There are two policies that are of special importance: (1) the bias against individual self-insurance and (2) the bias against personal and portable insurance.

Bias against individual self-insurance. There are basically two ways to insure against contingent events: (1) shift the risk to a third-party insurer in return for the payment of premiums; or (2) self-insure by making regular deposits to an account that can be used to pay costs directly. In general, third-part insurance works well in cases where the illness can be objectively determined and there is little discretion about how to treat it (e.g., setting a broken leg). However, in the mental health field, illness is often experienced subjectively and there is often a great deal of discretion about treatment regimes. Even when a person has been diagnosed with a mental illness, it is often difficult to determine whether or not progress is being made in treatment, and it is especially difficult for third parties to monitor any progress that is made. As a result, we would expect that free-market health insurance for mental illness would contain a large dose of self-insurance. The reason is: when people pay medical bills from their own health accounts, they are spending their own money rather than someone else' money. Self-insurance requires only self-monitoring, not third party monitoring.

Unfortunately, federal tax law is very biased against this very sensible arrangement. In general, employer payments for third-party insurance are excluded from the taxable income of the employee who gets the benefit. This is an important tax break for a middle-income family in the 28 percent federal income tax bracket, facing a 6 or 7 percent state and local income tax and a (combined employer and employee) FICA payroll tax of 15.3 percent. It means that the federal government is "paying" roughly half the cost of the insurance. However, employer payments to an employee health account do not get this tax break. If the employer tries to put a dollar in a health savings account for an employee, the government will take half of it at the time of the deposit.

There are two exceptions to this general rule. First there is a federal pilot program under which the self-employed and employees of small business can take advantage of tax-free, Medical Savings Accounts (MSAs). Although the idea behind MSAs is a sound one, the federal pilot program is too limited and too restrictive. As a result only about 100,000 U.S. families have MSAs.

A second exception is the Flexible Spending Account (FSA). Under programs set up by employers, employees can make pre-tax deposits to an FSA and use the account to pay medical bills. The problem is that employees must decide at the beginning of the year on a monthly deposit amount (deducted from their paychecks) and any unspent money left in the account at the end of the year must be forfeited. This means that employees must know in January what their health needs are going to be for the whole year. Further, the "use-it-or-lose-it" rule often encourages wasteful spending at year-end - on such items as designer eyeglasses, for example.

Bottom line: Federal tax law is heavily biased against the kind of insurance arrangements that make the most sense in the field of mental health care.

Bias against personal and portable insurance. Although the federal tax law is very generous to employer-provided insurance, there is virtually no tax relief for individually purchased, individually owned insurance (premiums are only deductible to the extent they exceed 7.5 percent of income). This is why more than 90 percent of people with private insurance get it through an employer. It also means that when most employees switch jobs, they must also switch health plans.

Years ago, when these federal policies were formed, health insurance was largely fee-for-service. Employees could see any doctor or go to any facility. In today's managed care world, however, a switch of health plans may mean a change of doctors. And that means there is no continuity of care.

This is a general problem for all patients and all illnesses. However, the doctor-patient relationship is more important in the mental health field and a change of doctors and facilities is more likely to have adverse healing consequences when the illness is mental.

• This is an argument for changing the federal tax laws, at least to create a level playing field (a) between third party insurance and individual self-insurance and (b) between individually purchased insurance and employer purchased insurance.

• A level playing field for individual self-insurance would allow employers and insurers to creatively use individually owned health accounts to improve incentives and more efficiently structure services in ways that are unique to mental health. (NCPA will elaborate on this in the future.)

• A level playing field for personal and portable insurance would allow people who are in a health plan they like to stay in that plan (without a break in the continuity of care) as they move from job to job.

• The existence of individually-owned insurance does not mean there is no role for the employer. In fact, one could argue that we should encourage employers to purchase individually-owned insurance for their employees. (NCPA will elaborate on this as well.)

• Finally, these proposals constitute a possible answer to the market failure argument. If employers make biased health insurance choices (to the disadvantage of the mentally ill), one antidote is to let employees choose their own insurance plans.

The argument from federal government failure implicitly assumes that individual choice and free markets produce ideal outcomes. Or at least better outcomes than we get under the current system. One can challenge that assumption.

Relying on the argument from ignorance, one could argue that individuals acting on their own are not capable of making good choices concerning mental health care. They will choose the wrong health insurance plans. When spending from health savings accounts, they will make the wrong purchases. Collectivization through the workplace may not be ideal. But it at least reigns in rampant individualism and puts limits on how bad individual choice can be.

Moreover, even if self-insurance through individual health accounts should be part of an ideal health plan, there is no assurance that individuals will choose the ideal. They may instead choose a poorly designed plan in which they fritter away their health savings money on inconsequential and unnecessary services.

Also, there are some common arguments against individually-owned health insurance. In most states, individual insurance is "underwritten." This means that acceptance into the plan and the premiums charged can vary depending on the individual's health status. In general, people with expensive-to-treat health problems are often turned down by individual insurance plans. Or, they may be accepted with a "rider" that exempts the insurer from paying for pre-existing conditions. So affirmative teams that argue for widespread individual insurance will have to have some way of getting insurance for the already sick. Moreover, once in a health plan, people who develop health problems will find it difficult or impossible to move to another health plan - at least as the market works now.

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