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WASHINGTON -- Employers whose health plan costs go up at least 1% after complying with a new federal law on mental health care benefits will have to wait until July 1 to apply for an exemption from the law.

The mental health parity law, which takes effect Jan. 1, prohibits employers from imposing annual or lifetime dollar caps on mental health care that are lower than caps on care for physical sickness.

The law, however, permits other restrictions on mental health benefits, such as limits on the number of covered visits and higher copayments for mental health care treatments than treatments for physical conditions.

While these permitted limitations should permit employers to comply with the law while holding mental health care cost increases below 1%, a vaguely worded section of the law also provides an exemption for employers whose costs rise at least 1%.

To clarify the application of this exemption, the Clinton administration last Friday released a regulation stating that employers can seek the exemption after six months if they document a cost increase of at least 1% and provide 30 days notice of the exemption filing to participants and to the federal government. Once an exemption is obtained, it is good for the entire duration of the law, which sunsets on Sept. 30, 2001.

The new rule, expected to be published in today's Federal Register, is a win for mental health advocates and a disappointment for business interests that had been lobbying for the right to do a prospective analysis of the cost of complying with the new regulation.

Private employers with 50 or more employees have three months, starting in January, to bring plans in line with the parity rules, though the government must be notified in writing if the grace period will be used.

According to government-sponsored studies, about 30,000 benefit plans, or approximately 10% of plans covered by the new rule, are likely to be able to prove that their costs have gone up at least 1%. These plans cover 11 million people, the government said.

Business advocates criticized the new regulation as expensive for employers and difficult to apply. Employers seeking the exemption would have to amend health benefits in the middle of a plan year and reduce a benefit, which would prove unpopular, said Neil Trautwein, manager of health care policy for the U.S. Chamber of Commerce in Washington. He said he hopes that the rule will be repealed.

The Clinton administration was not swayed by several letters sent last week to key government officials by the Washington-based National Assn. of Manufacturers, said lobbyist Julie Cantor-Weinberg. "We asked for prospective relief," she said. "Clearly it's an example of how the administration is hostile to the employers in this arena."

Neil Grossman, vp for legal and regulatory affairs at the Washington-based Assn. of Private Pension & Welfare Plans, said: "We'll try to apply it in practice and see if it's workable. If not, we may go back to Congress."

How employers will use the 1% rule is largely a moot point for the year ahead, according to Rich Stover, consultant for Buck Consultants Inc. in Secaucus, N.J. The federal government has delayed providing guidance for so long that most employers already have seen their open enrollment periods come and go, he said, and major decisions regarding benefit parity already have been made. Many plan sponsors already have equalized mental and physical coverage (BI, Oct. 27).

Few plans are likely to seek the 1% exemption, predicted Judy Bauserman, a consultant in the Washington office of William M. Mercer Inc., because other permitted plan design changes can control costs. In addition, self-insured employers will not want to incur the cost of figuring mental health care expenses, she said.

Bethesda, Md.-based Marriott International Inc., which now has a lifetime mental health benefit maximum of $50,000, compared with $1 million for medical and surgical care, will change its plan to comply with the rule, said Robert Dankmyer, vp-corporate benefits.

"Our objective is not to get around it by using the 1%," he said. "Our objective is to be in compliance." Mr. Dankmyer added that other restrictions -- which are still undetermined -- would be adopted to limit mental health expenses.

The administration's rule on the exemption is welcomed by mental health care advocacy groups. They had warned that prospective analysis of health costs would lead to massive defections of employers from the rule's umbrella.

"We were very pleased with the outcome," said Al Guida, vp of government affairs for the Alexandria, Va.-based National Mental Health Assn.

"It appears the implementation of the law will take place well into the 1998 plan year, and we hope we'll have a positive experience and long-term impact. It's our hope since the cost of the proposal is so minor, the actual exemption process will be rarely used," he said.

Although happy with the new rule, mental health advocates continue to criticize what they term major loopholes inherent in the law. Because plan sponsors are free to limit psychiatric care by number of inpatient days or number of outpatient sessions, for instance, these groups said employers still will be able to offer low levels of mental health care benefits.

"Anyone who wants to undermine (the rules) can undermine them," said Russ Newman, executive director for professional practice of the Washington-based American Psychological Assn. "People can still sabotage and undermine the intent of the parity legislation."

The new rule does not compel an employer to offer to its employees mental health care coverage or basic medical insurance, but analysts said that they expected few employers to drop these benefits.

The new rule also attempts to address the complexities that will arise when employers have more than one cap for various physical illnesses.

The rule specifies a weighted average of all covered physical conditions and sets mental health parity equal to that average. For instance, a group plan has a $100,000 annual limit on cardiopulmonary diseases, and 40% of the plan payments are for these illnesses. The remainder of claims, 60%, are covered at a maximum of $1 million.

The cap for mental health would be the weighted average annual limit, or 40% multiplied by $100,000 plus 60% multiplied by $1 million, or $640,000.