 80 percent of inpatient or residential costs may be covered) than if the full costs of treatment had to be paid out of pocket. This lower price means that more insured people who need treatment will seek it. From society's perspective, insurance should reduce the effective pur- chase price of treatment for individuals who need it to the point that the insured population purchases the socially optimal amount of treatment. The socially optimal amount of coverage depends on both the effectiveness of treatment in reducing external costs, its own costs, and the sensitivity of drug abusers to the price of effective treatment. The greater the social benefits from treatment, the greater should be the coverage rate (the share of costs paid by insurance). The greater the sensitivity of drug-abusing and dependent individuals (who create negative external costs) to the price of treatment, the greater should be the rate of coverage by insurance. The sensitivity of drug abusers to the price of treatment may also depend on their income and wealth and on the relative cost of the treat- ment. For a wealthy family, the price of treatment may be quite secondary, whereas a lower income family may find price to be a major factor. Simi- larly, a cost of $1,500 for a typical treatment episode of average effectiveness may have quite different implications than a cost of $7,000. Access to ex- pensive treatment is more likely than access to inexpensive treatment to be sensitive to insurance coverage. There has been no systematic, empirical economic study of private demand for privately supplied, competitively priced treatment or of the re- sponsiveness of private demand to the price of treatment. It is known that,

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PRIVATE COVERAGE 277 corresponding to the increase in private insurance coverage for drug treat- ment (effectively reducing the cost of treatment to insured drug abusers), the private treatment sector appears to have grown dramatically. Employer- provided private insurance coverage for drug treatment was held by 43 per- cent of employees in medium-sized and large companies in 1983 (Morrisey and Jensen, 1988) but had increased to 74 percent in 1988 (Bureau of Labor Statistics, 1989a). During this period a number of states enacted mandates requiring private health insurance policies to cover drug treatment. In 1982 the private, for-profit drug treatment industry included 159 programs with 9,800 clients in treatment; by 1987 it had grown to 735 programs with 30,000 drug abuse clients in treatment. Private insurance reimbursements for drug treatment (defined as such by treatment providers and thus not contingent on whether benefits were explicitly covered under a drug treatment clause) increased from $43.5 million in 1982 to $348 million in 1987. Client out-of-pocket reimbursement grew from $35.6 million in 1982 to $157 million (National Institute on Drug Abuse, 1983a; Institute of Medicine analysis of the 1987 NDATUS). It is not known, however, what proportion of the 1982 insurance reimbursements and client fee navments went to private-tier programs. ~ J In contrast to residential and outpatient nonmethadone treatment, methadone treatment has a significant private demand that is not subsi- dized by private insurance reimbursements. Out of $200 million in total methadone clinic revenues, client out-of-pocket payments made up 20 percent. Within the $22 million private, for-profit methadone treatment system, $17 million, or more than 75 percent of revenues, were from client out-of-pocket payments. The private tier predominantly treats clients who are ineligible for public coverage because of their level of income. In the absence of insur- ance coverage, these clients would have to pay for treatment out of pocket. Because the private treatment sector expanded so significantly in parallel with the growth of insurance coverage for drug treatment, it seems reason- able to suppose that whether potential drug treatment clients actually enter treatment is in fact quite sensitive to the price of treatment. THE EXTENT OF PRIVATE INSURANCE COVERAGE More than 150 million persons are covered by private health insurance coverage, the vast majority as a benefit of their employment (Chollet, 1988; Moyer, 1989~. The focus of this section is the degree to which this coverage extends to drug treatment. The details of health insurance coverage have been studied periodically by the Bureau of Labor Statistics (BLS) during the 1980s, primarily through surveys of insurance provided to employees of medium-sized and large firms and state and local governments. The drug

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278 TREATING DRUG PROBLEMS treatment coverage afforded to privately insured employees of the federal government has also been examined recently by the Office of Personnel Management. These studies constitute the source material for the following discussion. The major limitation on these detailed coverage data is that they do not include small, nongovernment employers, who employ half of the labor force. As discussed in Chapter 7, it is possible that in some cases drug treatment is reimbursed in the absence of explicit coverage. A claim for treatment under a drug diagnosis, submitted by an appropriately licensed practitioner or accredited medical or rehabilitation facility, may simply be accepted without question; alternatively, it may be submitted under the guise of a different diagnosis that is clearly covered (e.g., a psychiatric disorder such as severe depression, alcohol dependence, or a physical abnormality). It is difficult to determine the extent to which either practice occurs, particularly the latter. It has been said that alcoholics were treated in the past, despite the absence of explicit coverage or formal alcohol treatment programs, by sim- ply employing different diagnoses within the general medical population. This statement cannot be disproved, but it is difficult to credit. Certainly, many alcohol-dependent individuals received medical treatment at times, but most medical practitioners had no training in alcohol treatment (versus the treatment of, for example, gut ailments resulting from excessive alcohol consumption). The initial growth spurt of chemical dependency providers occurred largely after explicit coverage emerged in a number of key states and company plans, and its arc of growth has echoed the spread of explicit coverage. Nevertheless, the bar to treatment was probably much more the lack of formal programs, or programs with the medical or psychiatric accreditation recognized by insurers, than a disincentive to cover the treat- ment. A Blue Cross and Blue Shield Association study (1983) concluded that many if not most Blue plans at that time covered drug treatment under their mental and nervous disorders benefits. The most notable evidence for the relevance of explicit policy provi- sions to actual coverage is the fact that the growth in private insurance reimbursements reported by treatment providers has occurred in parallel with the growth of explicit coverage. Employees of Private Companies Medium-sized and large companies (i.e., more than 100 employees) have increased their explicit coverage for drug treatment significantly since 1983. In 1988, 74 percent of employees in such companies had coverage, an increase from 66 percent in 1986 and 43 percent in 1983 (Morrisey and Jensen, 1988; Bureau of Labor Statistics, 1989a). The BLS 1988

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PRIVATE COVERAGE 279 Employee Benefit Survey (EBS) included much more detailed questions than any previous survey about the character of such coverage. Only sketchy statistical summaries of the responses to these items are available as yet, but these summaries are indicative of the direction of this coverage. The 1988 EBS survey indicated that 28 million of the 31 million employees of firms sampled by the survey had employer-sponsored health insurance. Of the 31 million, 20.6 million were covered by plans that had an explicit provision for drug treatment or said that as a matter of course they would provide reimbursement for detoxification or rehabilitation charges. For the other 10 million employees of medium-sized and large firms, drug treatment episodes were excluded from their health insurance coverage. Of the 21 million employees with drug treatment coverage, nearly all (96 percent) would be reimbursed for residential or inpatient drug detoxification which is not drug treatment per se (referred to in this connection as "rehabilitation"), although it is certainly indicative of a drug- related diagnosis. Inpatient or residential treatment was covered for 16 million employees, and outpatient treatment was covered for 17 million. There were limitations on this coverage, however, that differed from the standard limitations in the applicable health plans.) For the most part, the limitations involved a differential cap on dollars or on number of days or visits, rather than different copayments, deductibles, or maximum out-of- pocket costs (Table 8-1~. The most frequently imposed inpatient limit was 30 days per year; the most frequent outpatient limit was 20 or 30 visits per year. The typical inpatient limitation was based on the average chemical dependency inpatient treatment plan. State and Local Government Employees Insurance coverage of public employees and their dependents is rel- atively better documented than insurance arranged through private em- ployers. Within the public sector, coverage for drug treatment is virtually universal for federal employees and nearly so for state and local employees. But the types of benefits are highly variable across the different plans of the thousands of state and local government entities. An estimate of this coverage is available from a BLS survey (Bureau of Labor Statistics, 1988) conducted in 1987 of benefits provided to employees of state and local governments. Health insurance coverage for drug treatment in 1987 was more widespread among publicly employed workers than in the private sector. Among the 10.3 million full-time employees of state and local governments iThe limitations may apply to drug treatment alone, or they may apply to drug, psychiatric, and/or alcohol treatment as a group.

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280 TREATING DRUG PROBLEMS TABLE 8-1 Details of Drug Dependence/Abuse Benefits (percentage) for the Covered Employees of Medium-sized and Large Firms Coverage Limitations Length of Any Stay or Out-of-pocket Copayment or Procedure Coverage Dollar Cap Ceiling Deductible Detoxification 96 0.61 0.05 0.01 Inpatient rehabilitation 77 0.58 0.05 0.01 Outpatient rehabilitation 81 0.46 0.10 0.06 Note: Of the 31 million employees of medium-sized and large fins (i.e., 100 or more employees), 90 percent have some health insurance coverage, and 74 percent of those (i.e., 20.6 million) are covered for drug detoxification or rehabilitation procedures. The first column of the table is the percentage of the 20.6 million with any coverage for a particular procedure; subsequent columns are fractions of the first column percentage to which the respective limitations apply. Source: Bureau of Labor Statistics (1989a). in 1987, the BLS study estimated that 94 percent had health care coverage, and of these, 94 percent had coverage for some type of inpatient hospital treatment for drug abuse; it is uncertain how much of this coverage applied only to detoxification. Outpatient coverage was conservatively estimated at 81 percent of health plan participants. Special limitations were usually imposed on the amount of coverage for drug treatment. About 71 percent of the 94 percent with inpatient coverage were subject to special limitations on care that were different from those for other health care procedures. The most common limitation (38 percent) was a cap on payment for inpatient days of mental health, drug, and alcohol treatment. Another 22 percent of covered employees were limited in the number of days that would be covered just for treatment of drug abuse. The most common limitation (15 percent) was a maximum of 30 inpatient days; 6 percent had higher limits, and 2 percent had lower limits. Coverage for outpatient services was more restrictive. Some form of outpatient coverage was available to at least 81 percent of employees participating in health insurance plans. Yet for only 16 percent of these was the coverage equivalent to that for other health problems. Charging benefits against mental health limits was most common—affecting 35 percent of the 81 percent with outpatient coverage. Limits on annual visits applied to 13 percent of the covered group (9 percent with 30 or fewer visits, 2 percent with 50 or more visits). There were coverage limitations on maximum dollars, or different coinsurance rates or copayments, for 18 percent of the . . provisions.

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PRIVATE COVERAGE 281 Federal Employees The federal system had nearly 4 million health insurance policies in force in March 1988, covering close to 10 million current employees, retirees, and dependents.2 The specifics of federal drug treatment benefits were closely examined by the Office of Personnel Management (OPM) in a document that outlined the pertinent benefits of all offerings within the Federal Employee Benefits Health Plan (U.S. Office of Personnel Management, 1988~. Every plan was required to offer substance abuse treatment benefits; however, there were no specific coverage standards, and the nature of coverage varied widely. The common characteristic of all plans was to make no distinctions between drug and alcohol treatment benefits; in addition, their monetary values, as calculated by OPM, were all heavily weighted toward inpatient treatment. In this sense the federal plans seemed more or less to endorse chemical dependency treatment concepts, by and large tending to focus benefits on hospital-based treatment to the exclusion of nonhospital residential programs and, more importantly, to provide only minimal coverage for outpatient services. Among the 23 fee-for-service plans available, the most common cov- erage package was judged to include $4,000 to $6,000 per year in potential drug treatment benefits, with significant special deductibles and copay- ments. There was much variation around this average: 8 plans had total annual coverage of from $2,800 to $4,000, 10 were in the $5,000 to $10,000 range, and 5 were worth $18,000 or more. In 15 policies, more than 90 per- cent of the value of these benefits was specifically designated for inpatient treatment in hospital-based facilities. Five fee-for-service plans offered no coverage for outpatient services, and 7 others limited such services to $250 to $400 per year. Benefits of $750 to $1,000 per year were provided by 6 plans, whereas 3 offered benefits worth $1,500 to $2,500.3 Health maintenance organizations (HMOs) had benefits similar in many ways to fee-for-service plans, although the major HMOs seemed to impose fewer constraints and limitations with regard to inpatient care and the same or fewer limitations with respect to covering outpatient care. Nearly all of the largest HMOs covered inpatient treatment for up to 30 days with negligible or modest copayments. Outpatient treatment was covered by all HMOs, generally to a maximum of 20 annual reimbursed 21he federal government employed 3 million persons in 1986, of which 2.6 million were full- time employees entitled to government-financed health insurance coverage. There were also an additional 1.1 million federal retirees. 3 Nine policies included stop-loss limits (payment for any annual out-of-pocket expenditures for alcohoVdrug treatment that exceeded a specific amount) ranging from $4,000 to $8,000, which were further subject to lifetime maxima. Another 9 policies specified out-of-pocket maxima of $25,000 to $50,000; 4 had no explicit lifetime maximum.

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282 TREATING DRUG PROBLEMS visits, which is close to, although somewhat short of, the average outpatient nonmethadone treatment plan. A significant number of plans stipulated copayments of $20 (or more) per outpatient visit, whereas about half the regional plans under one large HMO covered "all necessary outpatient counseling" at minimal copayment rates. Employers and Coverage Decisions Although the public sector has made a limited amount of treatment available for the past 20 years (primarily directed toward criminally active drug abusers), until recently there has been little recognition of the drug problem in the work force. Private insurance policies gave little explicit recognition to the need for this type of treatment. Drug treatment, if delivered, was reported under medical diagnoses. As recently as 1983, only 43 percent of workers in medium-s~zed and large private companies had explicit coverage for any kind of drug treatment (Morrisey and Jensen, 1988~. The reasons for the lack of coverage are many and varied, as are the reasons coverage has dramatically increased over the past 15 years. Not the least of the problem has been the lack of recognition or actual denial among employers that there were many or any drug-abusing and dependent individuals in their work force. Furthermore, like alcohol problems, drug problems have at best been viewed as a character flaw or personal weakness and at worst as "willful misconduct." Another problem has been uncertainty on the part of insurers. There is uncertainty about the extent to which the benefit will be used and how much to pay for these services. It is unclear what kind or kinds of treatment should be covered what works and what the outcomes are. This uncertainty makes it difficult for insurers to price the benefit reasonably without leaving themselves (or the self-insured entity) exposed to large potential losses if usage or cost per treatment is greater than expected. This uncertainty can motivate overpricing of the benefit until sufficient time as the benefit may be rated based on experience. Inflated pricing for a benefit may discourage employers (or individuals) from purchasing the benefit. Implicit in the rationale for the addition of coverage for drug treatment is that drug treatment may pay for itself, either through improved worker productivity or through a "health cost offset" effect. There has been no rigorous analysis of the productivity-improving effects of chemical depen- dency drug treatment. However, a large and growing literature (Holder and Those, 1986; Holder and Hallan, 1986) suggests that the cost of treating alcoholics is recovered subsequent to treatment by reducing their insurance claims for health services. The conclusions of this literature, although

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PRIVATE COVERAGE 283 subject to methodological weaknesses, have by inference been applied to justify drug treatment, even though there are no studies of cost offsets with clients with primary drug abuse problems. In the committee's view, the justification for insurance coverage for drug treatment does not and should not rest on insurance cost offsets. Most health care services are covered whether or not the treatment renders cost offsets. Many terminal or chronic illnesses might not be treated if the criteria of cost-effectiveness were applied. Advanced-stage cancer, stroke, and heart disease are primarily incident in older persons who have relatively short life expectancies even without the specific disease; they often have poor prognoses, and aggressive treatment tends to be very expensive (Hartunian et al., 1980~. Similarly, organ transplants involve high costs and are undertaken with the expectation of modestly increasing life expectancy or quality of life but not necessarily of saving costs for the insurance plan. In the sense that drug treatment has no proven expectation for immediate reduction of health care expenditures and can be expensive, it is analogous to coverage of treatment for many terminal or life-threatening illnesses. There are, however, valid concerns about directing patients to the least expensive of equally effective treatments or providers. These concerns have been the most important recent trend influencing the extent of private coverage and are discussed in the next section. TRENDS AFFECTING PRIVATE COVERAGE: COST CONTAINMENT OF HEALTH BENEFITS The major trend that is now affecting private coverage for drug treat- ment is unquestionably the increasing emphasis on cost containment. There are both general and specific reasons that have led purchasers and under- writers of group policies to take long, hard looks at drug treatment benefits. Generally, the cost of health services and particularly of health insurance has grown at an uncomfortably high rate during the past two decades. Health care expenditures now make up about 11.5 percent of the U.S. gross national product, up from 7.5 percent 20 years ago. Private health insurance expenditures were $71 per capita in 1970 and $552 per capita in 1987 (Health Insurance Association of America, 1989~. In the wake of these increases has come an ever-intensifying search for ways to reduce the cost of health insurance benefits by private as well as public insurance plans. The percentage of total health insurance outlays spent on drug treat- ment is small. Total health care outlays by commercial insurers, Blue Cross/Blue Shield carriers, and HMOs were $140 billion in 1987. The 1987 NDATIJS figure of just under $350 million for health insurance payments to all surveyed drug treatment programs amounts to just 0.25 percent of

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PRIVATE COVERAGE 287 appropriate treatment strategies as protocols for permitting or disallowing reimbursement for particular services in particular instances. With the use of managed care, insurance carriers are attempting to address the problems of limited patient knowledge about health services and the potential for supplier-induced demand (Fuchs, 1988~. If managed care strategies for drug treatment are backed by research findings on treatment effectiveness, they can help guarantee needed access to quality treatment while containing the costs of insuring it. Under the powerful prod of negotiated services and managed care, private coverage has been moving away from its orientation toward acute inpatient care models. In this respect the private drug treatment system is repeating the earlier cycle of the public tier. Hospital-based treatment was virtually eliminated from the public drug treatment strategy in the mid-1970s when it was concluded to be no more effective than other treatment approaches but substantially more expensive (Strategy Council on Drug Abuse, 1975; Besteman, 1990~. Public resources were redirected toward outpatient and nonhospital residential treatment, with the consequent ability to treat many more people for the same dollars. Managed care has the objective of identifying just such efficiencies. On the other hand, coverage for services received from residential providers must be carefully framed. Some clients undoubtedly require residential treatment, and insurers need to recognize the distinctive value of residential providers, who may be affiliated with hospitals and even located in such settings but are disjoined from the requirements including the financial burdens—of acute hospital care. Many insurers have in the past failed to recognize such providers as eligible for reimbursement, which may have contributed to excessive utilization of hospital inpatient treatment in the past. As managed care strategies have matured, they have come under increasing scrutiny and criticism from alcohol and drug treatment providers following aggressive moves by managed care companies to cut the costs of treating drug and alcohol abuse. Taking cues (that is, preadmission and utilization review protocols) from the reviews by Saxe and colleagues (1983) and Miller and Hester (1986), which were entirely focused on alcohol and not drug treatment, managed care reviewers have attempted to direct all drug clients away from inpatient programs and toward outpatient services; as a result, they are certifying shorter and shorter inpatient stays. This trend is viewed with particular alarm by employee assistance program (EAP) staff, chemical dependency programs, and theapeutic communities that have received accreditation and recognition but are increasingly being asked to shorten treatment plans in ways that defy all their therapeutic experience. Employee assistance program professionals are potentially important

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288 TREATING DRUG PROBLEMS actors in the managed care system. There appears to be an uneasy rela- tionship between EAP professionals and managed care providers because of the overlap of some of their respective roles. In many companies that use EAPs, the staff of the program have traditionally owned the role of "gatekeeper" to treatment, with the responsibility for assessing troubled employees, diagnosing their problems, and referring them to appropriate treatment. Because many EAP staff come from the alcoholism field and have had little professional contact with any other treatment modalities, as EAPs broadened their focus to deal with drug problems, the drug treatment of choice was by default the chemical dependency model. With the recent pressure on this model from cost-containment forces, the EAP profession- als who were committed to it have, by and large, felt as though they were in a virtual state of war with managed care contractors: their referrals to treatment subject to review by external practitioners selected by the man- aged care firm, with fully reimbursed care available only through providers selected by that firm, with whom the EAP has had no previous relationship or knowledge of their practices. There is clearly a significant overlap in the roles of EAPs and man- aged care providers, and this overlap may become a bureaucratic barrier that complicates access to needed treatment. However, EAPs are primar- ily charged with returning problem employees to satisfactory performance and promoting employee health over the long term. EAP personnel of- ten establish relationships with treatment agencies to achieve these goals, sometimes with the consideration in mind of using treatment resources effi- ciently. Managed care personnel are primarily responsible for reducing the costs of health care episodes while ensuring that beneficiaries receive good- quality care. There are tensions between EAP responsibility for employee health and managed care accountability for cost control—often backed by contractual promises or inducements to reduce stipulated benefit payouts by specific percentage targets. Yet the tension may be a creative one if EAP and managed care personnel work together. The best relationships between EAP and managed care personnel occur when EAP staff are fun- damentally involved in the adoption of managed care strategies and have a clearly delineated role in making assessments and referrals and in choosing providers. These relationships can be further improved by commitments to collecting better data on treatment processes and outcomes. The worst case seems to be when corporate benefits managers adopt managed care plans with minimal consultation of the EAP staff and no forethought about how the EAP will interface with managed care. PRIVATE INSURANCE AND STATE MANDATES The private tier of providers, which is linked to the corporate world of employee assistance programs, originated as and still is primarily an alcohol

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PRIVATE COVERAGE 289 treatment system. Private providers have joined with the labor movement and a few underwriters and corporations in major educational efforts since about 1970 that have steadily increased the number of health plans that specifically cover alcohol and drug treatment. Also as a result of these efforts, state insurance mandates represent an important initiative relative to private coverage for drug treatment. A total of 18 states plus the District of Columbia have passed laws mandating some coverage for drug treatment. The objective has been either to require insurance plans to include coverage for this problem in their basic package of benefits or at least to require them to offer to sell such a benefit. States clearly view health insurance as a mechanism through which an increasingly costly public problem can be privatized. The mandating of drug treatment benefits began and is best seen as an offshoot of the mandation of alcohol treatment. Access to Coverage The first issue about the relevance of state mandates for coverage of drug treatment is whether they in fact make coverage more available to beneficiaries. As of this writing, 10 states plus the District of Columbia mandate the inclusion of drug treatment benefits in group policies. Another 8 states mandate that insurers at least offer this benefit as an optional addition to basic coverage. Each state has a similar or identical mandate for coverage of alcohol treatment.5 The extent of coverage (discussed earlier) for the 31 million employees (plus dependents) of medium-sized and large corporations and for 13 million public employees is much greater than would be indicated by the mandates enacted by state legislatures. States with mandates to cover or offer to cover drug treatment were home to 11.9 and 16.6 percent of the U.S. population, respectively. But in 1988, 74 percent of private employees in medium-sized and large firms that had company-sponsored health insurance had some kind of coverage for drug treatment. Among public employees the coverage rate in 1987 was 94 percent. Thus, the extent of insurance coverage for drug treatment is greater than would be indicated simply by state mandates. A crucial issue with state insurance mandates is that private corpora- tions that self-insure under federal ERISA (Employee Retirement Income Security Act) statutes effectively evade any insurance coverage mandates 5Another 10 states mandated provision of alcoholism coverage, and 9 more states mandated the offer of optional coverage for alcohol treatment. Altogether, 37 states plus the District of Columbia, comprising 85 percent of the U.S. population, have mandates regarding alcohol treat- ment coverage.

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290 TREATING DRUG PROBLEMS that are legislated by states. State coverage mandates are not likely to be a necessary or sufficient cause for any company to self-insure, but there is a clear tendency for self-insured companies to be less likely to cover drug treatment than companies with Blue Cross/Blue Shield coverage or employees covered under HMOs. Morrisey and Jensen (1988) found that employees of self-insured companies were much less likely to be explicitly covered for drug treatment (56 percent of employees were covered) than employees insured by a Blue Cross/Blue Shield carrier (76 percent) or an HMO6 (88 percent). Policies with commercial insurers, however, were the least likely to offer drug treatment coverage (50 percent). A further analysis by Jensen (1988) indicates that state mandates are not significant predic- tors of whether a company self-insures when other characteristics of the company are examined. The important predictors of self-insurance were the size of the state tax on health insurance premiums, the nature of the industry, and the characteristics of workers of the company. Self-insured companies do so for more economically compelling reasons than to avoid coverage mandates for drug or alcohol treatment. On the other hand, an accumulation of several relatively inexpensive mandates may be expensive enough for a company to opt for self-insurance. Adequacy of Coverage The adequacy of mandated coverage for drug treatment is highly problematical because coverage for drug abuse is for all practical purposes an afterthought to coverage for alcohol treatment; where coverage for drug treatment Is mandated, it is virtually identical to that for alcohol treatment. Only in Maryland are there different limits on coverage for drug and alcohol abuse, and in that case drug treatment has a lower minimum coverage than alcohol treatment. Most of the state legislatures have virtually mandated only one modal- ity, chemical dependency treatment, and made barely enough provision for a Apical course of outpatient nonmethadone treatment. Of nine state drug abuse mandates that specify minimum days of inpatient coverage, six call for minimum annual coverage of 28 or 30 days; the other three call for minima of 21, 45, and 60 days.7 6 There is a widespread belief among chemical dependency providers that HMO coverage of drug treatment is less extensive in practice than on paper. For example, providers assert that HMos vigorously resist authorizing hospital stays, insist on group rather than individual counseling, and avoid treatment by high-cost care givers such as psychiatrists in favor of lower cost counseling professions. There is little documentary evidence on the extent of these practices or their effects on the outcomes of drug treatment of HMo clients. 7In a survey conducted in 1986 (ICE Incorporated, 1987), 230 chemical dependency programs charged an average of about $265 per day about 10 percent above the average national daily

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PRIVATE COVERAGE 291 Three other state mandates cover minimum annual dollar limits for inpatient reimbursement, with values of $3,000 (per 30-day period), $4,500, and $9,000, respectively. The $9,000 coverage is for hospital-based inpatient rehabilitation treatment and is marginally or less than adequate for a 28- to 30-day stay. The lower dollar limits clearly preclude the use of most chemical dependency treatment programs at the rates typically charged. There is a great deal of evidence, however, that these rates can be drastically reduced without cutting into patient care costs by simply reducing the extraordinary rates of return that characterized these programs during the 1980s (Health Care Advisory Board, 1988~. Another state mandates coverage for residential treatment "pursuant to a treatment plan" with no minimum specified for days of care or dollars. Three states mandate $1,500 to $2,000 annual coverage for outpatient treatment of drug abuse but specify no minimum coverage for inpatient services. Another three states simply require policies to offer optional coverage of an unspecified nature. Cost Containment State mandates recognize several mechanisms for containing the costs of drug treatment. The primary method allowed for this purpose is the use of less expensive competitive facilities for delivery of residential treatment. Alternative treatment facilities are recognized by 34 of the 35 states that have drug or alcohol abuse mandates, usually under the proviso that the facility be licensed by the state substance abuse authority or accredited by the voluntary Joint Commission on Accreditation of Healthcare Organi- zations (JCAHO) or the Commission on Accreditation of Rehabilitation Facilities (CARED. Many nonhospital residential facilities have lower cost structures than hospital-based programs and charge appreciably less per day of treatment. They do not have the continuing onsite medical facilities, equipment, and personnel required for hospital licensure, but then again, these capacities are not needed for most drug treatment clients. Insurance plans thus are often given the option of covering drug treatment in lower cost facilities. A frequent criticism of health insurance plans by nonhospital treatment providers, however, is that many insurers and third-party administrators do not in fact cover treatment in nonhospital facilities, even though these charge for a semiprivate hospital room in 1986 (Health Insurance Association of America, 1989) for an average of 28 days in treatment, making a typical episode of treatment (if it included initial detoxification) cost approximately $7,800; with intervening health care cost inflation, that charge would now be $11,000 if no other factors intervened. Charges differed little for privately supported inpatients treated in programs located in general acute care hospitals or in freestand- ing (although often hospital-affiliated) settings.

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292 TREATING DRUG PROBLEMS facilities are licensed by the state and accredited by JCAHO or CARE for drug and/or alcohol treatment. Although it may be in the financial interest of insurers to cover treatment in these facilities, insurance plans reportedly have been reticent to do so because of uncertainty about the quality of care delivered in nonhospital-based programs. 1VTO state drug coverage mandates, those of North Dakota and Arkan- sas, specify flexibility for the policy beneficiary. In North Dakota the basic mandate is for a minimum of 60 days in a hospital plus 120 days of partial hospitalization and 20 outpatient visits. Part of the inpatient care may be exchanged for partial hospitalization care on a two-for-one basis. Arkansas mandates a minimum total value of services of $6,000 per year, delivered in hospital or nonhospital freestanding facilities or by outpatient providers. Alabama in its alcohol treatment mandate allows a trade-off of inpatient (hospital) care for treatment in a state-licensed, short- term residential alcohol treatment facility or a three-for-one exchange for outpatient treatment. The 15 jurisdictions that mandate minimum levels of outpatient bene- fits range in value from $900 to $2,500 per year, or 20 to 45 visits (hours) per year. These benefits tend to have maximum copayment rates of about 20 percent. The Value of Additional Mandates The committee has reservations about the value of additional state mandates for drug treatment coverage. First, coverage for drug treatment is more widespread than the extensiveness of state mandates would indicate. There are clearly reasons other than mandate enactment for the spread of coverage perhaps the increasing realization by employers that drug treatment is a valuable benefit for their employees and for the company. Second, state mandates do not apply to the growing number of companies that self-insure under the federal ERISA statutes, especially companies with more than 500 employees, of which the percentage self-insuring is now at least 60 percent. ERISA does not deal with the coverage of drug treatment services or other matters that states have attempted to address with mandates. Third, the nature of coverage mandated by many states is too much captive to the chemical dependency model, which is not the only available modality of drug treatment. Finally, state benefit mandates are quite rigid in their structure. Only a few states permit flexibility or the trading-off of benefits of different kinds to encourage treatment purchasers and providers to seek the most cost- effective treatment choices. Typically, states mandate a minimum benefit for inpatient treatment and a minimum benefit for outpatient treatment, with no opportunities to substitute less inpatient for more outpatient or greater

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PRIVATE COVERAGE 293 amounts of less expensive treatments for smaller amounts of more expensive ones. Only one state, Oregon, mandates what seems, in the committee's view, to be the most sensible option: a simple minimum dollar value of insured drug treatment coverage. If that dollar value is realistic in terms of competitive prices, it enables companies and individual beneficiaries to seek the best treatment values while using managed care strategies to guard against inappropriate use and to collect useful information about provider characteristics and performances. CONCLUSIONS Extent, Costs, and fiends of Coverage The private tier of drug treatment providers is largely oriented toward treating the employed population and their family members. The majority of this population, about 140 million individuals, have specifically defined coverage for drug treatment in their health insurance plans. About 48 million others who are privately insured do not have specifically defined coverage for drug treatment, although coverage may occur de facto under general medical or psychiatric provisions. As of 1988, the health plans of about 67 percent of full-time employees of firms with 100 or more employ- ees offered specifically defined coverage for some types of drug treatment, although the actual extent of benefits under these defined coverage provi- . . . sloes 1S uncertain. Actuarial studies of claims experience yield rather modest estimates for the overall cost of covering drug treatment. Data about drug treat- ment expenditures tend to be buried under more inclusive headings and behind "horror stories" involving troubled adolescents with multiple diag- noses spending months In psychiatric facilities. Nevertheless, the committee estimates that a health plan with typical coverage now spends 1 percent or less of its total outlays for explicit drug treatment, most of it for hospital in- patient charges with a large fraction of that cost devoted to detoxification. However, there has been a substantial apparent growth in the rate of drug treatment claims in recent years, particularly for insured adolescents. It is difficult to know how much of this increase is actually due to the replace- ment of psychiatric or medical diagnoses with more revealing or accurate drug problem diagnoses versus an increased demand for drug treatment in the insured population. Possibly, both processes are occurring. Although this growth is disturbing to the degree it increases the aggre- gate cost of health insurance premiums, it is desirable if it means that an increased number of those who need treatment are seeking and receiving it, particularly if the treatment delivered is appropriate, effective, and rea- sonable in cost. Some payers, however, reacting in part to the high costs in

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294 TREATING DRUG PROBLEMS a small number of cases and the high incidence of recidivism, have strongly questioned the value of drug treatment episodes. There is a movement at least rhetorically to view drug treatment as part of the non-medicaVsurgical fringe of health coverage that may be differentially limited (rather than cut back evenly with other benefits across the board) to trim increasing overall costs. Mandating Drug Treatment Coverage There are legislative mandates in 18 states plus the District of Columbia that require certain categories of employer-supplied group health plans to specifically cover—or offer optional coverage for drug and alcohol treat- ment. (Another 19 states require some degree of coverage for alcohol treatment only.) In the committee's judgment, private coverage of drug treatment is beneficial to individuals and employers and should be included in every health package; however, legislative mandates at the state level have not necessarily proved to be an effective way, and are clearly not the only way, to induce adequate coverage. Most of those in the insured population whose plans include explicitly defined coverage for drug treatment reside in states that do not have legislative mandates for such coverage. Moreover, the political process has often produced less-than-optimal mandatory pro- visions that are difficult to adjust and overly rigid and that pay too much attention to limits on the length of stay and the number of visits rather than to the cost and effectiveness of treatment. Most mandatory provisions have the constraining effect of funneling people toward one particular modality of treatment by favoring inpatient stays of prespecified lengths. The committee believes that the development of soundly derived stan- dards for admission, care, and program performance will do more at this time to generate appropriate coverage than a further set of mandates. If mandates are to be used, efficiency and fairness dictate that they be applied to all competing insurers. Yet if the private market leaves large numbers of the insured population without coverage for drug treatment, it may be necessary for government to intervene. Such action could involve subsidies for drug treatment coverage, tax preferences for certain kinds of coverage, or mandates, with the choice dependent on judgments about the incidence, efficiency, and equity of alternative ways of financing coverage. Optimal Coverage Provisions Private insurance provisions (including most legislatively mandated benefits) often include financial incentives for beneficiaries to seek more expensive hospital or residential treatment. Insurance coverage until very recently has heavily favored hospital-based inpatient stays over outpatient

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PRIVATE COVERAGE 295 visits and continues to encourage the "gold standard" medical model rather than more explicitly psychological or socially oriented treatment. Although residential drug treatment, including hospital treatment, often serves clini- cally important functions such as permitting intensive therapy, isolating the patient from an adverse environment, or treating concurrent psychiatric or medical complications, the hospital-specific components of such programs (e.g., 24-hour onsite medical coverage) do not seem to be the therapeu- tically important elements in the drug treatment programs that are sited there, even though the availability of these components is used to justify charging acute care hospital rates for all clients. There is currently a movement afoot to reduce hospitalizations, mainly as a result of cost-containment measures, especially Recertification, uti- lization review, and negotiation of preferred provider arrangements. The committee's principal response to these developments is to favor them in general, but it specifically recommends that curbs on unit-of-serv~ce costs for inpatient care be strengthened and that payers insist on the generation of reliable performance/outcome data. There are two reasons why it would be unwise to institute blanket denials of coverage for hospital-based drug treatment. First, in some states and localities, hospital-based programs are the only sites providing residential treatment. Second, a certain proportion of the individuals who seek drug treatment also have problems for which a course of acute hospital care is appropriate, namely, complications or co-occurring medical or psychiatric disorders. Altogether, such cases in which it may be justifiable and necessary to initiate drug treatment services in a hospital setting may total one-fourth of privately covered clients who seek drug treatment. This figure is only guesswork, however, pending the advent of objective diagnostic assessment, systematic follow-up data collection, and systematic services research and evaluation of private treatment programs. Whatever the numbers involved, the committee recommends that drug treatment services at hospital sites be reimbursed separately from other diagnoses or hospital services, as there appears to be no compelling reason why these services for most drug treatment patients should routinely command fees comparable to acute care rates rather than to reasonably competitive residential treatment rates. Insurers and employers need to become better informed about drug treatment and to structure their benefits to support controlled access to a broad range of the most appropriate, effective, and efficiently priced treatments rather than to a narrow (and expensive) band of options that are similar in form to the treatment of acute medical conditions. Private insurance, health maintenance organizations, and other health financing plans should cover appropriate, adequate, cost-effective drug treatment and

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296 TRE4TING DRUG PROBLEMS TABLE 8-2 Preferred Sites or Types of Treatment for Selected Categones of Drug Treatment Clients Types of Service Needed or Client Inpatient/Residentiala Outpatient/Ambulatorya Characteristic Hospital Nonhospital Methadone Counseling Drug overdose P X X X Detoxification X S P P Rehabilitation High criminality X P P S Low criminality X S P P Job jeopardy only X S P P Adolescent X S X P Domiciliary (permanent drug-induced organic brain syndrome) X P X X ap = Primary site/modality of the most appropriate treatment; S = secondary or less likely site for treatment (nevertheless, for some clients this may be the primary or preferred site owing to their specific circumstances or needs); and X = generally inappropriate site/modality for this type of client. not reimburse the cost of excessive, inappropriate treatments or charges (Bible 8-2). The committee recommends that private risk bearers, in lieu of arbi- trary payment caps or exclusions, institute rigorous, independent pread- mission review (where possible) and concurrent review of all hospital and residential admissions as a way to control access and utilization, ensure appropriate placement, and manage costs. Preadmission review may not be necessary for outpatient admissions, but early concurrent utilization re- view is important for outpatient treatment to ensure that diagnostic criteria are observed and charges are reasonable. Employee assistance programs can serve as utilization managers in cases in which their personnel have appropriate training for matching patients to treatment. Hospital utiliza- tion should be managed under the same terms as recommended for public coverage (see the section on utilization management in Chapter 7~. In general, utilization management and indicators of performance are needed to meet concerns about costs and inappropriate treatment. In this area, as in other dimensions of health care, the stress should be on efficient delivery of effective care, in which responsible clinical innovation is encouraged, tested, and used when its worth is demonstrated. The committee recommends that private payers insist that providers participate in and agree to the publication of regular, independent follow- up surveys to determine client outcomes, taking into account data on admission characteristics such as problem severity. Providers and payers should be able to compare treatment results with overall program norms

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PRIVATE COVERAGE 297 to ensure that good performance is maintained and poor performance recognized when it occurs. The committee recommends that the provisions of drug treatment ben- efits, including deductibles, copayments, stop-loss measures, and sched- uled caps, be similar to provisions for treatment of other chronic, relapsing health problems. Except in terms of limitations on the length of stay and number of visits, such provisions are mostly the rule today. The commit- tee believes that sound cost-containment and managed care arrangements and reliable performance and outcome measurements will in short order obviate the need for separate length-of-stay and dollar caps on coverage. Nonhospital residential and outpatient treatment delivered in state-certified treatment programs should be covered. Coverage limitations, charge sched- ules, and cost-containment incentives (e.g., copayment schedules) should be adjusted to reflect the findings of research on appropriate models, lengths, and costs of drug treatment—especially the recognition that longer resi- dential and outpatient stays are strongly correlated with more beneficial results.