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Graduate 
Student Journal of Psychology                                                                             Copyright 2010 by the Department of Counseling & Clinical Psychology  
2010, Vol. 12                                                                                                                        Teachers College, Columbia University                          

 
Managed Care and the Mental Health Professions:  

History and Effects on Outpatient Care  
 

Gregory Erickson 
Teachers College, Columbia University 

 
The purpose of this article is to offer a brief review of how managed health care 
companies have affected mental health services.  An abbreviated history of these 
organizations is given followed by a discussion of how they operate to reduce both 
costs and service utilization.  The consequences of their practices on outpatient 
treatment are then examined.  Results indicate that the overall breadth and quality of 
outpatient services available to the public have been substantially reduced by 
managed care.  Furthermore, clinicians themselves have been harmed by having to 
accept onerous administrative, economic, and ethical burdens because of managed 
care policies.  The article concludes with suggestions on how to remediate some of 
these deficits in care and adjust to future challenges. 

 
 

The rapid growth of the managed care industry has 
indelibly changed the face of medicine over the last 30 
years and nearly every facet of the health-care industry has 
been affected.  Physicians have had to abandon their role as 
the sole decision maker in treatment and adopt one in which 
the market partially determines who receives care (Agrawal 
& Veit, 2002).  Pharmaceutical companies, too, have had to 
make radical adjustments to their business practices 
including regularly negotiating with third-party payers for 
medication, accepting increased pressure to sell generics, 
and directing marketing away from doctors and towards 
patients (Pollard, 1990).  Lastly, the medical insurance 
industry itself has changed as large free-market managed 
care plans have gradually eclipsed smaller, individualized 
health insurance options offered through employer benefit 
programs (Scofea, 1994).  In the midst of these 
paradigmatic shifts in health care delivery and finance, one 
particular group often gets left out of discussions regarding 
the future of medical care in the United States: those who 
treat mental illness.   

As this paper demonstrates, psychiatrists, 
psychologists, and other non-physician mental healthcare 
workers have also endured sweeping changes in their 
clinical practice.  In general, the results of these changes 
have not been well-received; commentary from these 
groups about managed care has been overwhelmingly 
negative both in academic journals (Appelbaum, 2003; 
Watt & Kallmann, 1998) and in the public media 
(Sharfstein, 2001).  One should note, however, that there 
are some advocates of the managed care system who argue 
that it provides necessary cost containment without any 

                                                                                                  
Correspondence concerning this article should be addressed to 

Gregory Erickson, 250 W. 100th St., Apt. 307 New York, NY, 
10025, Tel: 847-612-5163, Email: gregerick@gmail.com 

diminution in quality of care or patient satisfaction 
(Broskowski, 1991).  Still others make the case that 
managed care companies are unfairly maligned for ethical 
dilemmas that have always existed in medical practice in 
different forms (Meyers, 1999).  Yet, such defenders of the 
current health care system are generally rare among mental 
health care providers.  In order to understand the reasons 
for this, the current paper presents a brief overview of the 
history of managed care in the United States and typical 
strategies that these companies use to reduce health care 
utilization and costs.  Criticisms of the current mental 
health system by psychologists and other practitioners are 
then examined with special emphasis on the effects of 
managed care on outpatient psychotherapy.  Finally, 
strategies to either combat or adjust to ongoing changes in 
the mental health field are discussed.  Overall, there seem to 
be considerable drawbacks to managed care from both the 
perspective of mental health workers and their clients.  It is 
important that clinical psychologists recognize the extent of 
these challenges and seek opportunities for continued 
growth in the field of applied psychology. 
 
History and Structure of Managed Care 

While public discourse about managed care has 
become increasingly shrill in recent decades, the practice of 
providing pre-paid, group health care is not new.  Kaiser 
Permanente, currently the largest health maintenance 
organization (HMO) in the United States, originated in the 

provide comprehensive medical services for employees 
working on the Hoover Dam.  Similar plans were also put 
in place to cover the healthcare needs of employees in the 
lumbering, mining, and farming industries in various parts 
of the country during the Great Depression.  All these 
forerunners of modern HMOs shared the common features 

mailto:gregerick@gmail.com


ERICKSON 
  

   4 

of contracting with a limited number of clinicians for 
standardized fees, usually paid in advance (DeLeon & 
VandenBos, 1991).  Unlike current managed healthcare 
organizations, however, these practices were often limited 
to certain commercial and federal employees and were 
mostly delivered by non-profit organizations.  Enrollment 
in these plans was further limited by aggressive lobbying by 

-paid 
plans accounted for only a small fraction of the health 
insurance industry (Broskowski, 1991). 

All this began to change after the passage of the Health 
Maintenance Organization Act in 1973 under the Nixon 
administration.  The law provided federal funds for the 
establishment of HMOs if they met certain criteria for the 
program.  The legislation was initially passed and later 
amended to curb the burgeoning costs of healthcare, which 
had steadily increased to approximately 11% of gross 
national product by 1987 (Broskowski, 1991).  Prior to the 
passage of this bill, hospitals and clinics had had little 
incentive to operate efficiently or to invest in preventative 
medicine because most procedures were covered by 
traditional indemnity insurance plans in which medical 
procedures were paid for on a fee-for-service basis rather 
than through a single upfront fee.  Investment in 
increasingly expensive equipment and technology by health 
care providers was also problematic, especially when more 
cost-effective means for treatment existed.  As such, one of 
the major objectives of the new law was to streamline the 
delivery of healthcare, using such methods as treatment 
authorization by third-parties, periodic review of clinician 
performance and financial incentives to lower costs  all 
methods currently employed by HMOs.  Seeing a possible 
avenue for financial reform already in place, legislators 
merely sought to encourage HMO growth.  One of the ways 
they attempted to do this was by extending the proposed 
grants to for-profit companies.  Managed care companies 

insurance leaders sought to take advantage of these and 
other economic incentives such as lucrative contracts to 
provide services for Medicare.  This growth has been so 
rapid that as recently as 6 years ago an estimated 175 
million Americans, or about 58% of the population, were 
enrolled in some form of managed health care (Sanderson, 
2004). 

Soon after the passage of the 1973 HMO act, other 
institutional forms of managed care grew up alongside 
HMOs, including preferred provider organizations (PPOs) 
and independent practice associations (IPAs).  While the 
details of the care packages offered under these plans differ 
somewhat from those of traditional HMOs, all three 
organizational types share common features.  First, 
managed care plans use a pretreatment authorization 
process to assess whether medical care is warranted given a 

performed by a primary care doctor or sometimes by a non-
physician case manager.  In insurance parlance this person 

controls the flow of patients to healthcare specialists that 

(Richardson & Austad, 1991).  Mental health professionals 
are considered a part of this latter category of providers.  
Once the decision has been made to treat a patient, the 
specialist may then be asked to present a treatment plan to a 
utilization review committee either before or during the 
course of treatment.  The committee will often request that 
changes be made to the treatment protocol, especially if 
alternate treatment methods can be used in a time-limited 

recommendations, the patient may receive only a small 
portion of the benefits to which they are entitled by 
contract.  Another common aspect of managed care 
insurance plans includes the payment of practitioners via 
capitation, in which hourly rates per patient are 
predetermined.  Fees may also be withheld based on how 
cost-effective clinicians tend to be. 
 
Outpatient and Brief Therapy 

The economic policies mentioned above create 
potential barriers for patients seeking treatment for 
psychological disorders.  Perhaps the most severe effects 
have been felt in the realm of outpatient psychotherapy 
services.  Although federally chartered HMOs are mandated 
to offer up to 20 sessions of outpatient psychotherapy per 
year (Richardson & Austad, 1991), many patients receive 
far less. In fact, data indicates that most beneficiaries 
receive closer to 6 sessions per year and clinicians have 
even reported being explicitly told to drop patients within 
this time frame by their managed care company (Karon, 
1995).  Data from a national survey of outpatient 
psychotherapy utilization in 1997 paints an even more 
dismal picture: only 10.3% of psychotherapy users made 
more than 20 visits to a therapist and approximately one-
third of psychotherapy patients received only one or two 
sessions (Olfson, Marcus, Druss, & Pincus, 2002).  
Although unethical coercive practices of prematurely 
dropping patients are barred, the dual processes of pre-
authorization of treatment and utilization review are enough 
to limit participation in outpatient therapy.  Many patients 
have reported being told by their primary care physicians 
that their psychological distress did not constitute a 

 that is, it was not severe enough for 
referral to a mental health professional (Miller, 1996).  
Conversely, other incidences have come to light in which a 

the limited treatment available through the managed care 
plan, in which case he or she would be forced to pay out of 
pocket for specialists (Donovan et al., 1994).  Regardless of 
the ostensible reason for the denial, it seems clear that 
outpatient psychological services have been singled out by 
managed care companies for cost containment initiatives.  
Psychologist Lee Hersch hypothesizes that this effort to cut 
outpatient care stems from both skepticism among 
corporate and insurance leaders about the value of 



MANAGED CARE 
 

   5 

psychotherapy and the difficulties of demonstrating easily 
quantifiable outcomes among patients (1995).  Both 
objections are questionable and, moreover, do not represent 
good fiscal policy on the part of insurers.  Considering the 
vast difference between the costs of inpatient psychiatric 
hospitalizations and less expensive preventative methods 
like outpatient treatment, the latter should be preferred.  
Savings from increases in productivity and functionality 

accrue during the course of longer-term treatment.  Still, in 
the absence of hospitalization, patients who give up on 
therapy or go elsewhere to seek treatment represent a 
financial success for most managed care companies.  

Mental health consumers are not the only ones affected 
by the effort to restrict or deny outpatient therapy.  
Substantial changes are also beginning to take place within 
the psychotherapeutic community that treats managed care 
patients.  The limitations on session frequency and duration 
have created a shift in emphasis away from long-term 
therapy toward shorter courses of treatment.  As such, the 

modality in its own right, distinct from the traditional 
therapies that preceded it.  In other words, brief therapy is 
not just long-term therapy condensed into 10 or 20 sessions, 
but represents a significant shift in the overall delivery of 
treatment (Miller, 1996).  Although the techniques and 
theories underpinning brief therapy are beyond the purview 
of the current paper, they involve more direct intervention 
on the part of the therapist and focus on specific treatment 
goals such as symptom reduction (Charous & Carter, 1996).  
This does not necessarily imply, however, that all brief 
therapies eschew strategies from insight-based treatments.  
Even so, the practice of insight-oriented therapies is 
becoming less common under managed care because such 
treatments are not well-suited to the utilization review 
process (Charous & Carter, 1996). To many clinicians and 
academics this may not represent a problem because meta-
analyses have shown that short term treatments are often 
just as efficacious at alleviating psychological disorders as 
long-term psychodynamic therapies (Luborsky, Digeur, 
Luborsky, & Schmidtco, 1999; Luborsky et al., 2002).  Still 
some evidence exists that for certain patients, particularly 
those with comorbid conditions, chronic psychological 
problems or personality disorders, long-term 
psychodynamic psychotherapy provides superior results 
(Leichsenring & Rabung, 2008).  Managed care providers, 
on the other hand, are more likely to offer such patients 
group and educational interventions due to their potential 
cost-savings when compared to individual therapy.  
Medication is also a frequent component of treatment 
because it requires minimal supervision, thus saving time 
on the part of managed care clinicians and staff.  While the 
efficacy of medication for treating psychological conditions 
is generally beyond dispute, solely treating patients with 
pharmacotherapy may raise other issues such as lack of 
physician supervision, medication non-compliance, and 
increased risk for prescription drug abuse. 

they are standardized, one-size-fits-all treatments that do 
not sufficiently address individual differences among 
patients.  Therapists argue that both the limited number of 
sessions and the sometimes constrictive treatment protocols 
result in poor outcomes.  A cursory glance at research on 
the typical course of therapy in the U.S. would seem to 
confirm this conclusion: the median number of sessions per 
visitor to a mental health practitioner between 2001 and 
2003 was only 7.4 (Wang et al., 2005), yet studies estimate 

ions is 
needed to achieve a modest 50% rate of improvement 
(Anderson & Lambert, 2001; Kopta, Howard, Lowry, & 
Beutler, 1994).  As Ivan J. Miller (1996) has pointed out, 
patients are most susceptible to the placebo effect in the 
early course of their treatment and thus there is little reason 

producing change.  Moreover, it is likely that patients who 

disorders which are not appropriate for brief treatment.  
These patients, who would benefit the most from therapy, 
are therefore the least likely to receive a sufficient amount 
of it.  Ultimately, the only way to determine whether brief 
therapy is effective is to consult outcome and efficacy 
studies.  Psychological literature provides contradictory 
evidence, however, with some studies showing efficacy 
equal to that of long-term therapy and some showing 
reduced or non-significant efficacy (Plante, 2005).  Until 
further studies are done, the success of most outpatient 
therapies in managed care settings will remain unclear.  
More troubling is the fact that the existing brief therapy 
research focuses on interventions that last from 25 to 30 
sessions (Miller, 1996).  The services that managed care 
offers are oft -

knowledge, there are currently no controlled studies of this 
type of therapy. 

 
Difficulties for C linicians 

In addition to concerns over the effectiveness of 
managed care treatment, many mental health workers 
experience stress related to increased ethical, 
administrative, and economic burdens.  Ethical concerns 
may arise because of divided loyalty between third-party 
insurers and patients. Psychologists employed by HMOs, 
for instance, might be forced to follow a treatment plan that 
is inappropriate according to his or her clinical judgment 
and, as mentioned earlier, may even be pressured to 
discontinue treatment.  Practitioners who contract with 
insurers as independent agents (IPAs, PPOs) can encounter 
similar ethical dilemmas as they attempt to ensure their own 
financial stability.  Employees who are paid via a capitation 
system are particularly vulnerable to conflicts of interest 
since they assume most of the financial risk associated with 
treating clients.  In an environment where cost-containment 
is of such paramount importance, it may be difficult for 



ERICKSON 
  

   6 

clinicians to balance the financial limitations imposed on 
them by insurers with the needs of their client base. 

Onerous administrative responsibilities such as having 

providers can also provoke feelings of bitterness between 
parties in the managed care system.  The utilization review 
process involves intense scru
often by case managers who lack the same professional 
credentials as the person whom they are reviewing.  
Although it would be easy to accuse high-level practitioners 

resent having their decisions second-guessed by 
administrative personnel employed in business related 
settings.  Confrontations can be a frequent occurrence.  A 
study by Ronda Callister and James Wall Jr. (2001) showed 
that health care practitioners employed by managed care 
companies are highly susceptible to anger and may engage 
in retaliatory behavior such as poor collaboration and 
refusals to compromise.  Callister and Wall found that a key 
determinant in the development of conflict between 
clinicians and case managers was the disparity between the 
professional prestige of the individual parties and that of 
their respective organizations.  Interactions were most 
likely to become hostile between high-status clinicians who 
worked for weak institutions (like small private practices) 
and low-status case managers in powerful insurance 
organizations (Callister & Wall, 2001).  In such instances, 

in which each side seeks to manipulate the other according 
to different power criteria.  In the end, the person with the 
least organizational power usually ends up capitulating  
typically the clinician (Callister & Wall, 2001).   
 
Future Directions 

Despite the vicissitudes that both mental health 
consumers and providers face in dealing with managed care 
in the U.S., there are ample opportunities to adjust to and 
even benefit from current changes in health policy.  In his 
article on adapting to modern health care reform, Lee 
Hersch has outlined three basic strategies that current and 
future clinicians can use to ensure that the field of applied 
psychology will continue to flourish in the 21st century 
(1995).  The first two approaches are top-down strategies 
that seek to bring about change through legislative, judicial, 
and regulatory interventions.  First, he supports lobbying 
for parity with respect to government spending on 
psychological disorders in comparison with other medical 
conditions.  Second, he encourages APA members to 
support political candidates will be likely to endorse such 
initiatives.  Clinicians should also work with receptive 
politicians to create laws or sue for judicial rulings which 
require increased transparency from managed care 
companies.  One of the greatest impediments to an accurate 
assessment of the managed care system is the lack of both 
empirical and anecdotal evidence regarding its practices.  
Adequate information for the comparison of managed care 

plans remains inaccessible, even for insurance industry 
surveys (Miller, 1996).  Prospective buyers of managed 
care are often misinformed about the details of the plan and 
important company policies limiting treatment options are 
never disclosed.  Deficiencies in coverage are often 
discovered only after medical problems have arisen and 
consumers have sought funding or reimbursement.  With 
respect to outpatient care, the maximum number of therapy 
sessions covered in the contract does not accurately 
represent the number that will actually be received because 

usly discussed 
practices (Miller, 1996).  For those practitioners that are not 
in a position to lobby for governmental action, the resource 
is to simply express their concerns by voting during state 
and national elections. 

The third strategy that Hersch suggests for improving 
the quality of mental health care is for clinicians to work 
toward diversifying the applications of clinical psychology 
to the medical sciences while simultaneously integrating the 
delivery of services so that greater coordination exists 
between providers at all levels of patient care.  With respect 
to diversification, Hersch notes an encouraging 
proliferation of specialty areas in psychology, especially in 
fields related to general medical treatment.  It is estimated 
that 60% of doctor visits are due to stress or other 
psychologically related problems (VandenBos & DeLeon, 
1988).  It is not surprising, therefore, that psychologists see 

overall level of health.  Integration, on the other hand, can 
be achieved through the creation of multi-disciplinary 
mental health groups composed of social workers, drug 
counselors, psychologists, psychiatrists, and other mental 
health care professionals.  This increased coordination of 
care may better enable clinicians to contract directly with 
business and industry to provide superior mental health care 
without the encumbrances of third party insurers.  
Moreover, these organizations could more easily create 
working relationships with other medical providers 
including nurses, pediatricians, OB-
physicians, and other primary care physicians. 

While managed care has clearly brought about a host of 
difficulties that affect the quality, delivery, and funding of 
mental health care, the outlook for future clinicians and 
patients is not as grim as one might believe.  Rather than an 
obstacle to the future of clinical psychology, managed care 
can be viewed as a catalyst for much needed changes in the 
health care system.  It is therefore incumbent on 
psychological professionals to meet the challenges 
presented by managed care by rededicating themselves to 
mental health service that combines superior clinical 
practices with fiscally responsible and efficient methods for 
meeting patient needs. 
 



MANAGED CARE 
 

   7 

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