Managed Care

This article addresses the general topic of ‘managed care,’ which Kongstvedt, author of the standard reference on the topic, has characterized as ‘‘…..regrettably nebulous’’ but ‘‘…. at the very least,….is a system of health care delivery that tries to manage the cost of health care, the quality of that care, and access to care. Common denominators include a panel of contracted providers that is less than the entire universe of available providers, some type of limitations on benefits to subscribers who use non-contracted providers (unless authorized to do so), and some type of authorization or precertification system’’ (p. 807). He further observes that ‘‘Managed health care is actually a spectrum of systems….’’ (p. 807). To complicate matters, the structure of managed care organizations (MCOs) has evolved over time, reflecting the efforts of MCOs to respond to the demands of employers and public programs that offer health benefits to their employees and participants.

This article describes the evolution of managed care over the past 35 years. To provide a context for that description, it begins with a review of basic findings from agency theory as they apply to MCOs. It then describes the way in which managed care and MCOs have evolved over time, focusing on three different managed care ‘eras’. In each era, it reviews the empirical evidence regarding the effect of the financial mechanisms and utilization control techniques being used by MCOs to control costs, as well as the evidence of a ‘competitive impact’ of MCOs. The article concludes by discussing the current state of managed care. Although elements of managed care are evident in the health care systems of many different countries, this article focuses on the managed care experience in the United States.

Managed Care Organizations: A ‘Nexus Of Contracts’

In the United States, MCOs contract with private sector employers and government programs to manage the health benefits of their employees or program enrollees. To a lesser degree, MCOs also contract directly with individuals to provide health insurance coverage. As organizations, the revenues of MCOs depend on their ability to satisfy the demands of their purchaser-customers. As long as there are alternative MCOs, unhappy customers can decide not to renew their existing contracts, by seeking alternative MCOs that better meet their demands. In this article, the term ‘purchasers’ is used to refer to employers and government programs.

Typically, the core services that purchasers contract with MCOs to deliver include (1) establishing and managing a ‘provider network’ through contracts with providers that specify payment arrangements and provider participation in utilization management activities, (2) paying provider bills for their services, and (3) enforcing coverage limitations. In their contracts with employers, MCOs may assume risk for medical care costs (and purchasers pay ‘premiums’ to MCOs) or purchasers may retain ‘medical risk’ (in which case ‘self-insured’ purchasers pay administrative fees to MCOs for obtaining services). In addition to these ‘basic’ services, MCOs typically offer other programs to purchasers (e.g. related to utilization management or healthy lifestyle management), with program costs being incorporated in premiums or put up for separate payment by purchasers.

Historically, MCOs have responded to purchaser desires to control their health care costs by (1) applying utilization management techniques that cause network providers to substitute less expensive services or sites of care for more expensive ones, (2) negotiating payment arrangements that contain incentives for network providers to control their costs, and (3) simply using their negotiating power to hold down unit prices in provider contracts. At the market level, purchasers also have expected, or at least hoped, that competition among MCOs for their business, or competition among providers for inclusion in MCO networks, would place downward pressure on medical care costs. Some policy analysts have urged purchasers to adopt specific ‘managed competition’ strategies to encourage this ‘cost conscious’ competition on the part of MCOs. However, aggressive pursuit of cost control by MCOs has implications for private sector purchasers. Specifically, depending on how they are carried out, MCOs’ cost control efforts have the potential to reduce the value that employees place on their health benefits.

Most employers believe that health benefits are an important part of overall employee compensation, and thus more attractive health benefits can help in employee recruitment and retention, much the same as higher wages. Therefore, in their health benefits strategies, employers attempt to balance the potential benefits of aggressive MCO actions to control costs with the benefits of offering attractive compensation to employees. (Economists generally agree that employees care about overall compensation and thus if employer cost control efforts reduce the value employees place on health benefits, labor market pressures will cause wages to adjust upward in order to compensate for this, with little or no overall gain for employers.) Obviously, conditions in the market for labor affect the importance that employers place on benefit attractiveness versus cost containment; when labor markets are tight, offering attractive benefits becomes more important than when they are soft. In the latter case, employers can support aggressive pursuit of cost containment by MCOs with less risk that any associated reductions in the value of their compensation will cause employees to seek other job opportunities or that the firm will fail to attract new employees. Over time, the types of activities pursued by MCOs, and the aggressiveness with which they are pursued, will reflect the weight that employers place on these two goals for their health benefits programs. And, the most successful MCOs will be ones that can modify their organizational structures, activities, and products effectively in response to changing purchaser demands.

Agency theory provides one conceptual framework for understanding the pressures faced by MCOs and their options for responding to them. MCOs must contract with multiple providers for the delivery of services to MCO members, besides negotiating contracts with purchasers for management of their health benefits. Historically, many MCO contracts with providers have been of the ‘contingent claims’ nature in that the MCO agrees to pay the network provider a specified dollar amount for the delivery of an uncertain amount and mix of services in the future. This uncertainty can relate to the types and number of people who will seek services in some future period and the nature of their medical needs. It is very difficult to arrive at contingent contracts that are satisfactory as it is impossible to anticipate all possible future events, and one party to the contract (e.g. the provider in MCO/provider contracts) may be able to characterize the state of the world, for contract purposes, in a manner that serves its interests. For example, providers may argue that patients require extensive courses of treatment if paid on a fee-for-service basis, or very limited treatment if paid on a price per person per time period (capitated) basis. The MCO may not be able to determine if the provider did the right thing given the condition of the patient, especially if there is no consensus regarding the appropriateness and efficacy of different treatment options.

Using the language of agency theory, in negotiations with network providers the MCO (the ‘principal’) attempts to design contracts with financial incentives that reward the provider (the ‘agent’) for acting in the principal’s best interests. However, typical payment approaches in provider contracts (fee for service, capitation) contain relatively strong incentives for behavior that could, at the extreme, be detrimental to the MCO’s interests. For example, fee-for-service reimbursement rewards providers for delivering both necessary and unnecessary services to their patients. This could increase costs unnecessarily as well as expose patients to unwarranted medical risks. This being the case, and depending on the information at their disposal, purchasers might seek out MCOs that are able to negotiate provider contracts that minimize these undesirable outcomes. And, MCOs may attempt to incorporate rules and monitoring mechanisms in the contracts with providers that reduce the likelihood of an overaggressive response of the latter to financial incentives. Also, MCOs may seek to mitigate the incentives in ‘pure’ payment approaches such as fee for service by employing other financial rewards in contracts, such as payments for meeting care process goals (e.g. periodic testing for blood sugar among diabetic patients, not prescribing antibiotics for treatment of upper respiratory infections or reducing use of magnetic resonance imaging (MRI) in first visits by patients with lower back pain). In practice, there are many different so-called ‘blended payment’ arrangements accompanying the rules and monitoring mechanisms in the contracts between MCOs and providers.

The type of MCO/provider contract that emerges in any specific situation will depend in part on the competitiveness of the provider market. Where there is relatively little competition among providers (e.g. where provider concentration in a given geographic area is high), they could be expected to negotiate more favorable contractual terms. These could include higher levels of payment for services, an assignment of financial risk that more closely conforms with provider preference, and/or less obtrusive or objectionable MCO monitoring and oversight of provider activities. In contrast, contracts with terms more favorable to MCOs are more likely where provider markets are competitive, and when excess provider capacity exists. Variations in the contracting environment such as these are likely to lead to a variety of contractual arrangements between MCOs and network providers within the same market as well as across geographic markets. And, contractual arrangements are likely to vary over time as well, being influenced by changes in the structure of the markets for provider services of specific types, the competitiveness of the MCO market, and the preference of purchasers regarding employee health benefits.

Although MCOs are principals in their contracts with providers, they are agents in their contracts with purchasers. That is, the goal of purchasers is to negotiate contracts with MCOs that lead MCOs to act in the purchaser’s best interests. If the actions of MCOs do not promote the interests of purchasers, the MCO risks incurring financial penalties (e.g. the MCO pays for medical care costs above a contract-determined amount) and/or may not have the contract renewed. Different preference on the part of purchasers in different markets for specific outcomes (e.g. containment of specialist expenditures, avoidance of provider ‘never events,’ managing care for people with specific chronic illnesses) are likely to be reflected in different terms in MCO contracts with providers. Changes in purchaser preference are likely to precipitate changes in MCO/provider contracts over time.

Evolution Of Managed Care Organizations

MCOs have evolved over four decades from distinct organizations offering a single product is characterized primarily by (1) a restricted, relatively narrow, network of providers with severe penalties for out-of-network use, (2) financial arrangements that shared substantial risk with contracting providers, and (3) aggressive efforts to control utilization, to organizations that offer purchasers a choice of benefit designs for employees, most of which have (1) extensive provider networks and weaker financial incentives discouraging out-of-network use, (2) less financial risk shared with contracting providers, and (3) much more limited, targeted efforts to control utilization. This section describes this evolution of managed care in the United States, focusing on three different periods. In each case, it summarizes evidence on the use and impact of incentives and rules in MCO/provider contracts, and the market-level effects of managed care. The recurring theme in this narrative is how the changing demands of employers and their desires regarding MCO performance have shaped the evolution of managed care. Essentially, this evolution, being wedded to changes in the provider environment, has reduced the potential for MCOs to control purchaser costs through aggressive utilization management and price negotiation with providers. As a result, the role that MCOs are asked to play as agents of purchasers has changed in fundamental ways. Despite still being referred to as MCOs, many of these organizations arguably no longer conform even to relatively broad definitions of managed care.

Early Stages Of Managed Care Organization Development

Before World War II, there were a small number of organizations available to purchasers in some geographic areas that fit the definition of managed care. In particular, these organizations offered limited networks of providers at a lower cost to purchasers than conventional indemnity insurance. MCOs of this type (e.g. consumer cooperative prepaid group practices) had remained a relatively minor, but growing, component of the health insurance market in the United States until the early 1970s, when Congress passed the HMO Act. In addition to introducing the term ‘Health Maintenance Organization (HMO)’ into the health insurance lexicon, the Act focused employer attention on HMOs as alternatives that offered better benefit coverage at a potentially lower cost than traditional insurance.

The number of MCOs that met the legislative definition of an HMO grew steadily through the 1970s, so that by 1980 there were 236 HMOs with a total enrollment of approximately 9 million people. Over the next 6 years, however, enrollment grew dramatically to 25.7 million members in 626 HMOs. In particular, MCOs with more extensive but less integrated provider panels (IPAs), and often sponsored by local or state medical societies or Blue Cross/Blue Shield plans, emerged as competitive responses to HMOs with more restrictive provider panels. Most new HMOs during the early 1980s were IPA model plans that national HMO firms had established in local markets.

Large employers typically offered one or more HMOs as health benefits options alongside traditional plans, hoping to benefit from HMO presence in two ways: (1) some employees might choose to enroll in lower cost HMOs, accepting a more limited selection of providers and some restrictions on unfettered access in return for better coverage, and (2) the loss of enrollees to HMOs might stimulate other health insurers to more aggressively control their costs. Some policy analysts encouraged purchasers to leverage this new situation by contributing an amount equal to (or proportionate to) the cost of the lowest option toward whatever option the employee chose, with the employee paying the balance. The premise of this ‘managed competition’ model was that at least some employees would switch to the lower cost options, low cost plans would be rewarded with more revenue, aggressive price competition among HMOs and traditional insurers would ensue, and both employer and employee benefit costs, or at least cost increases, would be moderated.

The argument that HMOs would have lower costs than traditional insurance options rested on three premises. First, they were expected to be able to influence provider use of services because, with relatively limited plan networks, network providers received a substantial portion of their revenues from HMO contracts. Second, again because of the greater reliance of providers on specific HMOs for revenue, HMOs would be able to negotiate contracts that placed providers at risk (to some degree) for costs exceeding expectations, creating incentives for providers themselves to more effectively manage costs. And third, HMOs would be able to exercise their negotiating leverage to hold down provider unit prices.

From the beginning, there was disagreement among policymakers and in published research findings concerning whether lower costs reported for HMO enrollees were entirely the result of more effective utilization management and/or the negotiating power of MCOs. Some studies found that, when employers offered employees a multiple choice of benefit options, relatively healthy employees were more likely to choose HMO options. When offered a choice from among HMOs of different types, healthier enrollees were more likely to choose HMOs with more restrictive networks. Even so, research before 1980 did suggest that HMOs reduced the use of high cost treatment settings, especially hospitals, although more loosely organized HMOs (IPAs) were less effective in doing so. In a widely cited study by the RAND Corporation, hospital admissions in a single HMO were 40% less than in traditional fee-for-service insurance, and costs were 25% less. Research on the impact of specific utilization management techniques used by HMOs during this time period was relatively limited. However, one study reported that utilization review in hospitals reduced hospital expenditures by 12% for a sample of employer groups from 1983 to 1985. Others found similar results for use of inpatient review by BCBS plans.

Not all of the early research evidence supported the ability of MCOs to reduce costs of care or costs incurred by purchasers. For instance, a study of a single HMO found evidence that lower utilization of resources for some procedures was not always reflected in lower overall costs. Other research suggested that how physicians were paid was a key factor in explaining differences in findings for different types of HMOs. An analysis of Illinois HMOs between 1985 and 1987 concluded that providers reimbursed by HMOs using fee for service had higher rates of use of inpatient care and physician visits than those reimbursed by HMOs using other methods, except that the use of individual physician bonus payments resulted in lower utilization. Similarly, other research reported that physicians paid on a capitated basis in IPA type HMOs had service utilization rates which were comparable or lower than in group or staff model plans. This is consistent with general findings from multiple studies, indicating that reimbursement arrangements such as those placing providers at some degree of financial risk can reduce utilization of services.

There was also evidence that competition among HMOs for purchaser contracts occurred during this early period, with several studies describing competitive market dynamics that were stimulated by the development of HMOs in some geographic markets. Other studies sought evidence of an empirical relationship between HMO market presence and premiums of competing insurers, but these efforts were handicapped by the relatively low market penetration of HMOs in most communities.

Notwithstanding evidence of competitive behavior on the part of HMOs, the degree to which any real ‘savings’ generated by HMOs were passed on to purchasers in the form of lower premiums (for employers that were not self-insured) became a matter of dispute during this early stage of MCO development. HMOs were accused of ‘shadow-pricing’ traditional insurers, generating profits that were used for expansion. It was argued that this was possible because most employers did not adopt a ‘managed competition’ model, choosing instead to cover the entire cost of whichever option the employee chose, or to employ a contribution strategy that substantially subsidized higher cost options. This weakened incentives for HMOs in to compete by offering lower prices to purchasers. Some purchasers may not have adapted a managed competition model because it would result in substantially higher contributions for those opting to retain their traditional insurance, thus resulting in dissatisfaction on the part of these employees with their health benefits.

The Golden Years For Managed Care

By the mid-1980s, HMOs (IPA and closed panel plans) had grown dramatically in number and enrollment. This growth continued from 1985 to 1995, with total HMO enrollment (including point of service (POS) HMOs, see below) increasing from 18 million to 58 million, and the number of HMOs from 381 to 571, peaking at 695 in 1987. From 1985 to 1992, 155 HMO mergers occurred, as well as 152 failures. In an attempt to better understand the changing HMO landscape, several studies examined the causes and impacts of HMO mergers. They found that profit-seeking HMOs seldom absorbed nonprofit HMOs in mergers, and premiums were relatively unaffected by mergers except in very competitive HMO markets, where they were higher, yet only for 1 year postmerger. Mergers did not generally allow HMOs to reach greater scale economies without improved efficiency levels.

Throughout this period, HMOs were offered as options by most large employers and as the only health benefit plan by many smaller employers. The early to mid-1990s marked a period of very low health insurance premium increases; some analysts saw this as the phase of a predictable insurance premium cycle, while others attributed this to the growing enrollment in HMOs and other types of MCOs, as well as their ability to control costs. This generated a significant body of new research on the factors that explained the lower cost of care in HMOs. For instance, a utilization review program instituted by a large national insurer was found to reduce spending on hospital care after 1 year by 8% and total expenditures by 4%. In a study that compared the treatment of heart disease in HMOs and traditional insurance plans from 1993 to 1995, HMOs had 30–40% lower expenditures, with little difference in treatments or health outcomes; the authors attributed the lower expenditures to the lower unit prices paid by HMOs. Trends in the use of outpatient versus inpatient care showed a decline in hospital days per thousand enrollees in HMOs from 1985 to 1995, whereas ambulatory visits per enrollee increased, suggesting that HMOs substituted less expensive for more expensive treatment settings. A review of studies of the use of diagnostic tests in HMOs found that HMO enrollees received fewer diagnostic tests during their inpatient stays than patients enrolled in traditional insurance plans, and did not receive any more tests on an outpatient basis. And, another study found that increases in market share of HMOs were associated with lower MRI availability between 1983 and 1993.

Research conducted during this period found that differences in payment arrangements and practice settings continued to be important in explaining differences in utilization in HMOs. For instance, one study estimated that patients in solo or single specialty group practices, where physicians were reimbursed on a fee-for-service basis, were 41% more likely to be hospitalized than when the group practice received a capitated payment.

A major factor in the growth in MCO enrollment overall (not just HMO enrollment) from 1985 to the mid-1990s was a decision by most large employers to offer Preferred Provider Organizations (PPOs) to their employees. Under this type of MCO, the penalty for seeing a provider outside of the limited network was much less severe than under the traditional HMO (where consumers bore 100% of the cost for services received ‘out of network’). Typically, in the PPO model, consumers paid all costs up to a specified deductible level, then continued to pay a share of costs above that level until a specified maximum for consumer expenditures was reached. This design differed from traditional insurance in that the deductible and coinsurance rates were lower if enrollees used ‘preferred’ providers who agreed in their contracts to be paid set fees and also to participate in the plan’s utilization management programs. Providers sought preferred status because they hoped to attract more patients and thereby generate more revenues. Alternatively, they viewed it as a means of protecting themselves against the loss of patients to providers who held preferred provider status. A key to the popularity of PPOs was that consumers could choose between seeing a preferred provider or some other provider at the point of service. By 1995, almost 35 million employees were enrolled in PPOs. HMOs responded to PPO development by devising a plan with similar provider and consumer incentives (the POS HMO), utilizing the HMO network as the preferred providers.

Skeptics doubted the ability of PPOs to effectively control health care costs because they typically reimbursed physicians using a fee-for-service approach, which rewarded provision of more services, and their preferred provider panels were large, presumably making the effective application of MCO utilization management techniques more difficult. However, the relatively modest premium increases of the mid-1990s, which were coincidental with growth in PPO enrollment, seemed to belie those concerns.

The rapid growth during this period in the number of MCOs, the number of national MCOs, and the enrollment in MCOs generated a large body of research addressing the competitive impacts of HMOs. Regarding the relationship between degree of HMO competition and level of HMO premiums, one study found lower premium revenue per HMO enrollee in markets that contained larger numbers of HMOs in combination with a relatively high percentage of the population enrolled in HMOs. Another study found that HMOs had a constraining effect on the premiums of other health insurers at low levels of HMO market penetration despite that premium levels for other insurers were higher at greater levels of HMO penetration. The authors speculated that this could reflect shadow-pricing strategies by HMOs as soon as they had established their market presence.

The impact of HMOs on quality of care was also an important topic of research during this period, that stimulated in part by concerns HMO utilization management policies and payment arrangements shifting risk to providers could have a negative impact on quality. In general, review articles concluded that there was little support for the concern that HMOs reduced quality. For example, although one study found a negative effect of HMO competition on quality of care indicators relating to treatment of acute myocardial infarction, others found mixed or somewhat positive relationships between measures of HMO competition and quality of care.

As HMO presence grew in some markets, so did the degree of consolidation among hospitals and physician groups, raising concerns of whether HMOs could continue to contain costs by negotiating lower prices for inpatient care for their members. Quantitative analyses found that the increased presence of MCOs in local markets was not a major factor causing hospital mergers, but qualitative evidence suggested that the threat of managed care could have encouraged mergers. Irrespective of the role managed care played in stimulating mergers, quantitative studies found that hospital prices were higher in more consolidated hospital markets. Hospitals in more competitive HMO markets had slower rates of cost growth, but this HMO effect was not significant in highly concentrated hospital markets, suggesting diminished HMO negotiating leverage in consolidated hospital markets.

The Postbacklash Era: Rethinking Managed Care

By the mid-1990s, many large employers had begun to restructure their approaches to health benefits in a way that, arguably, subsequently shaped not just the trajectory of managed care, but the structure of the US health care system as a whole. First, influenced by relatively low premium increases that they attributed to the effective use of financial incentives and utilization controls by MCOs, along with their own savvy health benefits decisions, these employers eliminated their traditional health insurance options, replacing them first by MCOs and, subsequently, by consolidating the number of MCO options offered to employees toward one or two plans. By limiting the number of MCO options, employers hoped that they could reduce their health plan administration costs besides concentrating their purchasing power to achieve more favorable contractual terms with MCOs.

These employer decisions limited employee choice of health benefit options and, in effect, pushed many employees who had valued the flexibility and wide range of provider options offered by traditional health insurance into the more restricted MCO environment featuring both preauthorization for hospital admissions and limitations on referrals to specialists. New MCO members, unfamiliar with these restrictions, had their requests for reimbursement for care from out-of-network providers denied and experienced seemingly arbitrary decisions on the part of MCOs regarding access to care within MCO networks. Their unhappiness was reinforced by growing provider discontent with MCO payments, utilization review and other practice restrictions. The result was ‘managed care backlash’ that varied in its severity across different markets – less in areas where HMOs were well entrenched with a large market share, and more intense in markets where a large proportion of the population was affected by employer elimination of traditional insurance options.

In effect, purchaser attempts to capture a larger share of the presumed cost savings from enrolling employees in MCOshave resulted in a devaluation of health benefits for some employees. Although much of the anger of consumers was directed at MCOs, the decisions of employers to drop non-MCO plans too were resented by employees. This backlash came at an exceedingly inopportune time for employers, as the mid-to-late 1990s saw significant economic growth and competition to attract and retain employees. In this environment, employers turned to plans with broad provider networks and freedom for employees to access providers of their choice. MCOs responded by expanding their preferred provider networks, seeking to enroll as many providers as feasible in any given community, and by consolidating nationally. Blue Cross/Blue Shield plans held an advantage in this respect, as they already possessed expansive networks, and their enrollment grew, whereas enrollment in HMOs with limited networks declined or remained stagnant.

These changes had important consequences for the structure of MCOs as well as the subsequent shape of the health care delivery system in communities. MCOs sought to become ‘one stop shops’ to meet employer desires to minimize contracting and health benefits management costs. Those that had started as a product type (e.g. an HMO) now added other options (PPOs and, later, consumer-directed health plans (CDHP)). This allowed employers to make different benefit designs available to employees within a single contractual relationship with an MCO. MCOs, in losing their identification with a single product, became ‘health plans’ that offered an array of products to employers in different market segments.

At the same time, MCOs were losing the contracting leverage with providers that they had used to restrain rate increases in the past. Because they had to maintain relatively large provider networks to secure contracts with employers, plans could no longer credibly argue that providers would be rewarded with more patients and revenues if they accepted lower fees as preferred providers. Perhaps more important in the view of some analysts was the fact that providers (especially hospitals and specialty groups) merged in order to enhance their negotiating power, as health plans could not withstand significant ‘holes’ in their provider networks and yet be responsive to employer demands. Although the impact of managed care growth on provider consolidation is not clear, increased provider consolidation has important implications for employers; it makes it very difficult for their agents – the health plans – to hold down rate increases in contract negotiations or implement effective utilization control strategies. In fact, two studies had found that, post managed care backlash, higher HMO penetration in local markets was no longer associated with lower cost growth. And, research based on consumer surveys conducted in 1996–97 found no difference between HMOs and other insurance arrangements in the use of expensive services, but HMO enrollees reported less satisfaction with their care and less trust in physicians. Also, 2002 data pertaining to New York State suggested that a larger number of HMOs in a local health care market was associated with lower quality of care. Taken together, these findings suggest that the changes made by MCOs to meet employer demands had reduced their ability to contain provider prices or control utilization of services, leading some analysts to declare ‘the end of managed care.’

Returning to the past by offering ‘narrow network’ benefit options in contracts with employers, similar in design to early HMOs, would be difficult for health plans, even assuming that employers were inclined to favor such options. In highly consolidated markets, it would be difficult for health plans to exclude any significant provider system and still offer a product that was valued by employees. And, because health plans now offer multiple products, if they exclude a health care system when forming a narrow network product, they risk the withdrawal of that system from other products that rely on having an extensive network for market success.

Faced with tight labor markets, and with the recent managed care backlash firmly in mind, some large employers began advocating for a new health benefits strategy known variously as consumer-centric benefits, or managed consumerism, or facilitated consumerism. At its core, this strategy focuses on creating cost-containing, quality-enhancing competition among providers for consumers, rather than competition among MCOs for enrollees in a situation where employers offer multiple MCO options. In this environment, MCOs compete for contracts with employers by offering new benefit designs that feature greater employee cost sharing, sometimes accompanied by an employer-funded health savings account, besides maintaining substantial freedom of choice among providers. MCOs are charged with providing employees with cost and quality information necessary to make informed choices of providers. Employers contract with MCOs or freestanding vendors to provide disease management programs, intensive care management programs, and ‘healthy lifestyle’ programs to their employees. To meet these new demands of their employercustomers, MCOs have attempted to ‘re-invent’ themselves as organizations that encourage and facilitate the efforts of employees to more effectively managed their own health besides promoting cost-containing competition at the ‘retail’ as opposed to the ‘wholesale’ level.

By 2008, employers and MCOs had made credible inroads in modifying conventional managed care, by introducing elements of a managed consumerism strategy, although not without controversy. Skeptics argued that new ‘CDHP’ options offered by MCOs, featuring relatively high deductibles (in comparison to earlier benefit designs of HMOs and PPOs) coupled with health savings accounts, were simply mechanisms to facilitate greater cost sharing on the part of employees, and that MCOs were providing limited and not particularly useful information to employees to assist in the choice of providers. They also expressed concerns that CDHPs would be attractive to relatively healthy or higher income employees, but would increase costs disproportionately for sicker employees, and do little to modify employer costs or the growth in health care costs still more generally. In light of these concerns, and the reality that employers make health benefit decisions only once each year, it took several years for CDHPs to become established health benefit options for employers. However, buttressed by federal government actions that conferred tax benefits on the purchase of one type of CDHP (the ‘Health Savings Account’ plan) along with the experiences of early-adopting employers, 15% of employers were offering CDHP options to employees by 2010, including 34% of firms with more than 1000 employees, and overall 13% of employees were enrolled in these plans.

Research suggests that CDHP enrollees have higher incomes and are in somewhat better health than employees who do not choose to enroll in CDHPs. Employees who switched to CDHPs spent less on health care and used fewer services, but had lower levels of satisfaction with their plans, used less preventive care, and felt that they lacked sufficient information to make informed choices.

The onset of the worldwide recession in 2008 accelerated the implementation of at least one component of the managed consumerism strategy – increased employee cost sharing. Employers facing significant financial challenges focused their attention on the need to take immediate steps to reduce health care costs. Just as unemployment rates rose, employers too became less concerned regarding the possible impact of health care cost containment efforts on their ability to attract and retain employees. Large employers reduced employee compensation by increasing deductibles and coinsurance rates in PPO and CDHP plans as well as by reducing their percent contribution toward premium costs. For many employers, these actions led to year-to-year rates of increase in their health benefits costs of 5% or less.

Large employers also invested in disease management and healthy lifestyle programs to soften the impact of reductions in benefit coverage and, in some cases, because they believed that employee participation in these programs might reduce employer health benefit costs in the longer term. Targeted disease management programs, which include various utilization management components, are now a standard part of MCO offerings to employers, although the evidence that they reduce costs is decidedly mixed. More recently, MCOs have responded aggressively to employer demands to develop healthy lifestyle programs for employees. These programs reward employees for healthy behaviors and, in some cases, include benefit designs that penalize them for unhealthy lifestyles. In a growing number of case studies, programs have been identified that have favorable short-term returns on employer investments. However, other research suggests that there may be wide variation in the ability of such programs to contain costs.

The End Of Managed Care?

Clearly, the concept and reality of managed care has changed substantially since the introduction of the HMO Act almost 40 years ago. Large, closed panel MCOs of the type that once exemplified managed care still exist, integrating health insurance with a health care delivery system. However, even these organizations have become ‘health plans’ in that they offer a variety of products to employers, including CDHPs and other high deductible benefit designs. And, despite the continued success of some limited network plans, the vast majority of employed Americans now are enrolled in health benefit options featuring broad networks, deductibles, coinsurance, and in relatively few intrusive efforts that manage the delivery of care by contracting providers. This would indeed suggest that the concept of ‘managed care’ has come full circle, reflecting in large part a response to the changing goals of employers for their health benefits offerings. Health plans now generally avoid the label of MCO, preferring to emphasize their evolving role in supporting consumers both in choosing providers and engaging in healthy lifestyles.

Although some analysts suggest that ‘the end of managed care’ has occurred with the adoption of ‘managed consumerism’ by large employers, others refer to ‘the changing face of managed care’ instead. In fact, there are several reasons to believe that many aspects of the original concept of managed care remain relevant. First, the intensifying pressure on government to contain costs in public programs will continue to make public sector contracts with what now could be called ‘traditional MCOs’ appealing. At present, approximately two thirds of Medicaid beneficiaries are enrolled in managed care plans with limited provider networks, often aggressive care management, and an emphasis on primary care. (In addition, almost a quarter of Medicare beneficiaries are enrolled in a mixture of different private sector plan types, but these plans generally are less aggressive in managing care of enrollees.)

Second, some MCOs continue to practice utilization management in targeted areas, and some have reintroduced utilization management techniques that they had previously discarded. Perhaps the best example consists of efforts by MCOs to constrain the use of imaging procedures, especially as a first step in the diagnosis of lower back pain. Many MCOs conduct extensive retrospective review, and some require prior authorization and credentialing of imaging facilities and machines. It may be that there will be ongoing opportunities for MCOs to apply traditional managed care techniques to areas where growth in costs and service utilization seems excessive and indicative of poor quality, or where there are clear opportunities to substitute lower with higher cost service venues without jeopardizing quality.

There are also instances where essential aspects of early managed care, albeit controversial at a time, have now become accepted (if not always welcomed) as part of health practice. For instance, the use of data to ‘profile’ the practices of individual physicians and hospitals, with feedback of findings, was a standard tool employed by early MCOs to challenge provider ‘outliers.’ This practice continues today at a much more sophisticated and transparent level, with the results made available to some MCOs to their members, published in community reports and/or used to calculate financial rewards for providers. Early MCO support for the development and use of ‘practice guidelines’ is a second important example. Although providers saw these guidelines as tools used by plans primarily to contain costs, over time guidelines had achieved widespread acceptance as contributing to the practice of high quality evidence-based medicine. In this case, a utilization and quality management tool of the early MCOs has been widely adopted in the support of managed consumerism strategies, and its use will probably continue to expand, as care guidelines are increasingly being incorporated in electronic medical records.

One aspect of managed care that generally has not survived the transition to managed consumerism is the negotiation of capitated and other reimbursement arrangements that place providers at risk for costs exceeding budgeted amounts. However, this could change in the future, as some health plans are now negotiating ‘shared gains’ contracts with large integrated provider systems. Under these contracts, providers typically must meet quality and/or savings benchmarks in order to share a percentage of savings with health plans. In the United States, the Medicare program is encouraging providers to form Accountable Care Organizations (ACOs) that would contract with Medicare under shared savings arrangements. If a sufficient number of ACOs can be established, it shall accelerate the use of shared savings contracts between MCOs and providers in the private sector as well.

The prospects for MCOs to once again generate savings for purchasers through negotiation of deep discounts in fee-for-service contracts with providers seem to be less promising. In the early years of managed care, the considerable excess capacity in community health care systems was exposed as MCO enrollees used fewer services, especially inpatient care. Providers benefited from offering discounts so long as revenues from new MCO patients were sufficient to cover the fixed costs of unused capacity. Now, hospital occupancy rates are relatively high, and physician shortages are prevailing in many communities, reducing the value of new business to providers. Perhaps more importantly, provider consolidation limits the negotiating leverage of MCOs. It seems unlikely that this situation will change because MCOs will continue to find it difficult to restrain cost increases while negotiating favorable provider payment rates. Provider market power is also likely to inhibit the ability of MCOs to negotiate shared gain contracts that have strong incentives for cost control.

In summary, addressing the question of whether ‘the end of managed care’ has arrived is complicated. Some of the utilization techniques associated with traditional managed care have survived and may continue, in refined form, into the future. However, the increasing market power of providers, being supported by growing market consolidation, makes it rather unlikely for MCOs to be able to negotiate the sorts of risk sharing and discounted payment arrangements with providers that arguably were key elements to lower utilization of services and reduce costs during the early era of managed care. Interestingly, growing provider consolidation also threatens employers’ managed consumerism strategy, which now depends on the willingness of a shrinking number of provider organizations to compete for patients.


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