Health Maintenance Organizations (HMOs) and Preferred Provider Organizations (PPOs) administer the most common types of managed care health insurance plans. Managed care plans typically arrange to provide medical services for members in exchange for subscription fees paid to the plan sponsor—usually an HMO or PPO. Members receive services from a network of approved physicians or hospitals that also have a contract with the sponsor. Thus, managed care plan administrators act as middlemen by contracting with both health care providers and enrollees to deliver medical services. Subscribers benefit from reduced health care costs, and the health care providers profit from a guaranteed client base.
Managed care plans emerged during the 1990s as the main alternative to traditional, fee-for-service health insurance arrangements. In a fee-for-service arrangement, employees can go to the hospital or doctor of their choice. The plan reimburses costs at a set rate—for example, the insurance company might pay 80 percent and the company or individual enrollee might pay 20 percent—for all medically necessary services. Although they serve the same basic function as traditional health insurance plans, managed care plans differ because the plan sponsors play a greater role in administering and managing the services that the health care providers furnish. For this reason, advocates of managed care believe that it provides a less expensive alternative to traditional insurance plans. For instance, plan sponsors can work with health care providers to increase outpatient care, reduce administrative costs, eliminate complicated claims forms and procedures, and minimize unnecessary tests.
Managed care sponsors accomplish these tasks by reviewing each patient's needs before treatment, requiring a second opinion before allowing doctors to administer care, providing authorization before hospitalization, and administering prior approval of services performed by specialists. Critics of managed care claim that some techniques the sponsors use—such as giving bonuses to doctors for reducing hospitalization time—lead to undertreatment. Some plans also offer controversial bonuses to doctors for avoiding expensive tests and costly services performed by specialists.
On the plus side, managed care plan sponsors also have more of an incentive to emphasize preventive maintenance procedures that can help patients avoid serious future health problems and expenses. For instance, they typically provide physicals and checkups at little or no charge to their members, which helps them detect and prevent many long-term complications. Many plans offer cancer screenings, pre-natal care, stress reduction classes, programs to help members stop smoking, and other services that save the sponsor money in the long run. Some plans also offer financial compensation to members who lose weight or achieve fitness goals.
Another difference between traditional health insurance and managed care plans is that members typically have less freedom to choose their health care providers and have less control over the quality and delivery of care in a managed system. Participants in managed care plans usually must select a "primary care physician" from a list of doctors provided by the plan sponsor. The sponsor pays the health care provider a predetermined price for each covered service. The individual participant may have to meet a deductible and make a small co-payment.
As of 1998, traditional fee-for-service plans accounted for 15 percent of the health insurance market, according to a study cited in Nation's Business, while managed care plans grew to claim 85 percent of the market. Of the share controlled by managed care plans, HMOs held 30 percent, PPOs held 35 percent, and a third type of managed care plan known as a Point of Service (POS) plan—which was sort of a hybrid between an HMO and a PPO—held 20 percent of the market.
HMOs provide a wide range of comprehensive health care services to their members in exchange for a fixed periodic payment. In most cases, participants must select a "primary care physician" from a list of approved providers which usually includes internists, pediatricians, and general practitioners. These doctors act as "gatekeepers" to coordinate all the basic health care needs for their patients. A patient with a knee injury, for example, would be required to see his or her primary care physician, who would then decide whether referral to a specialist for surgery or rehabilitation was warranted. In this way, the primary care physician helps eliminate unnecessary care that would cause an increase in plan costs. Another way in which HMOs seek to reduce costs is by providing care only within a restricted geographical area. Most HMOs provide local service and do not cover visits to doctors or hospitals outside the network except when the patient is traveling or has an emergency.
HMOs can be classified into four organizational models that define the relationship between plan sponsors, physicians, and subscribers. Under the first model, called individual practice associations (IPA), HMO sponsors contract with independent physicians who agree to deliver services to enrollees for a fee. Under this plan, the sponsor pays the provider on a per capita, or fee-for-service, basis each time it treats a plan member. Under the second model, the group plan, HMOs contract with groups of physicians to deliver client services. The sponsor then compensates the medical group on a negotiated per capita rate. The physicians determine how they will compensate each member of their group.
A third model, the network model, is similar to the group model but the HMO contracts with various groups of physicians based on the specialty that a particular group of doctors practices. Enrollees then obtain their service from a network of providers based on their specialized needs. Under the fourth model, the staff arrangement, doctors are actually employed by the managed care plan sponsor. The HMO owns the facility and pays salaries to the doctors on its staff. This type of arrangement allows the greatest control over costs but also entails the highest start-up costs.
For small businesses in the market for a health care plan, HMOs offer relatively low costs, broad coverage, and little administrative work. Many HMOs had begun establishing plans for smaller companies by the mid-1990s, although some of the larger HMOs still did not provide coverage for individuals. Experts recommend that small business owners check the financial security of an HMO before signing a contract, since many managed care providers went bankrupt in the early 1990s. In addition, employers should be aware of the possibility of facing increased liability by choosing an HMO plan for employees. Because such plans limit employees' freedom to select their own doctors and hospitals, the employer may be held liable when an employee is the victim of malpractice by a network health care provider.
Although employees have a reduced ability to choose their own doctors and limited out-of-area coverage with an HMO, they also benefit from low outof-pocket costs, comprehensive services, preventative care, and no claim forms. In addition, there is no waiting period for coverage of preexisting conditions, and no maximum lifetime limits on benefits. Many HMOs also provide other services, like dental care and eye exams.
A PPO is a variation of the basic HMO that combines features of traditional insurance with those of managed care. With a PPO, the plan sponsor negotiates discounts with participating doctors and hospitals, then pays them on a fee-for-service basis rather than prepaying. Patients are usually permitted to choose from a fairly extensive list of doctors and hospitals. The patient is required to pay a set amount per visit, and the insurer pays the rest. The amount of the co-payment depends on the type of plan—those with higher premiums usually feature lower out-of-pocket costs.
The major difference between PPOs and HMOs is that PPO enrollees retain the option of seeking care outside of the network with a doctor or hospital of their choice. They are usually charged a penalty for doing so, however, as the percentage of costs paid by the PPO is reduced. Doctors and hospitals are drawn to PPOs because they provide prompt payment for services as well as access to a large client base. There are still restrictions on patients that are intended to control the frequency and cost of health care services, but not as many as with a typical HMO. PPOs are a popular choice for sole proprietors or owners of very small companies, since they require employees to pay a larger percentage of their own health care costs. Most insurance agents and brokers can provide information on the various PPO plans available to small businesses.
THE DEBATE OVER MANAGED CARE
Health care reform was a major topic of debate during the 2000 elections. Political candidates were reacting to growing public outrage over some of the restrictions imposed by managed care health insurance plans, especially HMOs. As HMOs increased in popularity during the 1990s, many people came to believe that, as for-profit companies, they placed a greater emphasis on making money than on providing needed care. The media was full of stories about HMOs denying medically necessary services to patients, ostensibly in order to control costs.
In response, the U.S. Congress began considering several major pieces of legislation that would regulate managed care providers and affect the way health insurance companies operate. The two best-known bills were the Norwood bill, sponsored by Republican Representative Charles Norwood of Georgia, and the Patients' Bill of Rights, sponsored by Democratic Representative John Dingell of Michigan. Both of these bills promised to impose numerous new federal mandates on health insurance companies. Some of the most commonly mentioned mandates include: a ban on gag clauses, which prevent physicians from telling patients about all possible treatment options; a ban on pre-authorization requirements for emergency room care; and the creation of independent grievance panels to settle disputes between patients and HMOs.
Many businesses objected to the proposed new mandates, arguing that they would vastly increase employer costs for health insurance premiums. Some experts claimed that the need to comply with the new mandates would increase premiums so much that small businesses could be priced out of the market for health insurance. In fact, the burden of rate increases falls most heavily on small and mid-sized businesses, because the largest corporations are able to self-in-sure. The most controversial provisions of the proposed legislation, however, were those that would potentially expose employers to medical malpractice lawsuits for decisions relating to employees' health insurance coverage. If this provision were to become law, experts predicted that many businesses would be forced to stop offering health insurance benefits to employees. Health care reform remained at the top of the political agenda for 2001.