Dissertation Title:  "The Economics of Managed Behavioral Health Care Benefit Carve-Outs"

In the past few years, managed behavioral health care (MBHC) carve-outs have become one of the dominant methods of organizing and financing mental health and substance abuse (MHSA) services. Under a MBHC carve-out, a payer of health care benefits separates the MHSA risk from the health insurance benefit packages it sponsors and enters into a contractual arrangement with a specialty vendor to manage the MHSA benefit only. This dissertation examines the payment arrangements used in managed behavioral health care (MBHC) carve-out contracts, the incentives such arrangements create, and the impact of contract features on the utilization and cost of care. The first essay is an applied theoretical analysis of the agency problem in MBHC contracting which examines optimal risk sharing and the use of an imperfect or "noisy" signal of quality for these contracts. Given certain assumptions, I find that the use of a soft capitation arrangement by the payer is not sufficient to influence the level of quality provided by the vendor. The payer can influence the level of quality by contracting on a noisy signal of quality. The second and third essays use claims and enrollment data to assess the impact on MHSA expenditures and treatment patterns of a MBHC carve-out program adopted by the Massachusetts Group Insurance Commission (GIC) in 1993. The GIC carve-out program used a soft capitation arrangement with weak incentives for controlling costs, contracted on several noisy signals of quality by creating financial incentives based on imperfect quality measures, expanded the MHSA benefit, and implemented a care management process for MHSA services. The financial incentives in the contract were tightened slightly at the end of the first year after implementation of the carve-out program. Adoption of the GIC carve-out program was associated with a substantial decrease in the probability of receiving any MHSA services, a dramatic drop in total costs per MHSA treatment episode, and a shift away from the use of facility care towards the use of outpatient care for MHSA treatment. Individuals with certain severe MHSA conditions received fewer services on average after the carve-out program was adopted. The tightening of the financial incentives at the end of the first year was associated with a further decrease in the probability and level of MHSA expenditures. The magnitude of the vendor's response to the weak financial incentives and the further decline in the probability and level of expenditures after the incentives were tightened slightly suggest that MBHC vendors are very sensitive to the financial incentives they face.