Page 1 of 18

Chapter 8: Managed Care Plans

Certificate in Health Insurance























































Confidentiality statement

This document should not be carried outside the physical and virtual boundaries of TCS and
its client work locations. Sharing of this document with any person other than a TCSer will
tantamount to violation of the confidentiality agreement signed when joining TCS.

Notice
The information given in this course material is merely for reference. Certain third party
terminologies or matter that may be appearing in the course are used only for contextual
identification and explanation, without an intention to infringe.
Certificate in Health Insurance TCS Business Domain Academy



Page 3 of 18

Contents

Chapter - 8 Managed Care Plans ...................................................................................... 4
Introduction ...................................................................................................................... 4
8.1 The concept of Managed Care ............................................................................... 5
8.2 Managed Care as a solution to the issues in American Healthcare ......................... 5
8.3 Objectives of Managed Care ..................................................................................6
8.4 Principles of Managed Care ................................................................................... 7
8.5 Models of Managed Care ..................................................................................... 10
8.5.1 Health Maintenance Organizations (HMO) .................................................. 10
8.5.2 Preferred Provider Organizations (PPO) ...................................................... 11
8.5.3 Point-Of-Service Plans (POS) ...................................................................... 13
8.5.4 Exclusive Provider Organisations (EPO) ....................................................... 13
Summary ........................................................................................................................ 15
References ...................................................................................................................... 17

Certificate in Health Insurance TCS Business Domain Academy


Page 4 of 18


Chapter - 8 Managed Care Plans

Introduction
Managed Health Care defines the entire area of health care delivery where cost savings can
be achieved. It ensures quality health care delivery in a cost effective way. This chapter tries
to explain the various principles on which the managed care works in order to attain its
goals and various models of managed care that are in existence.

Learning Objectives
On completion of this chapter, you will understand the:
The broad principles of managed care
Different reimbursement methods
Advantages & Disadvantages of managed care systems
Different models used by managed health care

Certificate in Health Insurance TCS Business Domain Academy


Page 5 of 18

8.1 The concept of Managed Care

Overview of Managed Health Care
Managed Health Care defines the entire area of health care delivery where cost savings can
be achieved. By establishing a broader infrastructure and defining control measures it is
possible to ensure a cost efficient, quality health care delivery by influencing the following
aspects:
Price of services
Utilization of services
Performance of health delivery systems

The Definition of Managed Health Care
This is a system that seeks to ensure quality health care delivery in a cost effective way. The
system manages the accessibility, utilization, cost risk management and the quality of
healthcare. Managed Health care brings the disciplines of analysis, efficiency and
accountability to bear on healthcare systems. This system makes it possible to:
Analyse the process and results of medical treatment
Develop and communicate guidelines for effective and cost efficient care
Build networks of providers to improve and maintain the cost effectiveness of
healthcare delivery
Co-ordinate communication and continuity of care among providers, patients,
healthcare benefits administrators, employers and the government
Enable and facilitate access to most appropriate healthcare services

Managed care can be described as the integration of both the financing and the delivery of
healthcare within a system that seeks to manage the accessibility, cost and quality of that
care .
It is a system that controls the financing and delivery of health services to members who are
enrolled in a specific type of healthcare plan.
8.2 Managed Care as a solution to the issues in American Healthcare

Managed care is revolutionizing healthcare delivery in the United States. The introduction
of Health Management Organisations was touted as the answer to two major problems
plaguing the healthcare system in US, which are:
Certificate in Health Insurance TCS Business Domain Academy


Page 6 of 18

The escalating healthcare expenditure, and
The indiscriminate use of health care services by the insured

In the last decade, US had one of the fastest rises in healthcare expenditure in the world.
One of the main causes for this phenomenon was the failure of the health insurance system.
The health insurance system had an inherent defect in that the insurance itself increased
the use of services. Since payments to health care providers typically were made by third
party payers (insurers), most healthcare consumers did not pay for services directly and had
little incentive to look for or use lower cost healthcare providers. Health care providers had
no link to the insurers and thus cost effectiveness in the management of patients was not
a concern for most of them. With the introduction of managed care, the gap that earlier
existed between the provider and the policy holders was bridged.
8.3 Objectives of Managed Care

Managed care is a system that seeks to control the accessibility, cost and quality of
healthcare and hence it is highly essential to keep a balance among these elements as they
greatly influence one another.

Accessibility: To certain extent, managed care place restrictions on the members
choice of healthcare provider. Depending on the plan type, member can either
exercise a choice in selecting a healthcare provider or may have little or no choice.
The plans have their specific rules regarding the benefits offered and the patient
referral system that must be adhered to by both members and participating
providers. The gatekeeper model is mostly used as it helps to reduce the number of
group members unnecessary visits to medical specialists, thereby influencing the
total cost of medical care.
Cost: Managed care uses a number of methods in an attempt to control rising
healthcare costs. Such methods include fixed fees, risk sharing agreements,
utilization management etc. As much as these methods place emphasis on cost
containment, quality is not being compromised as cost is associated with quality.
Quality of Care: The healthcare industry has established various institutions that
are responsible for reviewing and accrediting managed care organizations at a
national level. In order to achieve accreditation, such organizations must meet
Certificate in Health Insurance TCS Business Domain Academy


Page 7 of 18

certain criteria and standards related to achieving and maintaining quality care,
where the emphasis is on delivering of cost effective quality healthcare.
8.4 Principles of Managed Care

Managed care principles are designed to ensure the objective of attaining utilization,
reducing costs and improving quality of healthcare services.

Patient access and referral systems: To a certain extent, managed care plans place
restrictions on the members choice of health care providers. Depending on the plan
type, the patient may or may not have a choice in selecting a provider. The plans have
their own specific rules regarding the benefits offered and the patient referral system
that must be adhered to by both the members and participating providers. The
gatekeeper model is the most commonly used method. Members are required to select
a general practitioner from the participating providers. This general practitioner is
responsible for giving necessary care to the patient as well as providing referrals to
other healthcare providers when specialist services are required. Referrals for specialist
care and hospitalisation need authorisation. Members are allowed to change their
primary care provider subject to a formal procedure as specified by the plan.

Scope of Services: A clear definition of what is regarded as general practitioner care,
specialist care, hospital care, ancillary services and pharmacy is very important. This
requires the healthcare provider to understand the extent of the services that they
render as well as the remuneration they receive for the same. This will prevent
misunderstanding and conflict. The contract between the health service provider and
the health benefit administrator should clarify issues relating to:
Which services must be authorized
Which services must be referred
Limitation of services
Risk sharing agreements

Payment Methods: Risk is an intrinsic factor associated with the provision and
financing of healthcare. The method of payment determines the degree of risk
assumed. The relationship between risk and reimbursement is such that higher the risk
higher will be the compensation and conversely lower the risk lower will be the
Certificate in Health Insurance TCS Business Domain Academy


Page 8 of 18

compensation. The risk profile of each method is different. Commonly used payment
methods are:
Fixed Salary: The health care provider may receive a fixed salary for rendering
service over a stipulated period of time. This payment could be hourly, daily,
monthly or on a sectionals basis.
Fee-for-service: In this method, the service provider receives payment for each unit
of service provided. The cost of each unit is attached to a calculated fee schedule.
Capitation fee: This is a payment structure in which the funder pre-pays the provider
a fixed amount for each members medical care for a pre-determined period,
regardless of the use of services (usually per month). The contract usually clearly
specifies what exactly the fee covers.
Fixed fee: A fixed fee payment method is largely used to compensate hospitals for
services provided. There are various fixed fee payment categories, e.g.:
DRG (Diagnosis related groups)
Per Diems (set payment per day in hospital regardless of the service
rendered)
Per case (a set payment per hospital case, regardless of the duration of stay)
Payment is often modified for different types of services like medical, surgical,
oubliettes, specialized surgery (heart bypass) etc.
Global Fee: A fixed fee payment method used to compensate providers for an event/
stay in hospital, regardless of the length of stay in hospital. The fee paid would
reimburse all medical practitioners and the hospital for a specified event.

Utilization Management: Utilization Management is primarily a cost-containment
activity aimed at monitoring and containing costs of expensive treatments or
procedures. The effectiveness of a utilisation management program lies in the early
identification and expedient intervention of an appropriate, cost effective and safe
treatment plan for patients in the healthcare system.
Utilization review is a mechanism by which utilization is reduced. Techniques used in
carrying out utilization reviews are:
Prospective Review: It is usually linked to an authorisation system and requires
approval of a particular treatment or procedure before releasing the payment for
that service.
The authorization process should clearly define the following:
Certificate in Health Insurance TCS Business Domain Academy


Page 9 of 18

Definition of services provide a list of services that requires authorization,
to all participating providers and members. Provision should be made for
emergencies and other situations where authorization is not possible.
Link of authorization to claims payment Restrictions and penalties for
claims, which have not been authorized, should be clearly stipulated.
Authorization may be linked to claim payment by means of an
authorization number.
Data requirement The process as well as the information needed for
authorization should also be clearly defined to patients and healthcare
providers.
Concurrent Review: The focus is to follow-up the patient in hospital and to manage
the event by minimising the loss and the cost per event. In this technique they:
o Determine whether the ongoing services are reasonable, medically
necessary and covered under the benefit package
o Provide a mechanism to continuously review the delivery process
o Facilitate efficient and quality care
Retrospective Review: Salient aspects of this technique are:
o Review takes place after the service has been rendered
o Review is based on claims review and investigates comparative profiles of
patients and healthcare providers for particular conditions
o The data collected can lead to changes in clinical practice with consequent
improvement to the quality of care.
There are two main components financial review and clinical review and they
typically include the following reviews/surveys:
Cost benefit analysis
Member satisfaction
Disease profiles
Variance reporting
Provider profiling
Management reporting
Program evaluation
Quality assurance: Quality assurance should be done for every activity of utilization
review in order to maintain quality healthcare and to prevent deterioration in the quality
of healthcare services rendered. Quality assurance uses regulatory controls,
Certificate in Health Insurance TCS Business Domain Academy


Page 10 of 18

credentialing and healthcare evaluation programs to ensure and maintain high quality
care.

Risk Sharing: In the traditional fee for service environment, the financier assumes all
the financial risk. Change in reimbursement methodology transferred some or all the
risk to the provider. The ways in which risk can be shared include bonus / incentive
arrangements, penalties, fixed fees and capitation fees. Purpose of this risk sharing is to
transfer some risk, which will encourage cost effective behaviour without compromising
the quality of care.
8.5 Models of Managed Care

Managed care models are used to illustrate the different methods in which managed care
systems can be structured. Based on the structure and functioning they are primarily
categorized into four types, namely:
Health Maintenance Organizations (HMO)
Preferred Provider Organizations (PPO)
Point-Of-Service Plans (POS)
Exclusive Provider Organization (EPO)
8.5.1 Health Maintenance Organizations (HMO)
There is an agreement between health fund administrators and providers of health care for
the purpose of delivering health services to an enrolled population for a pre-determined fee
structure.
This model has got following features:
A defined population group (the group is voluntarily enrolled)
An organized system of health care delivery
An established mechanism for health care funding
A management organization to manage the affairs of health maintenance
Organizations
There are five basic sub-models, within this model namely;
Staff Model: In this type of model, HMO owns the hospitals and employs doctors to
provide care to the members. Although the providers are paid a salary, additional
payments may be made in terms of bonus for after hours work and performance.
Certificate in Health Insurance TCS Business Domain Academy


Page 11 of 18

Doctors have to adhere to the internal policies relating to continuing medical
education, leave and management reporting.
Network Model: In this model, HMO contracts with more than one provider group.
HMO compensates each provider group on an inclusive capitation basis. Each
provider in the group is responsible for providing healthcare services to the
members under the HMO. Usually each provider group is responsible for making
specialist referrals and providing hospitalization and ancillary services.
Group models: A practice group is a separate entity which can be organized as a
partnership, or a professional corporation or an association. The practice group can
either be single or multi specialty practices where facilities, equipment, accounting
systems and supporting staff are normally shared. In this model, HMO contracts
with the group to provide services to an enrolled population. The contract will
stipulate the remuneration, which can either be by way of salary, dividend or profit
sharing.
Independent Practice Association (IPA): Also known as individual practice
association. In this model, HMO contracts with an independent practice association
to provide health care services in exchange for a negotiated fee. This fee may
include all or some of the general practitioners services, specialty referrals and
hospitalization and ancillary services. The IPA in turn contracts with the doctors of
their individual / group practices. These doctors continue charge fee to non-HMO
patients and maintain their own offices, medical records and staff. IPAs generally
provide a broad choice of participating doctors and creates an organized forum of
providers to negotiate as a group with the HMO.
Direct contract model: In this model, HMO contracts directly with individual
practitioners to provide services to the enrolled population. The practitioners may
be paid on a fee-for-service basis or on a capitation basis. Generally, these doctors
are free to see non-HMO patients.
8.5.2 Preferred Provider Organizations (PPO)
A PPO is a plan which contracts with the providers of healthcare. Such providers are
referred to as preferred or participating providers. These providers usually charge
discounted fee-for-service rates under the healthcare plan for providing access to PPOs
enrolees. Members have incentives for using preferred providers but are generally given the
choice of consulting non-participating providers as well.

Certificate in Health Insurance TCS Business Domain Academy


Page 12 of 18

Key features of a PPO are: -
Designated panel of providers: PPO generally contracts with a list of providers
who are referred to as preferred providers. These providers could be doctors and /
or hospitals.
Negotiated payment rates: Medical services are typically provided on a traditional
fee-for-service basis. Providers are normally paid at pre-determined rates, generally
at a discount from their usual and customary charges. In exchange for the discount,
PPOs often limit the size of their participating provider panels and provide
incentives for their covered individuals to use participating providers.
Rapid payment terms: Favourable rates and discounts are usually linked to quick
payments made directly to the healthcare provider.
Utilization management: Participating providers of PPOs agree to abide by
utilization management and other procedures implemented by the PPO and accept
the PPOs reimbursement structure and payment methods.
Consumer choice: Individuals with a PPO cover in contrast to HMO cover are
allowed to avail services of non-PPO providers, although high levels of co-insurance
and deductibles apply to services provided by non-participating providers.

Advantages and Disadvantages of PPO:
Flexibility: One of the primary benefits of a PPO is its flexibility when compared to
most other restrictive managed care programs. In this type of managed care,
members are free to visit any doctor or healthcare provider of their choice
irrespective of authorization or prior consultation from Primary Care Physician
(PCP).
No Referrals: Since no referral from PCP is required for PPO plan members to
consult specialists, they can straight away schedule appointments and avail
treatment. Moreover no money is spent on the extra visit to a PCP. Also with less
hassles, a faster treatment can be obtained.
Out-of-Network Benefits: Irrespective of the participation of providers (in-the-
network or out-of-network) covered members are allowed to access to them and
PPO will bear the most of the treatment costs incurred even in case of a non-
network provider. This gives an added advantage to the PPO members to obtain
treatment from a provider of their choice.
Certificate in Health Insurance TCS Business Domain Academy


Page 13 of 18

Deductibles: The advantage of PPO comes at a cost, which is the deductible. PPO
will charge the member a deductible when he/she opts for treatment from
providers which are out-of-network. It means treatment cost incurred in the non-
network hospitals will be paid by the insurer once the member contributes a lump
sum towards the invoice.
Co-Insurance: Another disadvantage of a PPO is co-insurance. Apart from the
deductible members still have to bear certain amount of the remaining portion of
the bill when treated in a non-network hospital, which would usually be a
percentage split or a cost sharing between the member and the carrier. Those
percentage share ranges will be specified by the provider while writing the contract.
8.5.3 Point-Of-Service Plans (POS)
A POS plan is combination/ blend of a HMO and a PPO; in fact it can be termed as an open-
ended HMO. The reason it being termed as point-of-service is that members can
choose between HMO and PPO (type of service) each time they seek healthcare.

There exists a contracted provider network in this category as well, similar to HMO and
PPO. In POS plans, members can choose to consult a primary care physician (PCP) but is not
a mandate. If members dont wish to consult a PCP for getting referred to a specialist
physician, then they have to pay a higher deductible for the expenses incurred in the
corresponding visit. Its because of this choice, where a PCP used to act as a gatekeeper
while making referrals in a traditional HMO, now members need not use PCP referrals and
still can avail benefits by paying a higher co-payment and/or deductible when compared to
the members using a PCP referral.

A POS member can consult an out-of-network provider at his/her discretion. And in that
case member would have to co-pay, apart from that, the deductibles are substantially
higher. A POS plan is known for the flexibility and freedom it offers to its members when
compared to standard HMO plans.
8.5.4 Exclusive Provider Organisations (EPO)
An Exclusive Provider Organization (EPO) is a network of individual managed care providers
with whom the insurer enters into a contract to provide healthcare services to the members
of the policy. This agreement will be on a mutually beneficial basis both to the providers as
well as insurers. Those agreed managed care providers would provide medical services at a
Certificate in Health Insurance TCS Business Domain Academy


Page 14 of 18

lower cost to the policyholders when compared to the normal circumstances. In exchange,
those providers would be able to get a steady stream of business from the members of the
insurance. The members will get reimbursement for their medical expenses only when they
are derived from one of the managed care providers. The choice of members increases with
this model as there will be more number of managed care providers working for a single
insurance policy.

Another source of revenue to the EPO is the fee it charges to the insurer for using the
network. Moreover EPO negotiates with the managed care providers to arrive at fee
schedules that help in settling issues between the insurer and the managed care providers.
At times even EPOs would contract with one another in order to strengthen their business
and capture a particular geography.

This beneficial agreement between managed care providers and insurer is an advantage to
the members of insurance as well, reason being lower tariff of medical services imply lower
monthly premiums. The downside of EPOs being the restrictive nature of it, where it
doesnt allow consulting a non-network physician or availing services of non-network
hospitals. In case of emergency, where the services of out-of-network hospitals are availed,
those bills have to be settled partially or completely out-of-pocket.

EPOs provides cover only for contracted providers and limits their beneficiaries to these
practitioners whereas PPOs extend cover for non-preferred provider care as well as
preferred provider services.



Certificate in Health Insurance TCS Business Domain Academy


Page 15 of 18


Summary
Managed Health Care defines the entire area of health care delivery where cost
savings can be achieved
Managed Health care brings the disciplines of analysis, efficiency and accountability
to bear on healthcare systems. This
Managed care can be described as the integration of both the financing and the
delivery of healthcare within a system that seeks to manage the accessibility, cost
and quality of that care .
Objectives of managed care are:-
Enhancing the accessibility
Reducing the costs
Improving the quality of care
Principles based on which managed care is defined are:-
Patient access and referral systems
Scope of Services
Payment Methods which can be fixed salary in case of employees, fee-for-
service, capitation fee, fixed fee or global fee
Utilization management through prospective review, concurrent review and
retrospective review
Quality Assurance
Risk Sharing
Different managed care models are:-
Health Maintenance Organizations (HMO)
Preferred Provider Organizations (PPO)
Point-Of-Service Plans (POS)
Exclusive Provider Organization (EPO)
Basic sub-models under HMO are:-
Staff Model
Network Model
Group models
Independent Practice Association (IPA)
Direct contract model
Certificate in Health Insurance TCS Business Domain Academy


Page 16 of 18

Key features of a PPO are:-
Designated panel of providers
Negotiated payment rates
Rapid payment terms
Utilization management
Consumer choice
Advantages and Disadvantages of a PPO are:-
Flexibility
No Referrals
Out-of-Network Benefits
Deductibles
Co-Insurance
POS plan is combination/ blend of a HMO and a PPO; in fact it can be termed as an
open-ended HMO
An Exclusive Provider Organization (EPO) is a network of individual managed care
providers with whom the insurer enters into a contract to provide healthcare
services to the members of the policy

Certificate in Health Insurance TCS Business Domain Academy


Page 17 of 18

References
Managed Care, International Foundation of Employee Benefit Plans
Dranove D. (2000), The Economic Evolution of American Health Care: From Marcus Welby
to Managed Care, Princeton University Press, New Jersey
Managed care in the public sector, US Department of Health and Human Services
Jonathan Gruber and Helen Levy, The Evolution of Medical Spending Risk, Journal of
Economic Perspectives-Volume 23, Number 4-Fall 2009, Pages 2548
James C. Robinson, The End of Managed Care, American Medical Association


Notice
The information given in this course material is merely for reference. Certain third party
terminologies or matter that maybe appearing in the course are used only for contextual
identification and explanation, without an intention to infringe.


Page 18 of 18