Behavioral Healthcare Benefit Plan Designs

Behavioral healthcare benefit plan designs are closely aligned with medical plan designs. As with medical plans, behavioral benefit plans are either network-based (HMO, POS or PPO), or non-network based (indemnity). A large employer or purchasing group often will customize a behavioral healthcare carve-out plan to provide a standard plan design to all members regardless of their medical coverage. This greatly facilitates plan administration, but insurance and utilization review laws, and third-party administrator licenses vary from state to state, complicating behavioral plan administration. To fully understand behavioral health-care benefit plan design, it is essential to first understand funding arrangements.

Fully Insured Arrangements

In a fully insured funding arrangement, often called "full risk" or "risk-based," MBHOs assume the financial risk for providing behavioral services paying the claims submitted by providers for behavioral services rendered. Financial risk falls on the MBHO. When service utilization and corresponding claims costs exceed expected levels, the MBHO absorbs those increased costs. Purchasers pay MBHOs a predetermined, fixed (usually monthly) premium for assuming financial risk for behavioral treatment costs. On average, a monthly premium for a fully insured, full-risk behavioral plan, excluding EAP, ranges between 3 and 6 percent of a medical plan's premium, although rates can vary depending upon a group's utilization experience, number of members, geographic location, benefit plan, and state parity laws. The two primary cost drivers for a fully insured funding arrangement are group utilization rates and unit costs for practitioner and facility care.

A variation of a fully insured funding arrangement is a shared-risk arrangement, in which purchasers agree to assume financial risk for claims payment up to a certain amount. Premiums are based on projected claims costs. If claims exceed a prespecified amount, the MBHO assumes those claims costs or a percentage of those costs. If claims come in below the targeted amount, the balance can be shared by the MBHO and client or refunded to the client. There are many iterations of these shared agreements.

Administrative Services Only

Under an administrative services only (ASO) arrangement, an MBHO, for a fee, will handle medical management, utilization review, benefit and other administrative functions, such as claims payment (although some ASO contracts do not include claims payment). Often called a "self-funded" or "self-insured" arrangement, the purchaser assumes the financial risk for the health care costs for its members. Self-funded plans may also be administered by independent organizations called third party administrators (TPAs), which often provide administrative and medical management services in addition to claims processing. The larger the group, the more likely it is to self-fund because the financial risk is spread across more employees and its budget is large enough to absorb the risk. Self-funded groups typically have stop-loss insurance, which protects them from catastrophic losses.

A key advantage of an ASO arrangement is that employers can offer the same benefit to employees working in different states. Because ERISA exempts self-funded health plans from compliance with state laws and regulations, employers that self-fund can avoid individual state regulations such as diverse state mental health parity laws. Self-funded employers may also be able to save money because they can limit the risk pool to their own employees, avoid state taxes on insurance company premium revenues, and have complete control over benefit packages. In addition, some employers may self-fund to access claims data, allowing them to understand the true costs of their health care plans and tailor their plans accordingly. Figure 1 outlines benefit plan design and funding arrangement options.

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Benefit Plan Design	Funding Arrangement
Network Providers (HMO, PPO, POS)	Fully Insured Shared-risk
Non-network Providers (Indemnity)	Administrative Services Only (ASO) Network Management Claims Payment

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Figure 1: Behavioral Health Care Benefit Plan Funding Arrangements

Sample Managed Behavioral Healthcare Benefit Plan Design

Figure  shows an example of a managed behavioral healthcare combined HMO/POS plan design that complies with California's mental health parity legislation.

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Services	HMO	POS[*]
		In-Network	Out-of-Network
Mental Health
Inpatient deductible	None	None	N/A
Inpatient per admission fee	None	None	N/A
Inpatient treatment annual maximum benefit including partial and day treatment	Unlimited days at 100% based on medical necessity	Maximum of 30 days (combined with chemical dependency)	Not covered
Outpatient treatment	30 visits at $0 copayment	40 visits (combined with out-of network) at $0 copayment	40 visits (combined with in-network) per calendar year 50% of UCR up to $40 per visit
Chemical Dependency/Substance Abuse
Inpatient and outpatient (includes detox)	$25,000 per calendar year	Maximum of 30 days (combined with mental health)	$200 deductible per calendar year 50% of UCR up to a maximum of $1,000 per calendar year
Severe Mental Illness Benefit[**]
Inpatient deductible	None	None	N/A
Inpatient per admission fee	None	None	N/A
Inpatient, partial and day treatment	Unlimited days covered at 100%	Unlimited days covered at 100%	N/A
Outpatient mental health visits	Unlimited visits at $0 copayment	Unlimited visits covered at $0 copayment	N/A
[*] Pre-authorization required for all in-network and in-patient services both in and out of network. Chemical dependency and substance abuse combined in- and out-of-network maximum of $35,000 per calendar year. Chemical dependency and substance abuse combined in- and out-of-network maximum of $50,000 per lifetime. [**] Severe mental illness diagnoses include: anorexia nervosa, bipolar disorder, bulimia nervosa, major depressive disorder, obsessive-compulsive disorder, panic disorder, pervasive developmental disorder or autism, schizoaffective disorder, schizophrenia. In addition, the Severe Mental Illness Benefit includes coverage of serious emotional disturbance of children (SED).

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Figure 2: Sample Managed Behavioral Healthcare Combined HMO/POS Plan Design With A Typical Mental Health Parity Benefit

An employee assistance program is a confidential, short-term counseling service to assist employees and their family members with personal problems that negatively affect their job performance. These programs vary considerably in design and scope, and are offered by MBHOs, stand-alone EAP companies, and work/life companies. EAPs originally focused on substance abuse problems, but most today take a comprehensive approach to support members with a range of employee and family issues. Some include proactive prevention and health and wellness programs, and may even be linked to the health plan and MBHO benefit structure. While most EAPs offer a wide range of services, they generally refer members to other professionals or agencies that can offer more, or extended, help in particular areas. EAPs also provide human resource support through management consultation, on-site employee and employer seminars and critical incident stress management after catastrophic workplace events. The average utilization rate for an EAP ranges between six to seven percent, but it jumps to between seven and 10 percent when adding work/life programs. 

Figure 3 shows the benefits offered by a typical EAP.

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24-hour toll-free access to the EAP

Confidential services

Available to all household and dependent family members

Unlimited calls

Five face-to-face counseling sessions (per incident) with EAP provider

Child and elder care referral services

Legal assistance and referral

Financial counseling and debt management

Alternative medicine referral

Concierge services

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Figure 3: Typical Employee Assistance Program Benefit Summary

Hybrid Schemes | PENSION SCHEME DESIGN

The major philosophical difference between a defined benefit (final salary) scheme and a defined contribution (money purchase) was mentioned earlier. Moving from final salary to defined contribution provision shifts all of the risk from the employer to the employees.

For this reason, many commentators now advocate 'hybrid schemes' that seek to split the risk between both parties. Some employers have started to adopt such designs, and examples include the following:

§  Career revalued average salary scheme. This is a type of defined benefit scheme. Instead of pension being based on final salary, the employee receives a pension proportional to service and career average salary, with salary from earlier years revalued by RPI (say).

§  Combined final salary/defined contribution scheme. Under this approach, both types of scheme are in operation. A final salary scheme might be provided for staff who meet an age and/or service qualification, with defined contribution provision applying to other staff. For example, membership of the final salary scheme might be limited to staff aged 40 or more, with no backdating of service; pension in respect of previous service would be provided on a defined contribution basis.

§  Cash balance scheme. Employees are provided with a guaranteed individual retirement fund proportional to service and final or average salary. As in a defined contribution scheme, a proportion may be taken as cash with the balance being used to buy an annuity.

§  Schemes with an element of discretion. Low-level guaranteed benefits are provided, perhaps on a final salary or career average basis. However, there is discretion to provide enhanced pensions as and when the scheme's funding position allows it. A variant of this approach is to operate a defined contribution scheme with a modest final salary (or career average salary) guarantee.

§  Capped final salary. A self-imposed cap is applied to pensionable salary with defined contribution provision on the excess salary. The logic here is that it is reasonable to transfer some risk to the employee once a basic level of guaranteed retirement income has been built up.

§  Reduced cost final salary. This is not strictly a hybrid scheme, but has been adopted in a number of companies. This approach involves retaining final salary provision but with some benefits scaled back to restrain costs. For example, some have reduced the accrual rate from 1/60th per year of service to 1/80th or, more commonly, have increased employee contributions. Often employees and unions prefer this to a move towards defined contribution provision.

Defined Contribution Scheme Design

There is a very wide variety of defined contribution design models available, as follows:

§  Employer contribution is a fixed percentage of salary. For example, the employer pays 8 per cent of salary for all members. This is easy to understand and explain.

§  Employer contribution is a percentage of salary that increases with age (or service). For example, the employer pays 6 per cent of salary for all members, increasing to 9 per cent at age 40 and 12 per cent at age 50. This design partly mirrors the way final salary schemes work and may be targeted to deliver a benefit equal to a certain percentage of final or average salary.

§  Employer contribution is a multiple of that paid by the employee. For example, the employer will pay double what the employee contributes up to a maximum employer contribution of 10 per cent of salary. This design ensures that employer spend is targeted on those who most value it.

All three approaches are fairly common, and are often used in combination. For example, the employer may pay a fixed contribution of 3 per cent of salary and then match what the employee pays up to 5 per cent of salary. Hence, the maximum employer contribution is 8 per cent of salary.

There is also considerable variation in the maximum available employer contribution rates. Typically, for staff and middle managers these range from 3 per cent to 15 per cent with a median of around 8 per cent (source: Hay Group Survey of Employee Benefits 2003).

It is evident that the lower levels of contribution are highly unlikely to deliver an adequate retirement income unless the employee makes substantial contributions and/or has other forms of saving. For example, a pension contribution of 3 per cent of salary made from age 20 to age 60 might be expected, using conservative assumptions, to provide a pension of only around 10 per cent of final salary.

At retirement, the employee may take up to a quarter of the fund as a tax-free lump sum. The remainder of the accumulated fund is used to purchase a regular pension ('annuity') from an insurance company. The member typically determines the form of annuity chosen, subject to some government-imposed restrictions. The decisions required include:

§  the rate at which the annuity should increase in payment;

§  the benefits payable to a surviving partner on death;

§  whether the annuity should be guaranteed or on an investment-linked basis (for example, a 'with profits' annuity).

There is also the option not to take an annuity initially and instead 'draw down' an income from the pension account. (This approach is used mainly by more financially sophisticated members and/or those with larger individual funds.)

Why Provide Pensions?

Historically, leading employers in the UK and elsewhere have provided pension arrangements for the following reasons:

1.  There is a perceived moral obligation to provide a reasonable standard of post-retirement living for employees, especially those with long service. A similar logic extends to providing pensions for dependants on a current or retired employee's death. This obligation is less apparent in countries where state pension provision is at a higher level than in the UK.

2.  A good pension scheme demonstrates that the employer has the long-term interest of employees at heart.

3.  A good scheme may help to retain and attract high-quality staff.

4.  Pensions can be a tax-efficient form of remuneration. This was a particularly significant issue in the past when personal rates of income tax were higher than now and when other tax-efficient vehicles (eg ISAs or offsetting mortgages) were not widely available.

However, in recent years many employers have questioned the level and volatility of pensions cost and this has caused them to review scheme designs.

Main Scheme Types

The two main approaches that have been adopted for pension provision in the UK are described below. Recently, some employers have begun to adopt other designs and these are discussed further later in this chapter.

§  Defined benefit (final salary) schemes. The employer's pension promise to the employee is expressed by means of a formula specified in the scheme rules. The pension is typically proportional to service and (some definition of) salary. Traditionally, the salary used has been that paid over the last year (or sometimes three years) before retirement, which is why they are often known as 'final salary' schemes. A typical design is shown in the section 'Final salary scheme design' below.

§  Defined contribution (money purchase) schemes. Here the employer's pension promise to the employee is expressed as a contribution formula, typically expressed as a percentage of salary. The contributions are invested and the money used at retirement to purchase a regular income, usually via an annuity contract from an insurance company. The employer's contribution as a percentage of salary may be fixed, age related or linked to what the employee pays - see below.

In both types of scheme, employer and employee typically contribute to a fund. In a defined contribution scheme, members have individual shares of the fund, which represent their personal entitlements and which will directly determine the pensions they receive. In a defined benefit scheme, all employee and employer contributions are paid into a combined fund and there is no direct link between fund size and the pensions paid.

Apportioning Risk

Pension provision is an extremely long-term and unpredictable business. Consider a female employee currently aged 25. It is not possible to predict the future trajectory of her salary, how long she will stay in employment, her age of retirement, how long she will live after retirement and whether she will have a partner or other dependant(s) when she dies.

Because of these uncertainties, there are risks attaching to pensions provision for the employer and/or the employee. The apportionment of this risk varies considerably, depending on the type of pension scheme provided.

Final Salary Risks

Because the pension is based on a guaranteed formula, there is a risk that the cost of providing this guaranteed benefit will be higher than expected. Typically employee contributions are fixed and those of the employer vary based on specialist advice from the scheme actuary. Hence, the risk of higher-than-expected costs falls on the employer. Costs might exceed expectation if, for example:

§  salaries grow faster than expected;

§  longevity increases;

§  the fund investments perform less well than expected.

Defined Contribution Risks

Under a defined contribution scheme, the cost of employer contributions is predictable but there is a risk that the resulting pension falls short of expectations. This risk normally falls on the employee. For example, the pension may not meet expectations if:

§  the fund investments perform poorly, either in the long term or in the period immediately preceding retirement;

§  the annuity rate (ie the conversion rate from lump sum to regular pension) is unfavourable - for example, because interest rates are low.

From the above discussion, it can be seen that there is a huge philosophical difference between final salary (guaranteed pension, variable cost) and defined contribution (uncertain pension, fixed cost).

Typical Provision in the UK

The design of final salary schemes, the reasons behind the recent widespread move to defined contribution schemes, and the design of such schemes and some of the new hybrid designs emerging, are discussed below. More detailed design elements such as member contributions, contracting out, protection benefits and leaving-service benefits are then examined.

Final Salary Scheme Design

The final salary pension scheme has been the mainstay of occupation pensions in the UK for many years. Until around the earliest years of the 21st century, designs were relatively standardized, as in the following examples of typical private sector and public sector final salary schemes:

§  Typical private sector final salary scheme:

o    a pension of 1/60th of final-year basic salary per year of service;

o    payable from age 60 or 65;

o    pension in payment guaranteed to increase in line with inflation (up to 5 per cent per annum);

o    part of pension may be exchanged for a tax-free lump sum;

o    fixed employee contribution of 0 to 5 per cent of salary.

§  Typical public sector final salary scheme:

o    pension of 1/80th of final-year basic salary per year of service, plus lump sum of 3/80th of basic salary per year of service;

o    pension in payment guaranteed to increase in line with inflation;

o    fixed employee contribution of 1.5 per cent to 6 per cent of salary.

The protection benefits payable on death or in the case of serious ill health are considered below.

Because final salary schemes provide a high level of certainty for the participant (provided the scheme is adequately funded), they tend to be favoured by employees and unions. In addition, because of modest employer contribution rates, many defined contribution schemes are expected to produce lower pensions for most members than a typical final salary scheme, although defined contribution schemes may be better for younger, mobile employees.