Chapter 19
The Evolution of Managed Care Insurance
Background
 Managed care insurance was a market response to inefficient
excesses of the past that led to rapidly rising medical costs.
 This form of market competition emerged and grew rapidly during
the 1980s and 1990s.
 Traditional health insurance, with free choice of provider, has almost
disappeared (<1%) in the private insurance market (see slide). Most
(80%) Medicaid and 25% of Medicare enrollees now covered by
MCOs.
1. What is managed care, and what are managed care techniques?
 Managed care plans influence many decisions that were once
handled by physicians, including the decision whether to hospitalize
a patient, the length of stay, specialist referrals, and the types of
drugs participating physicians can prescribe (i.e., only those on a
restricted drug formulary).
 Managed care plans contracted with those physicians and hospitals
willing to both discount their prices and not overutilize services,
which were preconditions for joining the plan’s limited provider
network.
 The patient’s choice of physician was restricted to only those in the
plan’s provider panel.
 Patients were also limited to seeing specialists and going to hospitals
within the provider panel.
 Financial penalties for excessive testing and referrals, as well as
utilization review, were also common features of MCOs.
2. Evolving Managed Care Organizations (MCOs)
 MCOs were initially very restrictive relying on “selective contracting”
that limits the provider panel to those who are willing to discount
their prices and using a gatekeeper model and stringent utilization
review.
 More recently MCOs increasingly rely on changing physicians’
practice patterns, such as early identification of high-risk enrollees,
decreasing the variation in physicians’ utilization patterns, reducing
inappropriate use of services, and substituting less costly in-home
services for continued care in the hospital.
 Some managed care plans shifted more of the capitation payment
(particularly in CA), hence more of the risk, to physicians and
hospitals, giving providers an incentive to be innovative in the
delivery of medical services.
 Because managed care plans and their providers have a financial
incentive to provide fewer services under capitation, large
employers have increasingly demanded “report cards” that measure
patient satisfaction and medical outcomes for differing MCOs.
 MCOs are also experimenting with “pay for performance” that
attempt to reward providers who provide higher quality care.
Measures include (1) clinical quality, i.e., kid shot rates, cancer
screening rates and management of chronic diseases, (2) patient
satisfaction measures, and (3) investment in IT tech like patient
medical records, lab services, etc.
3. Why did managed care occur?
 Traditional indemnity health insurance, with its comprehensive
coverage of hospitals and small copayments for medical services,
lessened patient concerns with hospital and medical expenses,
leading to rapidly escalating insurance costs for employers.
o Physicians were paid fee-for-service (FFS) and were not fiscally
responsible for hospital use, which they prescribed.
o Rapid introduction of new medical technology also occurred,
because insurers covered its use and cost.
 Traditional insurers were not responsive to employer cost concerns,
providing entrepreneurs who recognized the potential for reducing
medical system inefficiencies from MCOs to enter the market.
 1982 Supreme Court decision that upheld anti-trust laws applied to
healthcare opened the way for MCOs.
4. What are the different types of managed care plans?
 Managed care plans vary in the degree to which they use a select
network of providers and limit access to specialists. Typically, the
more restrictive the managed care plan, the lower its premium.
 Traditional HMO is the most restrictive type where patients must go
to in-network providers or pay the full costs of non-network
providers. Cost control by HMOs is achieved through stringent
utilization management, financial incentives to its physicians, and
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limiting access to only its providers. Primary care MDs typically
salaried and must make referral to specialists.
PPO plans contract with providers for discounted rates & pay fee-forservice. Out of network care covered but with higher copays and
deductibles. Costs are controlled through utilization management,
patient copayments, and discounted fees from PPO providers. May
need to see primary care MD for specialist referral.
POS plans are HMOs that permit enrollees to use nonparticipating
providers if the enrollees are willing to pay a high copayment (e.g.,
40 percent) each time they use such providers. Offered to compete
with popularity of PPOs.
Consumer Driven Health Plans are like PPOs with in and out of
network coverage. Large deductibles (+$2500) & out of pocket
maximums but consumers can set up tax-deductible health savings
account to defray costs. Low premiums are attractive to low-users.
Fastest growing category.
Nearly no one has private traditional health insurance anymore (see
slide).
5. How has the growth of managed care affected the performance of
the medical sector?
 Hospital use and charges decline, leading to a decrease in hospitals’
share of medical care spending (see slide).
 Use of less costly settings for inpatient care increased.
 Lowered provider prices.
 Managed care competition has dramatically slowed the rise in health
insurance premiums. Employers and employees are very price
sensitive, so health plans had to be very price competitive (see slide).
 Managed care plans not only reduced their own medical costs but,
by their competitive effect, forced traditional insurers to adopt
managed care techniques to reduce their costs so they would remain
price competitive.
 Managed care has slowed the rate of new technology adoption.
 MCOs have increased capacity utilization of equipment, leading to
fewer new facilities.
6. How have MCOs affected consumer satisfaction & quality of care?
 HMO satisfaction quite high in terms of waiting time for
appointment, specialist referral and travel times to panel provider.
May only reflect those w/o serious health issues.
 For chronically ill, HIV positive or poor, patient satisfaction evidence
is mixed.
 Little evidence of difference in significant quality of care differences.
7. Why did MCO cost savings start to diminish in 1990s?
 Economy more prosperous in 1990s than 1980s, leading to tight
labor markets so employers started to offer less restrictive PPO plans
vs. HMOs to recruit and retain employees. Less gatekeepers,
broader networks led to rising premiums.
 Hospitals, physicians and Rx companies merged to gain greater
bargaining power with insurers.
 Increased government mandates and limits because of
o publicized cases of denial of care by HMOs & inadequate care
(e.g., drive-by babies)
o public demand for increased access to specialists (without
paying more)
o the AMA demanding that insurers take “any willing provider.”
Trends in MCOs
Hospital Trends
Premium Trends