Managed Care Organizations

A NextGen Tutorials in Medicine Article

"Managed care" refers to the management of health care services utilization and cost of delivering care. Managed care was introduced to control the rapidly spiraling cost of providing health care services in the 1960s. Today, managed care has become the dominant health care delivery vehicle.

Managed care organizations control the financing, insurance, delivery and payment of health care services. They try to control cost by introducing efficiencies of management, utilization analysis and aggressive negotiation of contracts with the providers. Since they are responsible for all the costs of treatment and have a fixed income, their profitability is dependant on how well they control the costs. This is different from traditional insurance model, which reimburses the provider or the patient for each episode of care.

The basic characteristic of managed care is the presence of a "Primary Care Physician" (PCP) who is the first point of contact for all health care needs of patients in his practice. The PCP acts as a gatekeeper and approves specialty consultations or inpatient admissions.

History

Health Maintenance Organizations grew in number and size after the government passed the Health Maintenance Organization Act (HMO Act) of 1973. The belief was that with pre-paid fixed payments, utilization would decrease. Earlier there was a separation of health care delivery from insurance systems and under fee-for-service arrangements, providers had tendency to increase billing. Physicians initially resisted the introduction of managed care but the growing clout of MCOs and weakening financial position of hospitals curbed their resistance. Managed care gained rapid popularity in 1990s with the population under managed care increasing from 27% in 1988 to 95% in 2002 and enrollment in Fee for Service plans declining from 70% to 5%. (Source Employer Health Benefits: 2002 Annual Survey, The Kaiser Family Foundation and Health Research and Educational Trust.) Managed care organizations are accredited by National Committee for Quality Assurance (NCQA).

Distribution of Managed Care enrollment by plan type

Source: AIS's Directory of Health Plans: 2007

Types of managed care organizations

Over time, the distinction between different types of managed care organizations and traditional insurance companies has blurred. The dominant managed care models that have emerged are:

HMO (Health Maintenance Organizations)
HMOs are most common Managed care organizations. They provide preventive services and provide full but controlled access to health care. They may have salaried staff or capitation based contracts under which they pay a fixed amount per patient per month (PMPM) to providers including single or multiple group practices or Independent Practice Associations. HMO plans usually have lower premiums and other out of pocket expenses, are less comprehensive and usually don't have deductibles.
PPO (Preferred Provider Organizations)
PPOs have been developed by commercial insurance companies, hospital groups or standalone investors. They differ from HMOs by giving them access to physicians outside the "preferred provider" panel, however the patients usually pay higher deductibles and co-pays for exercising this choice. PPOs negotiated discounted rates with providers for the services delivered. They do not aggressively enforce utilization protocols or limit care options of enrollees. PPOs now occupy 52% market share of all plans—up from 11% in 1988 (Source Employer Health Benefits: 2002 Annual Survey, The Kaiser Family Foundation and Health Research and Educational Trust.)
POS (Point of Service plans)
POS plans combine the best of PPO and HMO plans—controlled utilization while offering wider choice. Some HMOs also offer POS plans. POS plans have a gatekeeper to control utilization and the choice of provider is made at the Point of Service. The network providers are compensated on capitation basis, however the enrollees can choose a provider outside the network, who is reimbursed on fee-for-service basis.
FFS (Fee for service plan)

In a traditional FFS plan, the providers' incomes are linked to the number of services delivered. In a competitive market, they may over-invest in technology to differentiate themselves. These translated to higher costs of providing care, which are sent to insurance companies. Traditional insurance companies will pass all the costs to the patients in the form of higher premiums. The other difference is that the traditional insurance companies do not cover preventive visits but cover the hospitalization quite comprehensively leading sometimes, to more services being delivered than is required in many cases. Both Medicaid and Medicare contract with HMOs.

Relationship with Providers

Managed care has variety of arrangements with the providers for delivering care. The most common ones are

Salary
Physicians employed by the managed care organizations are compensated with a fixed salary and usually a bonus component which is usually distributed from the surplus at the end of the year.
Capitation
A fixed amount is paid to the provider for every Managed care customer every month (Per Member Per Month). In this case the burden of risk is shifted to the providers who are incentivised if patients use less health care services.
Discounted fees
The managed care organizations typically negotiate discounts with the providers on the services billed. So if a provider bills $1000 to a patient for a procedure, the managed care organization may just pay 70% of that. This is the preferred method for the PPOs.

Cost control methods

Managed care organizations use various methods to control costs:

Review of utilization of health care services
Managed care organizations use experts to deny claims of services which they think are unnecessarily provided and attempt to find most cost-effective methods for health care delivery. The utilization review can be conducted before delivering care, during the patients' hospitalization or after the care has been delivered.
Using primary care physicians as gatekeepers to control referrals to specialists
The PCPs are supported by Nurse practitioners or physician assistants and they provide preventive care, routine physical examinations and referral services to specialists.
Limit the providers from which the enrollee can seek treatment
Plans require that the enrollees seek treatment from only those physicians who are on the panel. Some plans with Open-panels have the option of seeking care outside the panel, in case the patient needs more choice, but patients need to pay higher out-of-pocket costs.
Use of case managers to monitor and coordinate care of patients with complex problems
Case managers interface with specialists, primary care providers, rehab or long term care facilities to make the patient care cost effective.
Primary Care Case Management
Direct contractual relationship between the State and Medicaid recipients in which providers are reimbursed in Fee for service basis.

Benefits and Drawbacks of Managed Care

Managed care has had tremendous impact on the practice of medicine. It has reignited the focus on preventive health care, introduced outcomes measurement and evidence based medicine and incorporated cost accountability and control in healthcare delivery.

At the same time, managed care has introduced its own set of problems. Some of these include increased administrative overhead for providers, restricted choice of Lab service vendors and occasional interference with treatment protocols.

Conclusion

Managed care evolved to a strong position due to multiple factors—employers could negotiate rates amongst different managed care providers, increasing size of managed care organizations provided them with the power to negotiate lower rates from providers and lower premiums attracted enrollees. Hospitals, on the other hand, formed collaborations in the form of health systems to grow in size and get back some of the negotiating power.

Managed care has become the backbone of US health care system. With the rapidly rising health care costs in the first decade of 21st century, critics have again started to question the effectiveness of the managed care model. 

Pushwaz Virk, MD is a Health care Management fellow at Harvard University.

Appendix

Table 1: Top 25 Managed Care Organizations, according to total enrollment, 2006

OrganizationManaged Care enrollment
WellPoint, Inc.27,236,851
UnitedHealth Group, Inc.21,684,629
Aetna, Inc.14,172,723
Health Care Service Corporation12,262,905
CIGNA Health care, Inc.9,064,024
Kaiser Permanente8,825,581
Humana, Inc.7,699,106
Blue Cross Blue Shield of Michigan4,937,591
Highmark, Inc.4,739,178
HIP Health Plan of New York4,285,194
Total (for US)206,226,739

Source: AIS's Directory of Health Plans: 2007 for complete listing.
*Includes enrollment in HMOs, PPOs, POS, Medicare, Medicaid and FFS managed medical plans, for companies that offer fully insured managed care products; does not include specialty benefit enrollment.

Table 2: Top 10 Managed Care Organizations according to HMO Enrollment, 2006

OrganizationHMO Enrollment
Kaiser Foundation Health Plan, Inc.5,629,249
Blue Cross of California1,466,580
PacifiCare of California, Inc.1,285,832
Blue Cross Blue Shield of Massachusetts1,250,821
Blue Cross Blue Shield of Georgia1,218,735
Blue Shield of California1,202,648
Horizon Blue Cross Blue Shield1,085,316
Health Net of California, Inc.1,011,344
Anthem Health Plans of Virginia949,136
Anthem BCBS of Ohio925,082

Source: AIS's Directory of Health Plans: 2007

Table 3: Top 10 PPO Networks according to number of lives covered with network access, 2006

PPOTotal Lives
MultiPlan Network®27,000,000
Integrated Health Plan, Inc. (IHP)12,500,000
Beech Street PPO Network12,225,000
National Preferred Provider Network (NPPN)10,450,116
USA H & W 5,427,757
PHCS Network4,965,017
First Health® Network3,600,000
Galaxy Health Network3,200,000
Olympus PPO3,000,000
ppoNEXT3,000,000

Source: AIS's Directory of Health Plans: 2007

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