Practice Management
How Does Managed Care Work?
To understand managed care, it is helpful to have an understanding
of traditional indemnity insurance. The insurer indemnifies the member
against financial losses due to the cost of treating a disease or a medical
condition. The insurer reimburses the insured based on the amount of
the medical cost. In the indemnity system, there is no incentive for
the health care provider to withhold or limit the number of hospital
stays, procedures, etc. This results in increased utilization or medical
services, with a higher cost. Therefore, the indemnity plans must increase
their premiums in an attempt to catch up with their financial losses.
A key component of managed care's payments to health providers is the
concept of concurrent payment in exchange for concurrent care. Instead
of paying providers based on the amount of care provided to patients,
the managed care organizations would pay the medical groups for their
assumption of the risks of care. In this type of system, the provider
receives a fixed portion of the health insurance premium in exchange
for an agreement to provide care to the health plan's members. This fee
is normally based on the number of health plan members assigned to the
provider. Since it is based on a "headcount"
of the enrolled membership, the payment has been called capitation.
In this system, there is no financial incentive to provide more care
since the monthly payment is a fixed amount regardless of the
actual services provided. In this manner, the managed care organizations
are able to fix their medical loss expenses. By being able to fix its
medical loss expenses, the managed care plan that capitates its providers
is able to contain costs and remain profitable. This also translates
to competitive premiums and, most recently, even reductions in premiums
for employer groups, which contribute to the future growth of managed
care membership.
For managed care to grow, there must be certain market conditions. If
any of these factors exist, there is a likelihood of some managed care
presence. When multiple conditions exist, the likelihood of significant
managed care penetration is increased.
- Oversupply of physicians relative to population
in a defined area
- Oversupply of hospital beds relative to population in the same area
- An employer coalition, or a few large employers
- A health care provider buying market that has coalesced in some way
- High Medicare population
Contact membership@acc.org;
800-253-4636, ext. 5603; 202-375-6000, ext. 5603
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