For single and multi-employer health plans, including self-funded, one strategy that can be extremely helpful in isolating risks and containing costs are carve-outs. Carve-outs provide better choices for managing costs and benefits provided by various insurers and other benefit vendors. Understanding how they work and the role of third-party administrators (TPAs) in handling the administration of carve-outs, which can be complex for the inexperienced, is important for all plan sponsors.
With a carve-out strategy, a plan sponsor is able to isolate risks within the health coverages they provide their employees/members. The financial risk for the carve-out is assumed by the benefit vendor who receives a flat fee from the employer/plan sponsor. A carve-out is not limited to just one benefit (e.g., pharmacy/prescription drug benefit), but can be broad and include multiple benefits in a health plan. The benefit areas often associated with carve-outs are those with high costs such as prescription drugs, cardiac care, neonatal intensive care, organ transplants and mental illness services (i.e., screening, diagnosis, and treatment benefits). Self-funded plans are especially good candidates for carve-out due to their size and the ability to leverage better rates. While some large plan sponsors may have internal resources, many of them along with middle-market and small organizations often find it is best to hand-off carve-out benefits administration to an experienced TPA. The TPA can effectively manage all aspects of carve-out benefits administration, from employee education to compliance.
There are clear benefits to using carve-outs. They include:
- Improved risk management achieved by gaining more data on key metrics such as utilization rates, employee inquiries and most common claims,
- Cost reductions achieved by working with more vendors and the ability to lock-in fixed prices,
- Broader access to medical care for employees/members,
- Greater ability to project plan expenses
Carve-outs, however, have disadvantages if not managed properly. They are challenging to manage for plan sponsor/employer(s) lacking complete carve-out experience and, the more vendors involved, the more challenging the task. Further, carve-out can introduce legal hurdles associated with first-loss coverage (i.e., when multiple policies are carried for an illness or injury, determining who will be the responsible party(ies) for the first loss and pay the claim and how should the payment be divided when multiple providers are involved. Sometimes, benefit vendors are not integrated with other vendors which introduces additional complexities and creates confusion for members/employees when they need to choose a provider and mistakenly select an out-of-network provider or file claims with the wrong benefit provider. There is also the matter of educating members/employees so they understand how carve-outs work, which can be difficult. Further, whenever working with many vendors, there is always the possibility of one or more not meeting your expectations and introducing additional work and challenges.
The Value Proposition of a TPA in Carve-Out Administration
To gain the most from a carve-out and achieve improved benefit offerings, risk management and cost savings, plan sponsors should give serious consideration to outsourcing this function to a qualified TPA. The TPA can handle the full roll-out and administration of the carve-outs including member/employee education, claims management and regulatory compliance. Using specialists, trained and experienced in carve-outs, plan sponsors can be confident that their carve-outs will meet their goals.