The economic functions of carve outs in managed care

This paper considers the economic functions of contracting separately for a portion of the insurance risk, offering both the payer's (i.e., employer's) and the health plan's perspective. Four major forms of carve outs are discussed: (1) payer specialty carve outs from all health plans; (2) payer specialty carve outs from only indemnity and preferred provider organization arrangements; (3) individual health plan carve outs to specialty vendors; and (4) group practice carve outs to specialty organizations. The paper examines whether carving out care fosters the payer's goal of delivering reasonable healthcare efficiently, how adverse selection affects the provision of healthcare, and the costs of providing this specialized care.