Health Care Institutions - Managed Care Organizations

Managed health care is the sector of the health insurance industry in which health care providers are not independent businesses run by, for example, private medical practitioners, but by administrative firms that manage the allocation of health care benefits. In contrast to conventional indemnity insurers that do not govern the provision of medical care services and simply pay for them, managed care firms have a significant voice in how services are administered to enable them to exert better control over health care costs. (Indemnity insurance is traditional fee-for-service coverage in which providers are paid according to the service performed.)

Managed care, which has a primary purpose of controlling service utilization and costs, represents a rapidly growing segment of the health care industry. The beneficiaries of employer-funded health plans (persons who receive health benefits from their employers), as well as Medicare and Medicaid recipients, often find themselves in this type of health care program. The term "managed care organization" covers several types of health care delivery systems, such as health maintenance organizations (HMOs), preferred provider organizations (PPOs), and "utilization review" (UR) groups that oversee diagnoses, recommend treatments, and manage costs for their beneficiaries.

Health Maintenance Organizations

Health maintenance organizations (HMOs) began to grow in the 1970s as alternatives to traditional health insurance, which was becoming increasingly expensive. The HMO Act of 1973 was a federal law requiring employers with more than twenty-four employees to offer an alternative to conventional indemnity insurance in the form of a federally qualified HMO. The intent of the act was to stimulate HMO development, and the federal government has been promoting HMOs since the administration of President Richard Nixon (1969–74), maintaining that groups of physicians following certain rules of practice could slow rising medical costs and improve health care quality.

HMOs are health insurance programs organized to provide complete coverage for subscribers' (also known as enrollees or members) health needs for negotiated, prepaid prices. The subscribers (and/or their employers) pay a fixed amount each month; in turn, the HMO group provides, at no extra charge or at a very minimal charge, preventive care, such as routine checkups and immunizations, and care for any illness or accident. Inpatient hospitalization and referral services are also covered by the monthly fee. HMO members benefit from reduced out-of-pocket costs (they do not pay deductibles), they do not have to file claims or fill out insurance forms, and they generally pay only a small co-payment for each office visit. Members are usually "locked into" the plan for a specified period—usually

TABLE 3.11

Hospice patients, according to age, sex, and diagnosis, selected years 1992–2000
(Data are based on a survey of hospice patients)
Age, sex, and diagnosis	1992	1994	1996	1998	2000
1Age adjusted by the direct method to the year 2000 standard population using the following three age groups: 65–74 years, 75–84 years, and 85 years and over.
2Denominator excludes persons with unknown age.
3Denominator excludes persons with unknown diagnosis.
Notes: Current hospice patients are those who were on the rolls of the agency as of midnight on the day immediately before the date of the survey. Rates are based on the civilian population as of July 1. Population figures are adjusted for net underenumeration using the 1990 National Population Adjustment Matrix from the U.S. Bureau of the Census. Diagnostic categories are based on the International Classification of Diseases, 9th Revision, Clinical Modification.
SOURCE: "Table 88. Hospice Patients, According to Age, Sex, and Diagnosis: United States, Selected Years 1992–2000," in Health, United States, 2003, National Center for Health Statistics, 2003, http://www.cdc.gov/nchs/data/hus/tables/2003/03hus088.pdf (accessed July 2, 2004)
	Number of current patients
Total hospice patients	52,100	60,783	59,363	79,837	105,496
	Current patients per 10,000 population
Total	2.0	2.3	2.2	3.0	3.8
Age at time of survey:
Under 65 years, crude	0.5	0.8	0.5	0.7	0.8
65 years and over, crude	13.1	12.9	13.9	18.2	24.9
65 years and over, age adjusted1	13.7	13.6	14.4	18.4	24.9
65–74 years	7.8	7.3	7.8	9.9	10.1
75–84 years	19.2	16.9	16.9	22.0	31.9
85 years and over	23.4	30.6	34.7	44.7	67.3
Sex:
Male, total	1.9	2.1	2.0	2.6	3.3
Under 65 years, crude	0.5	0.9	0.5	0.7	0.8
65 years and over, crude	13.9	12.5	14.8	18.5	24.8
65 years and over, age adjusted1	16.0	14.4	16.1	20.3	26.9
65–74 years	6.3	7.0	10.4	10.2	13.0
75–84 years	25.8	18.2	18.5	25.2	32.6
85 years and over	28.8	34.8	33.9	49.2	69.9
Female, total	2.1	2.5	2.4	3.3	4.3
Under 65 years, crude	0.4	0.7	0.6	0.8	0.9
65 years and over, crude	12.6	13.2	13.2	18.0	25.0
65 years and over, age adjusted1	12.6	13.2	12.9	17.3	23.3
65–74 years	8.9	7.5	5.8	9.6	7.6
75–84 years	15.1	16.1	15.9	19.9	31.5
85 years and over	21.4	29.0	35.0	42.9	66.2
	Percent distribution
Age at time of survey:2
Under 65 years	19.5	30.1	21.3	21.6	18.6
65 years and over	80.5	69.9	78.7	78.4	81.4
65–74 years	27.3	22.2	24.5	22.7	17.2
75–84 years	38.6	30.1	32.4	32.9	37.0
85 years and over	14.6	17.6	21.9	22.7	27.3
Sex:
Male	46.1	44.7	44.9	42.7	42.6
Female	53.9	55.3	55.1	57.3	57.4
Primary admission diagnosis:3
Malignant neoplasms	65.7	57.2	58.3	55.5	51.9
Large intestine and rectum	9.0	8.0	4.0	6.4	4.9
Trachea, bronchus, and lung	21.1	12.5	15.8	13.0	12.3
Breast	3.9	4.8	6.2	4.9	4.8
Prostate	6.0	5.9	6.6	6.1	7.7
Diseases of heart	10.2	9.3	8.3	9.7	12.8
Diseases of the respiratory system	4.3	6.6	7.3	10.6	6.5
Other	19.8	27.0	26.1	24.3	28.8

one year. If the necessary service is available within the HMO, patients normally must use an HMO doctor. There are several types of HMOs:

• Staff model HMO—the "purest" form of managed care. All primary care physicians are employees of the HMO and practice in a centralized location such as an outpatient clinic that also may house a laboratory, pharmacy, and facilities for other diagnostic testing. The staff model offers the HMO the greatest opportunities to manage both cost and quality of health care services.
• Group model—in which the HMO contracts with a group of primary care and multi-specialty health providers. The group is paid a fixed amount per patient to provide specific services. This model is the one used by Kaiser Permanente and Group Health Cooperative of Puget Sound (Group Health Cooperative of Puget Sound affiliated with Kaiser Permanente in 2000), early pioneers in the HMO movement. The administration of the medical group determines how the HMO payments will be distributed among the physicians and other health care providers. Group model HMOs are usually located in hospitals or clinic settings and have on-site pharmacies. Participating physicians usually do not have any fee-for-service patients.
• Network model—in which the HMO contracts with two or more groups of health providers that agree to provide health care at negotiated prices to all members enrolled in the HMO.
• Independent practice association model (IPA)—in which the HMO contracts with individual physicians or medical groups that then provide medical care to HMO members at their own offices. The individual physicians agree to follow the practices and procedures of the HMO when caring for the HMO members; however, they generally also maintain their own private practices and see fee-for-service patients as well as HMO members. IPA physicians are paid by capitation (literally, "per head") for the HMO patients and by conventional methods for their fee-for-service patients. Physician members of the IPA guarantee that the care for each HMO member for which they are responsible will be delivered within a fixed budget. They guarantee this by allowing the HMO to withhold an amount of their payments (usually about 20% per year). If at year's end the physician's cost for providing care falls within the preset amount, then the physician receives all the monies withheld. If the physician's costs of care exceed the agreed-upon amount, the HMO may retain any portion of the monies it has withheld. This arrangement places physicians and other providers such as hospitals, laboratories, and imaging centers "at risk" for keeping down treatment costs, and this "at risk" formula is key to HMO cost-containment efforts.

Some HMOs offer an open-ended or point-of-service (POS) option that allows members to choose their own physicians and hospitals, either within or outside the HMO. A member who chooses an outside provider, however, will generally have to pay a larger portion of the expenses. Physicians not contracting with the HMO but who see HMO patients are paid according to the services performed. POS members are given incentive to seek care from contracted network physicians and other health care providers through comprehensive coverage offerings.

The number of people enrolled in HMOs more than tripled between 1980 and 1990. In 1980 HMOs covered only 9.1 million people. By 1990, thirty-three million Americans were enrolled in HMOs. Enrollment continued to explode through the 1990s, and by 1999, there were 643 HMOs covering 81.3 million persons—30% of the American population. Since 1999 both the number of HMOs and the number of people covered declined. By 2003, the number of HMOs had dropped to five hundred, and enrollment had declined from the 1999 peak by about five million, to 76.1 million—more than one quarter of the U.S population. (See Table 3.12.)

HMOs Have Fans and Critics

HMOs have been the subject of considerable debate among physicians, payers, policymakers, and health care consumers. Many physicians feel HMOs interfere in the physician-patient relationship and effectively prevent them from practicing medicine the way they have traditionally practiced. These physicians claim they know their patients' conditions and are, therefore, in the best position to recommend treatment. The physicians resent being advised and overruled by insurance administrators. (Physicians can recommend the treatment they believe is best, but if the insurance company will not cover the costs, patients may be unwilling to undergo the recommended treatment.)

The HMO industry counters that its evidence-based determinations (judgments about the appropriateness of care that reflect scientific research) are based on the experiences of many thousands of physicians and, therefore, it knows which treatment is most likely to be successful. The industry maintains that, in the past, physicians' chosen treatments have not been scrutinized or even assessed for effectiveness, and as a result most physicians do not really know whether the treatment they have prescribed is optimal for the specific medical condition.

Further, the HMO industry cites the slower increase in health care expenses as another indicator of its management success. Industry spokespersons have noted that any major change in how the industry is run would lead to increasing costs. They claim that HMOs and other managed care programs are bringing a more rational approach to the health care industry while maintaining health care quality and controlling costs.

Still, many physicians resent that, with a few exceptions, HMOs are not financially liable for their decisions. When a physician chooses to forgo a certain procedure and negative consequences result, the physician may well be held legally accountable. When an HMO informs a physician that it will not cover a recommended procedure and the HMO's decision is found to be wrong, it cannot be held directly liable. Many physicians assert that because HMOs make such choices, they are practicing medicine, and should, therefore, be held accountable. The HMOs counter that these are administrative decisions, and they deny that they are practicing medicine.

The legal climate, however, began to change for HMOs during the mid-1990s. Both the Third Circuit Federal

TABLE 3.12

Health maintenance organizations (HMOs) and enrollment, according to type, region, and federal program, selected years 1976–2002
[Data are based on a census of health maintenance organizations]
Plans and enrollment	1976	1980	1990	1995	1997	1998	1999	2000	2001	2002
— Data not available.
1Enrollment or number of plans may not equal total because some plans did not report these characteristics.
2An HMO operating under an individual practice association model contracts with an association of physicians from various settings (a mixture of solo and group practices) to provide health services.
3Group includes staff, group, and network model types.
4Federal program enrollment in HMOs refers to enrollment by Medicaid or Medicare beneficiaries, where the Medicaid or Medicare program contracts directly with the HMO to pay the appropriate annual premium.
5Data for 1990 and later include enrollment in managed care health insuring organizations.
Notes: Data as of June 30 in 1976–80, and January 1 from 1990 onwards. Open-ended enrollemnt in HMO plans, amounting to 8 million on Jan 1, 2002, is included from 1994 onwards. HMOs in Guam are included starting in 1994; HMOs in Puerto Rico, starting in 1998. In 2002 HMO enrollment in Guam was 34,000 and in Puerto Rico, 1,825,000. Data for additional years are available.
SOURCE: "Table 132. Health Maintenance Organizations (HMOs) and Enrollment, according to Model Type, Geographic Region, and Federal Program: United States, Selected Years 1976–2002," in Health, United States, 2003, National Center for Health Statistics, 2003, http://www.cdc.gov/nchs/data/hus/tables/2003/03hus132.pdf (accessed July 2, 2004)
Plans	Number
All plans	174	235	572	562	652	651	643	568	541	500
Model type:1
Individual practice association2	41	97	360	332	284	317	309	278	257	229
Group3	122	138	212	108	98	116	123	101	104	100
Mixed	—	—	—	122	258	212	208	188	180	171
Geographic region:
Northeast	29	55	115	100	110	107	110	98	96	87
Midwest	52	72	160	157	184	185	179	161	190	140
South	23	45	176	196	236	237	239	203	158	178
West	70	63	121	109	121	122	115	106	97	95
Enrollment1	Number of persons in millions
Total	6.0	9.1	33.0	50.9	66.8	76.6	81.3	80.9	79.5	76.1
Model type:1
Individual practice association2	0.4	1.7	13.7	20.1	26.7	32.6	32.8	33.4	33.1	31.6
Group3	5.6	7.4	19.3	13.3	11.0	13.8	15.9	15.2	15.6	15.0
Mixed	—	—	—	17.6	29.0	30.1	32.6	32.3	30.9	29.6
Federal program:4
Medicaid5	—	0.3	1.2	3.5	5.6	7.8	10.4	10.8	11.4	12.8
Medicare	—	0.4	1.8	2.9	4.8	5.7	6.5	6.6	6.1	5.4
	Percent of HMO enrollees
Model type:1
Individual practice association2	6.6	18.7	41.6	39.4	39.9	42.6	40.3	41.3	41.6	41.5
Group3	93.4	81.3	58.4	26.0	16.5	18.0	19.6	18.9	19.5	19.4
Mixed	—	—	—	34.5	43.4	39.2	40.1	39.9	38.8	38.8
Federal program:4
Medicaid5	—	2.9	3.5	6.9	8.2	10.2	12.7	13.3	14.3	16.9
Medicare	—	4.3	5.4	5.7	7.2	7.4	8.0	8.1	7.7	7.1
	Percent of population enrolled in HMOs
Total	2.8	4.0	13.4	19.4	25.2	28.6	30.1	30.0	28.3	26.4
Geographic region:
Northeast	2.0	3.1	14.6	24.4	32.4	37.8	36.7	36.5	35.1	33.4
Midwest	1.5	2.8	12.6	16.4	19.5	22.7	23.3	23.2	21.7	20.6
South	0.4	0.8	7.1	12.4	17.9	21.0	23.9	22.6	21.0	19.8
West	9.7	12.2	23.2	28.6	36.4	39.1	41.4	41.7	40.7	38.2

Court of Appeals in Dukes v. U.S. Healthcare (64 LW 2007, 1995) and the Tenth Circuit Federal Court of Appeals in PacifiCare of Oklahoma, Inc., v. Burrage (59 F.3rd 151, 1995) agreed that HMOs were liable for malpractice and negligence claims against the HMO and HMO physicians. In Frappier Estate v. Wishnov (Florida District Court of Appeals, Fourth District, No. 95-0669, May 8, 1996), the Florida court agreed with the earlier findings. It seemed these decisions would be backed by new laws when both houses of Congress passed legislation (the "Patients' Bill of Rights") giving patients more recourse to contest the decisions of HMOs, although the House of Representatives and the Senate disagreed about the specific rights and the actions patients could take to enforce their rights.

The Senate-passed bill ensured that patients could hold their HMOs accountable when their actions resulted in injury or death. The bill allows patients to sue their HMOs in state court over denied benefits or to contest quality of care issues. It also allows federal court lawsuits for issues unrelated to quality of care. The bill does not limit damages in state court, but damages are capped at $5 million in federal court.

The House version of the bill limits patients' access to courts and their ability to sue their HMOs by permitting lawsuits in state courts under restrictive rules and sets a cap for noneconomic damages at $1.5 million. Critics of the House-passed bill contended that it placed special interests above the interests of insured Americans.

By August 2002 the prospects for a patients' rights law passing during 2002 dimmed as senators and members of the House failed to resolve their differences about the legislation. The central issue that stalled the negotiations about the bill was the question of how much recourse patients should have in court when they believe their HMOs have not provided adequate care. Although the legislation was not officially "dead," and a conference committee was appointed to attempt to resolve the issues, many industry observers decided that the talks, and White House actions to encourage consensus, had failed.

In June 2004 Democrats renewed their efforts to press for passage of a law enabling patients to sue their HMOs over treatment denials in response to the Supreme Court rulings against such lawsuits in state courts. The Democrats want the right to sue in state courts because monetary damages are usually higher than in federal courts. Republicans generally want limits on lawsuits and damages and to confine them to federal courts.

Preferred Provider Organizations

During the 1990s, in response to HMOs and other efforts by insurance groups to cut costs, physicians began forming or joining preferred provider organizations (PPOs). PPOs are managed care organizations that offer integrated delivery systems—networks of providers—available through a wide array of health plans and are readily accountable to purchasers for access, cost, quality, and services of their networks. They use provider selection standards, utilization management, and quality assessment programs to complement negotiated fee reductions (discounted rates from participating physicians, hospitals, and other health care providers) as effective strategies for long-term cost control. Under a PPO benefit plan, covered persons retain the freedom of choice of providers but are offered financial incentives such as lower out-of-pocket costs to use the preferred provider network. PPO members may use other physicians and hospitals, but they usually have to pay a higher proportion of the costs. PPOs are marketed directly to employers and to third-party administrators (TPAs) who then market PPOs to their employer clients.

Exclusive provider organizations (EPOs) are a more restrictive variation of PPOs in which members must seek care from providers on the EPO panel. If a member visits an outside provider who is not on the EPO panel, then the EPO will offer either very limited or no coverage for the office or hospital visit.

While HMO enrollment has declined in recent years, according to the CDC National Center for Health Statistics (NCHS) the percentage of employers offering one or more PPO plans rose from 49% to 57% between 2001 and 2003, and PPO enrollment rose from 50% to 54% of covered employees. Growth in PPO enrollment occurred almost entirely in the West and Midwest regions. PPO enrollment is highest in the Midwest, at 64% and the South, at 55%.