What is a Managed Care Organization? A Guide To Help Understand Different Types of MCOs and How They Reduce Costs

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What are Managed Care Organiziations?

What exactly is managed care? The National Library of Medicine, defines managed care as programs or organizations “intended to reduce unnecessary health care costs through a variety of mechanisms, including: economic incentives for physicians and patients to select less costly forms of care; programs for reviewing the medical necessity of specific services; increased beneficiary cost sharing; controls on inpatient admissions and lengths of stay; the establishment of cost-sharing incentives for outpatient surgery; selective contracting with health care providers; and the intensive management of high-cost health care cases”.

In a shorter version, managed care organizations are about two things: health insurance and delivery of health care at low cost.

Types of Managed Care Organizations

There are several types of managed care organizations, which will be discussed below.

Health Maintenance Organization, or HMO: This is the first form of managed care. The Health Maintenance Organization Act passed in early 1970s had led to the rapid growth of HMOs. HMOs refer to organizations in which physicians, hospitals, and insurance plans are either closely affiliated or in the same organization. Kaiser Permanente is a prime example of HMO. An HMO owns the hospitals, and pay the doctors by salaries (with performance bonuses, of course). Unless in the case of emergency, patients in an HMO plan have to use the plan-affiliated care provider.

One of the advantages of HMO plans is that they have a fixed amount of money to spend on medical care of the enrollee. This enables strict cost control and motivates patients and physicians to choose the more cost-effective treatment or drug. Thus, you pay less for an HMO plan in comparison to other plans. However, this is also one of the disadvantages of being HMO enrollees. HMO plans notoriously promote cost control over quality of care.

Fee-for-Service, or FFS: In fee-for-service plans, patients have the most freedom. They can choose any doctor or health care provider they want. Physicians receive a fee for each and every service, including visit, procedure, test, etc. Freedom of course comes with higher cost and patients in an FFS plan tend to pay significantly more.

Independent Practice Association, or IPA: In an Independent Practice Association, physicians work independently. They can have patients from both FFS plans and HMO plans.

Preferred Provider Organization, or PPO: Physicians provide care at lower rate in exchange for more patients directed towards them. This benefits both ways, patients get better care and better freedom for their bucks (presumably) and physicians get more business.

Point of Service Plans, or POS. POS is similar to HMO in many aspects as there is a capitation arrangement with providers for their enrollees. The difference is that doctors do not have to work in specified hospitals. Doctors receive compensation based on per patient per year. Patients in a POS plan are encouraged to use POS doctors since they have to pay out-of-pocket for doctors not in the plan.

This post is part of the series: Managed Care

Managed care refers to techniques and programs aiming to reduce health care cost and improve the quality of care. This series of articles will provide a 360 degree view of managed care from the history of managed care to the impact of managed care on current and future health systems.

  1. Guide to Different Types of Managed Care Organizations