What Legislators Need to Know About Managed Care

Executive Summary

Managed care is a term used to describe health care systems that integrate the financing and delivery of appropriate health care services to covered individuals by: arrangements with selected providers to furnish a comprehensive set of health care services; explicit standards for selection of health care providers; formal programs for ongoing quality assurance and utilization review; and significant financial incentives for members to use providers and procedures associated with the plan. Managed care is a rapidly growing phenomenon in America. At the end of 1993, enrollment in the two most popular forms of managed care--health maintenance organizations and preferred provider organizations--was over 44 million and 55 million, respectively.

The goal of managed care is to control skyrocketing health care costs without sacrificing the quality of care. Managed care pursues those goals in a number of ways. Most managed care plans establish a limited network of providers. In some cases, instead of being reimbursed for the specific care they give patients, these providers agree to fixed payments based on the number of members enrolled in the plan. Thus, the network of providers shares risk: If the care provided is more expensive than the allotted payments, the providers absorb the loss. This arrangement (called capitation), in theory encourages providers to care for patients efficiently and to promote healthy behavior so expensive treatment is less often necessary. Other common tools of managed care include:

requiring patients to initially consult a primary care physician (for example, a family practitioner), who will authorize and coordinate any referrals to specialists; and
performing "utilization review" in which a group of health care professionals assesses the appropriateness of care (for example, the length of hospital stay).

In addition to these cost controlling techniques, managed care encourages competition among groups of health care providers. This competition is another factor that encourages efficiency and other efforts to control costs and improve service.

The following are the four major types of managed care organizations:

Health maintenance organizations (HMOs);
Preferred provider organizations (PPOs);
Exclusive provider organizations (EPOs); and
Point-of-service (POS) plans.

The HMO provides a prearranged set of basic and supplemental health maintenance and medical services to an enrolled group. In a PPO, a third party (insurer, employer, administrator or other sponsoring group) negotiates discounted rates for services directly with selected providers. The EPO is an indemnity arrangement in which a group of providers contracts with an insurer, employer, third-party administrator or other sponsor. In a POS plan, members receive care from participating providers designated by the network, but have the option of getting care outside the network.

A frequent concern about managed care is quality. Proponents and skeptics alike want to assure that lowering costs does not mean providing inadequate or poor quality care. To address this concern, managed care organizations perform various activities to help measure and improve quality. In addition, professionals assert that improved efficiency can actually improve quality by causing practitioners to carefully examine the processes involved in patient care.

Another concern is choice. By design, managed care limits patients' choice of providers. However, some patients want the option to go outside the network of providers. In response, many managed care plans have worked to increase the size of their provider networks and to include the alternative to seek care outside the network (if the patient is willing to pay an additional amount).

Finally, some note a lack of evidence to support the claim that managed care actually will save money in the long term.

Despite these concerns, managed care is an established and growing method of health care delivery. Many states already use managed care extensively to improve access to health care, to assure health care quality, to manage the utilization of health care services and to manage health care costs. Managed care is a part of Medicaid, state employee health benefit plans, small group health insurance plans, workers' compensation programs and rural health care delivery. Various states are testing innovative delivery methods using managed care techniques, and managed care was at the heart of President Clinton's Health Security Act.

Last modified: 9/16/97.