Managed Care Organization

A managed care organization is a type of health insurance that combines (a) the collection of insurance premiums to pay for covered benefits with (b) methods that influence the cost and use of health services. A managed care organization uses methods to deliver health services[Page 339] and to pay hospitals and physicians that attempt to control or coordinate the use of services in order to contain expenditures, improve quality, or both.

A managed care organization is normally offered to potential enrollees as an alternative choice to traditional fee-for-service health insurance, which does not use methods to influence the cost and use of health services.

A managed care organization will have (a) a restricted network of hospitals and physicians, (b) administrative methods for utilization review, prior authorization, and quality assessment and improvement, and (c) financial incentives for enrollees to use the restricted network of hospitals and physicians.

Managed care organizations are primarily a U.S. phenomenon, although more managed care companies have been appearing in other countries over the last 10 years. The reason managed care organizations arose in the United States is because of the employment-based coverage of U.S. health insurance.

Most health care costs in the United States are paid by private health insurance plans. Most Americans, under the age of 65 years, are offered a health insurance plan through their place of employment. The employer pays more than half the cost of private health insurance when it is offered at the place of employment. Employer concern about the cost of health care for their employees led to establishment of health plans that attempted to control costs and improve the coordination of care after World War II.

The first managed care organization was the Kaiser Foundation Hospitals and Health Plan. It illustrates the influential role of employers over managed care organizations, because of the active role of Henry Kaiser, Sr., a prominent American industrialist and shipbuilder. He wanted his employees to have access to reasonable-cost, high-quality health care and pushed for the development of a form of health insurance in which administrators took over the management of service delivery to allow the physicians to only practice high-quality medicine. His original concept grew to be Kaiser Permanente, which today is America' largest not-for-profit managed care organization, serving 8.1 million members in nine states and the District of Columbia.

There are several types of managed care organizations. A health maintenance organization (HMO) is a type of managed care organization that accepts all the risk for covered services. A predetermined health insurance premium is paid for the managed care organization to provide the covered services within the budget supported by the premium—absorbing any financial loss or retaining any financial gain.

This type of managed care organization saw rapid growth in the 1970s and 1980s after the passage of the Health Maintenance Organization Act of 1973. Employers with more than 25 employees had to offer at least one HMO to their employees. To be approved by the federal government, HMOs had to expand their benefit package beyond hospital and physician services, offering mental health benefits and many other services. As a result, managed care organizations are often associated with comprehensive benefits. In 1985, the managed care organization was introduced to elderly Medicare beneficiaries when the federal government offered an alternative to paying only on a fee-for-service basis, by also paying HMOs through risk-based contracts. Approximately 5 million Medicare beneficiaries are enrolled in HMOs. In the 1990s, many states sharply expanded enrollment in HMOs for low-income and disabled people on Medicaid.

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