We discuss the rationale for benefit carve-out contracts in general and 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 sharing is common; we interpret this as a method of balancing cost-containment incentives with incentives to maintain access and quality on unmeasured dimensions.
Frank RG, Huskamp HA, McGuire TG, Newhouse JP. Some Economics of Mental Health 'Carve-Outs'. Arch Gen Psychiatry. 1996;53(10):933-937. doi:10.1001/archpsyc.1996.01830100081010