by Susan Brink

About the author: Susan Brink writes for U.S. News & World Report.

Kathy Rhinehart knew the routine. Voices in her head. Paranoia. She thought the television set was talking about her. The lyrics of a song—a Carly Simon tune, she thinks—took on personal and ominous meaning. A 15-year history of manic-depression had taught her what to do when those symptoms hit. “I know when I need to be in the hospital,” the Cedar Falls, Iowa, woman says.

But her insurer, one of the new managed-care companies specializing in mental health, thought otherwise. Rhinehart spent several hours in a hospital waiting room talking to doctors, nurses, and clerks, who in turn talked to managed- care representatives from Medco (since bought by Merit Behavioral Care Corp...