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J Ment Health Policy Econ. 1999 Mar 1;2(1):29-41.

Economic aspects of mental health carve-outs.

Author information

  • Boston University, CAS Economics, 270 Bay State Road, Boston, MA 02215 USA, vogelsan@bu.edu



Recent empirical research has found behavioral health carve-outs in the US to reduce costs immediately and considerably, compared to indemnity insurance and HMOs. Carve-outs have quickly captured a large part of the organized market in US behavioral health. At the same time, market concentration has increased significantly.


The current paper uses concepts and results from the industrial organization and transaction cost literature to explain (i) why carve-outs hold cost advantages over other institutional arrangements, (ii) why these hold in particular for behavioral health and (iii) why this did not happen earlier.


The main explanatory variables relate to economies of scale, the avoidance of diseconomies of scope, and the avoidance of personal relationships. The sometimes surprising lack of explicit risk-taking by carve-outs and of explicit cost-reducing incentives in carve-out contracts are more than overcome by incentives created from gaining large contracts. The specific advantages of carve-outs in behavioral health derive from a combination of lack of economies of scope with other health services, lack of economies of scale in provision of behavioral health and presence of economies of scale in management. It is conjectured that behavioral health carve-outs have benefited from biomedical innovations that changed the direction of treatments, from computerization that enables large-scale standardized management and from financial pressures on the behavioral health sector.


The empirical basis for the current study is a number of case studies and the rapid penetration of mental health carve-outs in the US. Cost reductions caused by such carve-outs appear to be quite robust. Explaining cost reductions from institutional changes has to start with the question of why the old institution did not implement the same or similar changes. We have emphasized reasons why such changes were not feasible under indemnity insurance and HMOs. Nevertheless, we have not been able to evaluate quality changes that might have accompanied those cost reductions.


While further cost reductions may follow a logistic curve, which simply flattens out, there are developments, regulatory and legal in particular, that could lead to a regression of carve-out costs towards those under other institutional arrangements. Thus, the main health policy questions arising from this study are to what extent the freedom of carve-outs to hold costs down should be upheld and to what extent the cost reductions should be used to increase behavioral health coverage.


I see three main avenues for further research. The first is to find more empirical evidence for the hypotheses developed in this paper. The second is to look for other countries and other areas of health care with characteristics that would lend themselves to the application of carve-outs. The third is to analyze the quality aspect of carve-outs. The empirical question here is "What has been the effect of carve-outs on the quality of behavioral health care in the US?". The theoretical question is "What are the incentives of the sponsors of carve-out plans and of the carve-out management to assure quality provision of care?".

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