A broad term used to describe a system of healthcare delivery that tries to manage the cost of the healthcare, the quality of healthcare, and access to healthcare. Now the term encompasses a variety of healthcare delivery organizations, including health maintenance Organizations (HMOs), preferred provider organizations (PPOs), and physician/hospital organizations (PHOs).
Gillian I. Russell, Terminology, in FUNDAMENTALS OF HEALTH LAW 1, 24 (American Health Lawyers Association 5th ed., 2011).
Managed care attempts to reduce healthcare costs primarily through the use of two mechanisms: (1) cost- containment financial arrangements with providers, and (2) reduction in the provision of unnecessary care to patients.
There are two methods of cost containment that managed care entities have established with providers: (1) capitation and the use of incentive programs to reduce referrals; and (2) discounted fee-for-service.
Capitation is the payment to the provider of a flat fee per patient per period of time (such as a month), and typically is used between primary care physicians (PCPs) and managed care entities. Under this arrangement, PCPs are financially at risk because they have agreed to provide all necessary services for all of the covered patients. In a capitation arrangement, the managed care entity pays the physician a set sum of money for the entire group of patients under that company's plan. Obviously, any single physician's time depends on the number of patients who require services that month. Therefore, inherent in capitated arrangements is the risk the physician assumes when too many patients require care.
One criticism of capitation is that it establishes an incentive for physicians to undertreat their patients. Undertreatment may occur in a variety of ways: underdiagnosing and undertreating by spending less time with each patient; diagnosing and treating by phone; using physician assistants who may not be qualified to diagnose or treat at least some of the presenting problems; and forcing patients to wait a greater length of time for treatment. All of these factors may result in a tendency for patients to refuse to make appointments, thus leading to exacerbation of symptoms and illness.
Discounted fee-for-service entails enlisting physicians to enroll on a panel of in-network providers who agree to accept lower fees than they normally would charge. This arrangement is generally the procedure by which managed care organizations (MCOs) contract with specialists, as opposed to the capitated arrangements with primary care physicians. In the discounted fee-for-service arrangement, the advantage for patients is that they pay a very limited co-pay ($ 5 to $ 15) to visit an in-network specialist. Depending on the plan, there may be no reimbursement or limited reimbursement for using the services of an out-of-network specialist, thereby creating an incentive to use a network provider. As a result of joining the panel and accepting a lower fee, the provider is on the in-network provider list from which almost all patients choose or from which the MCO makes recommendations.
Managed care entities cut costs by reducing unnecessary care provided to patients, typically through a precertification utilization review process. Utilization review allows a managed care company to prospectively analyze medical recommendations and then contain costs by judicious denials of unnecessary requests. Plaintiffs' attorneys argue that these determinations essentially substitute the medical judgment of the case reviewers and, ultimately, that of the medical director, for that of the provider. However, managed care companies assert that these "medical necessity" determinations are administrative, not medical, determinations--and the success of that argument frequently allows companies to avoid liability.
Excerpt from David L. Trueman, Managed Care Liability Today: Laws, Cases, Theories, and Current Issues, J. HEALTH L. (Spring 2000).