Managed Care

Module 3 – Home

Managed Care

Modular Learning Outcomes

Upon successful completion of this module, the student will be able to satisfy the following outcomes:

  • Case
    • Explain how a managed care organization (MCO) may commit an antitrust violation.
    • Explain the triggers that will send a message for an antitrust investigation to the Federal Trade Commission or Department of Justice.
    • Explain how to avoid these issues in structuring the MCO.
  • SLP
    • Explain the differences between fee for service delivery versus managed care delivery systems.
    • Discuss the ethical tensions in managed care organizations that occur between MCOs and physicians when treatment decisions are made for patient care.
  • Discussion
    • Given the ethical issues around managed care, discuss whether MCOs are good arrangements for patients.

Module Overview

Basically, managed care and managed care organizations (MCOs) was championed as a powerful force for containing healthcare costs. We will see that this is not necessarily the case. We will also see that managed care brings up a range of structural issues related to price fixing and market power.

In the United States after World War II, healthcare was based on an indemnity model or fee for service. In this case health insurers simply paid the bills for services ordered by physicians. These traditional plans provided few incentives for cost containment medical decisions.

Responding to the lack of cost containment measures in the indemnity model, private insurers began to “manage care” by exerting influence on the decisions made by physicians. Managed care is the process of structuring or restructuring the healthcare system in terms of financing, purchasing, delivering, measuring, and documenting a broad range of healthcare services and products.

Sometimes this process of restructuring took the form of bureaucratic rules, e.g. requiring physicians to seek administrative approval before proceeding with certain procedures. In other cases, financial incentives were used to shape physician behavior. By the mid 1990’s, “managed care” had become the dominant form of private sector health insurance.1

Today managed care organization (MCO) is a general term used to describe any number of health insurance arrangements that are intended to reduce unnecessary healthcare costs through a variety of mechanisms, including: economic incentives for physicians and patients to select less costly forms of care; programs for reviewing the medical necessity of specific services; increased beneficiary cost sharing; controls on inpatient admissions and lengths of stay; and the intensive management of high-cost healthcare cases.

Managed care organizations are structured with an imperative to consider both the impact on costs and also the impact on doctors’ decisions whether to join their networks.

These considerations by MCOs to both contain costs and attract physicians are influenced by the values and practices that physicians bring to healthcare. Physicians want to earn a living but not at the risk of endangering the lives they are meant to serve. These healthcare values held by physicians pose a strategic dilemma for managed care organizations needing to contain costs and attract physicians to assemble provider networks.

Low cost MCOs with contract restrictions on spending are seen as highly restrictive. On the other hand, MCOs with large physician networks write cost containment rules into contracts that are not overly burdensome.

It is interesting to think about how MCOs balance competing interests and ethical issues in cost containment, physician ideals, and quality of care.

There are a wide variety of managed care models that integrate financing and management with the delivery of healthcare services to an enrolled population.

Health Maintenance Organizations: HMOs are organized healthcare systems that are responsible for both the financing and the delivery of a broad range of comprehensive health services to an enrolled population. HMOs act both as insurer and provider of healthcare services. They charge employers a fixed premium for each subscriber. An independent practice association (IPA)-model HMO provides medical care to its subscribers through contracts it establishes with independent physicians. In a staff-model HMO, the physicians would normally be full-time employees of the HMO. Individuals who subscribe to an HMO are often limited to the panel of physicians who have contracted with the HMO to provide services to its subscribers.

Preferred provider organizations (PPOs) are entities through which employer health benefit plans and health insurance carriers contract to purchase healthcare services for covered beneficiaries from a selected group of participating providers. Most states have specific PPO laws that directly regulate such entities.

Exclusive provider organizations (EPOs) limit their beneficiaries to participating providers for any healthcare services. EPOs use a gatekeeper approach to authorize non–primary care services. The primary difference between an HMO and an EPO is that the former is regulated under HMO laws and regulations, whereas the latter is regulated under insurance laws and regulations.

These integrated health delivery organizations raise a variety of issues with the Department of Justice and the Federal Trade Commission. The issues include price fixing and antitrust problems based on market power.

Depending on how the groups are organized- horizontal versus vertical- and who is integrated- competing physician groups or a multi provider network a MCO may violate several antitrust laws.

Whenever an MCO possesses significant market power or deals with a group that has significant market power, antitrust implications should be considered. To determine market power, it is necessary first to identify the market in which the entity exercises power. For antitrust purposes, the relevant market has two components: (1) a product component and (2) a geographic component.

Price fixing is considered a per se violation of the antitrust laws. Per Se Violations conclusively violate antitrust laws and means there is no further investigation of its effects on the competitiveness of the market because its intentions are so obvious. A Per Se Violation would almost always limit competition and decrease productivity. Activities that fall under per se violations are acts such as horizontal price fixing and horizontal market division.

Price fixing occurs when two or more competitors come together to decide on a price that will be charged for services or goods. The per se rule applies to restraints in trade that are so inimical to competition and so unjustified that they are presumed to be unreasonable and, therefore, are illegal.

1Aaron, Henry J. and Reischauer, Robert D., (1995) “The Medicare Reform Debate: What is the Next Step?” Health Affiars. 14:4. p.8-30.


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