Medicare and Medicaid are the primary financiers of the US system of geriatric mental health services. Structured into the delivery of Medicare and Medicaid services are several key components including: (a) Medicare beneficiaries and expenditures; (b) Medicare’s benefit design including fee-for-service and managed care arrangements; (c) the emergence of managed Medicare, the Balanced Budget Act of 1997 and Medicare Part C; (d) Medicare Part D prescription drug coverage; (e) dually eligible Medicaid and Medicare beneficiaries; and (f) Medicaid beneficiaries and expenditures. The following sections provide an overview of each area including historical context and current issues.

Medicare Beneficiaries and Expenditures

Medicare is a federally funded health insurance programme. It was enacted in 1965 under President Johnson to cover health care for the elderly. Medicare benefits expanded in 1972 to include coverage of the disabled and individuals with chronic renal failure. Approximately 95% of older Americans receive Medicare health insurance⁴. Medicare comprises the second largest social insurance programme in the United States after social security⁵. In 2008 Medicare expenditures amounted to $468 billion and covered 45.2 million Americans, including 37.8 million individuals aged 65 years and older⁶.

Medicare’s Benefit Design for Mental Health Services: Fee-for-Service and Managed Care Arrangements

Medicare consists of four components (Parts A, B, C and D). This section reviews the four components of Medicare along with legislation enacted to restore parity in the administration of Medicare mental health benefits.

The fee-for-service (FFS) Medicare insurance programme covering health services is composed of two components (Part A and B). Part A, typically referred to as Hospital Insurance, covers inpatient psychiatric hospital care (up to 190 days lifetime maximum) and partial hospitalization⁷. Part A also covers hospice and home health-care services. Part B, or Medical Insurance, covers medically necessary physician and related ancillary services.

Medicare reimbursement policies have historically posed challenges for older adults and disabled persons seeking outpatient mental health services. Prior to the mid-1980s, Medicare payment policies supported reimbursement for acute inpatient care while restricting payments for outpatient services⁸. Restrictions on outpatient services included a $500 annual cap for outpatient psychotherapy, in conjunction with requiring a 50% co-payment. The Omnibus Budget Reconciliation Act of 1987 (OBRA-87) increased the $500 cap for psychotherapy reimbursement to $2200, yet retained the 50% co-payment. OBRA-87 also exempted medical evaluation and management of psychotropic medications from an annual cap. Subsequently, the Omnibus Budget Reconciliation Act of 1989 (OBRA-89) eliminated the annual cap on psychotherapy, yet retained the 50% co-payment⁹. Sustaining the discriminatory policy of a 50% co-payment for psychotherapy services set the stage for the Stark–Wellstone Medicare Mental Health Modernization Act of 2001 aimed at achieving mental health parity. This act was essential to the future development and enactment of legislation that restored parity in the delivery of mental health services.

In honor of the late Senator Paul Wellstone, the Wellstone– Domenici Mental Health Parity and Addiction Act (MHPAEA) was enacted in October 2008. MHPAEA required equal coverage for mental health and physical health care in group health plans by 2010. According to MHPAEA, equal coverage includes annual and lifetime limits, deductibles, co-payments, number of visits and other similar coverage requirements¹⁰. Although MHPAEA does not apply to Medicare beneficiaries, it does apply to Medicaid managed care health plans. Medicaid beneficiaries have access to mental health and substance abuse services at parity with other medical benefits¹¹. Enactment of the Medicare Improvements for Patients and Providers Act (MIPPA) of 2008 restored parity in the delivery of mental health services to Medicare beneficiaries. Prior to MIPPA, Medicare beneficiaries were subject to a 50% co-payment for outpatient mental health services (but only 20% for medical services). Following enactment of MIPPA, co-payments for mental health services will be reduced to 45% in 2010, 40% in 2012, 35% in 2013, finally reaching parity with medical co-payments of 20% in 2014¹¹. This legislation represents a major step towards eliminating the barriers that older adults face in accessing mental health services.

The Emergence of Managed Medicare, The Balanced Budget Act of 1997 and Medicare Part C

Managed care programmes were developed to control the escalating costs of delivering quality care to Medicare beneficiaries. This section provides an overview of managed care and legislation aimed at controlling Medicare expenditures. This section also includes a review of Medicare Part C.

The Balanced Budget Act (BBA-97) of 1997 made significant changes in the payment methodology to Medicare Risk Contracting (MRC) plans. Medicare Part C also introduced managed care alternatives to fee-for-service Medicare. In addition, Medicare Part C, or ‘Medicare + Choice’, expanded Medicare to health maintenance organizations, preferred provider organizations, provider sponsored organizations, religious fraternal benefit plans, private fee-for-service plans, point-of-service plans, PACE (Programs of All-Inclusive Care for the Elderly) and medical savings plans¹². However, due to the Plans’ inability to manage payments to providers, in addition to modest increases in Medicare plan payments, many providers left the programme. The result spurred an increase in premiums with a reduction in benefits¹³. New legislation became necessary to restore Medicare Part C and patient choice.

In 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act (MMA) (Pub. L. 108-173). MMA expanded the role of private health plans through prescription drug plans and renamed Medicare + Choice to ‘Medicare Advantage’¹³. The enactment of MMA enabled Medicare beneficiaries to choose from a variety of health plan options, including regional preferred provider organizations (PPO), health maintenance organizations (HMO), Medicare Special Needs Plans, Medical Savings Accounts (MSAs) and traditional fee-for-service (FFS) Medicare. The legislation also included a prescription drug benefit that allowed beneficiaries to choose among competing prescription drug plans. Although many Medicare Advantage plans offer mental health coverage to beneficiaries (coverage typically consists of a maximum of 20 outpatient visits and 30 hospital days per calendar year), most plans do not cover chronic mental illness in their standard benefit package. Despite the original intent of containing costs through competition by private insurance plans, Medicare Advantage has been characterized as government subsidization of health insurance companies at higher than average costs. In 2009, Medicare Advantage Plans have come under scrutiny by the Obama Administration as a potential source of savings¹⁴.

Medicare Part D Prescription Drug Coverage

The major impact of MMA was the introduction of Medicare Part D and the provision of a prescription drug benefit under fee-for-service Medicare. The implementation of Medicare Part D was meant to protect beneficiaries from the increasing cost of drug expenditures and to reduce costs associated with the underuse of medications¹⁵. In this section the implementation of Medicare Part D is reviewed along with suggested strategies to improve the delivery of prescription coverage to beneficiaries.

The introduction of Medicare Part D was largely welcomed as a means to address a longstanding lack of coverage for prescribed medications, yet presented specific challenges in covering psychiatric medications. Approximately 25% of Medicare beneficiaries are treated with psychiatric medications¹⁶ that are prescribed on a long-term basis. Some insurers, in an attempt to manage costs, initially provided Part D formularies with restrictions to discourage individuals with psychiatric disorders from enrolling in plans. Despite Part D guidelines intended to ensure patient access to prescribed medications, administrative tactics prohibited some beneficiaries from obtaining medication. Tactics included limited formularies, extensive use of prior authorization and step therapy requirements. Part D plans also included the preferred use of less costly medications, although many were inappropriate for older adults according to Beer’s criteria¹⁷.

Despite the welcome coverage of medication prescriptions, clinical providers experienced significant administrative burden with the implementation of Medicare Part D. For example, with some plans, every hour of direct patient care resulted in approximately an hour of administrative time¹⁸. Additionally, some psychiatrists reported making medication decisions based on whether exceptions or appeals would need to be pursued. Some also avoided patients whose care would entail higher administrative costs. These unintended consequences associated with the administrative burden of Medicare Part D have been cited as potential sources of compromised quality of care for some patients with psychiatric illness, an already vulnerable group¹⁸.

Recent changes have been implemented to improve the administration of Part D. According to a 2009 Medpac-funded report the minimum cost for specialty tiered drugs was raised to $600 a month. Since long-term users of specialty tiered drugs reach the maximum relatively quickly, they also qualify for catastrophic coverage. Federal reinsurance limits the beneficiary’s expense by paying 80% of costs once they qualify for catastrophic coverage¹⁹. Finally, the recently passed health-care reform legislation will result in removing the ‘donut hole’ gap for covering costs of medications in excess of $ 2,830 and up to $ 4,550 by the year 2020.

Dually Eligible Medicaid and Medicare Beneficiaries

Some older adults are eligible for both Medicare and Medicaid benefits. This population of individuals is referred to as ‘dually eligible’. This section provides an overview of the dually eligible population including estimates of expenditures for individuals with serious mental illness (SMI) (including schizophrenia, bipolar disorder and treatment refractory depression).

Many dually eligible beneficiaries are over the age of 65, have significant disabilities and often have fewer financial resources than the average Medicare beneficiary. According to a 2008 report by MedPac, dually eligible beneficiaries account for a disproportionate amount of Medicare spending. Dually eligible beneficiaries account- for 16% of Medicare beneficiaries and 25% of Medicare spending. Medicare spends 1.8 times more on dually eligible beneficiaries as compared to non-dually eligible beneficiaries. According to MedPac, $6212 is spent per non-dually eligible beneficiary while $10 994 is spent per dually eligible beneficiary. An assessment of total spending (including Medicare, Medicaid, supplemental insurance, and out of pocket spending) on dually eligible beneficiaries averaged about $23 554 per person in 2005. This amount is more than twice the amount of other Medicare beneficiaries²⁰. Similarly, the dually eligible beneficiaries comprise a major portion (42%) of Medic-aid spending²¹.

A 2003 study of Medicaid and Medicare dually eligible expenditures indicated that the highest per capita spending was on older beneficiaries with schizophrenia. According to this report, dually eligible beneficiaries age 65 and older with depression cost roughly $27 850, while beneficiaries with dementia and schizophrenia cost $39 154. Conversely, beneficiaries in this age cohort without mental illness generated a per capita cost of $10 898. Per capita spending by diagnosis increases with age. This study indicates a greater service need and cost for dually eligible older adults (age 65 and older) with mental illness²².

Medicaid Beneficiaries and Expenditures

While Medicare covers a portion of health-care expenditures for the elderly, the Medicaid programme also provides additional benefits and services to some older adults. This section provides an overview of this joint federal–state Medicaid programme which represents one of the largest public health-care insurers in the United States. Medicaid delivers health-care services to poor, blind or disabled individuals, including individuals with serious mental illness. People with SMI may also be covered by Medicaid. Total Medicaid expenditures in 2007 were $333.2 billion. In 2007 57% of Medicaid expenditures were federally financed (190.6 billion), while 43% (142.6 billion) were financed by state funding²³. By mid-2007, 61.9 million people (one in every five people in the US) were enrolled in Medicaid. Spending on individual beneficiaries averaged an estimated $6120 in 2007. Although older adults and disabled people represent less than a third of Medicaid enrollees, almost three-quarters of the Medicaid budget is expended on this population of beneficiaries²¹. Adults 65 and older covered by Medicaid averaged $14 058 per beneficiary, while disabled persons averaged $14 858 per beneficiary²³.

A considerable amount of Medicaid spending is dedicated to long-term care services in a variety of settings. In 2006, approximately one-third of Medicaid expenditures were for long-term care, including care in nursing homes, as well as home and community-based services (HCBS)²⁴. Although nursing home care for adults is an area that Medicaid is required to cover, states may choose whether or not to cover alternative models of community-based long-term care services such as PACE or services for older adults in mental institutions²¹. Medicaid is also accountable for a significant share of the cost of mental health services. In 2001 Medicaid payments comprised more than one-quarter of all mental health expenditures, including both private and public payers. No other payer, including Medicare, spent more on mental health services²⁵.