Add to MyNCSL

This page gives links and resources to supplement an article on mental health carveouts that was published in the October 1998 Health Chairs Bulletin. When your cursor passes over a link, information about where it goes will show on the bottom left of your screen. Clicking on the link will take you to one of the many sites on this topic that provided background for this article. These sites are not the property of the NCSL, and contain information that represents a broad variety of viewpoints including those of providers, consumers, the managed care industry and government. Please write and tell us whether you find this a useful way to get additional background material.

Health Chairs Project

Managed Behavioral Health Care Carveouts

Carve-out Controversy

Managed care and care of the mentally ill are both hot-button issues. When they come together-often in the form of a "carve-out"-the mix can be explosive. A carve-out is managed care lingo for a program that separates certain types of services or patient groups-most commonly in the area mental health and substance abuse , collectively known as behavioral health care-and provides them separately, usually through a separate managed behavioral health care (MBHC) contract.

"Carve-out" has become the catch-all name to describe a variety of state experiments that use managed care for an historically difficult and expensive group of beneficiaries. Results have been decidedly mixed. In Massachusetts, for instance, one of the oldest and most successful MBHC carve-out cut costs dramatically, improved access and added new types of treatment. In Tennessee, on the other hand, the system almost collapsed when funds for severely mentally ill patients were diluted across the entire Medicaid population.

MBHC Concerns

MBHC carve-outs carry all the promise of managed care-better coordination, the most appropriate level of services, the potential for savings-but also all of the risks. Private sector MBHC contractors boast of savings of around 20 percent, mostly from lower inpatient hospitalization. Still, consumers and providers worry that MBHC plans save by cutting back on needed care, turning away the sickest patients and choosing treatments based on price, not effectiveness.
Often the real controversy over carve-outs is whether mental health services should be managed at all. MBHC amplifies the problems of managed health care, because mental illness can leave patients less able to negotiate the complicated relationships of a managed care plan. Reports of plans dropping patients who are "noncompliant" or difficult are a constant concern to advocates. Because MBHC is such an entrepreneurial field and because the patients are so vulnerable, accountability and oversight are particularly important when putting a new system into place.

What is "carved out?"

When patients in managed care need behavioral health care, they may go through their regular health plan-"integrated services" or a "carve-in"-or through a "carve-out", usually under contract with a separate MBHC plan. Key differences among carve-outs are 1) what is carved out-patients, services or administration-and 2) whether the state or the managed care plan contracts for the MBHC.

Sometimes, it is services related to severe mental illnesses and less intense mental health care needs that are separated. New York and Hawaii, for instance, both plan to use partial carve-outs for more intensive treatment, leaving basic Medicaid-covered benefits as part of a conventional plan. Utah does not make its plans pay for stays in the state mental hospitals. Beneficiaries with behavioral health-related disabilities or specific diagnoses may also be "carved out" into a separate plan. Rhode Island has a capitated plan for patients with at least a year in the state mental hospital, while Wisconsin allows severely mentally ill recipients to stay in the fee-for-service system. About half the states have used carve-outs to incorporate long-standing community providers, private nonprofit and public alike, into a managed care system, while others have used carve-outs as competition to shake up an unsatisfactory mental health delivery system.

Many states contract for MBHC carved-outs, with the state defining who will be covered and for what services. When managed care organizations (MCOs) contract with states to provide comprehensive services, however, the plans may carve out MBHC by themselves. Plans in Connecticut and Florida, for example, subcontract MBHC, even though the state had expected to provide integrated services through the plans.

Why to Carve Out?

MBHC plans have the knowledge and flexibility to offer a range of specialized alternative services. Managed care is supposed to integrate services but in practice, many MCOs tend to shortchange behavioral health care. For a complicated mix of reasons, primary care providers tend to underdiagnose such conditions. Moreover, most conventional health plans lack experience serving patients with complex, multiple social and health needs, making them ill-suited to care for patients with severe mental illnesses. That's why early Medicaid managed care usually left out patients with severe and chronic illnesses. For states where conventional managed care plans seem unprepared for patients with special needs, carve-outs to MBHC represent a middle road between exclusion and integration in managed care.

Carve-outs can also be used to direct managed care funds to patients with severe and chronic mental illnesses. Nine percent of Medicaid patients use mental health services, and behavioral health services make up five percent of HMO expense for Medicaid enrollees. But (as Tennessee learned) the care may not be going to the patients who need it most. Adverse selection can hurt an MCO financially if it attracts the sickest patients and becomes known for treating them well. Properly designed carve-outs or rate adjustments-payments based on patients' conditions--can shelter funding for particularly vulnerable patients and the providers who care for them.

States that use a partial carve-out need to pay special attention to how people are screened for the carve-out system. If a health plan is reimbursed more for patients needing MBHC, it may overdiagnose the conditions; if it is paid the same for all patients, it may try to avoid the sicker patients, leaving them in mental health system or overreferring them to the carve-out. To prevent gaming, Arizona, a state with a long experience with carve-outs, uses regional behavioral health authorities as independent gatekeepers to manage intake and referral to care.

Traditional providers, including community mental health centers, are the biggest advocates for carve-outs...that let them keep their patients. Half of all public spending for community mental health services comes from Medicaid, and as the program moves into managed care the centers' survival may be at stake. States that want traditional providers to compete may offer them help to bring their management and information systems up to speed so they can work with managed care plans. Alternately, the providers may be encouraged to form their own networks and bid for the contracts themselves. In Philadelphia, the local behavioral health care authority obtained the right of first refusal on capitated contracts. But the same effect can be achieved without carve-outs. Oregon, for instance, asks MCOs to use essential community providers half the time.

Why NOT to Carve Out?

Most severe mental illnesses are organically based and medically treated today. Unless funds for all care are integrated, it is unclear which system covers the cost of drugs for patients whose psychiatric disorders are managed medically. The result may be patients who receive less than ideal treatment and are labeled as noncompliant when they stop taking the drugs-even when there are better-tolerated alternatives-because of avoidable side effects.

Integrating finances improves care, too. In a single integrated system, mental illness and substance abuse treatment costs can be offset by lower health care costs for both patients and their families. In fact, Minnesota and Oregon require that cost offsets be included in actuarial assumptions about the cost of alcohol and drug treatment services.

Finally, carve-outs depend on the infrastructure of managed care and providers. They have saved money where fee-for-service mental health services are inflated. If the community is underserved, however, states may have to choose among unfamiliar or unready partners. Community providers who know the needs of the patient population may not be able to handle the managerial demands of capitated contracts. Private MBHC is highly entrepreneurial and increasingly consolidated. Montana went through a series of false starts in implementing its program as its partner was absorbed by different MCOs.

A Half-way Stage?

Some practitioners hope carve-outs are a stage on the way to integrated care with interdisciplinary clinical teams. For some community providers, they are a chance to establish networks and gradually mainstream their institutions into managed care. The ideal of managed care is to integrate all care at one site. But in practice, carve-outs seem stronger than the ideal.

Other Web-based Resources

The Center for Mental Health Services of the Substance Abuse and Mental Health Services Administration (SAMHSA), U.S. Department of Health and Human Services

Managed Behavioral Healthcare News From the States
July-December 1996. Synopsis of key managed behavioral healthcare activities which occurred in 26 states from July to December 1996.

Managed Behavioral Health Care for Children: Medicaid and the Uninsured--National Institutes of Mental Health report.

National Association of State Mental Health Program Directors

National Technical Assistance Center (NTAC) for State Mental Health Planning
National Association of State Mental Health Program Directors
66 Canal Center Plaza, Suite 302
Alexandria, VA 22314
Telephone: 703/739-9333
FAX: 703/548-9517
E-mail: NTAC Staff
This site includes a page on the WWW and a forum on the National Mental Health Knowledge Exchange Network;

The National Resource Center on Homelessness and Mental Illness Annotated Bibliography on managed mental health care, August 1998

For more information or comments contact Kala Ladenheim at the National Conference of State Legislatures.
Please write "carveout" on your subject line.

NCSL Home Page

Visitor counts for this page.