MANAGED CARE - BACKGROUND, DEFINITIONS, AND OPERATION [ PART I]

            Starting more than 30 years ago and as a means of slowing the increase of health insurance premiums, the concept of “managed care” was born.  Since then, its use has broadened and numerous forms of it have developed.  Some of those forms will be discussed in future articles.

           In general, managed care involves the combination of payment for and delivery of health care into a single unit.  One of the ways in which it differs from traditional health insurance is that with traditional (“indemnity”) health insurance, there is no direct relationship between the provider of the medical services and the payer, other than the fact that the insurer pays some of the provider’s charges.  That is, the provider renders a medical service, issues a bill and, within the limits of the insurance policy, the insurer pays all or a portion of it.  In that situation, the patient is free to obtain services from whomever he/she wishes, and the payer (the insurer) is essentially a stranger to that transaction. 

           In contrast, a managed care plan negotiates in advance with a network of providers the terms under which they will work and the reimbursement that the plan will pay to the providers for covered services.  When a medical need arises, the patient (often called a “member”) is referred to the participating network, and may choose a provider who belongs to that network.  In some cases, the patient is permitted to go “out of network”, but the level of reimbursement and the co-payment may differ.  This often happens if the member has a medical need that cannot be addressed by a provider within the network.  In general, there is a much closer relationship between the provider of medical care and the payer of the charges for the care in a managed care plan than in an indemnity plan.

           Among the mechanisms used to accomplish the goal of reducing costs are incentives to providers and patients to use more cost-effective methods of care; some argue that by their nature, less effective methods of care are used to save money.  It seems doubtful that this would be done, at least intentionally, because in a market system, a short term financial gain would tend to be offset by the long-term implications (financial, legal, and regulatory) of doing so.  For example, another plan may see an opportunity to provide better care or customer service and thereby attract members from the first plan.  Additionally, a managed care plan could be subject to civil liability (money damages) to a person if it withheld care, used an inadequate level of care, or was otherwise negligent in providing care for a member.  That liability would arise, however, only if the member’s harm or injury was found to be directly traceable to the plan’s action or inaction.

           The managed care plan could also be subject to regulatory punishment if it were determined that it dealt improperly with members either in providing substandard care, charging rates (similar to insurance premiums) that were not approved by the State, or in some other respect.  The regulatory liability exists because managed care organizations are treated by most States in ways similar to other health insurers.  As such, many aspects of their operation are dictated by statute or regulation, and are enforced by the State Department of Insurance or other regulatory agencies.  If a violation occurs, the plan could be subjected to administrative fines, temporary or permanent suspension of operations, and other types of regulatory sanctions.

           Managed care differs from traditional health insurance in still another way.  Under a traditional indemnity health insurance plan, the cost of care is divided between the insurer and the patient according the terms of the insurance policy.  That is, the insurance company agrees to pay a percentage of allowable expenses, and the insured agrees to pay deductibles and co-payments.  Therefore, the more frequently an insured uses the insurance, the more costly it is for the insurer (it is paying more claims) and for the insured (he/she is paying more deductibles and co-payments), but it does not cost the physician or health care facility anything more.  Some managed care plans try to broaden financial responsibility by placing some of the additional expense upon the provider.  The theory is that the provider should bear some of the risk of the patient’s ill health by limiting the amount paid to the provider per patient (the so-called “capitation”), and by encouraging wellness and preventive medicine.  The encouragement of wellness and the practice of preventive medicine could include covering services such as, nutritional counseling and enhanced disease screening, which the participating physicians would have to provide as part of the “capitation” in order to participate in the provider network.

Copyright 2010, Luke S. Brown (Used with permission)