State Innovations in Child Welfare Financing. Origin of Managed Care


The concepts, principles, and tools of managed care were first developed in the medical field starting in the 1970s. Managed care was a response by the major payers of medical costs (employers and unions) to soaring medical care expenses. It was thought that a major source of higher costs was the fee-for-service financing system at the time. In that system, individual patients selected their health care providers, who had the sole discretion to set prices for their services. Third-party payers then footed the bill for any care that insured patients received. Critics charged that such a system was ripe for abuse by both patients and doctors. For patients, health care costs had become an abstraction represented by a bill that was paid by someone else. Doctors, it was argued, could increase their fees with little complaint from patients and could order unnecessary tests and procedures to increase revenue with no accountability.

The development of medical managed care was also driven by other dynamics. As medical malpractice suits began to proliferate, doctors responded by practicing “defensive medicine” in which they ordered tests or procedures in order to avoid accusations that they had been negligent. Further, in the fee-for-service system, doctors had little incentive to consult with one another and coordinate patient care. Patients could go directly to an expensive specialist or even multiple doctors at the same time. This could lead to overlapping treatments, dangerous prescription drug interactions, or other problems because no “gatekeeper” was aware of the full spectrum of the patient's medical history.

The American health care system underwent a revolution from a fee-for-service system to a predominately managed care system during the 1970s and 1980s. By 1998, three-quarters of privately insured Americans under the age of 65 were enrolled in some kind of managed care plan (Rosenbaum, 1998, p. 198).

Managed care organizations serve as “gatekeepers” that coordinate services for the patient. They seek to restrain doctors from ordering unnecessary tests and services by limiting certain reimbursements. They often require an authorization process that gives them the opportunity to review the diagnosis and medical recommendations and to suggest less expensive treatment. At the same time, they require patients to make a co-payment so that they have a financial incentive to avoid unnecessary procedures.

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