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 ca rve outs are discussed: (1) payer specialty carve outs from all health plans; (2) payer specialty carve outs from only indemnity and preferr ed provider organization arrangements; (3) individual health plan carv e outs to specialty vendors; and (4) group practice carve outs to spec ialty organizations. The paper examines whether carving out care foste rs the payer's goal of delivering reasonable healthcare efficiently, h ow adverse selection affects the provision of healthcare, and the cost s of providing this specialized care.