Managed Care

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Managed Care2017-11-06T23:42:36+00:00

Managed Care

Dr Paul Ellwood (1926-  ) is widely regarded as the father of managed care and a central architect of the sea change in American health care which has offered an alternative to the formerly predominant fee-for-service model, in the form of health insurer-managed prepaid, comprehensive care. Early in his career as a pediatric neurologist, he was frustrated by the institutional mandate to make financial, organization-beneficial decisions instead of those in the patients’ best interests, and thought, we can do better. In 1970, Ellwood was invited to consult with President Nixon’s staff on creating a coherent national health policy, through which consumers would have a choice among health plans that would compete on price and quality. 

One such health plan was already in place, the California born and bred Kaiser Permanente* managed care consortium. It was founded in 1945, on the shoulders of a massive Depression era public (in the 1930s) works project (Colorado River Aqueduct) and the Kaiser Company’s ship-building during World War II (1940s) and had key elements in the health plans envisioned by Nixon. In 1973, Nixon into law, Health Maintenance Organization Act, a US statute which provided for a trial federal program to promote and encourage the development of HMOs, a term coined by Dr. Ellwood. 

*In the 1970s, KP had circa 1 million plan members. As of January 1 2016, it had 10 million plan members, 186K employees, 19K physicians, 51K nurses, 38 medical centers, and 622 medical offices. 

Managed healthcare is an umbrella term for a constellation of activities designed to both reduce the cost of providing healthcare and improve the quality of that care. The maneuvers used to reduce or spread costs include:

• Healthcare provider incentives Economic incentives for primary care physicians to limit costly specialist referrals; to use generic drugs; to order fewer diagnostic tests

Patient incentives Economic incentives to chose less costly care

Selective contracting with provider groups–e.g., ophthalmology or orthopaedic groups to provide economy of scale 

Utilization review and denial of coverage if the conditions or their management don’t meet treatment guidelines, especially conditions that require high-dollar care.

Cost-sharing in the form of co-payments and annual deductibles funded by the patients.

Several different formats of managed care have evolved since the health maintenance organization (HMO) were first envisioned by Ellwood in the 1960s. 

HMO A federally-qualified organization which would, in exchange for a subscriber fee, allow members access to a panel of employed physicians or a network of doctors and facilities including hospitals. In return, the HMO receives mandated market access and possibly federal funds.

IPA* A legal entity that contracts with a group of physicians to provide service to an HMO’s members. The physicians are usually paid based on capitation–i.e., per ‘head’, regardless of whether an individual needs care. The contract is non-exclusive so the physician group can contract with multiple HMOs, and also provide fee-for-service care unrelated to their managed care obligations. 

*Independent practice association

HMO vs PPO image from New Medical Terms


PPO A format for health care which is usually the least expensive option for subscribers in that they must pay a deductible up front–i.e., before receiving any benefits. After the deductible is met, coinsurance kicks in.. If the PPO plan is a 90% coinsurance plan with a $1,500 deductible, the patient pays 100% of the allowed provider fee up to $1,500. The insurer then pays 90% of fees beyond the $1,500, and the patient pays the remaining 10%. Physician charges above the amount allowed by the insurer remain unpaid and are written off as a discount by the physician. The advantage for physicians (providers) is that they contract directly with PPOs which in turn earn money by charging an access fee to the insurance company for the use of their network. A membership allows a substantial discount below regularly charged rates from the designated professionals partnered with the organization. 

*Preferred provider organization

POS* POS plans cherry pick from the above. Plan members choose which system to use at the time of service. The more ‘managed’ the plan, the lower the patient’s out-of-pocket cost. Patient who stay ‘in network’ (i.e., in the network of providers) are only responsible for the copayment. However, if they use an out of network provider without a prior referral from their primary care provider (physician, nurse practitioner), they pay more or the entire provider fee. POS plans are increasingly popular given their greater flexibility and freedom of choice.

*Point of service

Managed care in some form has been with us since the late 1970s, begging the question of whether having more monkeys on the backs of physicians and health care institutions is a help or hindrance. The rabid advocates assure us that managed care increases efficiency and improves standards. They remind us not to confuse cost with quality. As evidence-based decision making becomes more central to medical practice, less may be more and managed care mavins may be on the mark.

On the other hand…

Critics of for-profit managed care point to the unsurprising conclusion that it is more expensive: it increases healthcare costs by up to one-third; it forces those with marginal incomes to go without health coverage; it causes primary care providers to leave low-income regions and centers; and, most importantly, despite the promises of evidence-based practice (above), managed care worsens quality*.

*For-profit managed care provides got worse scores on 14 of 14 quality indicators reported to the National Committee for Quality Assurance.


Health Maintenance Organization Act of 1973