Managed care organizations (MCOs) like HMOs emerged to control rising healthcare costs through integrated financing, insurance, care delivery, and payment. While MCOs achieved some cost savings initially, their impact was limited as utilization controls were relaxed due to backlash. This led providers and payers to pursue greater organizational integration through models like independent practice associations (IPAs), physician-hospital organizations (PHOs), and integrated delivery systems (IDSs). The Affordable Care Act further promotes accountable care organizations (ACOs) to coordinate care and share savings, though their ability to significantly reduce costs remains uncertain.

2. Chapter 9
Managed Care and Integrated
Organizations

3. Learning Objectives -
• To review the link between the development of
managed care and earlier organizational forms in the
US health care delivery system
• To grasp the basic concepts of managed care and
how managed care organizations realize cost savings
• To distinguish between the main types of managed
care organizations
• To examine the different models under which health
maintenance organizations are organized and to
understand the advantages and disadvantages of
each model

4. Learning Objectives
• To understand why managed care did not achieve its
cost control objectives
• To study the driving forces behind organizational
integration and strategies commonly used to achieve
integration
• To become familiar with highly-integrated health care
systems, namely, integrated delivery systems and
accountable care organizations
• To learn about the provisions in the Affordable Care
Act that apply to managed care and other emerging
organizations

5. Introduction
• Managed care has become firmly entrenched in
the US health care system
• Other countries have adopted some of its features
• Managed care became successful because of
failures of fee-for-service, mainly uncontrolled
costs
• Earlier tighter controls were relinquished in face of
a backlash against managed care
• Managed care did not evolve as intended, and had
limited success in controlling costs

6. Introduction
• As managed care gained marketplace power,
health care organizations began integrating
• MCOs have also consolidated
• The ACA assumes that cost control
responsibilities will be shared between MCOs
and Accountable Care Organizations

7. What is Managed Care?
• An organized approach to deliver
comprehensive services
• to enrolled members
• through efficient management of services and
• negotiation of prices with providers
• Core features of managed care:
– Integration of financing, insurance, delivery, and
payment
– Formal control over utilization

8. Integration of the Quad Functions
• Financing – negotiation of premiums with
employers
• Insurance – the MCO assumes insurance risk
• Delivery – MCO’s own physicians and
hospitals or contracts with providers
• Payment – risk sharing
–Capitation
–Discounted fees
–Salary

9. Objectives besides Cost Control
• Accountability for quality and cost
• Measurement of health outcomes and quality
• Health promotion and disease prevention
• Management of resource consumption
• Consumer education
• Continuing quality improvement

10. Evolution of Managed Care
• Baylor plan (1929) was based on capitation
• Contract practice
• Prepaid group practice
• Managed care—added utilization control to
the other features

11. Alternative Forms of Managed Care
• Prepaid group practice led to HMOs which
incorporated management of utilization
• Competition between HMOs and commercial
insurance led to other MCO forms, such as
preferred provider organizations (PPOs)

12. Accreditation of MCOs
• The National Committee for Quality Assurance
(NCQA)
• Participation is voluntary, but about half are
accredited
• A national committee of physicians supervises
the accreditation process
• A rating system assigns 6 status categories

13. Quality Assessment in MCOs
• Healthcare Effectiveness Data and Information
Set (HEDIS)
• HEDIS results are used by employers, the general
public, public insurers, and regulators
• Over 90% of health plans use HEDIS
• 2013 HEDIS has 80 measures in 5 domains:
– Care effectiveness
– Access to and availability of certain services
– Client experience of care
– Utilization and resource use
– Information on the health plan

14. Growth of Managed Care
Two main factors:
• Flaws in fee for service
• Weakened economic position of providers

15. Flaws in Fee for service
• Fee for service (indemnity insurance) allowed the
insured to get services anywhere, without restraint
• Moral hazard prevailed, along with provider-induced
demand
• Itemized billing of charges by the provider to the
insurer
– Few, if any, controls over the amount of payment
– Insurers functioned simply as passive payers of
claims
– Sickness coverage; no coverage for wellness and
prevention; no control over hospitalizations

16. Employers’ Response to Rise in
Premiums
• Initially, there was limited appeal for HMOs
• Employers were passive
• Double-digit premium rises during the 1980-
1990 period forced employers to abandon
indemnity plans

17. Providers’ Weakened Economic
Position
• Excess capacity in hospitals (brought on by
PPS)
• Physicians gave in to the momentum of
managed care—participate or be left out

18. Efficiencies in Managed Care
– Elimination of insurance and payer intermediaries
– Risk sharing with providers promotes
economically prudent delivery of health care
– Monitoring the delivery of services for
appropriateness
– Delivering care in cost-efficient settings (e.g.,
outpatient instead of inpatient)

19. Inefficiencies in Managed Care
–Complexity for providers of having to deal
with numerous plans
–Laboratory and some other services are
carved out, creating inconveniences for
patients and providers
–Lengthy appeals for denied services

20. Cost Control in Managed Care
The need for cost control:
• 10% of patients with chronic/complex conditions
account for 70% of health care spending
• Hospital services cost about 50% of all medical care
Utilization management requires:
• Expert evaluation of what services are needed
• Determination of how to provide services
inexpensively without compromising quality
• Review of the process of care

21. Cost Control Methods
• Choice restriction
• Gatekeeping
• Case management
• Disease management
• Pharmaceutical management
• Utilization review
• Practice profiling

22. Choice Restriction
• Choice restriction
– Closed panel (In-network access) – no access
outside the panel
– Open access (Out-of-network access) – outside
option is allowed, but at a higher out-of-pocket
cost
• There is a greater willingness among enrollees
to reduce out-of-pocket costs

23. Gatekeeping
• Primary care physician (PCP) as portal of
entry
• PCP delivers basic and routine care,
• PCP refers and coordinates when secondary
care is needed
• Gatekeeping achieves modest cost savings

24. Case Management
• Coordination of care for complex and
potentially costly cases
• A variety of services from multiple providers
are needed over an extended period
• Secondary and tertiary services are needed
more often than primary care
E.g., AIDS, spinal cord injury, transplants, severe
injuries, etc. cases
• Cost savings have been achieved with better
delivery of care and reduced hospitalizations

25. Disease Management
• Population-oriented strategy for chronic problems
• Evidence-based treatment guidelines
• Focus on education, self-management training,
monitoring of the disease process, and follow-up to
ensure compliance – Self care with professional
support
• Goal: prevent or delay complications
• Although cost savings are uncertain, better quality
and disease control are achieved

26. Pharmaceutical Management
Three main strategies:
• Drug formularies
• Tiered cost sharing
• Pharmacy benefits management companies

27. Utilization Review (UR)
• Review each case
• Determine appropriateness of services
• To ensure cost-efficiency
• To plan subsequent care
• Quality of care is an important component

28. Three Types of Utilization Review
• Prospective UR
• Concurrent UR and discharge planning
• Retrospective UR

29. Prospective UR
• Decision to refer or not
• Preauthorization (precertification)
• Second opinions
• Inform concurrent review about the case
• For pharmaceuticals:
– Formularies are the first step
– Preauthorization for certain drugs and biologics

30. Concurrent UR
• length of stay and when to discharge
• optimal drug therapy and management
reduces length of stay and reduce drug
utilization and cost

31. Discharge Planning
• Purpose: Post-discharge continuity of care
– expected inpatient stay
– anticipated outcomes
– subsequent appropriate setting
– special needs

32. Retrospective UR
• Examination of medical records
• Analysis of utilization (overutilization or
underutilization)
• Billing accuracy
• Review of practice patterns and feedback to
physicians
• Drug review: inappropriate use of controlled
substances

33. Practice Profiling
• Evaluate provider-specific practice patterns
• Compare to a norm
• Feedback to change behavior
• Goal: improve quality and efficiency
• Somewhat controversial

34. Types of MCOs
• Many insurers offer HMO and PPO plans
• Many HMOs offer triple-option plans that
combine the features of indemnity insurance,
HMO, and PPO

35. HMOs
• Emphasize preventive care (under the ACA,
however, all health plans must include
preventive services)
• PCP as gatekeeper
• Capitation
• In-network access (except hybrid and triple-
option plans); carve outs for special services
• Standards of quality

36. HMO Enrollment
• Rapid growth in early 1990s which peaked in
1996
• PPO and POS plans became popular
• Conversely, the majority of Medicaid and
Medicare Advantage beneficiaries are enrolled
in HMOs

37. HMO Models
• Staff
• Group
• Network
• Independent practice associations (IPAs)

38. HMOs—Staff Model
• Employ physicians on salary
• Contracts for only uncommon specialties and
hospital services
• Advantages:
– Exercise control over physicians
– Convenience of one-stop shopping
• Disadvantages:
– Fixed salary expense can be high
– Expansion into new markets is difficult
– Limited choice of physicians

39. HMOs—Group Model
• Contract with a single multispecialty group practice
• Separate hospital contracts
• Group practice is paid a capitation fee
• Advantages:
– No salary or facility expenses (as in staff model)
– Well known practice may lend prestige
• Disadvantages:
– Difficulty with service obligations if a contract is
lost

40. HMOs—Network Model
• Contract with more than one group practice
• Variations:
– Contracts with only PCPs who are financially
responsible for specialty services, or
– Separate contracts with PCPs and specialists
• Advantage:
– Wider choice of physicians
• Disadvantage:
– Dilution of utilization control

41. HMOs—IPA Model
• Separate entity from the HMO
• HMO contracts with IPA
• IPA (not HMO) contracts with providers
• Advantages:
– Eliminates the need to contract with various
providers
– Transfers financial risk to the IPA
– Choice of providers
• Disadvantages:
– Difficulty with service obligations if a contract is
lost
– Dilution of utilization control
– Generally, a surplus of specialists

42. PPOs
• Both in-network (preferred providers) and
out-of-network access (an exclusive provider
plan does not permit out-of-network use)
• Discounted fees are used to pay providers (no
direct risk sharing)
• Generally, no gatekeeping and other controls
• PPOs enjoy the highest enrollment (in
employment-based insurance market) of all
managed care plans

43. POS Plans
• Cross between HMO and PPO
• HMO features are retained (utilization
controls, capitation)
• PPO feature: Open access option available at
the point of service
• Later, the need for POS plans became less
important
– HMOs relaxed utilization controls
– PPOs already offered out-of-network access

44. Managed Care Trends in Employment-
Based Health Insurance
• See Figure 9-6 for HMO enrollment
• See Figure 9-8 for PPO enrollment
• See Figure 9-9 for POS enrollment
• See Figure 9-10 for share of managed care
enrollments in 2013

45. Managed Care and Health Insurance
Exchanges
• Managed care plans are expected to be
dominant players in the exchanges established
under the ACA
• Plans must comply with ACA mandates
– Must include “essential health benefits”
– Must comply with the medical loss ratio
requirements
• Federal funds are provided to start CO-OPs

46. Medicaid Enrollment
• 71% of beneficiaries enrolled in managed care
in 2009
• Primary care case management (PCCM) is
used in some rural areas
– Enrollee must choose a PCP
– The PCP is paid extra for coordinating care

47. Medicare Enrollment
• Level of participation in Part C depends on the
amount of reimbursement; payment cuts prompt
HMOs to drop out of the program
• Between 2003 and 2007, the CMS rolled out risk
adjusted payments based on Hierarchical Condition
Categories
• In 2013, 28% of Medicare beneficiaries were enrolled
in managed care
• Payments to MA plans will be reduced under the
ACA; this could affect MCOs’ participation in Part C

48. Managed Care’s Impact: Cost
• Managed care provides better value than
indemnity insurance
• Backlash from consumers and providers
diluted cost control efforts
• Managed care’s full potential was not realized
• Future cost reduction efforts may not
materialize without tighter restrictions on
utilization

49. Managed Care’s Impact: Access
• Good access to primary care and preventive
services in certain key areas
• On a larger scale, impact on access is not well
established

50. Managed Care’s Impact: Quality
• Overall, quality of care in MCO plans has been
equivalent to traditional FFS
• No evidence of skimping on care because of capitation
• Based on several measures, quality may be higher in
MCO plans
• No negative impact on care based on
race/socioeconomic status
• Quality may be lower in for-profit plans vs. nonprofit
plans
• Higher likelihood of rehospitalization in MA plans

51. Managed Care Backlash: 1990s
• Three main reasons:
– Employees faced barriers to free choice of
providers
– Employees did not see lower out-of-pocket costs
– Physicians reacted negatively to utilization
management and lower reimbursement

52. Regulation of Managed Care
• Federal: Newborns’ and Mothers’ Health
Protection Act, 1996
• Numerous laws across states, e.g.,
– Limits on utilization-based financial incentives to
physicians
– Quick appeals and external reviews
– Mandated benefits
– Right to seek redress in courts

53. Managed Care Aftermath
• Better relations with providers
• Relaxed utilization controls
• Organizational integration shifted power in
favor of providers
• Cost spiral hasn’t been cured
• The ACA’s promise of lower costs and better
access may impact managed care’s future

54. Organizational Integration
Strategies employed to:
• Achieve economies
• Diversify by offering new services
• Gain market share
• Gain leverage with health plans

55. Integration Strategies
• See Figure 9-11

56. Basic Forms of Integration
• Management services organizations (MSOs)
• Physician-hospital organizations (PHOs)
• Provider-sponsored organizations (PSOs)

57. MSOs
• Supply management expertise, administrative
tools, and information technology to physician
group practices
• Mainly used by small groups that cannot
employ full-time managers

58. PHOs
• An alliance between a hospital and physicians
• A large PHO may contract directly with
employers
• Recent trend is for physicians to become
hospital employees. Reasons:
– Reimbursement cuts
– High practice expenses
– New demands, such as electronic health records
– Younger physicians prefer employment

59. PSOs
• A risk bearing entity (incorporation of
insurance function) that competes with MCOs
• Directly contract with employers and public
insurers
• PSOs failed in large numbers because of a lack
of experience with the insurance function

60. Highly-Integrated Health Care Systems
• Integrated delivery systems (IDSs)
• Accountable care organizations (ACOs)
• Payer-provider integration

61. Integrated Delivery Systems
• A network of organizations
• Coordinated continuum of services
• Willing to be held clinically and fiscally accountable
• Managed care promoted the formation of IDSs:
– Cost effective for MCOs to contract with a full
service provider
– Preference by MCOs to seek cost-efficient providers
who will take responsibility for quality
– Providers strengthened their bargaining power with
MCOs and protected their autonomy

62. Integrated Delivery Systems
• Member satisfaction is higher in integrated
plans
• IDSs have had a positive effect on quality of
care, but cost savings have not materialized
• Both hospitals and physicians are integrating at
an accelerated pace

63. Accountable Care Organizations
• Integrated group of providers who take
responsibility for delivering services to a defined
population
– Take responsibility for improving health status
– Provide cost-efficient care
– Focus on satisfaction with careI
• ACOs use mechanisms already used by MCOs and
IDSs (disease management, care coordination,
sharing cost savings with providers, etc.) to
improve cost, quality, and population health

64. Accountable Care Organizations
• Evidence suggests that ACOs’ impact on cost
savings is likely to be limited
• Lack of clarity on 3 main issues:
– Hospitals and large clinics are joining hands; the
fate of smaller practices is unclear
– It is not clear how safety-net providers will be
included in ACOs
– ACOs could dominate a market, reduce
competition, and harm consumers through higher
prices and lower quality

65. The ACA and ACOs
• Medicare is authorized to develop payment
methods for ACOs
• Payment must include a shared savings
program – pay additional moneys to ACOs that
achieve targeted cost savings while meeting
quality standards
• A 3-year contract is required for ACOs that
want to participate

66. ACOs and Antitrust
• Antitrust laws deal with anticompetitive practices
• ACOs may be able to use their market power to
inhibit competition by monopolizing patient
referrals within the ACO
• There could be a tradeoff:
– ACOs’ size and geographic reach could be limited by
antitrust laws, thus increasing competition
– ACOs may find it difficult to achieve economies and
care coordination, restrained by antitrust laws

67. Payer-Provider Integration
• On the rise
• Insurance companies are acquiring large
practices and health systems to gain greater
control over health care delivery
• Hence, collaboration between MCOs and
providers could be the next major trend
• Due to fear of encroachment from a powerful
adversary — the government