Managed Care Economics


The United States is one of the largest advanced economies by gross domestic product (GDP) in terms of both nominal and purchasing power parity. Especially in healthcare, the U.S. is the leading power in state-of-art medical technology, training, and research. However, healthcare spending in the U.S is remarkably highest with scanty health outcomes and poor public service compared with the ten highest-income countries (United Kingdom, Canada, Germany, Australia, Japan, Sweden, France, the Netherlands, Switzerland, and Denmark). From 1960 to 2017, U.S. healthcare expenditure as a percentage of GDP inflated from 5.0 to 17.9 (i.e., $3.5 trillion), and average dollars spent on individuals increased from (in dollars) 146 to 10,739 respectively. Among these national healthcare expenditures, nearly 25% of spending was wasted.[1][2] Early origins of the deliberate steps to change the American healthcare system through a controlled form of financing and healthcare delivery traced back to the Nixon administration during 19 century. The significant structural changes in the U.S. healthcare system started in 1970. Congress passed a bill in 1973, the Health Maintenance Organization Act, which spurred the rapid growth of Health Maintenance Organizations (HMOs), the first form of managed care. Under traditional insurance (also known as fee-for-service or indemnity insurance), insurance companies and providers operated independently without incentive, resulting in unaffordability and unrestrained delivery of services with spiraling health insurance premiums. This integration of financing and insurance was an efficient way to gain control and prompted the explosion of managed care during the 1970s and 1980s, lifting a heavy burden from employers.

Managed Care


To put in simple terms, Managed Care is defined as a group of activities or techniques intended to control costs, utilization, and maintain quality of care through health insurance plans. Many authors define Managed Care as a "Healthcare delivery system that 1) integrates fragmented four basic healthcare delivery functions, i.e., the financers, insurers, providers and payers to achieve efficiency, 2) implement control (manage) mechanisms in medical services utilization, and 3) introduces price competition in health service markets, i.e., determining the price at which services are purchased and how much the providers get paid. Managed Care and "Managed Care Organization" (MCO) terms are used interchangeably in an organizational context.[3][4][1][5]

Evolution and Growth

The principles on which managed care were based had been existed for over a century. Before the introduction of health insurance plans, patients/ consumers paid directly out-of-pocket. Between 1910 and 1940, a blueprint for modern health insurance emerged in the form of the Baylor Plan, the first form of private health insurance based on capitation. In this capitation plan model, the Baylor Hospital gets paid a monthly fixed fee for every enrollee in the plan without the involvement of any insurance company. Baylor's plan is a classic example of a prepaid plan, where providers are risk bearers, and a combination of triad functions (insurance, delivery, and payment) of healthcare is observed. However, further evolution of this initial concept got derailed by organized medicine. Later comes evolutionary changes in medical care delivery labeled as corporate practice of medicine, referring to precursors of managed care – 1) Contract practice, 2) Pre-paid group practice.

  • Contract practice followed the same path towards integrating the triad mentioned above functions and capitation plan model, but with the addition of a defined group of enrollees. For instance, an employer (financer) provides health care to a group of enrollees – the employees by contracting with one or more providers at a fixed fee per enrollee.
  • Pre-paid group practice follows the same principles of contract practice (capitation, bearing risk by providers, and defined group of enrollees) but with a slight variation by adding comprehensive services. For instance, Mayo Clinic in Rochester, Minnesota, is the first form of a multispecialty clinic where a group of specialists consolidated to form a group practice to provide comprehensive services by complying with principles of capitation, risk-bearing to provide care to a defined group of enrollees.

Later, the commercial insurance companies developed health insurance models that strongly influenced fragmentation of the triad functions by slackly hold on to insurance and payment functions but a stranded delivery function of healthcare. However, the fundamental American healthcare landscape changed by the flourish of Managed Care in the 1970s after the HMO act. Managed care covers a broad spectrum of activities including but not limited to greater integration of quad-function healthcare delivery (financiers, insurers, providers, and payers), cost containment by limiting unnecessary utilization, limited fee-for-service, sharing of risk with providers, financial incentives to providers, accountability for plan performance.

Issues of Concern

Types of Managed Care Organizations

From an economist's point of view, managed care was the impetus for the growth of for-profit organizations in health care, which was predominantly operated by non-profit organizations for ages. Managed care has become a beacon of hope for employers to generate hospital revenue by cost control and utilization management. This cost containment concept leads to the development of different managed care organization models based on various networks. However, there are three major types of managed care organizations that gained recognition over the years.

The managed care models (market plans) range from more restrictive to less restrictive. As mentioned previously, 1) HMOs are the first form of managed care organizations that falls under more restrictive category followed by 2) Physician Provider Organization (PPOs), less restrictive, and 3) Point-of-Service Plans (POS), the combination of HMO-like and PPOs features, thus blurring the managed care landscape.

Health Maintenance Organizations (HMOs)

An HMO involves preventive medical care services, capitation, prepaid premiums, a limited panel of primary care physicians (PCP), and specialists. HMOs frequently require healthcare plan members to choose physicians and hospitals in-network and only pay for the services obtained from in-network, making it more restrictive. Financial risk-bearing for providers is one of the main concerns on the HMO part; for instance, PCPs have to share financial risk with specialists. HMOs usually use capitation, risk pools, and withholds to control physician and patient behavior, consequently control overutilization to achieve cost containment.

Preferred Provider Organizations (PPOs)

PPOs involve selective contracts with a group of physicians and hospitals, discounted fee arrangements with providers, and negotiated charges for diagnosis-related groups (DRGs) with hospitals, flexible panel of providers. In this healthcare plan, the patient can choose physicians from out-of-network as well but incurs high-cost sharing. Prior authorization is generally necessary for hospitalization and high-cost outpatient procedures. PPOs provide flexibility and risk-sharing for both providers and patients, making PPOs less restrictive. Despite having higher premiums, PPOs became popular than HMOs.

Point of Service (POS)

POS provides a combination of HMO-like and PPO-like options. Patients have to choose PCP; however, they can select from out-of-network and allow patients to choose their physicians and care of their choice. This plan is mostly favored by employers for their employees with higher premium arrangements without fear of losing coverage if a patient or employee goes for out-of-network providers.

Managed Care plans were fully or partially implemented all over the U.S., making MCOs ubiquitous. About 16% of insured workers around the country were enrolled under full risk-bearing HMOs, and an additional 49% enrolled in partial risk-bearing or discounted fee-for-service PPOs.[1]

Effect of the Affordable Care Act (ACA) on Managed Care

In legislation, the enactment of ACA in 2010 considered a significant impact on the American Healthcare System since the passage of Medicare and Medicaid during the 1960s''. Patient Protection and Affordable Care Act (PPACA) is often referred to as "ACA" or "Obamacare," was the first of its kind to be increasingly consumer-driven and made MCOs accountable for its members/enrollees and the services provided to them. Among the ACA's many provisions, managed care plans were taken to a new level in the healthcare market. In the healthcare market, HMOs penetrated and peaked during the mid-1990s and later followed by a plateau. From 2001 to 2009, HMO enrolment declined from 91.1 million to 75.3 million. Managed care became a mature industry that has become a primary form of health insurance in the private sector, and states enrolled more members under Managed care Medicare and Medicaid plans. Under ACA provisions, HMO enrollment increased from 2014 (84.8 million) to 2015 (89.3 million). However, PPOs continue to rise after the 1990s due to acquisition and mergers in the market and still maintained their growth. Under ACA, PPOs have emerged as powerful players in the market from 2008 to 2015. The number of PCPs contracted per PPO rose 56.3% (from 3,595 to 5,618) and specialists rose 92.4% (from 6,962 to 13,397).[6][7][1][8][9]

Regulation of Managed Care

Since the 1980s, there has been an explosion of managed care that simultaneously resulted in widespread complaints and negative publicity against managed care. In response to those negative criticism, state and federal governments imposed laws and regulations to protect both consumers and providers to a certain extent. The three federal laws, ERISA, COBRA, and TEFRA, mainly affect managed care with rapid expansion.

ERISA stands for Employee Retirement Income Security Act of 1974; shields managed care organizations from malpractice lawsuits when they fall under employee group health plan governed by ERISA. Under ERISA, any negligence claims against ERISA managed care health plans for injuries resulting from physicians'' malpractice, overutilization, improper treatment plan, and denial of plan benefits can be subject to veto.[10]

TERA stands for the Tax Equity and Fiscal Responsibility Act of 1982. This legislation was created to reduce budget gaps to generate revenue. In healthcare, TEFRA required the conversion of hospital Medicare reimbursement from cost-plus to the prospective payment system (PPS) based on diagnosis-related groups (GRGs). Under PPS, hospitals receive a fixed amount based on patients'' principal diagnosis. To improve hospital revenue and earn profits, hospitals have to reduce inpatient days. Under the TEFRA program, managed care organizations were able to flourish as the main goal of managed care is to generate revenue by controlling costs and overutilization of hospital services.[11]

COBRA stands for the Consolidated Omnibus Budget Reconciliation Act of 1985, provides temporary access to the health coverage of the previous employers under certain events such as unemployment. COBRA coverage usually lasts for 18 months or sometimes extends up to 36 months, depending on the nature of the event. This federal law protects consumers from organizations such as MCOs through temporary access to full coverage of health insurance.[12]

Clinical Significance

Managed care penetration in the US is associated with higher rates of preventive services utilization, such as vaccinations and disease screenings in the general population. Also, Managed care penetration linked with a reduction in utilization of inpatient procedures, especially among Medicare Advantage (MA) beneficiaries, resulted in lower inpatient complications and reduced mortality rates. American Hospital Association conducted a cross-sectional study to examine the effect of Managed Care among Medicare patients and privately insured patients vs. fee-for-service patients.

The results showed that among managed care privately insured patients, declining inpatient mortality rates were observed for acute myocardial infarction (AMI), stroke, pneumonia, and congestive heart failure (CHF) compared to FFS patients. However, patients in Medicare managed care had similar outcomes when compared to Medicare FFS. Among state-wide Medicaid programs, 77% of Medicaid patients were enrolled in some form of managed care, and results shown were better quality outcomes in preventive services, maternity care, patient experiences when compared to Medicaid programs without managed care plans. The effect of managed care penetration on overall hospital costs turned out to be cost-effective as per previous studies. For instance, in California, with 40% of managed care penetration in market share, there was an evident 25% slower growth rate in hospital costs.[13][14][8][15][16][17][9]

Nursing, Allied Health, and Interprofessional Team Interventions

Utilization Management (UM)

Managed care emanates from the basic concept of monitoring and controlling the utilization of medical services by a team approach. In simple economic terms, total healthcare costs are the result of two variables: price and volume. As discussed previously, capitation, reimbursements of providers, bundled payments, etc.., describes price concept, whereas volume mainly speaks about medical services utilization. In the organizational context, utilization management is interchangeable with utilization review (UR). Shi & Singh (215) defines utilization review as "the process of evaluating the appropriateness of services provided." Depending on the type of services provided, UR can be used in various sectors of healthcare. For instance, Drug UR practices address the utilization and cost of prescription drugs. UM or UR broadly divides into three categories: 1) Prospective, or before the event occurs; 2) Concurrent, or while the event is occurring; 3) Retrospective, or after the event has occurred; and all these reviews serve to identify cases for case management intervention, where cases with chronic illness with multiple complications or catastrophic events requires larger expenses and result in substantial costs.[18][19][20]

Prospective Utilization Review: This concept applies to major categories such as health risk appraisals, demand management, referral services, and institutional services. A classic example is the advanced Medicare HMO. A managed care organization intervenes in cases where patients or members require extra services to lower overall costs. For instance, when a new member joins the plan, in addition to data-gathering forms, patient history, physical exams, a nurse will be sent to home aid to check nutritional assessment, prescribed medications, and other simple interventions such as providing bathmat to prevent falls for older patients and save costs of care later in their treatment.

Concurrent Utilization Review: This review solely referred to inpatient care and case management, where the continuous review is necessary, such as inpatient cases. Assignment and tracking of the length of stay (LOS), review and rounding by UR nurses, and discharge planning are commonly used techniques for concurrent review. For example, if the patient is admitted with a hip fracture, the UM nurse on-site should gather information and plan discharge accordingly to home with subsequent home health services and need for durable medical equipment (DME) or to skilled nursing facilities (SNF). In a nutshell, UM/UR nurse plays a key role in gathering the information and coordinate medical services to the patient from admitting to discharge while complying with the LOS guidelines and help in cost savings and generate revenue of the hospital.

Retrospective Utilization Review: This review refers to the quality of care at the right time in the right place, billing errors. MCOs usually intervene in regular review of providers to see any patterns of over or under-utilization of medical services or providers continuously making errors in the care plan and testing etc..; MCOs usually provide physician performance data to individual physicians to compare their performance with peers. That feedback would help them modify their practices as appropriate and help curtail overall healthcare costs and improve the quality of care.

Nursing, Allied Health, and Interprofessional Team Monitoring

Case Management 

The widely accepted definition of case management by accrediting bodies such as Case Manager Certification (CCMC) is " A collaborative process which evaluates, plans, implements, coordinates, monitors, and assesses the options and services required to meet an individual's health needs, using communication and available resources to promote quality, cost-effective outcomes." The central concept of case management is all cases do not require a continuum of care or high demand for medical services. Only a small portion of patients was chronically ill and needed continuous monitoring and care coordination, but they utilized the most services resulting in considerable healthcare costs. The care management team's key role is to identify and track those complex cases, which usually slip through the cracks in the healthcare delivery system because of the requirement of care from various departments and different levels of care as well. High frequency of admissions in a short period and longer LOS after surgical hospitalization with multiple complications are few examples where case managers need to be competent in clinical knowledge and play a key role in curtailing costs of utilizing expensive medical services. Some examples of complex cases include preterm delivery, a CVA suffered by a teenager, a spinal cord injury, etc.[21]

Article Details

Article Author

Niharika Namburi

Article Editor:

Prasanna Tadi


2/4/2021 12:56:20 PM

PubMed Link:

Managed Care Economics



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