Mental illness is a leading cause of disability worldwide with vast costs to society. Yet,
insurance coverage for effective treatments remains limited. This paper revisits the Offset
Hypothesis, which claims insurance coverage for psychotherapy is self-financing through reductions in the use of other health care services and improved labor market outcomes. I
study a 2008 reform of the Danish public health care system that introduced 60 percent
coverage of the cost of psychotherapy for depression and anxiety patients below age 38. Using Regression Discontinuity and Difference-in-Difference designs, I show that psychotherapy
coverage reduces the use of other mental health services, physical health care and suicide
attempts, but does not impact employment, sick leave or disability pension receipt. Still, the
reduction in health care costs is sufficiently large to finance the policy. This suggests mental
health coverage is both welfare improving and cost reducing.