Managed Care as a Means of Cost Control

With health‐care costs increasing, health insurance providers are looking for ways to reduce costs. Traditionally, patients paid for most medical care on a fee‐for‐service basis, where physicians, laboratories, and hospitals charged set fees for procedures. Patients either paid the fees directly or paid a partial fee with a private insurance company paying the remainder. The patient and his or her employer shared the cost of premium payments to the insurance company. Such systems do not typically cover serious illness, or if they do, insurance companies substantially raise premiums for the individual and the employer.

Until the last decade or so, most traditional insurance plans covered serious illness but not routine care. Blue Cross had separate plans for doctor visits and hospitalizations. In most plans, patients would pay the cost of check‐ups and preventive testing. Insurance covered costs associated with a diagnosed illness and with hospitalization. “Gold‐standard” plans, such as those held by the Auto Workers and Steel Workers, covered virtually everything. This system did not promote wellness, however, as many patients whose plans did not cover routine doctor visits and minor illnesses did not go for checkups and preventive tests. If you didn't have a lump, insurance did not pay for a mammogram; the patient did and the cost was prohibitive. But most people who had insurance were covered to some extent (mostly 80 percent insurance, 20 percent patient, until the patient reached a set limit).

HMOs were set up to approach health from a wellness perspective rather than a disease perspective. HMOs believed you could save money and lives by getting regular checkups and treating illnesses in their earliest stages, where the costs were lower and the prognoses better. Some argue that the current HMO system, which expects insurance to pay for wellness and illness, increases costs by encouraging visits for minor illnesses that a patient would forego if he had to pay the bill. Most hospitals at the time were nonprofit or not‐for‐profit, so the expectations of high profits based on holding down costs were not part of that system, though “profits” were indeed made. The requirements of remaining nonprofit funneled most of these profits into new programs or expanded facilities.

In response to this situation, managed care organizations emerged as nonprofit organizations to reduce health‐care costs and provide broader coverage. Managed care organizations are groups of physicians, specialists, and often hospitals, coordinating with each other to provide care for a set monthly fee. These systems control the patient's access to doctors, specialists, laboratories, and treatment facilities. HMOs hire physicians as salaried employees rather than paying them on a fee‐for‐service basis. In this system, the medical clinics receive the same amount of money regardless of how frequently patients see the doctor. Because no connection exists between services rendered and fees paid, the incentive is to keep costs down. Critics of this system point out that business managers or non‐medical personnel trying to hold down costs frequently overturn medical decisions made by doctors.

Although the number of HMOs has skyrocketed in the last few years, medical experts predict the decline if not the demise of HMOs because of the impact on patient care and widespread public dissatisfaction. HMOs are not traditionally considered managed care, and there are more managed care models than just HMOs, such as Preferred Provider Systems. Although begun as nonprofits, most managed care systems are for‐profit, and many hospitals are now for‐profit, introducing a strong profit‐motive (not just a hold‐down‐costs motive) throughout the system. Members of managed care organizations can only visit approved doctors and stay at approved hospitals and get approved tests. They cannot see other doctors or even specialists within the managed care system without an okay from a primary care physician, who is incentivized not to make such recommendations. The blatant profit motive in many cases accounts for patient distrust of the system and dissatisfaction from everyone involved except for high‐salaried system administrators and CEOs. Other issues include replacing highly trained nursing and physician staff with lesser trained assistants to save costs, overuse of emergency rooms, a growing shortage of hospital beds for critically ill patients, hospice and home health care, and the provision of follow‐up social services to patients.