Mental Health in the Level Funded Workforce: Parity on Paper, Gaps in Practice

LFP-06.06 | Sharp Analysis | Series 06: The Populations

The Mental Health Parity and Addiction Equity Act requires that financial requirements and treatment limitations on mental health and substance use disorder benefits be no more restrictive than those applied to medical and surgical benefits. Self-funded plans, including level funded plans, are subject to MHPAEA. The requirement is not optional. The penalties for noncompliance include excise taxes of $100 per day per affected individual, ERISA civil penalties, and litigation exposure from participants denied parity-compliant benefits.

The compliance gap in small self-funded plans is not primarily about plan generosity. It is about compliance infrastructure that small plans lack and that the vast majority of TPAs have not built. The DOL’s 2022 Report to Congress on MHPAEA enforcement found that none of the nonquantitative treatment limitation comparative analyses initially submitted by plans and insurers under the new CAA requirements were sufficient to demonstrate compliance. Not a minority. Not a troubled subset. None. The regulation exists. The documentation requirement exists. The analysis that would establish compliance does not exist in most small self-funded plans.

The Parity Requirements

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MHPAEA was enacted in 2008 and became effective for plan years beginning after October 3, 2009. The ACA extended MHPAEA to the individual market and strengthened enforcement. The Consolidated Appropriations Act of 2021 added a nonquantitative treatment limitation comparative analysis requirement effective February 10, 2021. The 2024 final rule issued by HHS, DOL, and Treasury, published at 89 Fed. Reg. 77577 on September 25, 2024, further strengthened the NQTL comparative analysis and documentation requirements, with most provisions effective for plan years beginning on or after January 1, 2025.

The statute requires parity in two domains.

Financial requirements include deductibles, copayments, coinsurance, and out-of-pocket maximums. The rule requires that financial requirements applied to mental health and substance use disorder benefits be no more restrictive than the predominant requirements applied to substantially all medical and surgical benefits in the same classification. Classifications include inpatient in-network, inpatient out-of-network, outpatient in-network, outpatient out-of-network, emergency care, and prescription drugs. A plan applying a $50 copay to mental health office visits and a $30 copay to primary care office visits violates parity if $30 is the predominant copay applied to substantially all outpatient in-network medical and surgical benefits.

Treatment limitations include both quantitative and nonquantitative varieties. Quantitative treatment limitations are visit limits, day limits, and frequency limits. A plan limiting outpatient mental health visits to 20 per year while allowing unlimited primary care visits violates parity. The 2024 final rule strengthened the quantitative parity analysis.

Nonquantitative treatment limitations are the compliance frontier. NQTLs include prior authorization requirements, step therapy protocols, medical necessity criteria, network adequacy standards, reimbursement rates, and fail-first requirements. The parity rule requires that NQTLs applied to mental health and substance use disorder benefits be comparable to, and applied no more stringently than, NQTLs applied to medical and surgical benefits. Demonstrating compliance requires a comparative analysis, a documented examination of how the plan’s NQTLs operate across benefit classifications and whether mental health benefits face more restrictive application than comparable medical benefits.

The Compliance Gap in Small Self-Funded Plans

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The NQTL comparative analysis is the mechanism by which a plan demonstrates parity compliance for nonquantitative treatment limitations. The 2021 CAA requirements and the 2024 final rule made this a documentation requirement: plans must be able to produce the analysis on request from DOL, state regulators, or plan participants.

The analysis must identify each NQTL applied to mental health and substance use disorder benefits. For each NQTL, the plan must identify the factors used to design the limitation, the evidentiary standards supporting it, and the sources of those factors and standards. The plan must demonstrate that the NQTL as written and as applied in practice is comparable to, and no more stringent than, NQTLs for medical and surgical benefits in the same classification.

Large self-funded employers with benefits counsel and compliance teams perform this analysis. The documentation runs dozens of pages, requires claims data analysis to evaluate how NQTLs function in operation rather than just as written, and demands comparison across benefit classifications and services within each classification.

Small self-funded employers with level funded plans administered by TPAs overwhelmingly do not perform this analysis. The DOL’s first Report to Congress on MHPAEA NQTL compliance, issued in January 2022, stated explicitly that none of the comparative analyses initially submitted to EBSA were sufficient to demonstrate compliance. The 2023 Report to Congress, issued in July 2023 and covering the second year of CAA implementation, confirmed that the same pattern continued: none of the comparative analyses initially submitted were sufficient. Between February 2021 and July 2022, EBSA issued 138 insufficiency letters covering over 290 NQTLs reviewed across the plans and insurers from which it requested analyses.

The practical consequence is that most small self-funded plans are technically noncompliant, not because they have consciously chosen to restrict mental health benefits, but because they have not analyzed whether their benefit administration satisfies parity requirements. The analysis has not been performed. Violations are not identified. Restrictions continue until enforcement or litigation compels change.

The economic and operational barriers to performing the analysis are real. The cost of engaging outside counsel or consultants to perform an adequate NQTL comparative analysis can exceed $10,000 to $20,000. For an employer paying $180,000 annually in level funded costs, that expense requires a compliance rationale that most small employers have not confronted because they have not received an enforcement inquiry or a participant complaint.

The 2023 Report to Congress noted that EBSA has focused its NQTL enforcement on large service providers and TPAs whose practices affect hundreds or thousands of plans. A correction at the TPA level cascades to all plans the TPA administers. This is the enforcement approach most likely to produce systemic improvement in the small group market, because small plans individually lack the resources to self-correct.

How Plan Design Restricts Mental Health Access

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The mechanisms by which level funded plan designs restrict mental health access in ways that may not survive a parity analysis are identifiable, and they recur across plans because they often flow from TPA standard practices rather than employer-specific decisions.

Prior authorization requirements applied more stringently to mental health services than to comparable medical services represent the most common violation category. DOL’s FY 2023 enforcement data found violations including impermissible prior authorization requirements for outpatient mental health services that were not applied to comparable medical and surgical services. A plan that requires prior authorization for six outpatient psychotherapy sessions but not for six outpatient physical therapy sessions has a parity problem.

Network adequacy is a documented and persistent gap. Milliman’s 2019 research on behavioral health network access found that patients were 5.7 times more likely to use out-of-network providers for behavioral health office visits than for medical and surgical office visits. The differential exists because in-network reimbursement rates for mental health providers are lower than for medical providers, reducing providers’ willingness to contract with health plans and participate in networks. Network inadequacy functions as a treatment limitation even when the plan document does not restrict visits, because members cannot access in-network providers.

Visit limits and treatment duration limits that apply to mental health but not to comparable medical services are quantitative parity violations. Fail-first requirements that mandate failure of prior treatment before authorizing more appropriate mental health treatment, when no comparable step therapy applies to medical conditions, are NQTL violations. DOL’s FY 2024 enforcement reporting documented violations including more restrictive copays for mental health and substance use disorder office visits compared to medical and surgical visits, and visit limits on autism spectrum disorder related services without comparable limits for analogous medical conditions.

The specific plan designs vary across employers. The common thread is that the designs have not been analyzed against parity requirements, and the gaps persist.

The Enforcement Trajectory

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DOL enforcement of MHPAEA in self-funded plans is increasing in scale and sophistication. EBSA has allocated nearly 25% of its enforcement program to MHPAEA NQTL work. The enforcement posture shifted materially after the 2021 CAA requirements took effect, and the 2024 final rule has added additional documentation and reporting requirements.

Plans must make NQTL comparative analysis documentation available to participants upon request within 30 days. A participant who requests the documentation and receives nothing, or receives an analysis that is not meaningfully responsive, has grounds for a complaint to DOL and potentially for litigation. The DOL and CMS 2024 enforcement reporting, covering FY 2023, found 33 total violations in 56 plans reviewed across the two agencies. These are enforcement actions against plans that came under investigation; the compliance rate among plans not yet investigated is not reported, but the consistent finding that initially submitted analyses are insufficient provides a reasonable basis for concern about systematic noncompliance.

Class action litigation under MHPAEA has produced settlements exceeding $100 million against large self-funded plans. The theories of liability do not exclude small plans. The question is whether plaintiffs’ attorneys will find small plans economically viable targets; the answer may depend on whether TPA-level investigations continue to produce corrections that reverberate across the TPA’s book of business.

The TPA is the actor best positioned to build the compliance infrastructure. The TPA designs the plan document, administers prior authorization, manages network relationships, adjudicates claims, and holds the claims data needed to evaluate whether NQTLs operate in practice as they do on paper. NQTL comparative analyses performed at the TPA level, and applied consistently to all plans the TPA administers, is the compliance architecture that the 2023 Report to Congress explicitly recommended. Most TPAs have not built it.