Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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The lowdown...

  • Carve-out medical plans treat certain diseases, conditions, or sub-groups differently
  • Carve-outs typically either exclude some risk or include it at a separate rate
  • Carve-out plans sometimes use multiple insurers and piece together coverage
  • Employers frequently use carve-out plans to reward top executives
  • Employer plans use carve-outs to control costs over the entire group

Employer-sponsored plans often use the device of carve-outs to control costs and distribute benefits in accordance with their policies.

The usual use of a carve-out is to exclude certain conditions or diseases from the regular rate charged to group members; typical examples include the following:

  • smoking related diseases
  • mental health issues
  • drug and alcohol addictions

The Affordable Care Act limits the use of individual traits, and the amount of price difference individuals must pay. Many employer plans were grandfathered in and not affected by the ACA.

Comparison shopping is a proven method for finding high-value medical insurance. In an employer-sponsored menu, comparison shopping can help employees find the best fit for their needs.

Compare health insurance plans for free today using our free comparison tool above.

Using Group Carve-Outs


Some companies try to limit the size of groups that receive coverage. They use group carve-outs to manage the size of the participation.

Union versus non-union is a carve-out grouping for health insurance. Benefits, prices, and access will differ based on labor status. Salary versus hourly and executive versus clerical are other commonly used group carve-outs.

The Affordable Care Act abolished the distinctions between subgroups and except for grandfathered employer plans, companies must offer essentially the same benefits to all employees.

Some companies use carve-outs to reward top executives or other subgroups. Commenters have criticized this practice because it may divert critical resources that other members might need. Some carve-outs can be lavish or have high value and low costs to the beneficiaries.

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Why use Carve-outs?

Carve-outs can help make administration easier. Some tasks are better performed by knowledgeable specialists. Cancer treatment, drug abuse, and family violence issues are likely candidates for managed care outsourcing.

The below-listed items describe typical company objectives for employer-sponsored healthcare.

  • Separate high-risk sub-groups like smokers and particular lifestyles like adventure activities, high-risk hobbies, and active pastimes.
  • Separate employee groups with low risks for lower rates.
  • Reward top executives as incentives for retention.

Risk Reduction Carve-Outs

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Employer plans can use carve-outs to control risks and their costs to the company and its covered employees.

The larger body if group members can get lower prices when the carve out removes certain conditions such as diseases that connect to drug or alcohol use for group members with mental health issues.

The carve-out providers can charge higher rates and use specialty contractors to manage the activity.

Prescription Drug Carve-Outs

Many employers seek to simplify the operation and management of their employee health plans. A popular option among large and small employers is the pharmacy carve-out.

This cost saving step achieves employer goals of providing important coverage but preserving resources at the same time. The below-listed items describe the advantages of the pharmacy carve-out.

  • Simplification – some areas of health management can absorb a disproportionate amount of financial and administrative resources when performed in-house. Carve-outs allow company manages to focus on the things they do best rather than spreading too thin in areas that require new knowledge and techniques.
  • Expertise -the employer should select a pharmacy carve-out contractor with proven expertise and a successful record in managing prescription drug benefits.

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Mental Health Carve-Outs


Prior to the Affordable Care Act, Medicaid was the largest payer for mental health services these included alcohol and drug-related conditions.

The ACA reformed Medicaid and the entire insurance industry by treating mental health conditions as other diseases and illnesses. The essential health benefits include mental health services and screenings.

Medicaid agencies still use carve-outs extensively. State Medicaid organizations typically contract with managed care organizations to deliver medical and related services.

Typically, states carve out mental health and carve in prescription drug benefits in their Medicaid managed care contracts.

The Medicare Carve-Out

Medicare provides a wide range of coverage. Both in Original Medicare and Medicare Advantage, the consumer has options that cover medical, hospital and prescription benefits.

Medicare Part A and Part B have payment limits that typically leave a balance for the consumer to pay. The shortfall helps extend the Medicare funding to cover a growing population of older Americans. The

Medicare program offers consumers an option for paying the out-of-pocket expenses, copays, and coinsurance in Part A and particularly in Part B.

The Medigap or Medicare Supplement is a carve out that protects subscribers that wish to pay a significant monthly insurance premium. Comparison shopping is the ideal way to select among private Medicare Supplement policies.

Medigap Prevents Unexpected Costs


Medigap can help stabilize an individual or family budget in times of high demand for medical services. With advances in prescription drugs, doctors can treat many patients on an outpatient basis.

Medicare Part B covers up to 80 percent of the benefits with a coinsurance of 20 percent or more. Medicare Supplement can pay these charges as well as the Part B deductible and help keep patient expenses low.

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Flexible Management Tool for Health Coverage

Carve-outs and carve-ins help employers and other sponsors carry out their programs in cost-effective ways that can best serve their diverse populations. Some carve-out plans assign particular areas to contractors with specialized expertise.

This category included specialty firms for alcohol and drug abuse treatment and prescription benefit administrators. Self-insured companies can use carve-outs effectively to manage areas such as cancer or organ transplants.

The company points the effort towards costs savings and low prices for the employees.

Carve Out Medical Plans Play an Important Role


Carve-out medical plans are commonly used to adjust risks and prices and benefits for a diverse group.

Companies also use them to reward and retain top executives. Typical carve-outs include prescription drug benefits, mental health care, and high-risk individuals or subgroups such as tobacco users.

Medicaid and Medicare use carve-outs, and Medicaid is a large payer for mental health services. Comparison shopping is an ideal method for considering the options in a carve-out medical plan.

Comparison shopping helps focus on the features affected by the carve out including higher rates and limited coverage. Use our free comparison tool today!