Managed Care 101

If you are going into a primary care field, there are four reasons you need to learn more about managed care:

• Managed care will provide you with some, if not all, of your patients.
• Managed care is radically changing how your medical education is financed.
• Managed care is affecting the physician job market throughout the country.
• Managed care will demand skills you will not learn in medical school.

The certainty of these statements comes from a simple fact: Right now, 115 million people, or 44 percent of all Americans, are enrolled in managed care plans.1 There is every reason to expect that this number will continue to rise for the foreseeable future. These plans already account for 70 percent of employer-provided health insurance2, and the federal and state governments (through Medicare and Medicaid) are preparing to move millions of additional patients into managed care organizations.3,4 Because these changes reduced the cost of employer-sponsored health coverage by two to four percent last year2, they undoubtedly will continue to be attractive to the major purchasers of health care in both government and business.

Medical education has not kept pace with changes in the medical environment. This is reflected in the Association of American Medical College's 1995 Match Day poll, in which more than 50 percent of new graduates felt their medical schools had not provided them with an adequate background in the areas of medical economics or practice management.5 The majority of medical schools do not require their students to have any clinical experience in managed care settings6, nor do they teach many of the skills necessary for practice in these systems. Representatives from the managed care industry and the Institute of Medicine stressed this in a report released last year7, with a special emphasis on the health-promotion and team-coordinating skills needed by primary care graduates. Given the recent increase in the number of students entering primary care fields8,9, the time to tailor medical education to address primary care in the managed care environment is now.

American medical schools face significant difficulties in responding to these challenges.10,11,12 Academic medical centers are encountering fierce competition from other health care providers, which is driving faculty practice revenues down.13 In addition, because all providers are growing eager to treat government-insured patients, academic medical centers can no longer rely on this population as a continuous source of clinical revenues and teaching cases.14 Their department-based governing structures, designed to foster professional autonomy, impede the system-wide changes necessary to adapt to the new managed care environment.15 Despite these problems, cooperation between managed care organizations and academic centers remains blocked by mistrust, misunderstanding and conflicting priorities.16,10 Finally, with the attention of academia's leaders focused on these pressing fiscal issues, the threat of physician oversupply is left unaddressed, even though it may be the most serious problem facing physicians-in-training today.

STUDENT ORGANIZERS GUIDE
This organizers' guide is designed to assist students willing to learn about these issues on their own by providing them with a primer in managed care history, systems and finance. Without this information, current physicians-in-training will not be able to act effectively as advocates for their managed care patients or as leaders of the medical system in which they will practice. With this basic information in hand, medical students will be able to start taking control of both their own education in managed care and their future as physicians in the modern health-care environment.

Refer to these definitions as needed throughout this section. A more detailed glossary of managed care and insurance terms can be found at the end of this Box.

Patient, member, enrollee--equivalent terms signifying someone who is either receiving medical services or who is in a contractual relationship with an organization that provides such services

Physician, doctor--in this Box, will refer to MDs and DOs only; sometimes used to refer to anyone who provides diagnostic and treatment services as a physician

Primary care physician--a physician who practices any of the generalist specialties of family practice, pediatrics and general internal medicine

Provider--anyone or any organization that provides health care, including hospitals, physicians, nurses, nurse practitioners, physician assistants, physical therapists and so forth

Purchaser--anyone who buys health care services in any form

Third-party payer--anyone or any organization that purchases health coverage for someone else; usually refers to government or private employers

STUDENT ORGANIZERS GUIDE
GPIT is here to help you light a candle, not curse the darkness. The following are suggestions for medical students and student leaders for projects and activities designed to help you shape your educational experience in managed care.

Suggestions for Planning an Activity

• Sponsor a brown-bag lunch discussion for students. Invite the dean of medical education, or members of the medical school curriculum committee, to discuss how managed care is addressed in your medical school curriculum. Informally poll your fellow students beforehand to find out what they would like to know and plan it from there.
• Organize a speaker event: "Managed Care and Medical Education." Invite the medical director from a local HMO to come and talk with medical students. To find a speaker, call an MCO in your area (such as Kaiser Permanente, Health Net or Group Health) and ask if they have a speakers' bureau or an office of medical education. Hand out this Project-in-a-Box to make sure students understand the basic definitions and concepts involved in managed care ahead of time so they can take full advantage of the medical director's expertise in this area and ask informed questions. Ask the office of medical education or the office of alumni affairs to sponsor the event and host a pizza dinner afterwards. Invite an interdisciplinary panel of speakers, including physicians (especially recent graduates), nurse practitioners, physician assistants, case managers and so forth, who have experience working in HMOs and can give different perspectives on the positive and negative aspects. Try to find speakers from a variety of managed care settings and experiences to portray an accurate picture. Invite students from other disciplines as well, such as public health, physical therapy and nursing.
• Join the curriculum committee at your school and work to get managed care issues incorporated into the medical school curriculum. Most medical school curricula now include problem-based learning. Request that managed care issues be included within the cases discussed. For example, include information about the patient's insurance, costs of drugs and procedures, "covered services," use of a formulary for pharmacy needs, and so forth, as they are of direct concern to the patient's care and should be considered along with the patient's disease process. Many physicians who serve as preceptors during your clinical rotations see patients enrolled in managed care plans. Ask your preceptors how it has affected their practice and how they have learned to adjust to it. Ask them what skills they think are necessary for medical students to learn in order to practice within a managed care environment. Pass this information on to the curriculum committee.
• Find out for yourself what managed care medicine is like in your region. Big differences exist in the types and extent of managed care from region to region. Talk to physicians inside and outside of your school, and find out what your local health care market is like. Does your school compete with for-profit HMOs? What arrangements do primary care providers have with these organizations (salaried, capitated, IPA)? How have things changed in the last five years? Check out GPIT's The American Health Care System: ATrainer's Manual.
• Do research in an HMO setting. There are many opportunities to do population-based clinical research in the managed care populations. Contact the medical or education director of a local MCO to find out if they have ideas for studies they want to do in which medical students could participate.
• Join AMSA and get involved at the local, regional or national level. AMSA is committed to improving the lives and educational experiences of medical students, and there are many opportunities to get involved. AMSA's Standing Committee on Medical Education and GPIT have sponsored activities focusing on managed care in the past. The AMSA Foundation has some internships for medical students to gain practical experience with HMOs. In addition, there are opportunities throughout the year for medical students to come to the AMSA national office and participate in a Health in Public Policy Internship. Call (800) 767-2266 for AMSA and GPIT membership applications, or contact your local AMSA chapter president or AMSA's legislative affairs director for more information.

Questions for your speakers to consider ahead of time

1. How has managed care affected the way physicians practice medicine? How has managed care affected other health care providers, such as nurses and physical therapists?
2. What skills are needed to practice effectively in a managed care environment? Which of those are missing in medical education?
3. What kinds of programs can medical students develop to learn the skills they will need to practice effectively in managed care?
4. How do local MCOs and your medical school interact? Is there any effort to cooperate in medical education, or research? Do they compete financially?
5. Do local HMOs use primary care teams, and if so, what should be done to train medical students to work in a team structure?

Forces Behind Managed Care
This section will briefly examine two crucial factors underlying the conversion of the American health care system to managed care: the economic pressures that forced the government and industry to make containment of health care costs an issue and a key piece of legislation designed to accomplish this goal.

Exploding Costs
The escalating cost of medical services has been the main justification for the drive toward managed care. From 1970 to 1990, national health care expenditures rose between 10 to 13 percent per year, while growth in the total value of the nation's output of goods and services (the gross national product) averaged only 8.5 percent per year.17 This high rate of growth spurred an increase in all health-related expenses from $27 billion in 1960 to $949 billion in 1995; as a result, the health care industry now accounts for one-seventh of the U.S. economy.18 When compared abroad, U.S. health care expenses since 1960 have been the highest per person of all industrialized countries, with the gap widening steadily every year. For example, in 1989, the United States was spending 40 percent more per person than Canada, 91 percent more than Germany, and 127 percent more than Japan.17 Many critics use the United States' consistently poor ranking among industrialized countries in measures of overall public health, such as infant mortality, life expectancy and immunizations, to question both the priorities and quality of the entire national system. But even without considering these issues, it remains true that America has had the most expensive, fastest growing health care system in the world for the last 35 years.

Two other important and related changes occurred over this time period. First, federal and state governments became major purchasers of medical services. Prior to the creation of Medicare and Medicaid in 1965, the government purchased 25 percent of all health care services sold in the U.S. After these programs went into effect, the government share increased to 42 percent18, and by 1995, this spending accounted for 16 percent of the budget deficit (an amount equal to defense spending).15 Second, because of the quadrupling of health spending as a share of labor costs from 1960 to 1990 (from 2.1 to 8 percent), employers became very aggressive in managing their health benefits and progressively more willing to accept alternatives to traditional insurance.

Legislative Response
In the early 1970s, the Department of Health, Education and Welfare (now Health and Human Services) became alarmed by projections of the rising cost of Medicare and began to look for a way to control expenses. While several different cost-containment mechanisms have been created by the Health Care Financing Administration (see Glossary for definitions of HCFA as well as related terms DRG and RBRVS), the first piece of legislation enacted for this purpose was the Managed Care Act of 1973.19 This act invalidated all existing state and local measures designed to prevent prepaid medical service, giving legal sanction to a new form of medical delivery system called a health maintenance organization (HMO), a name coined by the bill's originator, Dr. Paul Ellwood. This act set minimum standards for coverage and quality that, if met, would grant an HMO federal "qualification." Once qualified, an HMO became eligible to receive low-cost loans from the government to support its growth and development. A key aspect of the act was to require private businesses that provided traditional insurance to employees to offer at least one closed- and one open-panel HMO (see next section for explanation) as options; however, this requirement lapsed in 1995. Currently, 70 percent of all HMO patients are enrolled in federally-qualified HMOs.20

Proponents of these new systems felt they would be able to control costs through managerial oversight of the medical system. Management involvement in strategic planning, resource acquisition and allocation, and all aspects of financing were deemed essential to coordinating and combining the insurance and delivery components of health care.19 It was anticipated that increased administrative efficiency would lead to meaningful cost reductions. Additional savings also would be found in the area of physician decision-making. By placing an emphasis on outcomes research and utilization review (see Glossary), reductions in the amount of expensive inpatient and specialist care common in American medicine would be achieved without compromising quality.20 More immediate price reductions would be attained by requiring all providers to accept some financial risk for providing care, thereby aligning the financial incentives of payers, physicians and hospitals.

The Rise of Managed Care
This combination of economic pressure and innovative legislation has produced explosive growth in managed care nationwide. In 1980, seven years after the initial legislation was passed, nine million people were enrolled in 250 different HMOs nationwide, only 18 percent of which were for-profit corporations. By 1995, 56 million people were enrolled in more than 500 HMOs, 70 percent of which were for-profit. A second managed care innovation, preferred provider organizations (PPOs), grew from a mere 25 systems in 1980 to more than 800 by 1990, a forty-fold increase. This growth in managed care came at the expense of traditional health insurance; in 1988, 70 percent of all employees were still enrolled in fee-for-service plans, but by 1993, only 33 percent still had this form of coverage.

Today, 115 million U.S citizens, over half of the insured population, are covered through some form of managed care organization. Traditional indemnity plans account for only 15 percent of employee coverage in the West, and managed care enrollment has doubled in the Northeast since 1994. Although government health entitlement plans have lagged behind the private sector in this move, the situation is changing rapidly. Thirteen million of the nation's 22 million Medicaid recipients are now in managed care. Not surprisingly, doctors have had to move along with their patients. Currently, 70 percent of all practicing physicians have at least one managed care contract, and projections by most experts are for vigorous expansion well into the new millennium.1,2,20,21,22

Managed Care Systems: What is Managed Care?
Managed care is a system of medical management in which patients, purchasers, administrators and providers are linked together, with the common goals of improving health care quality and reducing costs. The integration of financing and delivery of care is carried out through:

• Contracts between insurers and providers that provide members with a comprehensive set of health care services
• Utilization review and total quality management techniques, designed to move provider behavior toward higher quality and more cost-effective care
• Financial or contractual incentives for patients to use providers chosen by the plan management
• Placement of some financial risk for care on providers, through financial rewards and penalties linked to resource utilization10, 20,23

Managed Care Organizations (MCOs)
Any organization that uses managed care techniques in providing health services is referred to as an MCO. Some are independent organizations, while others are owned by, or are a division of, other corporations such as insurance companies. While an HMO is a kind of MCO, the two terms are not interchangeable. The following list briefly describes each of the commonly recognized types of MCOs. Bear in mind that the distinctions between these structures have begun to blur. For example, some HMOs are allowing in-plan self-referral to specialists in response to consumer preferences. On the other hand, most indemnity plans now use preauthorization and other managed care techniques to influence provider behavior and reduce their billings.

The following MCO types are listed in descending order of managerial control of medical decision making. Advantages and disadvantages for each type are expressed from the point of view of their management. This overview is a modified version of the classification system by Eric Wagner found in chapter three of The Managed Health Care Handbook, third edition.

Health Maintenance Organizations (HMOs)
An HMO is a corporate entity that provides, offers or arranges for coverage of specified health services for plan members at a fixed, prepaid premium. More than 70 percent of HMOs currently arranging for care in the U.S. are run on a for-profit basis. HMOs typically require members to select a primary care physician who functions as a first contact with the system for most non-emergency health issues. As such, primary care physicians serve as gatekeepers to the use of specialists and diagnostic tests. They may operate on either a closed-panel basis, in which specific physicians are chosen to participate and all others in the community are excluded, or on an open-panel basis, in which any physician who agrees to the contract terms and meets basic credentialing criteria can participate. HMOs can be organized as individual practice associations or by group, network or staff models:

Staff-Model HMO--An HMO that delivers health services through its own physician-employees. Physicians are paid by salary and treat HMO members exclusively. These are a form of the closed-panel HMO; typically, they are also heavily invested in all aspects of a delivery system (for example, owning hospitals, labs, clinics, and so forth). One of the oldest example of this kind is the Group Health Cooperative of Puget Sound in Seattle, founded in 1947.

• Advantages: allows for tight management of services; program integration offers "one-stop-shopping"
• Disadvantages: difficult and expensive to establish; limited choices may deter potential enrollees
  

Group-Model HMO--An HMO that contracts for all physician services through a single group of doctors. The health plan compensates the medical group for contracted services at a negotiated rate, and the group is responsible for compensating its physicians and contracting with hospitals for care. This is another form of the closed-panel HMO. An example is Kaiser Permanente, where the Permanente medical group contracts exclusively with the Kaiser Foundation to provide care for its enrollees.

• Advantages: allows for tight management of services; program integration offers "one-stop-shopping;" typically has lower overhead costs than the staff-model plans
• Disadvantages: difficult and expensive to establish; limited choices may deter potential enrollees

Network-Model HMO--An HMO that contracts with more than one physician group and may contract with single- or multi-specialty groups. These may be exclusive arrangements (where providers can have no other contracts), but are more typically non-exclusive. Physicians accept utilization review and other forms of oversight from the HMO. These may be closed- or open-panel systems.

• Advantages: broader participation by physicians in community may attract more enrollees
• Disadvantages: ability to manage resources is reduced

Individual Practice Association (IPA)--An organization of individual medical practices formed for the purpose of negotiating with an HMO. The IPA could be created by the HMO, the practicing physicians or a third party. Typically, the HMO pays the IPA a single capitated fee, and leaves provider reimbursement to the IPA. IPA plans are open- panel, and physicians continue to practice in their own locations using their own staff.

• Advantages: very broad participation by community physicians; easier and cheaper to establish
• Disadvantages: physicians may negotiate aggressively because they are organized; management of physician behavior is limited

Point of Service (POS)--Also known as an open-ended HMO, POS plans encourage, but do not require, members to use physicians within their network. If the enrollee chooses to use an outside physician, the plan acts like traditional insurance but carries very high copayments and deductibles. Inside the plan, all services are covered by the negotiated, prepaid fee when service is obtained through a gatekeeper primary care physician. The decision over which aspect of the insurance plan is used is made by enrollees at the time they seek care (the point of service). While demand for these plans is high and their recent growth has been rapid, it is unclear how often enrollees actually opt to use services outside of the network.

• Advantages: offers flexibility of traditional insurance while allowing management of majority of care
• Disadvantages: risk of out-of-plan use; otherwise as per type of HMO above

Preferred Provider Organization (PPO)--A PPO is an arrangement between providers, who offer services at a discounted rate, and an insurer, who in return offers to grant those providers preferred status. PPO members have incentives (such as lower deductibles and copays) to use these preferred providers, while those who want to use out-of-plan providers do so at a higher cost. Single physicians and groups could belong to one PPO, or several at the same time, each with different terms and for different populations. Preferred providers usually agree to utilization review by the PPO, but providers' behavior is generally managed to a lesser degree than in an HMO system. A PPO typically does not own an extensive delivery system, opting instead to contract with independent hospitals and labs for those services.

• Advantages: offers flexibility of traditional insurance
• Disadvantages: allows less management of physician behavior as compared to POS; physician reimbursement may still be predominantly fee-for-service

Fee-for-Service (FFS)--In a fee-for-service model, physicians bill each patient separately based on the delivery of services. While the ultimate responsibility for payment rests with the patient, many will have purchased indemnity insurance plans that will pay a portion of these costs. With this kind of insurance, patients or physicians may submit claims to the insurance company, which pays a certain portion of the bill depending on the terms of the contract. There is no relationship between providers and insurers beyond billing.

• Advantage: complete freedom of choice may attract enrollees
• Disadvantage: little to no management of utilization

Capitation and the Medical Loss Ratio
Until recently, fee for service was the dominant method of medical reimbursement in the United States. Under this system, physicians bill patients for each service rendered. Indemnity insurance plans pay physicians and hospitals directly or reimburse their policyholders, who pay these bills for their "medical losses." Prices are determined by individual providers and cluster around a usual and customary fee for each task. Insurers and providers interact little beyond billing, and ultimate responsibility for payment rests with the patient. Any difference between what is billed and what is paid by insurance can be balance billed to the person who received care.

Capitation is the prepayment to a provider for the delivery of medical services to a specific population.24 This fee is typically calculated on a per-patient basis, with adjustments for the demographic and health characteristics of the enrolled group; it is paid on a fixed time schedule instead of per episode of care. Balance billing is prohibited by the contract. This payment method is seen by many who study health financing to be an effective way to align the fiscal goals of providers and managed care organizations. Today, 50 to 60 percent of all primary care physicians who treat managed care patients see some patients under capitation.25

Capitation can benefit providers by reducing insurance paperwork and increasing reliability of bill collection. However, the main effect is to shift financial risk (for the morbidity of the patient base and cost effectiveness of medical services) away from the MCO and toward the provider.

Under indemnity coverage, the insurance agencies try to set a price for coverage that would pay all medical claims, provide a profit and allow them to compete with other plans. If their predictions are inaccurate and medical expenses are higher than anticipated, profits are reduced and the insurer may incur a loss. However, under capitation, the MCO negotiates a rate per covered life with both payers and providers, independent of each other. In the process, it sets what percentage of all money collected will be used to cover medical expenses. This number is referred to as the medical loss ratio. The money retained by the MCO is used for administration, marketing, utilization review and other MCO functions. In the case of for-profit corporations, it also provides the profit margin and dividend payments for investors. For the most part, MCO profit is shielded from the risks of providing medical services by the terms of the provider contract.

The Physician-Patient Relationship and Capitation
Shifting this risk from insurers to providers turns previous economic incentives upside-down. Under the fee-for-service system, physicians addressed the health of individual patients, one at a time, within the limits of their insurance policy or willingness to pay out of pocket. Under capitation, physicians are explicitly obligated to care for the health of a group and to maximize the value of each dollar spent in the process. Physicians also earn more under capitation by reducing the volume, or the cost, of services they provide to their prepaid patients. Capitation differs radically from another managed care strategy called negotiated fee for service. In this model, an MCO lowers costs by contracting with a provider group for medical services at a discount but continuing to pay on a per-event basis. This provides an incentive for providers to increase services in order to make up lost revenue.

By contracting with MCOs, American corporations are making it necessary for the medical profession to reorganize. Groups of providers will now be held accountable for controlling health care costs of specific population segments. Ideally, all parties will have equal access to accurate data on the medical, social, legal and financial considerations needed to allow this health care system to provide high-quality care while reducing costs. However, the distribution of information that currently exists is unequal and incomplete, and mechanisms for taking even the simplest of quality measurements are just starting to be tried on a national scale (see Glossary, National Committee for Quality Assurance). Furthermore, the negotiation process that determines which services will be offered to whom, and at what cost, is profoundly influenced by many forces, such as physician supply and distribution issues, consumer advocacy movements, and a multitude of state and federal regulatory agencies. Finally, many fear that this new system creates strong financial pressure for physicians and MCOs to favor their salaries (or the well-being of their stockholders) over the needs of their enrollees. While capitation does oppose the forces causing the meteoric rise of health expenditures in this country, it remains unclear whether the emerging managed care system can guarantee that "physicians...have incentives to promote and improve health, rather than...[to simply reduce] the use of health care services."26

Beyond the Basics
For all medical students, and especially those considering a career in primary care, the managed care revolution should be an area of serious concern. This Project-in-a-Box has concentrated on the basic knowledge that a medical student needs in order to be able to read and ask questions about the changes in the financing and delivery of care currently sweeping the nation. This final section will introduce a few provocative topics at the intersection of primary care and managed care, with the hope of encouraging students to pursue whatever managed care subjects interest, anger or excite them.

The Team Approach to Health Care--There are roughly 50,000 practicing nurse practitioners and physician assistants in the United States, and over half of these clinicians practice in primary care. MCOs are turning to them more and more as a cost-effective means of providing medical services. How will this affect primary care physician supply and practice? How does this change the patient-doctor relationship? What is the team approach to health-care delivery?

Resources: See the "Physician Assistant Web Page" at http://www.aapa.org. This site has links to the American Association of Physician Assistants and organizations representing nurse practitioners and nurse midwives. Also, see the GPIT Project-in-a-Box, The Primary Care Team; call (703) 620-6600, ext. 209, to request a copy.

Physician Supply and Mix--Specialist supply in this country has doubled since 1965, rising from 59 to 123.5 per 100,000 people. Over that same time period, the supply of generalists rose from 55.8 to 66.5 per 100,000 people, an increase of less than 20 percent. Every major review of physician workforce needs projects a surplus of specialist physicians, especially given current staffing ratios in most managed care organizations. How will this affect your chance to practice the type of medicine you find most satisfying?

Resources: JAMA: "Improving Access to Health Care Through Physician Workforce Reform," 1994, Vol. 270, No. 9, pg. 1074-1078; "Forecasting the Effects of Health Reform on US Physician Workforce Requirements," 1994, Vol. 272, No. 3, pgs. 222-230; "The Initial Employment Status of Physicians Completing Training in 1994," 1996, Vol. 275, No. 9, pgs. 706-712. Medical Economics: "Can Specialists Become Primary-Care Doctors?," April 24, 1995, pgs. 67-75. Also, see the GPIT Project-in-a-Box, Physician Supply and Distribution; call (703) 620-6600, ext. 209, to request a copy.

Professional Unions--A consortium of Podiatric Medical Associations representing 10,000 podiatrists announced in October 1996, that it would be forming a nationwide podiatrists union under the auspices of the Office and Professional Employees International Union (OPEIU), an affiliate of the AFL-CIO. Members state that the purpose is to seek agreements on collective bargaining and bring additional clout to negotiations on provider autonomy. Is unionization sensible? What about professionalism? What about antitrust law?

Resources: "Podiatrists to Form First Nationwide Labor Union for Doctors," The New York Times, Oct. 25, 1996. Online, try http://www.opeiu.org to access the OPEIU, and from there the AFL-CIO and LaborNet.

Medical Education and Managed Care--Medical schools and teaching hospitals face uncertain times. Competition is fierce, and government budgets are tightening. How will this affect your education? How should managed care topics be taught? Is funding for medical education at risk?

Resources: "The Financing of Medical Schools: A report of the AAMC Task Force on Medical School Financing", Association of American Medical Colleges, Division of Institutional Planning and Development, 1996; call (202) 828-0475 for a free copy.

Glossary of Managed Care Terms

Insurance...

Claims Review--The method by which an enrollee's health care services are reviewed prior to reimbursement. The purpose of the claims review process is to validate the medical necessity of the provided services and to establish that the cost of the service is not excessive.

Copayment--A cost-sharing arrangement in which a plan member pays a specified charge for a specified service, such as a $10 fee for an office visit. The member is usually responsible for payment at the time of services.

Deductible--The out-of-pocket expenses that must be borne by an insurance policy holder before the insurer will start paying for medical losses. For example, a policy with a $500 deductible requires the patient to pay the first $500 of a medical bill, while the insurer will pay for any costs above this threshold.

Experience Rating--A system that allows insurance companies to evaluate the risk of insuring an individual or group by looking at the applicant's health history.

Indemnify--To make good on a loss. Indemnity insurance treats medical bills as "losses" by the patient, and reimburses a portion of the bill specified in the insurance contract.

Preauthorization--A method that insurers and managed care companies use to monitor and control the delivery of medical care by evaluating the need for a service before the patient is allowed to receive care; it is usually done by trained, mid-level providers, such as nurses.

Premium--The fee an insurance company charges in exchange for insurance coverage. Alternatively, the fee an MCO charges for provision of medical services.

Self-Insurance--Some large companies (and even groups of small companies) are choosing to pay for their employees' medical bills themselves rather than contract for coverage from an insurer. This is referred to as self-insurance; establishing this kind of program requires that the company set up a fund against which claim payments are drawn. Claims processing is often handled by an independent administrative services organization.

Group Practice....

Group Practice Without Walls (GPWW)--A legal entity composed of private practice physicians who agree to combine their practices into a single group while continuing to work in their own offices. The participating doctors become joint, sole owners of the total assets of the group, and the group negotiates contracts with MCOs as one unit.

Integrated Delivery Systems (IDS)--Any health care system that seeks to coordinate administrative, clinical and insurance functions into a single organization. Kaiser Permanente most closely approximates an IDS because it operates as the insurer as well as the provider of physician, hospital and outpatient services.

Management Service Organization (MSO)--An organization that offers administrative services to independent physicians for a fee. Many MSOs now actually purchase the tangible assets of their physicians' practices, and some even act as intermediaries in contracting with MCOs.

Physician Hospital Organization (PHO)--A legal entity formed or owned by hospitals and physicians in order to contract with MCOs. Physicians maintain ownership of their practices but agree to accept managed care patients under terms negotiated by the PHO.

Managed Care...

Case Management--The process by which all medical issues for a single patient are overseen by a single physician or designated health professional. Physician case managers coordinate referrals to consultants, hospital care and ancillary services like home health and physical therapy. Case management is intended to ensure continuity of services and prevent the misutilization of resources.

Exclusivity Clause--A part of a contract that prohibits physicians from contracting with more than one MCO (HMO, PPO, IPA, etc.)

Federally-Qualified HMOs--HMOs that apply for consideration and meet federal provisions aimed at protecting consumers, such as providing a broad range of basic health services, assuring financial solvency and monitoring the quality of care, are referred to as "federally-qualified." The process is administered by the Health Care Financing Administration (HCFA), a division of the Department of Health and Human Services (DHHS) in the U.S. Public Health Service.

Formulary--A list of selected pharmaceuticals and the dosages thought to be the most useful and cost effective for patient care. Organizations often develop a formulary under the auspices of a pharmacy and therapeutics committee. In HMOs, physicians are often required to prescribe from the formulary.

Gag Rule--A clause included in some MCO contracts forbidding the physician from a) recommending to patients procedures not covered by the MCO plan, or b) discussing financial aspects of the physician/MCO relationship (for example, whether the doctor has monetary incentives to withhold care). Many states have passed laws against one or both of these forms of verbal restriction on the grounds that they violate the sanctity of the physician-patient relationship.

Gatekeeper--A primary care physician responsible for overseeing and coordinating all aspects of a patient's medical care. In order for a patient to receive specialty care referral or hospital admission, the gatekeeper must preauthorize the visit unless there is an emergency. This person has a dual role as an advocate for patients and a guardian of institutional welfare.

Health Plan Employer Data and Information Set (HEDIS)--A program of evaluation designed to assist employers and other health purchasers to compare health plans by examining a core set of performance measures. This system is one of the first attempts to objectively measure the quality of MCOs and has been widely criticized as being insufficiently focused on clinical outcomes.

Hold Harmless Clause--A frequently found clause in managed care contracts whereby the HMO and the physician agree not to hold each other liable for malpractice or corporate malfeasance if either of the parties is found to be liable in a court of law.

Market Share--The part of the market potential that a MCO has captured; usually market share is expressed as a percentage of the market potential.

Medically Necessary--Those services deemed essential to the preservation and maintenance of the health status of a patient in accordance with the standards of medical practice. What falls within the scope of medical necessity depends on who is answering the question (providers and utilization review personnel frequently come into conflict in this area).

National Committee for Quality Assurance (NCQA)--A non-profit organization, created by a consortium of American corporations and other purchasers, dedicated to improving health plan performance by objectively measuring health care quality. The NCQA is one of several such organizations now trying to become recognized enough to be accepted as the "industry standard."

Peer Review--A process by which a panel of physicians reviews the diagnosis and treatment of patients for quality and appropriateness of care.

Prudent Layperson--In an effort to curb perceived abuses of preauthorization by MCOs, several states have passed laws that require all insurers to cover any services that a "prudent layperson" would consider to require immediate medical attention, regardless of whether preauthorization was obtained or not.

Quality Assurance--Activities and programs intended to assure the quality of care in a defined medical setting. Such programs include peer or utilization review components to identify and remedy deficiencies in quality. The program must have a mechanism for assessing its effectiveness and may measure care against pre-established standards.

Risk--The chance or possibility of loss. For example, physicians may be held at risk if hospitalization rates exceed agreed upon thresholds. The sharing of risk is often employed as a utilization control mechanism within the HMO setting. Risk is also defined in insurance terms as the possibility of loss associated with a given population.

Single Payer System--A regional health care financing mechanism in which all medical services are paid for by a single governmental organization. Instead of paying insurance premiums for health care, individuals pay a tax to fund health care for all citizens, for example, Canada uses this kind of system.

Utilization Review--A review of the appropriateness of medical services before, during and after a hospitalization or outpatient procedure. The objective is to improve the quality and decrease the cost of health care by systematically examining medical decisions and comparing them both to the standards established by the medical literature and the experience of the plan with similar patients.

Withhold--That portion of a physician's payment held back by an MCO to provide an incentive for efficient care. A physician who exceeds utilization norms or other practice expense goals does not receive the withheld amount. This system serves as a financial incentive to reduce utilization, especially in systems where the provider is not directly capitated.

Government and Legislation...

Department of Health and Human Services (DHHS)--Part of the U.S. Public Health Service, this is the federal government's principal agency for protecting the health of all Americans and providing essential human services, especially for those who are least able to help themselves. It includes 250 programs covering many health-related activities. Divisions include the National Institutes of Health (NIH), the Centers for Disease Control and Prevention (CDC), the Indian Health Service (IHS), the Food and Drug Administration (FDA) and many others. Three divisions particularly concerned with managed care are listed below.

Agency for Health Care Policy and Research (AHCPR)--Established in 1989, this is the lead agency charged with supporting research designed to improve the quality of health care, reduce its cost and broaden access to essential services.

Health Resources and Services Administration (HRSA)--The programs administered by the HRSA are designed to improve the health of the nation by assuring that quality health care is available to underserved and vulnerable populations and by promoting primary care education and practice. Through its Bureau of Health Professions (BHPr), the HRSA helps to shape government policy on medical education and health care provider supply issues.

Health Care Financing Administration (HCFA)--This is the federal agency responsible for administering Medicare and overseeing the states' administration of Medicaid.

Medicare--Formed by Title XVIII of the Social Security Act in 1965, Medicare was established as a health insurance program for aged persons and retirees. Coverage is currently extended to persons a) 65 and over, b) those receiving disability payments for two years or longer, and c) persons with end-stage renal disease (ESRD) requiring dialysis or transplantation. It is divided into two parts:

Part A--Hospital Insurance (HI) provides protection against the costs of inpatient hospital charges, hospice care and limited amounts of home health and skilled nursing facility expenses.

Part B--Supplemental Medical Insurance (SMI) is an optional program paid for by monthly premiums designed to cover physician services, lab tests, durable medical equipment, ambulance services, and non-self-administered drugs. Most people receiving part A coverage choose to pay for part B coverage.

Medicaid--Formed by Title XIX of the Social Security Act, Medicaid is a federal-state matching entitlement program designed to provide medical assistance for certain low-income individuals and families. Eligibility overlapped with, but was not exclusively composed of, people also eligible for welfare payments. With the enactment of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (welfare reform law), limitations on lifetime availability of Medicaid will be imposed upon most recipients, while legal immigrants will in most cases lose all coverage. States will now receive large block grants, as opposed to matching funds, and will have greater leeway for designing their delivery systems. Medicaid is expected to radically change in the next two years because of this law.

DRG (Diagnostic Related Groups)--A system developed by Medicare and used by many private insurers to classify illnesses according to diagnosis and treatment. All Medicare inpatient hospital operating costs are determined in advance and paid on a per-case basis according to a fixed amount or weight established for each DRG. For example, a hospital treating a Medicaid-insured patient for pneumonia receives one fixed payment, whether the patient stays for one day or 50 days.

RBRVS (Resource Based Relative Value Scale)--The current method of physician reimbursement under Medicare. Enacted in 1992, the RBRVS was designed to redress Medicare's tendency to overcompensate for such services as surgery and diagnostic tests and to underpay for primary care services. It measures training and skill required to perform a given service, breaking each into units of either cognitive or procedural effort. It also attempts to adjust for overhead costs and geographical differences.

Waiver--Under section 1915(b) of Title XIX (Medicaid) of the Social Security Act, states are granted the option of requesting a waiver of the federal guidelines for delivery of Medicaid benefits when engaged in the design of innovative new health care delivery or reimbursement systems. These may be either demonstration projects or statewide initiatives (if applied for under section 1115). Waivers are being used primarily to move Medicaid recipients into MCOs. The TennCare system in Tennessee is an example of a 1115 waiver project.

Stats to Know

• 44% of the U.S. population is enrolled in some form of managed care plan
• 71% of employees with health insurance benefits participate in either an HMO, PPO or POS plan
• 46% of all states have enrolled or are planning to enroll their Medicaid recipients in MCO plans
• 75% of all physicians have at least one managed care contract
• 16% of U.S. medical schools currently require students to learn in a managed care setting
• 26% of 1995 graduates plan a career in primary care medicine
• 50% of 1995 graduating seniors felt the time dedicated to instruction in medical economics was inadequate

What is a medical loss ratio?
The medical loss ratio (MLR) is the percentage of all funds collected by an insurer or MCO that is paid out for medical claims or services. The higher the number, the more of each premium dollar is turned over to physicians, hospitals and other health care providers.

What is a typical MLR?
Wellpoint of California, a Blue Cross for-profit subsidiary, had an MLR of 73 percent in 1995, while Foundation Health Corporation, another for-profit plan, had an MLR of 77.4 percent in the same time period. In contrast, nonprofit giant Kaiser Permanente outspent all for-profit plans, directing 95 cents of each dollar collected to the delivery of clinical services.21

What is the difference between a PPO and an HMO?
In their original forms, two key differences existed between HMOs and PPOs. First, HMOs absolutely restricted the patient from receiving care from a non-plan provider, while PPOs allowed this at an additional cost to the patient. Second, because of their more open structure, PPOs wielded much less effective control over physician behavior. These differences are fading as both kinds of systems adapt to increasing competition.

References

1. Meyer H. Indemnity insurance: down but not out. Medical Economics. Aug 12, 1996:209-220.
2. Managed Care 1996. Adapting to marketplace turmoil: a special seven-part section. Medical Economics. April 15, 1996 (special edition):64-74.
3. Iglehart J. Health policy report: medicaid and managed care. N Engl J Med. 1995;332:1727-1731.
4. Waid M. Medicare and Medicaid: Brief Summaries of Title XVIII and Title XIX of the Social Security Act. Health Care Financing Administration public document. World Wide Web Site: http://www.hcfa.dhhs.gov.
5. Section for Educational Research of the Association of American Medical Colleges. 1995 Medical School Graduation Questionnaire Survey Results - All Schools Summary. Washington, DC.
6. Veloski J, Barzansky B, et al. Medical Student Education in Managed Care Settings. JAMA. 1996;276:667-671.
7. Donaldson M, Yordy K, Lohr K, Vancelow N, eds. Primary Care - America's Health in a New Era. Washington, DC: National Academy Press; 1996.
8. Pretzer M. Why primary care is drawing more top graduates. Medical Economics. July 29, 1996;198-214.
9. Kassebaum D, Szenas P. Specialty intentions of 1995 US medical school graduates and patterns of generalist career choice and decision making (AAMC Paper). Academic Medicine. 1996;70:1151-1157.
10. Solit R, Nash D. Academic Health Centers and Managed Care. In: Kongstvedt P., ed. The Managed Health Care Handbook, 3rd ed. Gaithersburg, MD: Aspen Publishers, Inc; 1996.
11. Kralewski J, Hart G, Perlmutter C, Chou S. Can academic medical centers compete in a managed care system? Academic Medicine. 1995;70:867-872.
12. Gold M. Effects of the growth of managed care on academic medical centers and graduate medical education. Academic Medicine. 1996;71:828-838.
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16. Council On Graduate Medical Education. Managed Health Care: Implications for the Physician Workforce and Medical Education: 6th report to Congress and the Health and Human Services Secretary. Rockville, MD: Health Resources and Services Administration, 1995. HRSA-P-DM-95-2.
17. National Health Expenditures Aggregate and Per Capita Amounts, Percent Distribution, and Average Annual Percent Growth by Source of Funds: Selected Years 1960-94. Office of the Actuary, Health Care Financing Administration. Public document at World Wide Web Site: http://www.hcfa.dhhs.gov.
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19. Fox D. An overview of managed care. In: Kongstvedt P, ed. The Managed Health Care Handbook, 3rd ed. Gaithersburg, MD: Aspen Publishers, Inc; 1996.
20. MacLeod G. Roots of Managed Care. In: Kongstvedt P. ed. The Managed Health Care Handbook, 2nd ed. Gaithersburg, MD: Aspen Publishers, Inc.; 1994.
21. Data from Physicians for National Health Policy World Wide Web Site: http://www.pnhp.org.
22. Alkire A, Stolz W. The employer's view of managed health care: from a passive to an aggressive role. In: Kongstvedt P, ed. The Managed Health Care Handbook, 2nd ed. Gaithersburg, MD: Aspen Publishers, Inc.; 1994.
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27. Jung P. The Primary Care Team. In: Primary Care Projects-in-a-Box, A project of Generalist Physicians in Training, the American Medical Student Associaton; 1996. Reston, Virginia.

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