Part I:
What is Managed Care?


Managed care is rapidly becoming the dominant form of healthcare delivery and financing in the United States. Managed care has the ability to manage the cost and quality of healthcare services, while balancing access to that care through the use of the essential "building blocks", such as utilization management procedures, quality assurance protocols and information system capability.
It is important to keep in mind that the definition of managed care is constantly changing. How managed care is defined today, may not be how it is defined in the future.
Once, managed care meant HMO care, and an HMO was defined as a pre-paid organization that provided healthcare to voluntarily enrolled members in return for a pre-set amount per member per month. Now, however, the meaning of managed care has expanded to include almost any form of coverage that limits the member's ability to choose any provider and to self-refer throughout the healthcare system.
Managed care encompasses a broad spectrum of models for care delivery and management. Several types of managed care organizations (MCOs) have evolved. A listing of the most common types of managed care organizations is provided in Appendix A.



Each type of MCO may define managed care differently; it depends on the level of emphasis that the managed care organization places on each of the essential "building blocks".
Three essential "building blocks" include:
Freedom of Choice: the level of freedom the patient has to choose his/her healthcare provider
Utilization Controls: the use of utilization management programs to control the volume and type of services utilized
Patient Financial Burden (co-pay & co-insurance): what the benefits are, how the benefits are designed, and what financial incentives are put in place for a member to choose one provider over another.

Every managed care company uses a planned and coordinated approach to providing healthcare with the goal of quality care at a lower cost.

What Has Led to the Growth of Managed Care?

Now that we have defined managed care, let's review the forces that have led to the growth of managed care.

Source: Marion Merrell Dow Managed Care Digest/HMO Edition 1994
* Annualized based on 6 months of data

As this slide shows, in 1994, HMOs enrolled almost 57 million members, which represents approximately 20% of the U.S. population. Growth in enrollment is expected to continually increase.

There are three main forces contributing to the growth of managed care:
American employers, who pay a large part of the health care bill, are shifting its workers into managed care plans in an effort to help control their costs and improve the quality of care.

The changes in healthcare are in response to the demands of employers, business coalitions, the government and general public. But the changes are occurring at different rates in different geographical markets across the country. The challenge is to apply an understanding of broad managed care concepts to specific situations in local markets in order to identify opportunities for your hospital.
The Douglas Group, Health Care Consultants
Healthcare costs in the United States have been increasing at a rapid rate. The U.S. Commerce Department reported that the $838.5 billion spent on healthcare in 1992 accounted for greater than 14% of the total economic output for the U.S. The Commerce Department projects that medical spending will continue to rise 12%-15% per year for the next five years unless significant changes in the system take place.

Up until the 1980s, the healthcare environment was one of expansion. The number of hospitals and providers grew. The predominate form of medical insurance was fee-for-service which covered everything, and patients had complete freedom of choice.

In the 1980s, an era of cost containment began. New forms of reimbursement were introduced, such as Medicare's prospective payment system, commonly referred to as DRGs (Diagnostic Related Grouping). This was the first attempt to share risk between providers and payers.

In the 1990s, an era of assessment and accountability began. Providers are beginning to be held accountable for the quality and cost of the services they provide. The risk for the cost of care is beginning to be shared through prospective payments and capitation.



Business coalitions, employers, the general public and government are all demanding:

Lower Cost of Care:
Why, because healthcare costs in the U.S. have been increasing at a rapid rate. Historically, several important factors have contributed to the upward spiral of healthcare costs, such as:
Demand for higher quality care and greater accountability:
The government, employers and the general public are not only demanding lower costs for health services, but are also demanding greater access to care, and the ability to measure outcomes of this care.

What Are Managed Care Organizations' Objectives?




Throughout the healthcare system, many actions are being taken to gain more control over the delivery of care in anticipation of more market changes. The influence of managed care continues to expand in the face of continued pressures to bring down costs.

In order to effectively respond to the changing healthcare environment and prosper under managed care, every hospital and its employees must understand the goals of managed care organizations.

Managed care organizations have several objectives. They must perform a balancing act. On one side of the scale, managed care organizations want to maintain quality by:
On the other side of the scale, managed care organizations are focused on controlling costs by:


What does this balancing act mean to hospitals?
In the short-term, managed care organizations attempt to control utilization of hospital services has resulted in decreased hospital admissions.

Reducing hospital use offers the greatest opportunity for controlling costs. Overall, hospital costs usually account for greater than 40% of the medical expenses for most managed care plans.


While the growth of managed care has pushed down hospital utilization rates, the observable short-term outcome has been a continual reduction in hospital length of stay.

For example, HMOs' utilization controls have succeeded in cutting the number of inpatient days in half without evidence of compromised patient care.


In the long-term, Managed Care Organizations (MCOs) have several ways to restrain hospital costs. Commonly employed methods include:

Most hospitals are currently trying to learn how to bear the financial risk for the services they provide without losing money.

Continue to Part II

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