Behavioral Health Carve-Outs: Why Mental Health Claims Go to the Wrong Payer

Key Takeaways

• A behavioral health carve-out moves mental health and substance use disorder benefits from the medical plan to a managed behavioral health organization (MBHO), whose name may not appear on the front of the patient’s insurance card.
• Claims sent to the medical plan for carved-out services typically deny with CARC 109, which signals the wrong payer and is fixed with a new claim to the right one.
• Health plans must report mental health coverage in eligibility responses, but the benefit detail is optional, so a call to the MBHO is often needed to confirm where claims go.
• Prior authorization and network participation usually run through the MBHO, while federal parity rules require group health plans to accumulate deductibles jointly across medical and behavioral benefits.
• Plans change behavioral health vendors, so carve-out verification belongs at the start of every plan year as well as at intake.

When a health plan carves out behavioral health benefits, a different company usually decides and pays the therapy claim. Claims sent to the medical plan for those services deny no matter how accurately they are coded. Carve-outs appear in employer-sponsored, Medicare Advantage, and Medicaid coverage, and catching one at intake prevents a denial that no amount of coding review will stop.

What Is a Behavioral Health Carve-Out?

A behavioral health carve-out is an arrangement in which a health plan or Medicaid program contracts with an outside organization to administer mental health and substance use disorder benefits apart from medical benefits. That organization, called a managed behavioral health organization (MBHO) and sometimes referred to as a behavioral health organization (BHO), behavioral health manager, or behavioral health administrator, handles some or all of eligibility, prior authorization, provider networks, and claims payment for behavioral health services. The opposite arrangement, in which one plan manages medical and behavioral benefits together, is called a carve-in.

National MBHOs include Optum Behavioral Health, Carelon Behavioral Health (formerly Beacon Health Options), and Magellan Healthcare. Regional and state-specific vendors also manage behavioral benefits for individual health plans and Medicaid programs.

Which Health Plans Carve Out Behavioral Health Benefits?

Employer-sponsored commercial plans, Medicare Advantage plans, and state Medicaid programs all use carve-outs:

• Employer-sponsored plans, where the employer or insurer contracts with an MBHO to manage the behavioral portion of the benefit.
• Medicare Advantage plans, which can delegate behavioral health to a vendor. Sharp Health Plan’s Medicare Advantage provider manual update, effective January 1, 2026, replaced Magellan Health with OptumHealth Behavioral Solutions of California as its behavioral health contact and added that company’s claims address.
• State Medicaid programs, which may carve behavioral health out of managed care organization contracts and deliver it through fee-for-service or a prepaid health plan, according to KFF’s survey of state Medicaid programs.

Original Medicare does not use carve-outs. Part B mental health claims go to the Medicare Administrative Contractor, the same as any other professional claim.

What Does CARC 109 Mean on a Behavioral Health Claim?

CARC 109 is the denial a payer issues when it receives a claim it is not responsible for. The X12 code list defines it as a claim or service not covered by this payer or contractor, with an instruction to send it to the correct one. On a behavioral health claim, it usually means the services were carved out and the claim went to the medical plan instead of the MBHO.

Because the denial concerns where the claim was sent, the payer never reviews its coding, documentation, or medical necessity. Those problems produce different denials, covered in PGM’s breakdown of the coding and billing mistakes behind denied behavioral and mental health claims and its overview of common denials in medical billing.

Carve-out errors can also show up as front-end rejections. An MBHO may issue a member ID distinct from the medical plan’s, and an X12 interpretation describes an eligibility response returning a distinct ID for the behavioral health portion of a plan. A claim that pairs the wrong member ID with the wrong payer may be rejected before it reaches adjudication.

How Do You Fix a CARC 109 Denial for Carved-Out Services?

A CARC 109 denial is resolved with a new claim to the correct payer. An appeal to the payer that issued the denial rarely helps, since that payer has no financial responsibility for the service. The steps:

1. Re-check eligibility for the date of service and identify the MBHO responsible for behavioral benefits.
2. Get the MBHO’s payer ID, claims address, and the patient’s member ID for behavioral claims.
3. Check whether the service required MBHO authorization. If it did and none was obtained, ask whether the MBHO allows retroactive authorization before resubmitting, since a correctly routed claim without required authorization will deny for a new reason.
4. Submit a new claim to the MBHO within its timely filing limit. Whether the MBHO accepts proof of the original submission to the wrong payer depends on its policy, so work these denials as soon as they post.
5. Update the patient’s record in the practice management system so future claims go to the MBHO.

An appeal makes sense only when the denying payer was in fact responsible on the date of service, for example when a carve-out ended before that date and the payer’s records have not caught up. Include documentation of the coverage dates with the appeal.

How Do You Identify a Behavioral Health Carve-Out Before the First Session?

Identifying a carve-out at intake takes five steps:

1. Read both sides of the insurance card. A dedicated mental health or behavioral health phone number, a vendor logo, or a distinct claims address on the back is the most common visible signal.
2. Read the mental health lines in the eligibility response. Under the CAQH CORE eligibility operating rule%20Data%20Content%20Rule%20vEB.2.1.pdf), health plans must report service type MH (Mental Health) in responses to both general and explicit eligibility inquiries. Benefit detail for MH is discretionary, so a response can show active coverage without naming who manages it.
3. Look for a referral to another entity. When another organization maintains the benefit details, X12 guidance says the 271 response should identify it in an additional benefit loop coded EB01 = U, which directs the provider to contact the named entity. A behavioral health company named there is a carve-out.
4. Call the MBHO to confirm the items in the table below. Electronic responses vary in completeness.
5. Load the carve-out as its own payer in the practice management system so claims do not default to the medical plan on later visits.

Item	What to confirm with the MBHO
Claims destination	Electronic payer ID and paper claims address
Member ID	Whether behavioral claims use the medical card’s member ID or one issued by the MBHO
Prior authorization	Which services need it and how many sessions or units an approval covers
Network status	Whether the rendering provider is credentialed and contracted with the MBHO
Patient cost sharing	Copay, coinsurance, and remaining deductible as of the date of service
Effective dates	When the arrangement began and whether a vendor change is scheduled

Which Services Follow the Carve-Out and Which Stay With the Medical Plan?

The carve-out contract decides, and contracts differ. Common criteria are the rendering provider’s specialty or license type, a primary diagnosis from the mental, behavioral, and neurodevelopmental disorders chapter of ICD-10-CM (F01 through F99), and procedure codes such as psychotherapy and psychiatric diagnostic evaluation. PGM’s ICD-10 codes for mental health page lists frequently billed diagnosis codes from that chapter.

Services for the same patient that fall outside those criteria stay with the medical plan. Lab work ordered by a psychiatrist, a primary care visit for a physical condition, and an emergency department visit typically go to the medical side. The gray zones are services that sit between the two benefits, such as medication management for depression billed with an E/M code by a primary care physician, or behavioral health care management delivered in a primary care office. For those, check with both the health plan and the MBHO before billing.

Some contracts split functions instead of moving the whole benefit. The MBHO may review authorizations while the health plan still processes claims, so verify the claims destination independently of where the authorization comes from.

How Do Carve-Outs Affect Authorization, Network Status, and Patient Cost Sharing?

Authorization and network participation usually move to the MBHO. In group health plans, deductibles and out-of-pocket maximums still have to accumulate together with medical benefits.

• Prior authorization for carved-out services comes from the MBHO. An approval issued by the medical plan does not carry over.
• Network status. Being in network with the medical plan does not guarantee in-network status with the MBHO. An MBHO that manages a dedicated network requires credentialing and contracting with the MBHO itself, and services delivered before enrollment is complete may pay at out-of-network rates or deny. See what credentialing delays really cost your practice.
• Patient cost sharing. The federal parity regulation at 29 CFR 2590.712(c)(3)(v) bars group health plans from applying deductibles or out-of-pocket maximums to mental health and substance use disorder benefits that accumulate apart from those for medical benefits. Complying requires the medical plan and the MBHO to share accumulator data, so collect patient responsibility based on the MBHO’s benefit response for the date of service.

How Often Should a Practice Re-Verify a Behavioral Health Carve-Out?

At the start of every plan year, and whenever a patient presents a new insurance card. Health plans switch behavioral health vendors, as Sharp Health Plan did for its Medicare Advantage members in 2026. Employers change insurers or plan designs at renewal, and state Medicaid programs move behavioral health between carve-out and carve-in models, a shift KFF has documented in its annual state surveys.

A claim sent to last year’s vendor denies the same way as one sent to the medical plan.

How PGM Supports Behavioral Health Billing

PGM has provided independent medical billing and revenue cycle management since 1981, with dedicated support for mental and behavioral health practices. That support spans the full revenue cycle: eligibility and benefits verification, prior authorization support, coding review, claims submission, denial management and appeals, and payment posting and reporting across commercial, Medicare, and Medicaid payers.

If wrong-payer denials or delayed payments are affecting your practice, talk to PGM’s behavioral health billing team. For what to expect from a specialized partner, see how to choose a behavioral health billing company.

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Frequently Asked Questions About Behavioral Health Carve-Outs

Does a carve-out change which telehealth billing rules apply?

Yes. Place-of-service, modifier, and documentation requirements for a carved-out telehealth session follow the MBHO’s policy, which can differ from the medical plan’s telehealth policy for the same member. The general rules are covered in PGM’s post on telehealth versus in-office mental health billing.

What happens when a patient has two health plans with different carve-outs?

Coordination of benefits determines which plan is primary. The claim goes first to the MBHO for the primary plan, then to the MBHO for the secondary plan with the primary remittance attached. Each plan’s carve-out has to be verified on its own.

How is an employee assistance program different from a carve-out?

An employee assistance program (EAP) usually covers a small number of short-term counseling sessions at no cost to the employee, under an EAP authorization number. Those sessions are billed under that authorization. Ongoing treatment after the EAP sessions end is billed to the patient’s health plan benefit, which may itself be carved out to an MBHO.

Who processes behavioral health claims when a state Medicaid program carves out behavioral health?

It depends on the state. Claims may go to the state’s fee-for-service program, a prepaid health plan, or a specialized behavioral health vendor, depending on how the carve-out is designed. The state Medicaid provider manual for behavioral health services is the authoritative source for routing in each state.

How do you find the payer ID for a carved-out plan?

Start with the back of the insurance card and the eligibility response, either of which may name the MBHO. The MBHO’s provider manual or claims page lists its electronic payer IDs, and the clearinghouse payer list shows which ID routes correctly. Some MBHOs use different payer IDs for different health plans or lines of business, so match the ID to the patient’s specific plan.