The Basics of Managed Care

This introduction to managed care is excerpted from Chapter 2 of "Managed Care: Handbook for the Aging Network," by Robert Kane, Rosalie Kane, Neva Kaye, Robert Mollica, Trish Riley, Paul Saucier, Kimberly Irvin Snow, and Louise Starr. The handbook was edited by Louise Starr, Rosalie Kane, and Mary Olsen Baker. All of the contributors are part of the University of Minnesota National LTC Resource Center, which sells the entire handbook. An order form is placed at the end of this excerpt.

The handbook contains the following chapters:

Chapter One Introduction to the Handbook

Chapter Two The Basics of Managed Care

Chapter Three Managed Acute & Post-Acute Care for the Elderly

Chapter Four Managed Long-Term Care for Older People: Long-term Care and Integration With Acute Care

Chapter Five Consumer Issues and Quality in Managed Care

Chapter Six LTC Providers: Reactions, Issues, and Plans

Chapter Seven Managed Care and Aging Network Roles

Appendix A PROGRAM SUMMARIES: SELECTED MANAGED CARE INITIATIVES FOR OLDER PERSONS AND PERSONS WITH DISABILITIES

Appendix B MANAGED CARE ACRONYMS

Appendix C GLOSSARY: MANAGED CARE TERMS FOR THE AGING NETWORK

Appendix D RESOURCE BIBLIOGRAPHY

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This project was supported, in part, by award number 90AM0698101 from the Administration on Aging, Department of Health and Human Services, Washington, D.C. 20201. Grantees undertaking projects under government sponsorship are encouraged to express freely their findings and conclusions. Points of view or opinions do not, therefore, necessarily represent Administration on Aging policy.

Chapter Two -- The Basics of Managed Care

• Definition
• Historical Evolution of Managed Care
• Cost Control in Managed Care
• Types of Managed Care Organizations
• Promises and Pitfalls of Managed Care
• Specific Cost Containment Strategies
• Penetration Rates
• Order Form

DEFINITION

Managed care is discussed more often than it is defined. Perhaps this is because managed care is used variously and eludes clear definitions. In part, this is because managed care refers both to programs that coordinate, rationalize, and channel the delivery of care without being risk-based, and it also refers to care managed by organizations that assume full financial risk for the care managed. We use the following definitions to anchor the Handbook:

1. Managed care refers, in general, to efforts to coordinate, rationalize, and channel the use of services to achieve desired access, service, and outcomes while controlling costs.

2. Risk-based managed care describes care from organizations that provide or contract to provide health care in broad/specified areas for a defined population for a fixed, prepaid price [where the managed care organizations (MCOs) are at financial risk to deliver the services for the fixed price]. Managed care organizations use various strategies to control costs.

1. Full risk--accepting all the financial risk for providing services (all the possible profits as well as the losses).

2. Partial risk--accepting a portion of the financial risk of service provision.

3. No direct risk--but incentives are present for controlling cost, as in various case-managed primary care arrangements.

HISTORICAL EVOLUTION OF MANAGED CARE
Roots in Health Insurance
Historically, health insurance was instituted as a method of redistributing the financial risk associated with major illnesses from individuals to collectives mediated by insurance companies. In practice, health insurance companies serve as conduits between individuals and their doctors, hospitals, or other health providers by taking in a predetermined amount of money per person covered (called a premium), and paying it out as costs were incurred. Premiums were based on the insurance companies' best estimate of the average cost to cover enrolled individuals for a defined set of health benefits. If at the end of the year, the companies' calculations of expected outlays proved an underestimate, rates for the subsequent year would have to be raised to make up the deficit and prevent such an error from recurring. Different insurance companies established alternative arrangements with health care providers. Some paid the rates charged; others negotiated special discounted rates, or sometimes rates based on fixed payment schedules.

A major shift in health insurance philosophy occurred just after World War II, when health insurance became an important component of employee benefit packages. As the competition for the health insurance business became more intense, insurance companies recognized that they could charge different rates for different parts of the population. Because workers tended to be healthier than people unable to work, companies could offer coverage for them at lower rates than those paid by the rest of the population. This shift from charging one rate for the whole community at risk (termed community rating) to charging higher rates for higher health risk (termed risk rating) eventually led to the exclusion of many older persons from the private insurance market. Their care was too expensive when its cost was isolated. This disproportionate burden, combined with the large numbers of older persons who were impoverished, provided the rationale for the passage of Medicare in 1965.

Some economists see availability of health insurance as a major contributor to the rapid escalation in health care costs. Financial barriers to obtaining care were removed, and the idea that someone else was paying the bill encouraged both providers and consumers to take full advantage of the growing array of technological advances becoming available. With insurance companies acting as intermediaries in the financing of health care, accountability for cost of care was removed from either doctor or patient. This shift gradually led to a climate within the health care system which encouraged, indeed actually provided incentives for, doctors and other health care providers to serve as many people as possible with as many procedures as possible. By providing services to large numbers of people and ordering tests and procedures at high rates, doctors received more fees-for-services rendered and collected sizable salaries.

By the 1980s, the climate was set to find a solution that would preserve financial protections for consumers against the exigencies of health problems and health costs and make health care expertise available in timely, user friendly and appropriate ways, while changing some of the incentives to over treat or over utilize....
Cost Control in Health Insurance

As the costs of health care continued to rise more rapidly than inflation and health care consumed an ever larger share of the gross domestic product during each successive decade, attention shifted to ways to curtail health care spending. Two basic strategies emerged, one aimed at modifying consumers' behavior and one at modifying providers' behavior.

Consumer-focused strategies. The consumer strategy was directed at imposing some barriers to use by levying various forms of co-insurance. The most common approaches used either deductibles (where the consumer paid the first portion of the bill -- a technique familiar in other types of insurance) or co-payments (where the consumer paid a portion of the bill and the insurance company the rest) or a combination of both.

In the 1970s, the RAND Corporation conducted a major study of the effect of different health insurance patterns on health care utilization and outcomes for working age people and their children. This study showed that when co-payments were applied, utilization of health services declined dramatically. An unexpected corollary was that for the entire insured population studied there were few differences in the health status of the groups with and without the co-payments. The obvious explanation for this finding was that, at any time, most insured persons are not very sick. Indeed, if they were, health insurance would not work, because the actuarial component that allows for spreading the risk would be absent. When the results of this RAND study were re-analyzed to look specifically at the health status of those who were sick, a different pattern of results emerged. Those who were poor and sick were especially disadvantaged by the co-payments, even though these payments had been adjusted for differences in people's incomes.

Provider-based strategies. The provider-based strategies of cost control addressed largely the price paid for services. Perhaps the best known technique was Medicare's Prospective Payment System (PPS) which dramatically changed the way hospitals were paid. Under PPS, Medicare no longer reimbursed hospitals their actual costs incurred but instead reimbursed them for a preset amount per admission (or discharge) based on the type of illness or the procedure performed. Some 470 payment categories of illnesses and procedures (called Diagnostic-Related Groups or DRGs) were created from available data that used diagnoses, patient age and the presence of complications as the basis for estimating hospital costs.

Although insurance companies did alter their payment methods, they continued to play a largely non-invasive role in the way care was delivered. The concerns about rising cost were coupled with a growing recognition of the substantial variation in the way care was delivered from one location to another without any concomitant differences in quality. These observations suggested that providing less care might not adversely affect quality.
Evolution of Managed Care
Managed care in the United States is an outgrowth of the private sector, and dates back at least to 1929. At that time, Michael Shadid, a physician in Elk City, Oklahoma, established a rural farmer's health cooperative in a community of 6,000 with no medical specialists, selling shares to raise money for a new hospital and establishing an annual dues schedule to cover the costs of care. By 1934, 600 family memberships supported a medical staff of Dr. Shaddid, four new specialists who were attracted to the area, and a dentist. Also in 1934, two Los Angeles physicians, Donald Ross and Clifford Loos, entered into a prepaid contract to provide comprehensive health services to about 2,000 water company employees.

Other major prepaid group practice plans started between 1930 and 1960, including the Group Health Association in Washington, DC in 1937, the Kaiser-Permanente Medical Care Program in 1942, the Group Health Cooperative of Puget Sound in Seattle in 1947, the Health Insurance Plan (HIP) of Greater New York in New York City in 1947, and the Group Health Plan of Minneapolis in 1957. Such developments encountered strong opposition from organized medicine, but they also enjoyed considerable success in attracting enrollees.

When most people think of managed care, they typically think of a health maintenance organization (HMO). This name was given to prepaid group practice around 1970 as a way of making it more attractive, emphasizing its focus on health promotion and prevention. The growth of HMOs took a big spurt when Congress enacted the Health Maintenance Organization Act of 1973 (PL 93-222). This legislation promised financial support (start-up grants and loans) to HMOs that offered at least a minimum level of benefits, charged premiums based on community-wide health care costs, and met criteria for federal certification. It also required every business with more than 50 employees to offer enrollment in federally qualified HMOs as a benefit option whenever such HMOs existed in the area.

Despite the active efforts to introduce them, federally qualified HMOs did not expand as rapidly as their advocates wished. Relatively few organizations were prepared to mount all the services and reporting required to be federally qualified, fearing they might not be affordable under such circumstances. Instead, they set about to make themselves attractive without seeking qualification. One strategy was to offer services that would appeal to people who were not sick. Preventive services, modest mental health services, wellness activities, and active prenatal services, for example, might appeal to young people who were unlikely to have high health risks. Plans could offer this sort of coverage for this population at very competitive prices.

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COST CONTROL IN MANAGED CARE

Managed care has attempted to change the way in which health care is financed by changing the incentives in the health care system. In effect, managed care repolarizes health care. What was a source of revenue under fee-for-service becomes a cost under managed care. Fee-for-service health care encourages provision of health care services, while managed care discourages use of care unless absolutely necessary. In managed care, doctors and other health care providers make a profit by providing only the services absolutely necessary in treating patients and by maintaining the health of its members. Fee-for-service providers profit instead when people are sick and use health services, thus having less incentive to keep people healthy.
Managed care, in effect, combines health care insurance and provision of services into one organization, and takes the insurance approach one step further. For a fixed fee, the managed care company agrees to provide a package of services. Having accepted a fixed amount of money for the task, its incentives are to conserve these funds. Its range of strategies are not altogether different from those available to insurance companies, but its motivation to contain costs is much stronger because its market advantage lies in offering lower costs in exchange for restricted options. Of course, when MCOs compete in a market area, the MCO also needs to structure benefits that appeal to consumers.

In theory, managed care can succeed in two ways. It can lower costs for individual services, and/or it can improve the efficiency of service across the full spectrum of an individual's illness. By providing more effective care early, it may avoid more costly care subsequently; or by substituting less costly modes of care (for example, out-patient instead of in-patient surgery, nursing home care instead of hospital care), it may achieve the same ends less expensively.

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TYPES OF MANAGED CARE ORGANIZATIONS
The original managed care model was the staff-model HMO, which characterized some of the pioneers in managed care such as Group Health of Puget Sound and the Group Health Association in Washington, DC. In such a model, physicians are salaried employees or partners of the HMO, but may also receive bonuses, incentive payments or share in profits. Typically, they employ physicians in all the common specialties needed to deliver comprehensive care, though they may also subcontract to specialists for infrequently needed services. Staff model HMOs are sometimes called "closed panel HMOs," because community physicians in general cannot participate. Physicians in staff-model HMOs practice in clinics often but not necessarily owned by the HMO, which usually provide the range of laboratory, x-ray, and ancillary services. Such HMOs may own their hospital systems, though they typically contract with hospitals and other in-patient entities in their community to provide non-physician services. This model affords greatest control over the practice patterns of physicians, and typically offers one-stop shopping to out-patients because a wide range of services are available at the clinics. Disadvantages to this model for providers include establishing and maintaining ambulatory facilities, large fixed expenses for staff, and physician reluctance to be part of a large group. Disadvantages to consumers may be lock-in provisions that offer less flexibility in service. This original concept of a staff-model HMO, where doctors worked for the organization, was felt to be too confining to grow quickly, and the structure of HMOs was expanded to include several different models.

In a group-model HMO, the HMO contracts with a multi-specialty physician group to provide all physician services to the HMO's members. However, unlike the staff model, the physicians are employed by the group rather than the HMO, though the HMO may have formed the group to serve its members. The best known HMO of this type is the Kaiser Foundation Health Plan. Permanente Medical Groups provide all physician services for Kaiser's members under an exclusive contract, whereas the Kaiser Foundation Health Plan does the HMO functions like marketing, enrollment, and collection of premiums. Kaiser is readily mistaken for a staff model because the relationship between the HMO and the Permanente Medical Groups is so close. In another variant of the group-model HMO, the physician group sponsors or owns the HMO. Group-model HMOs are also "closed panel HMOs," because they are closed to physicians not belonging to the group.

Another variant is the network-model HMO, where the HMO contracts with more than one group practice to provide physician care to the members. Sometimes they contract with large multi-specialty clinics, and sometimes with small groups of primary care physicians. These may be either open-panel or closed-panel HMOs, depending on whether participation in the group practices is open to any physician who meets the HMO's and the group's criteria.

In the Independent-Practice Association model (IPA), HMOs contract with an association of physicians --the IPA-- to provide physician services to their members. In a plan more akin to insurance than some other HMO models, a central company could sell coverage as an HMO, and then contract with independent providers to meet the service needs. The physicians are members of the IPA, an independent legal entity, but maintain their own separate offices and identities, see their non-HMO patients, and maintain their own records and support staff. IPA-model HMOs are also known as "open-panel plans," because any community physician who meets the HMO and the IPA standards may participate. Physicians and hospitals can ordinarily belong to several different IPAs and also see patients under fee-for-service. HMOs typically compensate their IPAs on an all-inclusive physician capitation basis to provide services to the members; the IPA, in turn, can compensate its participating physicians on either a fee-for-service basis or some combination of fee-for-service and primary care capitation. In the former arrangement, some portion of each fee payment is withheld for incentives and risk-sharing. Under the latter, the IPA usually pays primary care physicians on a capitated basis and specialists on a fee-for-service basis. Utilization control in IPA-model HMOs is more difficult, because the physicians remain individual practitioners with little sense of belonging to the particular group.

Direct-contract-model HMOs are similar to IPA-model HMOs, except the HMO contracts directly with individual physicians. U.S. Healthcare is an example of this model, in which the HMOs attempt to recruit broad panels of community physicians, both primary care physicians and specialists, and typically use a primary care case management approach to control access to physicians. Direct-contract-model HMOs compensate their physicians either on fee-for-service or a primary care capitation basis. The HMOs usually bear most of the financial risk, unlike the IPA-model plans that transfer much of this risk to the IPA.

One of the major reasons some consumers resisted joining HMOs despite their lower costs was the forfeit of all coverage for using non-participating providers. To attract more customers, the HMOs created a hybrid program, called a Point of Service (POS) HMO. Under this arrangement, a subscriber, usually for an additional premium, can opt either to use an authorized HMO provider or can go outside the plan and use anyone s/he wants. Coverage for the latter, however, is usually much less complete; out-of-service plan use is discouraged by high deductibles and co-payments. Nonetheless, this kind of plan is attractive to some employers and their covered employees.

Preferred Provider Organization (PPOs) are entities through which employer health benefit plans and health insurance carriers contract to purchase health care for covered beneficiaries from selected lists of participating providers. The providers agree to adhere to the utilization management procedures of the PPO and to accept its reimbursement structure. Hospitals and physician groups typically are paid at discounted rates in recognition of the high volume resulting from being in the PPO. Consumers receiving care from a PPO have flexibility to use non-PPO providers, but usually at higher costs because of co-insurance and deductibles that apply to care from providers not on the lists.

An Exclusive Provider Organization (EPO) is like a PPO except that the beneficiaries are limited to those on the lists of participating providers which beneficiaries must identify in advance. EPOs may use gatekeeper approaches similar to HMOs for authorizing specialty services. PPOs and EPOs are similar to an HMO, except the latter is regulated under HMO laws and regulations, whereas the former are regulated under insurance laws and regulations. Thus, PPOs and EPOs are not HMOs, but have many of their features, and provide some form of care management within insurance frameworks.

As the competitive climate has grown more intense, hospitals and their medical staffs have formed joint venture companies to create new managed care products. These companies are often referred to as Physician-Hospital Organizations (PHOs). Under these arrangements, resources are pooled to create a range of services that can be either marketed directly as an HMO or offered as a package to existing HMOs.

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PROMISES AND PITFALLS OF MANAGED CARE
Managed care has become the new watchword of health care reform. Partly because it seems to conform to a fundamental belief in the values of the marketplace, it is imbued with the capacity to align incentives to create a more effective delivery system. At a minimum, managed care serves a useful political role. It distances the policy-maker from the responsibility for making rationing decisions. By limiting the government's liability and transferring operational responsibility to a separate contracted organization, the government can claim to have met public needs.

Managed care has a number of features that could make it an attractive vehicle to bring the best of geriatric medicine and LTC to older people with serious health problems:

It should encourage a strategy of investment in areas such as primary care, comprehensive assessment, prevention, Alzheimer's disease workups, case management for high risk enrollees, assistance with medical compliance, and medication reviews. Whenever such activities can be expected to lower the risk of subsequent expensive events like hospitalizations, they are advantageous to the MCO. However, such interventions need to be properly targeted to be cost-effective.

It encourages the use of less expensive alternative services to hospital care, such as home care and residential care.

With an over-riding incentive for under-service, the burden of proof is on those who propose more intensive geriatric services or LTC. Often, there is a dearth of empirical data on the values of such services.

It is not yet clear just how acute and LTC can be packaged in a single managed care product, although there is active experimentation underway. LTC experts have concerns that in managed care, medical models of LTC will dominate.

MCOs should be more willing to think in terms of episodes of care rather than simple incidents. They should be more anxious to treat problems aggressively early if such treatment can avoid costly care subsequently. Similarly, they should be more likely to provide medical follow-up care to avoid rehospitalization. In the arena of geriatric care, they should be prepared to underwrite the costs of appropriately targeted geriatric assessments because such actions have been shown to save money in the long run.

MCOs can afford to establish information systems that can track patients over time and can provide information to primary care practitioners (PCPs) about patients at risk. They can employ additional personnel to work at keeping patients healthy, or at least facilitate their compliance with therapeutic regimens. MCOs can develop programs that offer patients better information about how to care for themselves, in terms of both improving individual health habits to reduce risks and monitoring their own health and treatment.

Managed care offers a way to coordinate care. A central administration and common working systems should reduce fragmentation. A common record system should improve the flow of communication about a client.

Managed care has the opportunity to be more creative in developing ways to meet its service obligations. Less expensive forms of care can be used where they are shown to be as effective. Non-physicians can perform tasks normally assigned to physicians, and the chain of delegation can continue. Subacute care can be substituted for hospital care. In the sphere of LTC, new forms of care, such as assisted living, can be utilized in lieu of nursing homes with their constrictions of life style.

Care management can take on a more aggressive approach. Growing evidence suggests that aggressive monitoring of high risk patients can reduce the subsequent use of expensive hospital care. For example, randomized trends of nurse follow up of post-hospital patients showed good results from these efforts. The reduction in hospital days was not as evident among older patients and the size of the effect on rehospitalizations was smaller for elderly surgical patients than for medical ones. Another study by Rich and colleagues showed that active follow up for elderly patients discharged from hospitals with congestive heart failure reduced the rate of readmissions.

Managed care could be advantageous for consumers of care by simplifying the process of care for them, and minimizing billing procedures and out-of-pocket expenditures.

Managed care provides more flexibility in the use of funding, reducing the constraints which can require people to be institutionalized because institutional placement is funded, whereas home care in the community may not be funded. The incentives for low-cost solutions may work in favor of promoting some of the kinds of post-hospital care and LTC (to the extent LTC is part of managed care) that consumers most appreciate. MCOs typically are offered flexibility to provide services in creative ways.

Loss of customary doctor. If the person's doctor is not a participant in the managed care program, the person will have to choose one who does participate. Because managed care programs want to grow, they will often attempt to enroll as many physicians as possible in the hopes of attracting their patients, but some of these physicians may be weeded out subsequently on the basis of their practice patterns. In all fairness, although many people attach great importance to continuity of care, there is little evidence to support its centrality to good quality. If patients have to choose a new doctor, and if they can choose among competent practitioners, there may not necessarily be a diminution in quality of care, although they will have to form new interpersonal bonds.

Restricted access to hospitals. The managed care plan may not contract with the hospital a patient prefers.

Restricted access to specialty care. Many managed care programs require that patients see specialists only on the referral of their PCP. This mandate may be simply a minor inconvenience involving consulting a PCP. But it could become a major impediment if the PCP feels pressure to restrict access to specialists (If the PCPs do not feel this pressure, there is less rationale for requiring the gatekeeper role, though some might argue such a role also offers better coordination). In some cases, managed care firms may restrict the number of specialists with whom they contract, causing queues to form.

Restricted access to tests. Once again, if the PCPs (or specialists) are judged on their use of laboratory testing, there will be pressure to avoid such tests in marginal situations. Many managed care programs use clinical protocols to establish norms for ordering tests. Practitioners often complain that these protocols are too restrictive.

Restricted access to medications. When the benefit package includes drug coverage, consumers may find that certain expensive medications are not included on the plan's formulary. They may also be required to attempt to use less expensive drugs with more known side-effects before being offered drugs that have better results; often if they do not complain, they may not even learn about the alternative medications.

Managed care has an incentive for under-service. Just as fee-for-service has an incentive for too much service, managed care has an incentive to provide too little. In general, most practitioners who have worked under the aegis of managed care note that the greatest effect is in areas where health care decisions are not clear-cut. Without clear evidence that a given course of action is indicated, the balance may swing to less intensive care under capitation.

SPECIFIC COST CONTAINMENT STRATEGIES

Most observers agree that the early experience with managed care has emphasized the cost reduction strategy much more than the increased efficiency approach, but some are hopeful that as the programs mature, the transition will occur to the latter. Costs can be controlled in a variety of ways, each of which has implications for consumers. In general, the trade-off from the consumer perspective is lower costs for restricted choice.

Some MCOs own their own services (e.g., hospitals and doctors). They use their ownership to create an environment that operates with more consistent rules and encourages efficient practice. They can control use of expensive services by establishing rules that govern their access.

But the majority of MCOs are predominantly contractors rather than owners. In one sense, these MCOs can be compared to retailers that use their buying power to negotiate discounts. They buy large quantities of brand name merchandise at greatly reduced prices and sell it at a lower price than traditional retailers. Often these discounts come at the cost of reduced amenities, such as selection, knowledgeable salespersons or other services.
MCOs have used a variety of devices to obtain lower prices from providers. Some of the most common ones include:

Contracting with only those providers who offer the MCO a discount;

Monitoring the use of both basic and ancillary services by providers and punishing excessive (more than average) use;

Restricting the use of tests or drugs;

Requiring that access to specialty care be granted by a PCP, who serves as a gatekeeper (and is held responsible for the use of such specialty care);

Providing financial rewards for using fewer or less expensive services in the form of bonuses (or penalties in the form of withheld payments if heavy usage is made); and

Encouraging or even requiring that the providers share the risk of the costs of elements of care under their direct or indirect control.

PENETRATION RATES

By October 1994, 625 HMOs, 1107 PPOs, and 188 plans were operating in the United States, and by the end of that year, 52.2% of the American public was enrolled in some form of managed care (HMO, PPO, POS). This represents a substantial increase from 1992 when more than 42 million Americans, equaling more than 18% of the population, were enrolled in 554 HMO plans. Enrollment varies substantially by state. Table 2.1 shows the states with highest enrollment for both HMOs and PPOs in 1993 data.

Table 2.1 Penetration of HMOs and PPOs by State in 1993
Greatest HMO Enrollment	Greatest % of Population Enrolled in HMOs	Greatest PPO Enrollment	Greatest % of Population Enrolled in PPOs
California 10.9 million	Massachusetts 38.2	California 7.3 million	Colorado 50.9
New York 3.6 million	Maryland 37.3	Texas 5.2 million	Hawaii 40.7
Florida 2.9 million	Minnesota 35.1	Florida 3.0 million	Alabama 34.5
Massachusetts 2.3 million	California 34.8	Illinois 2.9 million	Nebraska 33.2

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Source: Data from AMCRA Foundation Managed Health Care Database, 1994.

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