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The term "managed care" is used to describe a variety of techniques intended to reduce the cost of providing health benefits and improve the quality of care ("managed care techniques"), organizations that use those techniques or provide them as services to other organizations ("managed care organizations"), or systems of financing and delivering health care to enrollees organized around managed care techniques and concepts ("managed care delivery systems"). According to the National Library of Medicine, the term "managed care" encompasses programs:

...intended to reduce unnecessary health care costs through a variety of mechanisms, including: economic incentives for physicians and patients to select less costly forms of care; programs for reviewing the medical necessity of specific services; increased beneficiary cost sharing; controls on inpatient admissions and lengths of stay; the establishment of cost-sharing incentives for outpatient surgery; selective contracting with health care providers; and the intensive management of high-cost health care cases. The programs may be provided in a variety of settings, such as Health Maintenance Organizations and Preferred Provider Organizations.[1]

The growth of managed care in the U.S. was spurred by the enactment of the Health Maintenance Organization Act of 1973. While managed care techniques were pioneered by health maintenance organizations, they are now used by a variety of private health benefit programs. Managed care is now nearly ubiquitous in the U.S, but has attracted controversy because it has largely failed in the overall goal of controlling medical costs. Proponents and critics are also sharply divided on managed care's overall impact on the quality of U.S. health care delivery.


Paul Starr suggests in his analysis of the American health care system (i.e., The Social Transformation Of American Medicine) that Ronald Reagan was the first mainstream political leader to take deliberate steps to reform American health care from its longstanding not-for-profit business principles into a for-profit model that would be driven by the insurance industry. In 1973, Congress passed the Health Maintenance Organization Act, which encouraged rapid growth of HMOs, the first form of managed care.

Managed care plans are widely credited with subduing medical cost inflation in the late 1980s by reducing unnecessary hospitalizations, forcing providers to discount their rates, and causing the health-care industry to become more efficient and competitive.[2] Managed care plans and strategies proliferated and quickly became nearly ubiquitous in the U.S. However, this rapid growth led to a consumer backlash. Because many managed care health plans are provided by for-profit companies, their cost-control efforts created widespread perception that they were more interested in saving money than providing health care.[2] In a 2004 poll by the Kaiser Family Foundation, majorities of those polled said they believed that managed care decreased the time doctors spend with patients, made it harder for people who are sick to see specialists, and had failed to produce significant health care savings. These public perceptions have been fairly consistent in polling since 1997.[3]

The backlash included vocal critics, including disgruntled patients and consumer-advocacy groups, who argued that managed care plans were controlling costs by denying medically necessary services to patients, even in life-threatening situations, or by providing low-quality care. The volume of criticism led many states to pass laws mandating managed-care standards.[2] Complying with these mandates increased costs. Meanwhile, insurers responded to public demand by beginning to offer other comprehensive plan options with more comprehensive care networks. In fact, between 1970 and 2005, the share of personal health expenditures paid directly out-of-pocket by U.S. consumers actually fell from about 40 percent to 15 percent. So although consumers faced rising health insurance premiums over the period, lower out-of-pocket costs likely encouraged consumers to use more health care, leading to expenditure growth.[4]

By the late 1990s, U.S. per capita health care spending began to increase again, peaking around 2002.[5] Despite managed care's efforts to control costs, U.S. health care spending continues to outstrip the overall economy, rising about 2.4 percentage points faster than annual GDP since 1970.[6]

Nevertheless, according to the trade association America’s Health Insurance Plans, managed care is nearly ubiquitous in the U.S.; 90 percent of insured Americans are now enrolled in plans with some form of managed care.[7] The National Directory of Managed Care Organizations, Sixth Edition profiles more than 5,000 plans, including new consumer-driven health plans and health savings accounts.

Managed care techniques[]

One of the most characteristic forms of managed care is the use of a panel or network of health care providers to provide care to enrollees. Such integrated delivery systems typically include one or more of the following:

  • A set of selected providers that furnish a comprehensive array of health care services to enrollees;
  • Explicit standards for selecting providers;
  • Formal utilization review and quality improvement programs;
  • An emphasis on preventive care; and
  • Financial incentives to encourage enrollees to use care efficiently.[8][9][10]

Provider networks can be used to reduce costs by negotiating favorable fees from providers, selecting cost effective providers, and creating financial incentives for providers to practice more efficiently.[11] Other managed care techniques include disease management, case management, wellness incentives, patient education, utilization management and utilization review. These techniques can be applied to both network-based benefit programs and benefit programs that are not based on a provider network. The use of managed care techniques without a provider network is sometimes described as "managed indemnity."

Managed care organizations[]

There is a continuum of organizations that provide managed care, each operating with slightly different business models. Some organizations are made of physicians, while others are combinations of physicians, hospitals, and other providers. Here is a list of common MCOs:

  • Group practice without walls
  • Independent practice association
  • Management services organization
  • Physician practice management company

Types of network-based managed care programs[]

There are several types of network-based managed care programs. These range from more restrictive to less restrictive, and include:

Health Maintenance Organization (HMO)[]

Main article: Health Maintenance Organization

Proposed in the 1960s by Dr. Paul Elwood in the "Health Maintenance Strategy", the HMO concept was promoted by the Nixon Administration as a fix to rising health care costs and set in law as the Health Maintenance Organization Act of 1973. As defined in the act, a federally qualified HMO would in exchange for a subscriber fee (premium) allow members access to a panel of employed physicians or a network of doctors and facilities including hospitals. In return the HMO received mandated market access and could receive federal development funds.

HMOs are licensed by the state level, under a license that is known as a certificate of authority (COA) rather than under an insurance license. [12] In 1972 the National Association of Insurance Commissioners adopted the HMO Model Act, which was intended to provide a model regulatory structure for states to use in authorizing the establishment of HMOs and in monitoring their operations. In practice, an HMO is a coordinated delivery system that combines both the financing and delivery of health care for enrollees. In the design of the plan, each member is assigned a "gatekeeper", a primary care physician (PCP) who is responsible for the overall care of members assigned to him/her. Specialty services require a specific referral from the PCP to the specialist. Non-emergency hospital admissions also required specific pre-authorization by the PCP. Typically, services are not covered if performed by a provider not an employee of or specifically approved by the HMO, unless it is an emergency situation as defined by the HMO. Financial sanctions for use of emergency facilities in non-emergent situations were once an issue; however, prudent layperson language now applies to all emergency-service utilization and penalties are rare.

Since the 1980s, under the ERISA Act passed in Congress in 1974 and its preemptive effect on state common law tort lawsuits that "relate to" Employee Benefit Plans, HMOs administering benefits through private employer health plans have been protected by Federal law from malpractice litigation on the grounds that the decisions regarding patient care are administrative rather than medical in nature. See "Cigna v. Calad ", 2004.

Independent Practice Association (IPA)[]

Main article: Independent practice association

An Independent Practice Association is a type of HMO that contracts with a group of physicians to provide service to the HMO's members. Most often, the physicians are paid on a basis of capitation, which in this context means a set amount for each enrolled person treated. The contract itself is not binding, allowing individual doctors or the group to sign contracts with multiple HMOs. Physicians who participate in IPAs usually also serve fee-for-service patients not associated with managed care.

Preferred Provider Organization (PPO)[]

Main article: Preferred provider organization

Rather than contract with the various insurers and third party administrators, providers may contract with preferred provider organizations. They generally agree to a discount from a relative value-based fee schedule or simply a discount from whatever they bill (which is perhaps subject to reasonable, usual, and customary limitation (generally a percentile of national or regional charge data)). The PPO, in turn, promises convenience, less administrative expenses, and/or prompt payment.

In terms of using such a plan, unlike an HMO plan, which has a copayment cost share feature (a nominal payment generally paid at the time of service), a PPO generally does not have a copay and instead offers a deductible and a coinsurance feature. The deductible represents the first dollar of coverage and is paid by the patient. After the deductible is met, the coinsurance portion applies. If the PPO plan is an 80% coinsurance plan with a $1,000 coinsurance out of pocket, then the patient will pay 20% of the allowed provider fee up to $1,000. After this amount has been paid by the patient, the insurer will pay 100% of subsequent costs.

Because the patient is picking up a substantial portion of the "first dollars" of coverage, PPO are the least expensive types of coverage[1].

Point Of Service (POS)[]

Main article: Point of service plan

A POS plan utilizes some of the features of each of the above plans. Members of a POS plan do not make a choice about which system to use until the point at which the service is being used.

In terms of using such a plan, a POS plan has levels of progressively higher patient financial participation as the patient moves away from the more managed features of the plan. For example, if the patient stays in a network of providers and seeks a referral to use a specialist, they may have a copayment only. However, if they use a network provider, but do not seek a referral, they will pay more, and so on.

Managed care in indemnity insurance plans[]

Many "traditional" or "indemnity" health insurance plans now incorporate some managed care features such as precertification for non-emergency hospital admissions and utilization reviews. These are sometimes described as "managed indemnity" plans.


The overall impact of managed care remains widely debated. Proponents argue that it has increased efficiency, improved overall standards, and led to a better understanding of the relationship between costs and quality. They argue that there is no consistent, direct correlation between the cost of care and its quality, pointing to a 2002 Juran Institute study which estimated that the "cost of poor quality" caused by overuse, misuse, and waste amounts to 30 percent of all direct health care spending.[5] The emerging practice of evidence-based medicine is being used to determine when lower-cost medicine may in fact be more effective.

Critics of managed care argue that "for-profit" managed care has been an unsuccessful health policy, as it has contributed to higher health care costs (25-33% higher overhead at some of the largest HMOs), increased the number of uninsured citizens, driven away health care providers, and applied downward pressure on quality (worse scores on 14 of 14 quality indicators reported to the National Committee for Quality Assurance).[13]

See also[]

Notes and references[]

  1. "managed+care" Managed Care. National Library of Medicine.
  2. 2.0 2.1 2.2 The backlash against managed care, Nation's Business, July 1998, accessed 2007-10-05
  3. Kaiser Public Opinion Spotlight: The Public, Managed Care, and Consumer Protections, June 2004, accessed 2007-10-05.
  4. Health Care Costs: A Primer, Kaiser Family Foundation Health Care Marketplace Project, August 2007, accessed 2007-10-05
  5. 5.0 5.1 The Factors Fueling Rising Healthcare Costs 2006, report prepared by Price Waterhouse Coopers for America’s Health Insurance Plans, January 2006, accessed 2007-10-05
  6. Trends in Health Care Costs and Spending, Kaiser Family Foundation Health Care Marketplace Project, September 2007, accessed 2007-10-05
  7. Fast Facts. America's Health Insurance Plans. URL accessed on 2007-07-18.
  8. Peter R. Kongstvedt, "The Managed Health Care Handbook," Fourth Edition, Aspen Publishers, Inc., 2001, page 3, ISBN 0-8342-1726-0
  9. Managed Care: Integrating the Delivery and Financing of Health Care - Part A, Health Insurance Association of America, 1995, page 9 ISBN 1-879143-26-1
  10. Margaret E. Lynch, Editor, "Health Insurance Terminology," Health Insurance Association of America, 1992, ISBN 1-879143-13-5
  11. Managed Care: Integrating the Delivery and Financing of Health Care - Part A, Health Insurance Association of America, 1995, page 9 ISBN 1-879143-26-1
  12. Peter R. Kongstvedt, "The Managed Health Care Handbook," Fourth Edition, Aspen Publishers, Inc., 2001, page 1322 ISBN 0-8342-1726-0
  13. (Himmelstein, Woolhandler, Hellander, Wolfe, 1999; HMO honor roll, 1997; Kuttner, 1999)

Further reading[]


  • Piotrowski C, Belter RW, Keller JW. The impact of "managed care" on the practice of psychological testing: preliminary findings. J Pers Assess 1998 Jun;70(3):441-7

External links[]

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