Carve-Outs

A “carve-out” refers to health care benefits that are paid for or delivered differently from the remainder of services covered under an insurance policy or managed care contract. This may occur in two general ways. First, certain services covered under a policy may be delivered or financed using managed care methods, whereas the remainder of services are delivered and financed under conventional indemnity model systems. For example, an indemnity policy may carve out behavioral health benefits to be managed by a behavioral health organization using capitated payments to providers and strict use management controls, whereas all other services are provided under a conventional fee-for-service model.

Second, all services may be delivered using a managed care model. However, certain services may be carved out from the basket of services that a provider is obligated to deliver under its contract. Those carved-out services are then provided under a separate financial agreement and, commonly, by a different delivery system. Payment for these carved-out services is provided above and beyond the capitation rate that covers all other services that are included in the managed care contract. For example, prescription drug services may be carved out from a comprehensive managed care contract. A provider group may receive a capitation-based contract to provide all services except prescription drugs to members. Prescription drugs may then be provided though a separate organization under a separate financial arrangement, such as direct reimbursement for costs. The most common services that are carved out include behavioral health services, prescription drugs, catastrophic care, and transplantation.

Thus carve-outs serve to separate the health insurance function into categories by disease or service groups, with each group provided under a separate service or contractual arrangement. Carve-outs have several potential advantages. They permit employers, for example, to introduce managed care in a limited way without incurring the backlash against more comprehensive managed care plans. Carve-outs to highly specialized groups may enhance quality of care by [Page 64]promoting care by providers and delivery systems specifically oriented to certain conditions or services. In addition, carve-outs may protect against underutilization of specialized services by separating funds for these services from the general pool available for all care, and they may reduce the incentive for managed care plans to avoid enrollment of patients with certain conditions that, in the absence of a carve-out, would result in above-average expenditures.

The major objective is, however, to reduce costs of care. In the case of predominantly indemnity coverage, carving out selected services for a managed care approach may reduce costs through utilization review, discount contracting, and so on. This approach is particularly valuable for services such as behavioral health that are less well defined than other services and for pharmaceutical drugs in which use controls are highly specialized. In comprehensive managed care models, carving out selected services allows rigorous use control and, possibly, quality management, by highly specialized service delivery and finance systems. Carve-outs have been shown to reduce the intensity of both outpatient and, particularly, inpatient behavioral health services.

Substantial disadvantages also exist. Carving out particular services from the remaining services leads to fragmentation of care and may, paradoxically, increase overall costs. For example, carving out behavioral health services from physical health care inhibits or precludes the management of mild and common behavioral health conditions such as depression by primary care providers and interrupts continuity and integration of care services. This may lead to reduced or duplication of services. Finally, by establishing administrative boundaries between the responsibilities of different groups, carve-outs create conditions conducive to cost shifting. For example, if pharmaceuticals are carved out, a capitated provider is more likely to opt for drug therapy for a condition that may also be treated by nonpharmacologic means. Carve-outs may also increase expenses by adding substantial administrative costs.

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