BENEFIT CARVE-OUTS - Reasons for use

The use of benefit carve-outs by medical expense plans has grown in popularity in recent years, often as a method of cost containment through the use of managed care techniques. In addition, many medical expense plans have come to realize that they cannot always provide as high a quality of care as a well-managed specialty provider. Carve-outs for prescription drugs, vision care, dental care, and behavioral health have been common for a number of years. Increasingly, carve-outs are being used to better manage a wide variety of medical conditions such as pregnancy, asthma, and diabetes. This is devoted to a discussion of the nature of such carve-outs, the reasons for their use, possible concerns and a few of the more common types of carve-out arrangements.

Nature
A benefit carve-out can best be defined as coverage under a medical expense plan for a health care service that has been singled out for individual management by a party other than the employer or the employer's primary health plan provider. Some types of carve-outs predate managed care as it is now known. For example, many employees have long been covered under separate prescription drug plans. However, the early emphasis under these plans was on discounts with preferred providers of prescription drugs. Today, prescription drug plans and other types of carve-outs use a wider variety of managed care techniques.

An employer can purchase a medical expense plan to provide benefits to its employees for most types of medical care and then enter into a separate contract with another provider for the carved-out benefit. However, in most cases, it is the insurance company, Blue Cross-Blues Shield plan, HMO, or PPO that enters into the carve-out arrangement with a "subcontractor" that manages the benefits. From the standpoint of employers and employees, the benefit is part of the provider's plan.

It should be pointed out that the vendors who provide carve-outs often act as managed care plans for a single medical expense benefit and take on the characteristics of HMOs or PPOs. They also have learned over time that their type of specialty care should sometimes be accompanied by a unique benefit structure. This is one reason why mental health and prescription drug benefits are often subject to different deductibles, copayments, or benefit limitation than those used for most types of medical expenses.

Reasons for Use
There are several reasons for using benefit carve-outs. These include the following:

The carve-out can save money. A good carve-out vendor should be able to provide products and services in a cost-effective manner and pass along savings from these efficiencies.

The carve-out may result in a shifting of financial risk and a better ability to budget. It is often difficult for a benefit plan to control costs. One way of doing this is to select a carve-out vendor that is paid on a capitated basis. This shifts much of the financial risk of higher-than-average claims to the carve-out vendor.

The carve-out vendor may be better able to build a network of specialists. For some diseases or medical conditions, even very large HMOs or PPOs have too few claims to justify establishing their own in-plan network. The carve-out vendor may also be able to provide better outcomes data because of its size and expertise.

The carve-out vendor may increase employer and employee satisfaction by lowering plan costs, providing high-quality care through the use of well-regarded specialists, and providing easier access to medical products and services.

Possible Concerns
A carve-out arrangement must be entered into with care. Today, there are many vendors that claim they can properly perform the required tasks, but benefit plans sometimes find themselves less than satisfied. Therefore, a proper evaluation of potential vendors is of utmost importance. Some of the questions that need to be answered include the following:

How does the carve-out vendor credential providers?

Is the carve-out vendor financially able to deliver what it promises?

Does the carve-out vendor have the management expertise to deliver what it promises?

Why is the carve-out vendor in business? Carve-out arrangements are often marketed by providers of medical products and services, and this may result in their having the expertise to run a high-quality operation. On the other hand, it is important to distinguish these arrangements from those whose primary goal is to increase sales of the provider's products and services.

Will the carve-out vendor keep a patient's primary care physician informed about the patient's treatment? This information is essential if the primary care physician is to properly do his or her job of coordinating patient care.

COMPARISON OF TYPICAL MEDICAL EXPENSE PLANS

There are various types of medical expense plans and how they differ. While variations within each type of plan exist, some generalizations can be made. These are summarized in Table below. The degree of managed care increases as one moves from left to right in the table. However, the cost of the plans, on the average, decreases as the degree of managed care increases. In addition, a higher degree of managed care is generally associated with lower annual premium increases by a plan.

Group Medical Expense Benefits, Managed Care Plans - MULTIPLE-OPTION PLANS

Until recently, an employer who wanted to make an HMO or POS option available to employees had to enter into a separate contractual arrangement with an HMO. Unless a PPO was sponsored by the insurance company or Blue Cross-Blue Shield plan of an employer, a similar contractual arrangement was also required. Several insurance companies and Blue Cross-Blue Shield plans are now providing all these options under a single medical expense contract. For example, one insurer markets a so-called quadruple-option plan that gives employees the choice of a traditional major medical contract, a PPO, an HMO, or a POS plan. In most cases, the HMOs and PPOs used in such arrangements have been formed or purchased by the insurance company or Blue Cross-Blue Shield plan, but occasionally a contractual relationship has been established with an existing HMO or PPO. HMOs, in addition to offering POS options, also frequently offer PPO products to employers as part of a multiple-option plan.

These plans offer certain advantages to the employer. First, administration is easier because all elements of the plan are purchased from a single provider. Second, costs may be lower because the entire plan, including the HMO, may be subject to experience rating. Because federally qualified HMOs cannot fully use experience rating (particularly on a retrospective basis), only nonfederally qualified HMOs are often used in multiple-option plans.

POINT-OF-SERVICE PLANS

A newer and fast-growing type of managed care arrangement is the POS plan. A POS plan is a hybrid arrangement that combines aspects of a traditional HMO and a PPO. With a POS plan, participants in the plan elect, at the time medical treatment is needed, whether to receive treatment within the plan's tightly managed network, usually an HMO, or outside the network. Expenses received outside the network are reimbursed in the same manner as described earlier for nonnetwork services under PPO plans.

There are two basic types of POS plans: the open-ended HMO and the gatekeeper PPO. An open-ended HMO is by far the most common form and is the HMO industry's response to the demand for more consumer flexibility in the choice of providers, even though it increases costs somewhat. It essentially consists of traditional HMO coverage with an endorsement for nonnetwork coverage. It can take the basic form of any of the HMOs previously described. However, at any time a subscriber can elect to go outside the HMO network of medical care providers.

It can be argued that any PPO is actually a POS plan. However, the normal usage of the term POS implies a higher degree of managed care than is found in most PPOs. A gatekeeper PPO requires that the PPO participant elect a primary care physician in the manner of an HMO participant. This physician acts as a gatekeeper to control utilization and refer members to specialists within the PPO network. However, any time that care is needed a covered person can elect to go outside the network. This type of PPO has generally been formed by a traditional PPO or insurance company that does not own an HMO.

Under some POS plans, a covered person can go outside the plan's network without informing the plan of this fact. In other POS plans, the person must notify the gatekeeper that such treatment will be sought. Even though the gatekeeper has no power to prevent the nonnetwork treatment, the gatekeeper may be able to convince the person that proper treatment is available within the network. Furthermore, the gatekeeper can better manage future medical care by being aware of all medical treatment that a person is receiving.