Direct Contracting Carve-Outs: When to Separate Pharmacy, Behavioral Health, and Oncology

If you're building or renegotiating a direct contract with a health system or provider group, one of the first structural decisions you'll face is this: which services stay bundled under the main contract, and which get carved out to a separate vendor or specialty arrangement?

There's no universal right answer. A carve-out that saves a 5,000-life manufacturer plan $1.2 million annually in pharmacy spend might cost a 1,200-life professional services firm more in administrative complexity than it saves. This article walks through the three most common carve-out candidates—pharmacy, behavioral health, and oncology—and gives you a framework for making the call.

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What a Carve-Out Actually Means

A carve-out removes a specific category of care from your primary direct contract and routes it to a dedicated vendor, network, or arrangement. Instead of your contracted health system handling everything, a specialty PBM manages pharmacy, a behavioral health organization manages mental health and substance use, or an oncology-focused center of excellence handles cancer cases.

The alternative—keeping everything bundled—means your primary direct contract partner is responsible for coordinating and delivering (or subcontracting) all of it.

Both structures have real trade-offs. The decision turns on three factors: your population's utilization patterns, your administrative capacity, and the quality and pricing leverage available in your market.

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Pharmacy Carve-Outs

The Case For Carving Out

Pharmacy is the most mature carve-out market and the one where the financial case is clearest for most employers. The core issue is that health systems and integrated delivery networks have limited incentive to drive down drug costs—and in many cases, the opposite incentive. Hospital-owned outpatient pharmacies and 340B programs create margin for the health system, not savings for your plan.

When you carve out to an independent PBM or a transparent pass-through PBM, you gain direct visibility into ingredient costs, dispensing fees, and rebate flows. Employers using transparent PBM models with carve-out arrangements report per-member-per-month drug costs 15–25% lower than fully bundled arrangements, according to the Health Transformation Alliance's 2023 member data.

Specialty pharmacy is where the real dollars are. Specialty drugs now represent roughly 53% of total pharmacy spend for self-insured employers despite being used by fewer than 2% of members (AHIP, 2024 employer survey). A carved-out specialty pharmacy program with clinical management—prior authorization, site-of-care optimization, white-bagging policies—can reduce specialty spend by $800–$1,500 PMPY for populations with meaningful oncology, inflammatory, or rare disease utilization.

When to Keep Pharmacy Bundled

If your direct contract is with a single primary care or multispecialty group that doesn't own a pharmacy benefit and already routes prescriptions through your existing PBM, there's nothing to carve out. The carve-out question is most relevant when contracting with integrated health systems that have pharmacy operations of their own.

Also consider scale. If your plan has fewer than 500 covered lives, the administrative overhead of a separate pharmacy contract—reconciliation, formulary management, appeals processes—often exceeds the savings.

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Behavioral Health Carve-Outs

The Case For Carving Out

Behavioral health is structurally different from medical care. Most health systems are not good at it. They lack the provider networks, the care management infrastructure, and frankly the financial incentive to invest in outpatient and community-based behavioral health. Inpatient psychiatric admissions are profitable; the longitudinal outpatient care that prevents those admissions is not.

A carved-out behavioral health organization (BHO) gives you a dedicated network with virtual and in-person access, utilization management staffed by clinicians who specialize in behavioral health criteria, and—critically—faster access. The average wait time for an in-network behavioral health appointment through a standard PPO network is 25 days (Milliman, 2023). Dedicated BHOs with virtual-first access routinely achieve first-appointment access within 5–7 days.

For employers with workforces that have elevated behavioral health utilization—industries with high stress, shift work, or trauma exposure—a carve-out that improves access reduces downstream medical costs. Studies consistently show that employees with untreated depression cost employers $3,000–$5,000 more per year in total medical spend than those receiving treatment (Harvard Business Review analysis of MEPS data, 2022).

When to Keep Behavioral Health Bundled

If your direct contract is with a health system that has a genuinely strong behavioral health program—real outpatient capacity, integrated care management, measurable outcomes data—don't fragment it. Carving out behavioral health from a system where primary care physicians are co-locating with behavioral health clinicians breaks the integration you're paying for.

Ask for the data before deciding: What is the system's average days to first behavioral health appointment? What percentage of behavioral health referrals from primary care result in a completed first visit within 14 days? If they can't answer those questions, that's your answer.

Mental health parity compliance is also a consideration. A carved-out BHO with weak utilization management can create parity exposure. Make sure your carved-out vendor has documented parity analysis and that you're reviewing it annually.

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Oncology Carve-Outs

The Case For Carving Out

Oncology is the highest-stakes carve-out decision. A single complex cancer case—metastatic breast cancer, CAR-T therapy, advanced lung cancer—can run $400,000–$1.2 million in a single plan year. For a 2,000-life plan, two or three such cases in a year can blow up your stop-loss corridor and reset your renewal trajectory for years.

Centers of excellence (COE) programs for oncology route members to high-volume cancer centers that have lower complication rates, more accurate initial diagnoses, and better adherence to evidence-based treatment protocols. The Employers Centers of Excellence Network (ECEN) has published data showing that COE-treated cancer patients have 30–40% fewer unnecessary surgeries and 20% lower total episode costs compared to community-based treatment.

Beyond cost, diagnosis accuracy matters enormously. Studies published in the Journal of the National Cancer Institute found that 44% of cancer patients who sought a second opinion at a major cancer center received a change or refinement to their diagnosis. Misdiagnosis at the start of treatment is not just expensive—it's harmful.

An oncology navigation carve-out doesn't have to mean pulling patients out of your direct contract health system entirely. It can mean layering a second-opinion and care guidance program on top of your existing contract, with financial incentives for members to use it.

When to Keep Oncology Bundled

If your direct contract is with an NCI-designated cancer center or a health system with an integrated oncology program that already meets COE standards, a separate carve-out adds cost without benefit. Verify their tumor board utilization rates, their clinical trial enrollment rates, and their outcomes data by cancer type. If the data is there, stay bundled.

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Making the Decision: A Practical Framework

Before carving anything out, answer these four questions:

• What does your claims data show? Run a three-year lookback. Where is spend concentrated? If pharmacy is 28% of total spend and trending up, that's where to focus first.
• What is your direct contract partner's actual capability? Get outcome and access data in writing, not a sales presentation. Audit it against benchmarks.
• What is your administrative capacity? Each carve-out adds a vendor relationship, a contract, a reconciliation process, and a communication challenge for members. Staff accordingly or use a TPA or benefits consultant who can manage the complexity.
• What does your stop-loss carrier allow? Some stop-loss arrangements have specific requirements around specialty pharmacy and COE programs that affect your carve-out options. Review your policy before signing any specialty vendor contracts.

Carve-outs are tools, not strategies. Used precisely, they fix specific problems—opaque pharmacy pricing, inadequate behavioral health access, catastrophic oncology costs. Used indiscriminately, they create fragmented care and administrative drag that cost more than they save.

Start with your data. The answer is usually in the claims.