The Case for Managed Care: Part 1 of 3

The Case for Managed Care: Part 1 of 3
July 1, 2001


If your approach to analyzing the health care system is through anecdotes, this article is not for you. We will not discuss Aunt Hilda's latest problem with her insurance company. We will not examine Grandpa's hip replacement at his HMO.

Health care analysis using anecdotes would require 280,000,000 individual case reviews. Neither time nor the nation's paper supply allows such an approach.

This series will look at managed care from a macro perspective, the only way to understand managed care . . . or the entire health care system, for that matter. Individual cases come later. Remember, medical students do not start their education with the performance of brain surgery. There is much to be learned before a student can deal with a specific patient.

Thank you for reading on.


What Is Managed Care?

Together, we can learn a lot and, I hope, appreciate the role of managed care in our country. I also expect you will come to believe, as I already do, that managed care has been good for us, and its future role in our nation’s health care system is even brighter.

The best place to start is with a definition of managed care: any centrally financed and controlled system of the delivery of health care services.

Control may be loose or tight, depending on the insurance contract held by an individual. In preferred provider organizations (PPOs), for example, the patient may have available a broad selection of physicians—even specialists he or she can choose as needed or desired.

In a health maintenance organization (HMO), the patient probably will be required to get a primary care physician's approval before seeing a specialist, and even then, the choice of specialist may be very limited. In some cases, no choice of specialist may be available at all under the HMO coverage.

Within the spectrum of managed care organizations are:

  • independent physician associations (IPAs)
  • preferred provider organizations (PPOs)
  • point of service plans (POSs)
  • health maintenance organizations—staff model, where most physicians are employed by the insuring organization
  • health maintenance organizations—group model, where most physicians are not employed by the insuring organization, but are probably members of a physician group. They work on contract with the insuring organization.


Defining Moments

While there are many variations on managed care, they share a common history.

The 1940s saw two "defining moments" in U.S. health care. The first was the creation of employer-based insurance. That occurred because the federal government controlled wages during World War II, but did not control employee benefits. As a result, employers used benefits to attract and reward employees, because wages were controlled.

The second "defining moment" came at the end of World War II, when the health care system in the U.S. was dramatically expanded. Government money was made available to build hospitals, educate more doctors and nurses, expand research efforts, etc. As a result of those funding decisions, the U.S. developed the most expensive health care system in the world.

Employer-provided health insurance—the first “defining moment”—protected the vast majority of Americans from these increasing costs. For the most part, individual Americans were pleased to see health care grow more complex and expensive: We were "off the hook" for the cost, and we liked the idea of having a health care system that could treat, perhaps even cure, everything. We could see almost any physician, anytime. We had freedom of choice and no concern for cost.

Few of us even paid attention to our own self-destructive lifestyles. The health care system would take care of everything, at little cost to us.


Bursting Our Bubble

Eventually, we learned the hard way that all good things must come to an end. The cost of health care in the U.S. became overwhelming, crowding out other items in our personal, corporate, and government budgets. Federal and state treasuries and many employers reeled under the increasing burden of Medicare, Medicaid, and other health-related programs.

In response to these pressures, the delivery of health care services began to change rapidly. Managed care became a household word in the 1970s, touted as the key to controlling the growth of health care spending.

Good examples of cost-control were everywhere. The Kaiser-Permanente organization in California was successfully caring for patients within a single organization; they employed almost all of the physicians and other personnel, and even owned the hospitals. In the Pacific Northwest, Group Health of Puget Sound was similar. Patients were satisfied with the care, and costs were lower than would have been expected for the geographic area. These became examples of how health care services could be delivered at lower cost.

A silver lining, in the form of a new method for providing patient care, had been found in the health care cost cloud. Instead of total patient choice and uncontrolled use of specialists, these "successful HMOs" provided for a single patient contact physician who decided when to utilize specialists. The HMOs created patient care protocols (procedures) that emphasized more use of primary care physicians and less dependence on specialists, expensive procedures, and high-tech equipment. Those measures saved money; research concluded patients were satisfied and care of appropriate quality was being delivered.

The federal government encouraged widespread deployment of the managed care model. Hospitals merged and large health care networks were created. Many of these networks established their own insurance companies, while others participated in joint ventures combining insurance companies, hospitals, physicians, and other parties. Soon, the majority of insured Americans were receiving their care from a managed care organization.

Managed care options were made available—sometimes as a choice, at other times as the only option—to Medicaid and Medicare beneficiaries. Managed care became the norm. It slowed significantly the inexorable increase in the nation’s health care spending. Governments at all levels breathed more easily. The cost monster appeared under control.


On the Downside

The ascendancy of managed care was not without a downside. Stories were told of care delivered impersonally . . . or not at all. Complicated approval processes for specialists were derided, and those who opposed managed care decried the lack of physician choice. State legislatures began debating such health care specifics as the appropriate length of a hospital stay for mothers who had just delivered babies; the federal government started considering a "Patient's Bill of Rights." These were—and are still—exciting times.

The next two issues of Health Care News will consider the problems of managed care and explain why—and how—managed care should be kept alive and well.


Stuart A. Wesbury Jr., Ph.D. is professor emeritus in the School of Health Administration and Policy at Arizona State University’s College of Business. With Joseph L. Bast and Richard C. Rue, Wesbury is the coauthor of Why We Spend Too Much On Health Care (1992-1993). He can be reached by email at at stu.wesbury@asu.edu.