SOME ECONOMICS OF MENTAL-HEALTH CARVE-OUTS

We discuss the rationale for benefit carve-out contracts in general an d for mental health and substance abuse in particular. We focus on the control of adverse selection as a principal explanation and find that this is consistent with the widespread use of sole-source contracting with periodic rebidding. We also find that some degree of risk sharin g is common; we interpret this as a method of balancing cost-containme nt incentives with incentives to maintain access and quality on unmeas ured dimensions.