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Managed Care

Understanding Our Changing Health Care System

Introduction

The health care industry in this country is going through a major reorganization. Managed health care is the result. Throughout the 1990s, health care reform has been an important issue. The call for reform, to a great extent, was the result of rising health care costs. These costs have risen an average of 10 percent a year for the last 30 years.

Families have seen their health-related costs rising faster than their incomes. They are paying more for health insurance and for health care. Obviously, the more families spend on health, the less they have for other necessities, such as housing, clothing, and food.

Businesses have also seen their profits dwindle as they attempt to keep up with the rising costs of providing employees with health care insurance. Some companies have dropped health insurance as a benefit. Others offer insurance plans which provide less coverage and fewer services. In addition, employees are often expected to cover a greater share of the cost. The result is a growing number of underinsured and uninsured individuals. Quite often, the uninsured are the children and spouses of full-time workers. Concerns like these have resulted in the current changes occurring in this nation's health care industry. Rather than being driven by legislation, the changes that are occurring are "market-driven".

Historically, this country's health care industry was made up of a large number of independent health care providers who owned their own practices. These were either solo practices or practices jointly owned by physicians who practiced together in a clinic setting. Furthermore, almost all communities of any size had their own hospital. Most of these were also independent from one another. Frequently, these facilities were run as nonprofit institutions.

Under this system, when individuals needed care, they went to a doctor or hospital of their choice. Typically, at least a portion of these bills was covered by their health insurance plan. In most cases, the plan was provided by their employer. The method of payment was called fee-for-service. The physician was paid each visit. The amount charged increased as more services were provided or as more expensive tests and procedures were substituted for less expensive ones. Usually, the patient paid the bill, submitted a claim to the insurance company, and was reimbursed a percentage of that bill.

There were advantages to this system. Individuals with insurance could see a physician of their choice at almost any time. Insurance also decreased the risk of high and unexpected costs for both the provider and the patient. As a result, this approach sometimes led to overuse. There were also no incentives to control costs. As costs continued to rise, business and industry became concerned and demanded that the health care industry do something to control costs. Managed care is the result.

What is Managed Care?

While individuals may not be familiar with managed health care, it is not a new idea. Early efforts in managed care began in 1929. Legislation to encourage the expansion of Health Maintenance Organizations (HMOs), one of the oldest forms of managed care, was written more than twenty years ago. What is new is the rapid growth of managed health care plans and their increased acceptance and use by business and industry as a means of controlling health care costs.

Managed care is a general term for any system of health care delivery organized to improve cost-effectiveness. While there are different types of managed care arrangements, all types share four common characteristics: 1) arrangements with doctors, hospitals, home care agencies, therapists, and other health care providers to supply health care services to members for a set fee; 2) criteria for the selection of health care providers; 3) significant financial incentives for members to use providers in the plan/network; and 4) formal programs to monitor the amount of care and quality of services (Utilization Review).

Managed care is not only a health care financing system, it is also a health care delivery system. Managed care plans typically guarantee members 24-hour, seven-days-a-week access to health care. While there is some variation in how the plans operate, most involve access to a primary care physician who coordinates all the individual's care. The individual selects their primary care physician from a list provided by the managed care plan or network.

Under ideal conditions, this provider functions much like the traditional family doctor. He/she makes the initial diagnosis, advises the patient on further treatment, and makes referrals, when necessary. Rather than focusing on the health of a single organ system in the body, the primary care physician focuses on the health of the whole person. The patient/doctor relationship is viewed as a partnership where both the patient and the provider share responsibility for maintaining the health of the individual.

It is estimated that 90 percent of a patient's medical care can be addressed by the primary care physician in the office. For the remainder of the care, the primary care provider is responsible for helping the patient identify and schedule appointments with appropriate specialists. The term, "gatekeeper," is sometimes used to refer to the primary care physician when he or she is carrying out this role. One concern about this approach is that too few services will be provided. In order to control costs, the "gatekeeper" may limit access to specialists or more costly tests and procedures.

Major Differences Between Conventional and Managed Care Health Plans

In the future, more of us will be receiving our care through managed care health plans. The following table shows some of the major differences between traditional insurance and managed care plans.

The number of individuals participating in managed care networks has increased dramatically over the past 20 years. As implied earlier, much of this growth has been in the last few years. By July 1991, total enrollment in Health Maintenance Organizations (HMOs) reached 36,482,090. In addition, the number of employees covered by Preferred Provider Organizations grew from zero in the late 1970s to 37,117,051 by December 1991. These numbers will continue to grow, not only as employers search for ways to control their health care costs, but as federal and state governments attempt to control the health care costs associated with the Medicaid and Medicare Programs.

How Does a Managed Care System Reduce Medical Costs?

As a financing system, the goal of managed care is to control health care costs. The managed care plans contract with physicians, hospitals, home health agencies, therapists, other health care providers, and insurance companies. These individuals and organizations are linked into managed care networks and provide services to the plans' members. Employers pay a monthly fee to contract with a managed care network to provide health care services for employees. Under some circumstances, individuals might pay the fees themselves. Once an individual joins a plan, he/she is considered a member of the plan.

Members are expected to go to doctors, hospitals, or other health care providers that are contractually linked to the managed care network. These providers have agreed to accept lower fees in return for having access to a steady "pool" of patients. Typically, providers in the network are paid a fixed amount for each person enrolled in the plan. Known as "capitation," the health provider is paid a set amount per person without regard to the actual number of visits or the kind of services provided. For example, the network might contract with an employer to provide care for each employee in the plan for $12 a month. The provider is paid that amount regardless of whether or not the employee receives services. On the other hand, the provider does not receive additional payment if the amount and cost of care exceeds the capitated amount.

This means that the provider shares more of the financial risk. The associated risk for the patient is that too few services will be provided. However, most plans (at least HMOs) are required to have a formal grievance procedure. To insure the quality of their care, members should become familiar with their plan's grievance procedure, and be assertive about using such procedures when they believe the quality of their care is inadequate.

Managed care plans also control cost by establishing criteria for the selection of health care providers and by establishing formal programs to monitor the amount and quality of health care services being provided. For example, in many plans, the primary care physician functions as a gatekeeper and must be seen before being seen by a specialist.

All forms of managed care also use some type of utilization review as a way to further reduce unnecessary hospitalization or the use of expensive procedures. Except in an emergency, providers are often required to get approval from the plan before hospitalizing a patient.

How Does Managed Care Affect Medicaid and Medicare?

Medicaid is a program operated by the states that uses federal and state funds to provide health services for low income individuals. Medicare, on the other hand, is designed to meet the health care needs of older adults in this country. There is increasing interest on the part of both Medicaid and Medicare to increase their use of managed health care networks as a means of controlling costs, improving case management, and the quality of care. While the health care needs of low-income families and older adult populations are different, there are subgroups within each of these populations that have a great number of medical needs. These individuals will be heavy users of any health care system. Providing quality care at a reasonable cost for these high risk populations while maintaining the financial stability of managed care plans continues to present a challenge.

What are Some of the Major Types of Managed Care?

Learning about managed care, to some extent, means learning a new language. There are health maintenance organizations (HMO), independent practice associations (IPA), physician hospital organizations (PHO), point-of-service plans (POS), preferred provider organizations (PPO), and medical service organizations (MSO). These are all examples of managed care approaches and each may operate somewhat differently. There are also such terms as Utilization Review (UR), Per month per month charge (PMPM), and Primary Care Physicians (PCP) who function as "gatekeepers." (See Managed Care Abbreviations and Key Terms for additional information.)

HMOs and PPOs are two of the most common forms of managed care arrangements. Most other types of managed care are hybrids or variations of these two types. It is also worth noting that different forms of HMOs and PPOs have developed over time. As a result, it is sometimes difficult to notice any real difference between these types of plans in terms of how they operate. Nevertheless, as the following descriptions indicate, there are some basic differences between the two approaches.

Health Maintenance Organizations (HMOs) represent "pure" managed care. HMOs use a "capitated" financing system in which enrollees make an annual payment to the HMO in exchange for access to a set of services. The total amount of advanced payments received by the HMO becomes its annual total revenues. Since the HMO, unlike the insurance company, is also responsible for providing care, the financial risk remains with the HMO. The more efficient the HMO, the more funds remain in the original revenue pool for profits, reinvestments, and bonuses to the physician-employees of the HMO. Additionally, there is an incentive to keep people well so they do not require costly "sick care." As a result, HMOs are more likely to emphasize disease prevention and health promotion and actively oversee the quality of care provided. Individuals who choose to go out of the HMO to receive care will often find that they have to pay all or most of the cost out of their own pockets.

Preferred Provider Organizations are networks of doctors, hospitals, and other providers that work together to provide services at prearranged prices to members of the plan. Typically, participating providers agree to accept the PPO's reimbursement structure and payment levels. Providers may be paid for each visit and for each service provided using a fee-for-service approach, but at an agreed upon lower rate. PPOs also agree to follow utilization review procedures and other cost control strategies implemented by the Plan.

Quite often, the cost control and utiltization review procedures established by PPOs are somewhat more relaxed than those established by HMOs. In order to insure sufficient income for preferred providers, PPOs often limit the number of participating providers and provide incentives for covered individuals to use the plan's providers instead of others. Some PPOs don't require members to have a primary care physician. Rather, they allow members to use any primary care provider or specialist on the list. Members are also permitted to use non-PPO providers. However, the PPO only reimburses the patient for covered services at the discounted rate set for preferred providers. If the amount charged by the non-participating provider is higher than the rate established by the PPO, patients have to pay the balance of the charged amount out of their own pocket.

While a somewhat simplistic approach, it is possible to place different forms of managed care on a continuum. At one end is managed indemnity. Managed indemnity is similar to conventional insurance with simple forms of utilization review added. Similar to indemnity are service plans which have contractural relationships with providers. These contracts typically address maximum fee allowances and prohibit "balance billing," i.e., billing the patient for all charges not paid for by the insurance plan. Service plans typically use the same utilization review techniques as managed indemnity. Further along the continuum are PPOs, POSs, open model (IPA) HMOs, and finally closed (group and staff) HMOs. As one moves from the managed indemnity end of the continuum to the HMO end, new and greater degrees of control and accountability are needed. The complexity and overhead required to operate the plans increases as well. However, there is also greater potential for controlling cost and quality.

Managed Care Abbreviations and Key Terms

Balance Billing - The practice of a provider billing a patient for all charges not paid for by the insurance plan. Balance billing is generally prohibited by managed care plans.

Capitation - The insurer pays health providers a set amount for each person enrolled in the managed care plan rather than for the number and type of services delivered. The amount paid may vary by factors such as age and sex of the enrolled member.

Closed panel - A managed care plan that contracts with physicians on an exclusive basis for services and does not allow those physicians to see patients from another managed care organization.

Coinsurance - Under conventional insurance plans, there is often a limit on the amount covered by the plan, commonly 80 percent of UCR charges. Any additional costs are paid by the member out of pocket.

Co-payment - That portion of a claim or medical expense that a member of a health plan must pay out of pocket. Usually this is a fixed amount - $5 or $10 for each visit.

Credentialing - The process of obtaining and reviewing the documentation (licensure, certifications, insurance, etc.) of health professionals. Generally, this includes reviewing information given by the provider and verifying that the information is correct and complete.

Deductible - That portion of an individual's health care expenses that must be paid out of pocket before insurance coverage applies. A common deductible is $200. Deductibles are used in insurance plans and PPOs, but usually not in HMOs.

Fee-for-service - The traditional method of reimbursing physicians, hospitals, and other health care providers for their services. Providers are paid each visit. The fees increase as more services are provided or as more expensive services are substituted for less expensive ones.

Formulary - A listing of drugs that a physician may prescribe. The physician is requested or required to use only formulary drugs unless there is a valid medical reason to use a nonformulary drug.

Gatekeeper - A primary care physician (PCP) in a managed care plan who is responsible for monitoring a patient's care and deciding when specialized care or tests are needed. Except in actual emergencies, all care from providers other than the member's PCP must be authorized by the gatekeeper.

Group model - An HMO that contracts with a medical group for the provision of health care services. The relationship between the HMO and the medical group is generally very close, although there are wide variations in the independence of the group from the HMO.

Managed Care - A general term for any system of health care delivery organized to improve cost effectiveness. It includes arrangements with doctors and hospitals to supply health care services to members for a set fee, criteria for the selection of health care providers, significant financial incentives for members to use providers in the plan, and formal programs to monitor the amount of care and quality of services.

Midlevel Practitioner (MLP) - Nonphysicians who deliver medical care, generally under the supervision of a physician. Some examples of MLPs are physician's assistants, clinical nurse practitioners, and nurse midwives.

Network - A selected group of physicians, hospitals, laboratories, and other health care providers who participate in a managed care plan's health delivery program. Providers agree to follow the plan's procedures, permit the monitoring of their practices, and provide certain negotiated discounts in exchange for a guaranteed patient pool.

Open panel - A managed care plan that contracts with private physicians to deliver care in their own offices.

Primary Care Physician (PCP) - The term usually applies to internists, pediatricians, family physicians, and general practitioners. It may also apply to obstetrician/gynecologists.

Point Of Service (POS) - Generally, the plan enrolls each member in both an HMO (or HMO-like) system and a conventional insurance plan. Members do not have to choose how they will receive services until they need them. The amount the member is reimbursed depends on whether the member chooses to use the plan or go outside the plan for services.

Service plan - A health insurance plan that has direct contracts with providers, but is not necessarily a managed care plan. Providers bill the plan directly rather than billing the member and are paid directly by the plan.

Staff model - An HMO that employs providers directly. These providers see members at the HMO's own facilities.

Usual, Customary, or Reasonable Fees (UCR) - A method of reimbursing providers on the basis of a profile of prevailing fees in an area. One common method is to average all fees and then pay providers 80 percent or 90 percent of that average amount.

Utilization Review (UR)- A general term for an insurance or managed care plan's review of the health care provided to its members. This includes such activities as granting prior approval before hospitalization or doing certain procedures; coordinating a patient's care and rehabilitation once they have left the hospital; and making decisions about whether a second opinion is necessary .

What are Some of the Concerns About Managed Care?

The primary goal of managed care is to control health care costs. While much less is known about the other models, research on the HMO model suggests that at least HMOs are achieving cost savings by controlling or managing the use of services and service inputs. This certainly is one advantage to managed health care. However, concerns about managed care have also been raised.

Managed care may result in too few services being provided.

While conventional insurance often resulted in "over utilization," the provision of too few services may result under managed care. In managed care plans, health care providers assume more of the financial risk. Carefully managing a member's access to services is one means of controlling cost. Typically as networks mature and gain experience, they realize that providing too few services may, in fact, result in increasing costs. Patients who are not treated early and effectively frequently require more costly and extensive follow-up care. Nevertheless, the provision of too few services can be a problem particularly in newly-established networks. Members need to be aware of the plan's grievance procedures and be assertive about using them if they question the quality of care they are receiving.

Managed care restricts patients' "free choice" of providers.

Managed care plans are frequently offered by employers. Some employees offer a choice of plans, while others do not. It is also possible that an individual's current provider will not be part of the managed care plan being offered. When this occurs, the individual must either select a new physician from the list provided or pay a greater share of his/her health care costs in order to receive care from an existing provider. Under some plans, choice is further restricted because a specialist can only be seen if the primary care physician makes the referral. Plans differ greatly with regard to choice of providers. Read the information provided by the plans carefully, if this is an area of concern for you as an individual.

Managed health care models developed for large urban centers may not work in rural areas.

In many rural areas, there is an insufficient population base to support a full range of health care services. The increased competition for primary care providers to work in managed care systems creates additional uncertainty for communities already having difficulties recruiting and retaining primary care providers. While there are a few HMOs with a long history of serving rural areas, in recent years there has been limited development of new managed care plans in rural America. There is also a risk that as urban-based networks move into rural areas, more rural residents will bypass the local health care system and travel to providers who are part of networks in larger communities. Developing locally-owned and operated networks is one strategy for insuring the provision of services locally and maintaining local control of the health care system.

Managed care does not address issues of access to health care services.

Nationwide, 16 percent of the non-elderly population do not have access to public or private health insurance. Most of the uninsured live in families where there is at least one working adult. In comparison to those with insurance, the uninsured are less likely to use health services. As a result, they are more likely to have a greater number of avoidable hospitalizations, more diagnoses of late stage life-threatening disease, lower levels of subjective health status, and higher death rates. Managed care, as it is currently structured, does not improve access to health care for those without insurance. Neither does it address other access issues, such as long waiting periods, difficulty making appointments, inadequate transportation, impersonal and culturally inappropriate treatment, and demeaning policies and procedures. Issues such as these affect the appropriate use of health care and contribute to rising costs.

What Should an Individual Do if Offered a Managed Health Care Plan?

In a managed care plan, the individual needs to become a full partner in promoting his/her own health and well being. Efficient use of health services will help to ensure that financial health is preserved along with one's physical health. When offered a choice of plans, consider which plan is most likely to meet your needs. Use the worksheet included with these materials to compare plans. Even if only one plan is offered, answering these questions can help an individual be a wiser consumer of the benefits and services offered. As with conventional health insurance, it is difficult to use the plan wisely without being aware of its benefits and services, and your responsibilities as a member. It is unlikely that you will find a plan that gives you everything you want, but with a little homework, you should be able to find a plan that fits your needs and does not require too many compromises.

References

Commerce Clearing House. 1993. Managed Care Covers Majority of Persons in Job-Related Health Plans. CCH Pulse: The Health Care Reform Newsletter 1(6, April 19):10. Chicago, IL.

Cordes, Sam, Ph.D. 1995. Hogs and Health Care: There are Similarities. Corn Husker Economics (May 31). Lincoln, NE: University of Nebraska, Cooperative Extension.

Lewis, Marion Ein. 1993. Barrier to Health Care Access: Beyond Insurance. In Building Blocks to Change: How Health Care Reform Affects Our Future edited by Jack A. Meyer and Sharon Silo-Carroll. Washington, DC: The Economic and Social Research Institute.

Lipman, Marvin M., M.D., How to Manage with Managed Care, Consumer Reports on Health. September, 1994. Yonkers, NY.

MacLeod, Gordon K. 1993. An Overview of Managed Health Care. In The Managed Health Care Handbook edited by Peter R. Kongstvedt, MD. Gaithersburg, Maryland: Aspen Publications, Inc.

Mueller, Kurt, Ph.D.; Andrew Coburn, Ph.D.; Robert Crittenden, M.D.; Sam Cordes, Ph.D.; J. Patrick Hart, Ph.D.; and Wayne Myers, M.D. 1996. Changes in the Health Care Marketplace: What is the Future for Rural Health Care Delivery? A National Key Informant Survey. Prepared by The Rural Policy Research Institute Expert Panel on Rural Health Delivery. Columbia, Missouri: University of Missouri.

Wagner, Eric R. 1993. Types of Managed Care Organizations. In The Managed Health Care Handbook edited by Peter R. Kongstvedt, MD. Gaithersburg, Maryland: Aspen Publications, Inc.

------ 1994 Your Guide to Managed Care. HEALTHPAGES (Winter). A Special Report of the St. Louis Business Health Coalition. St. Louis, MO.

Credits:

Author: Gail Carlson, MPH, Ph.D., Health Education Specialist, University Extension, University of Missouri - Columbia

Burton Halpert, Ph.D., Team Leader, Community Decisions For Health National Initiative Management Team, U.S. Department of Agriculture, Cooperative State Research, Education, and Extension Service.

Jerry Coopey, Director of Government Affairs, Office of Rural Health Policy, U.S. Department of Health and Human Services

Acknowledgments:

The author would like to thank Sam Cordes, Director of the Center for Rural Community Revitalization and Development, University of Nebraska-Lincoln and Gerald Doeksen, Regents Professor and Extension Economist, Oklahoma Cooperative Extension Service, Division of Agricultural Sciences and Natural Resources, Oklahoma State University for contributing to this fact sheet through their review and content additions.

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