CE: Overview of managed care

January 1, 2003

Pharmaceutical Representative

January 2003 CE.

Learning Objectives

* Describe factors that have led to the growth of managed care and identify types of managed care organizations.

* Identify types of cost-containment strategies used by managed care organizations.

* Describe efforts to enroll Medicare and Medicaid recipients in managed care.

* Describe managed care initiatives being undertaken by insurance companies and large corporations.

* Explain the role of the NCQA, HEDIS and the JCAHO in evaluating the quality of managed care.

This initial article in a three-part series provides an overview of managed healthcare. The article discusses legislation influencing health maintenance organizations, types of managed care organizations, cost-containment strategies, and government and private-sector initiatives influencing the growth of managed healthcare. Organizations that evaluate the quality of managed care are also described.

J. Lyle Bootman, Ph.D., dean, College of Pharmacy, professor of pharmacy, medicine and public health, executive director of the Center for Health Outcomes and PharmacoEconomic (HOPE) Research, Arizona Health Sciences Center, The University of Arizona, Tucson, AZ; and Mark Callahan, M.D., director of outcomes research, New York Presbyterian Healthcare Network, assistant professor of medicine, Graduate School of Medical Sciences, Weill Medical College of Cornell University, New York, served as consultants for this article for the Certified Medical Representatives Institute Inc.

The use of managed care as a healthcare delivery system has grown dramatically in the United States over the last thirty years. Before the 1970s, the primary model of healthcare delivery was fee-for-service, whereby subscribers paid premiums in advance, and healthcare providers received payment after they provided their services. Payments rendered after services are delivered are known as retrospective payments.

As healthcare costs skyrocketed during the 1970s and 1980s, premiums also grew rapidly, causing an outcry from both employers and individual subscribers who demanded solutions to these rising insurance costs. As a result, managed care organizations developed as a mechanism for controlling costs. In the mid-1980s, HMOs experienced phenomenal growth in response to the need for cost containment.

Legislation influencing HMOs

Managed care came to the forefront in the 1970s, and was provided predominantly in the form of health maintenance organizations. Their growth was fueled significantly by the passage of the HMO Act of 1973. This act mandated that employers with more than 24 employees provide their workers with the option of a federally qualified HMO as an alternative to conventional fee-for-service programs.

Amendments to the HMO Act approved in 1976 removed many of the restrictions for federal qualification of new HMOs, such as the requirement to allow anyone, including unfavorable medical risks, to enroll during an open season.

In 1985, The Preferred Provider Healthcare Act was passed, which encouraged the establishment of preferred provider organizations. This act allows consumers to choose healthcare providers outside of the PPO. In 1996, the Health Insurance Portability and Accountability Act was passed. This act ensures that people who lose or change their jobs are guaranteed continuation of their health coverage for a period of time, regardless of health status.

Types of managed care organizations

Today's HMOs are more likely to be hybrid models and may include:

* Preferred provider organizations. These organizations are groups of independent physicians who contract with an insurance company or employer to provide care for a pre-established fee schedule. A PPO will cover services from nonparticipating physicians, but with higher co-payments.

* Exclusive provider organizations. This model is similar to a PPO, but restricts members to participating physicians only.

* Point-of-service plans. These fast-growing managed care hybrid plans offer members the choice of an HMO or PPO provider for each medical incident they experience. A plan may limit the services that can be obtained from a nonparticipating provider or charge high deductibles and require co-insurance for the option of using the nonparticipating provider.

* Integrated delivery systems. This term refers to the banding together of healthcare providers (physicians, hospitals, HMOs, nursing homes and others) as a means to coordinate patient care, strengthen or broaden the range of services, expand geographic coverage, and compete more successfully for managed care contracts. Integrated delivery systems emerged as a prominent force during the 1990s.

Cost-containment strategies

Managed care organizations use several major strategies to reduce costs and cut down on the utilization of healthcare resources. These include:

Gatekeepers. A gatekeeper is usually a primary care physician who provides primary care services to a plan member and is generally responsible for the member's healthcare. The gatekeeper assumes responsibility for, reviews and approves all health services the patient receives, including care from specialists.

Capitation. Capitation is a method of payment for health services in which a provider is prepaid a fixed amount for each person covered without regard to the actual number or nature of services delivered.

Global capitation. Global capitation is a system in which a monthly, capitated amount per enrollee is paid to a provider entity -- such as a group practice, health system or physician practice management company -- instead of an individual provider. Entities who accept global capitation contracts agree to provide a full range of services, including primary care, specialty care, tertiary care and professional physician services (such as medical management).

Drug management strategies. Drug management strategies are being employed to address the problem of rising pharmaceutical costs, which represent a growing percentage of MCO expenditures. These strategies include:

* Formularies. A formulary is a list of drugs that have been approved by a pharmacy and therapeutics committee, from which physicians can select an appropriate drug. The general purpose of formularies is to reduce pharmacy budgets by controlling drug acquisition costs.

* Generic substitution. This is the act of dispensing a different brand or unbranded version of the drug product prescribed. This policy often requires that when a generic drug exists, it is dispensed in place of a brand-name medication.

* Therapeutic interchange or substitution. This is a cost-containment policy in which the pharmacist is permitted to substitute a therapeutically equivalent alternative to a prescribed drug in a particular drug class as approved by the pharmacy and therapeutics committee.

* Cost sharing. Patients share in prescription costs, either through co-payments -- specific dollar amounts that members pay for each prescription -- or co-insurance, whereby members pay a certain percentage of the total cost of the prescription.

* Drug utilization review. This process evaluates prescription drug use, physician prescribing patterns and patient drug utilization. If necessary, remedial strategies are implemented to achieve clinically effective care and cost-effective, appropriate drug utilization.

* Prior authorization. This strategy requires physicians to request authorization before prescribing a drug, allowing the MCO to evaluate the appropriateness of a medication before it is prescribed. Prior authorization does not guarantee that the MCO will cover the drug.

* Managed drug limitation. This strategy allows prescribing of certain drugs on a limited basis. It is used for drugs needed only a certain number of times per year or for drugs the MCO may want to limit.

Pharmacy benefit management companies. Pharmacy benefit management companies provide services to manage prescription benefits for MCOs, such as developing pharmacy networks, running prescription card services, providing drug utilization reviews, administering and processing claims, negotiating drug purchases, and formulary maintenance.

Government initiatives

Federal and state programs have been created as a means to channel greater numbers of Medicare and Medicaid beneficiaries into managed care programs. Currently, the standard Medicare program does not pay for a majority of outpatient prescription drugs. Provision of a comprehensive drug benefit is considered a priority in the overhaul of Medicare. The primary problem, however, is the high cost of implementing such a benefit. The General Accounting Office estimates that at the current rate of prescription spending, which is influenced by the availability of more innovative (and expensive) drugs, a drug benefit would increase Medicare program costs by 7% to 10%, or as much as $168 billion over 10 years.

Medicare. The Medicare program was enacted by Congress in 1965 to provide health insurance benefits to U.S. citizens 65 years or older. By the 1980s, both federal and state governments had contracted with MCOs to develop programs that encouraged the use of managed care. One of these, Medicare+Choice, was created by Congress to enable more private insurance companies to offer coverage to Medicare recipients and to give those recipients more choices. Participation by the elderly and disabled in Medicare+Choice increased steadily during the 1990s because the managed care plans, though more restrictive in choice compared with fee-for-service, offered more comprehensive benefits, including coverage of prescription drugs, lower out-of-pocket expenses and an emphasis on preventive care.

The passage of the Balanced Budget Act in 1997 dealt a severe blow to the growth of Medicare+Choice. This act limited annual payment increases to MCOs to 2%, an amount much lower than the 5% to 8% annual growth estimated to provide coverage. Many MCOs reacted the following year by not renewing their Medicare contracts, or by reducing the geographic coverage area they served. These actions resulted in over two million Medicare beneficiaries being dropped from their managed care plans.

Medicaid. Medicaid, enacted by Congress in 1965, offers medical benefits to low-income individuals or families with dependent children, as well as the aged, blind and disabled. Today, nearly all state Medicaid programs use some form of managed care. While enrolling Medicaid recipients in managed care plans and reimbursing providers on a capitated basis does appear to produce significant savings for states, there are also significant obstacles. Lack of appropriate planning before start-up, forcing physicians to accept Medicaid patients, and non-negotiable reimbursement policies have created hostilities among patients and providers.

Private-sector initiatives

Both insurance companies and large corporations have, of necessity, contributed to the growth of managed care. Virtually all insurance companies today have instituted managed care divisions in order to remain competitive. Many continue to aggressively develop or acquire their own MCOs. Meanwhile, corporations see managed care as an important tool in controlling their health insurance expenditures.

A notable insurance company initiative is the triple option program, which offers subscribers an HMO, a PPO and a managed indemnity option (which remits retrospective payments to subscribers or providers).

Large corporations no longer look only to outside insurance companies to provide health insurance for their employees. In response to a changing health insurance market, they are:

* Forming or purchasing their own HMOs.

* Creating on-site medical centers at company locations.

* Creating self-insurance programs, in which the employer serves as the insuring mechanism through contractual agreement with a management services organization.

* Developing alliances with other large companies in order to better negotiate with MCOs in the purchase of healthcare services.

Evaluating the quality of managed care

Managed care organizations are being pushed to monitor and continually improve the quality of their services. The National Committee for Quality Assurance is one of the major organizations that provide accreditation to MCOs and report on performance measurements. Because the NCQA is seen as an impartial evaluator of quality, some states and employers require MCOs to attain accreditation. In fact, almost half of the HMOs in the country are involved in the NCQA accreditation process.

In addition to accrediting MCOs, the NCQA manages the primary performance measurement tool for the managed care industry, known as HEDIS (Health Plan Employer Data and Information Set), which includes measures for:

* Seventy-five standardized performance indicators related to key areas of care and service.

* Medicare and Medicaid, which unite the private and public sector data.

* Preventive care (not just illness).

* Member satisfaction.

* Information systems.

Like NCQA accreditation, the collection and submission of HEDIS data is voluntary. However, MCOs that participate in the NCQA accreditation process are required to submit HEDIS data. In addition, employers and other healthcare purchasers are increasingly requiring that MCOs provide HEDIS information.

The Joint Commission on Accreditation of Healthcare Organizations is a private, non-profit organization that evaluates and accredits hospitals, healthcare networks, managed care organizations and other providers. In 1994, the JCAHO began to evaluate MCOs. Like the NCQA, the JCAHO evaluates MCOs on quality.

Article Summary

* Managed care organizations, such as HMOs, have grown rapidly since the 1970s in response to dramatically increasing healthcare costs.

* The HMO Act of 1973 and the Preferred Provider Healthcare Act of 1985 further stimulated the growth of managed care.

* Major types of MCOs include:

- Preferred provider organizations.

- Exclusive provider organizations.

- Point-of-service plans.

- Integrated delivery systems.

* Cost-containment strategies that are used to reduce costs and cut down on the utilization of healthcare resources include gatekeepers, capitation, drug management strategies and pharmacy benefit management companies.

* Government initiatives such as Medicare+Choice encourage the use of MCOs; nearly all state Medicaid programs use managed care.

* Insurance companies are aggressively developing or acquiring their own MCOs and offering programs with both managed care and managed indemnity options.

* Large corporations are increasingly developing their own managed care initiatives.

* Two organizations that evaluate and accredit MCOs are the National Committee for Quality Assurance and the Joint Commission on Accreditation of Healthcare Organizations.

* The Health Plan Employer Data and Information Set (known as HEDIS) is the primary performance measurement tool for the managed care industry.

© 2003 The Certified Medical Representatives Institute Inc., Roanoke, VA 24018. All rights reserved. No part of this article may be reproduced by any method or in any form without written permission from the CMR Institute. Reprints of this article are available from the CMR Institute. Request Continuing Education article MH-1.