#8 Managed Care: Balancing the Payment System

Managed care is one of the most popular systems of health insurance. It is designed to ensure the efficiency of a wide variety of healthcare services. Managed care aims to secure an overall high level of quality, while also reducing prices and overall utilization. This is especially true for the usage of expensive or unsubstantiated technology. The majority of modern healthcare systems actually use managed care to a certain degree, making your understanding of it all the more important. 

Overall, managed care requires more oversight than the basic system for health insurance. 

This includes:

  • Specific requirements for referrals
  • Pre-approvals for hospital stays
  • Formularies for prescription drugs
  • Pre-approvals for certain treatments 
  • Pre-approvals for expensive scans (ie MRIs and CTs)

Managed care programs contract with specific providers, hospitals, and pharmaceutical benefits managers (PBMs) for lower rates and prices.  They employ narrow networks (when an insurer contracts with a group of providers).  In this system, patients insured can only be referred to providers within the network, and the insurer gets a lower capitation rate.  While this lowers costs, it also decreases patient choice and flexibility.  

There are three main types of managed care: Prepaid Group Practice (PGP), Independent Practice Association (IPA), and Preferred Provider Organization (PPO). 

In a PGP, the insurer and provider are the same body.  While the financial risk is high, the insurer is able to organize the providers according to their preference.  The providers are all on salary, hired by the PGP. As together they are one entity, enrollees of the program can only receive care from within that same entity.  The Kaiser Permanente of California is one of the only pure PGPs in existence today.  

IPA’s were created after the push from providers to become their own independent entity, thus escaping employment by the insurer. An IPA is a provider network that contracts with physicians and practices. It is easier for the insurance company to contract with IPA’s as a whole and pay through capitation. The IPA still holds some financial risk and oversight over the providers, though they have more independence and can still be self-employed. However, the patient referral network is still limited to stay within the IPA.

The third type of managed care directly contrasts with a PGP. In a PPO, the insurer and provider are completely separate.  However, the insurer contracts with preferred providers for a lower fee-for-service rate.  Enrollees of a PPO program can still see providers outside of the network, but must pay a higher cost-sharing fee.  In this scenario, the insurer still has a lot of financial risk and no oversight over the providers it contracts with. The insurer does have the power to select providers with whom they agree with.  For patients, this means that they get much more flexibility and choice in their care. The downside is that the care is not as coordinated as other programs with providers all part of the same entity. 

Managed care is a way to help balance the two ends of the payment system.  FFS often causes overutilization while capitation causes underutilization; managed care helps to find the happy medium between the two.