I.

Introduction

Managed Healthcare, a general classification used for a type of health insurance that provides comprehensive medical care based on a prepaid contract as opposed to traditional fee-for-service health insurance. Traditional health insurance pays a healthcare provider each time a medical service is performed. Managed healthcare plans, however, pay healthcare providers a set monthly fee for each member of the plan, regardless of whether the member seeks medical care. Managed healthcare plans are so-named because they attempt to manage or control the costs of healthcare by requiring participants in the plan to seek medical care from designated physicians. These physicians act as “gatekeepers” who determine if patients need to see more costly medical specialists.

Most managed care systems encourage preventive medicine, operating with the philosophy that it is better for the patient and more cost-effective to focus on preventing illness or to treat an illness in its early stages than to treat an illness in advanced stages. Accordingly, managed healthcare plans provide broad coverage for preventive care, such as immunizations and physical examinations, unlike traditional health insurance plans. Managed healthcare plans were also among the first to focus on providing care in an “out-patient” setting, such as a clinic or a physician’s office, rather than more expensive “in-patient” care in hospitals.

The first managed care plans formed in the United States in the late 1920s and early 1930s, but they did not become widespread until the 1980s. Prior to the 1980s, doctors and hospitals historically were paid on a fee-for-service basis. Their income increased by delivering more services, and health insurance companies typically complied with these increased services by paying the bills they received. With incentives like this in place, American doctors adopted new technologies quickly, hospitals invested in expensive new technologies, and American patients sought out specialists to provide care. The result was increasing costs in providing healthcare. Managed care plans were created, in part, to address the issue of rising healthcare costs.

Health insurance experts are still divided over whether managed care plans have succeeded in helping to tame cost increases. Some critics of managed care plans maintain that they have actually helped increase costs because patients can see their physician as many times as they like without paying a separate fee for each visit. Critics also argue that in playing the “gatekeeper” role, physicians are under pressure to control costs and therefore may hesitate to refer a patient to a specialist. Supporters argue that managed care plans have helped control costs because the plans encourage early detection of health problems when it is easier and less expensive to cure the problem.

Managed care plans are unique to the United States. They are usually offered through employers, although individuals and senior citizens who receive government-funded health insurance through Medicare can enroll directly in managed care plans. Most employer-sponsored plans allow an “open enrollment period” of one month when employees can decide whether they want a managed care plan or a traditional fee-for-service plan, also known as an indemnity plan. (See also Health Insurance.) There are three basic types of managed care plans: health maintenance organizations (HMOs), preferred provider organizations (PPOs), and point-of-service plans.

II.

Health Maintenance Organizations

HMOs provide comprehensive medical services in exchange for a monthly payment from the plan participant. HMOs developed in the early 1970s with the passage of the federal Health Maintenance Organization Act of 1973. The law applied minimum, uniform standards in all 50 states for a health insurance organization to qualify as an HMO. Under those standards, an HMO had to provide a comprehensive set of medical services for a prepaid fee or with minimal copayments and could not deny coverage to people with preexisting illnesses. The standards also required that participants in the plan be represented in making decisions about how the plan was administered.

Once an HMO meets these federal standards, the law permits it to require most employers that offer health insurance in a region served by the HMO to offer an HMO benefit. Requiring an employer to offer an HMO as a health insurance alternative is referred to as “mandating” the employer. In the first years after this legal option became available, it gave HMOs the ability to broaden their access to the marketplace. Today, however, mandating is seldom used because HMOs have become so popular and widespread. By the year 2000, more than half of Americans with health insurance were enrolled in managed care plans, a large percentage of them in HMOs.

Although HMO plans offer comprehensive coverage of healthcare services, participants face restrictions on their choices of doctors and hospitals. HMOs either hire physicians directly as salaried employees or contract with them on the basis of predetermined fees. HMOs may also own the clinics or hospitals that are staffed by these physicians. The services provided by these member physicians and facilities are paid for almost in their entirety by the HMO; services provided by nonmember physicians and facilities are not covered except with prior approval or in the case of emergencies.

In order to receive services from an HMO, a participant first enrolls as a plan member. Enrollment requires providing information about each family member to be covered, arranging to pay the required monthly fee, and selecting one of the member physicians as the primary care physician (the first physician that a patient consults). A membership card is issued and printed material describing the plan’s coverage is provided to the new enrollee. When the HMO member needs healthcare services, he or she makes an appointment to see the primary care physician. The physician provides the needed treatment or decides that the condition warrants referral to a specialist.

Most HMO members enroll through the employee benefit program at their place of employment. Once enrollment forms are complete, coverage usually begins the first of the next month.

People may also enroll directly in HMOs as individual members. For example, some HMOs accept senior citizens (those aged 65 and older) under special programs established to accept a monthly payment from Medicare. These special programs accounted for a big growth in individual memberships since the mid-1990s. Senior citizens can choose a basic plan for which the Medicare payment covers all or nearly all of the cost of the HMO membership. Alternatively, the plan member may choose a more extensive plan. By paying an additional premium, the member can get benefits not normally covered by Medicare, such as free or greatly discounted prescription drugs.

HMOs are organized in two different ways. A group practice association HMO houses physicians and other health-care services in its own locations. The healthcare providers who work at the HMO may be independent contractors or employees of the HMO. If the relationship is that of employer-employee, the type of group practice is called a staff model HMO. Under either type of contractual arrangement, HMO members are eligible to receive services from any physician who is a member of the group. An independent practice association HMO establishes a contractual relationship with doctors in private practice and with hospitals to provide services to its members. In both instances, physicians who participate in HMOs typically are paid a flat monthly amount for each patient enrolled in the HMO who has selected that doctor as their primary care physician. The doctor receives the same amount each month whether or not the patient requires health services.

III.

Preferred Provider Organizations

PPOs are health plans that provide more generous benefits to members who choose the services of preferred providers, but a PPO still provides some benefits for services received from other healthcare providers. Consequently, although the PPO covers its participants for any doctor or hospital they choose, it reserves its richest benefits for members who choose the preferred healthcare providers. A list of participating or “preferred” physicians and hospitals is distributed to members of the PPO and may change over time. Such changes occur because PPOs periodically negotiate contracts with their healthcare providers. This contracting mechanism allows the PPO to negotiate for the physician’s services to be delivered at reduced prices. It also enables the PPO to screen the quality of the medical care being delivered by the physician. If the quality of care fails to meet the PPO’s standards, the physician may be removed from the list of preferred providers. Many physicians cooperate with this arrangement because the PPO gives them access to a pool of potential new patients.

IV.

Point-of-Service Plans

Point-of-service (POS) plans give participants the opportunity to choose whether to receive treatment within the plan’s network of healthcare providers or outside the network at the time they receive medical treatment. In this way the point-of-service plan combines aspects of a traditional health insurance policy with aspects of an HMO or PPO. If healthcare services are provided by a physician who is a member of the HMO or PPO network, then benefits are the same as if the person were an HMO or PPO member. If healthcare services are delivered by a provider who is not on the preferred list, coverage is the same as a traditional health insurance policy, which means that the patient will share more of the costs. The member also assumes responsibility for paying the cost of services received. Once paid, bills are submitted to the plan for reimbursement. The patient must pay a deductible and usually pays a fixed percentage of the charges (typically 20 percent) with the traditional health plan covering the remainder.