Health Maintenance Organizations and Preferred Provider Organizations

Related Terms: Employee Benefits; Health Insurance Options

Health Maintenance Organizations (HMOs) and Preferred Provider Organizations (PPOs) administer the most common types of managed care health insurance plans. Managed care plans typically arrange to provide medical services for members in exchange for subscription fees paid to the plan sponsor—usually an HMO or PPO. Members receive services from a network of approved physicians or hospitals that also have a contract with the sponsor. Thus, managed care plan administrators act as middlemen by contracting with both health care providers and enrollees to deliver medical services. Subscribers benefit from reduced health care costs, and the health care providers profit from a guaranteed client base.

Managed care plans emerged during the 1990s as the main alternative to traditional, fee-for-service health insurance arrangements. In a fee-for-service arrangement, employees can go to the hospital or doctor of their choice. The plan reimburses costs at a set rate—for example, the insurance company might pay 80 percent and the company or individual enrollee might pay 20 percent—for all medically necessary services. Although they serve the same basic function as traditional health insurance plans, managed care plans differ because the plan sponsors play a greater role in administering and managing the services that the health care providers furnish. For this reason, advocates of managed care believe that it provides a less expensive alternative to traditional insurance plans. For instance, plan sponsors can work with health care providers to increase outpatient care, reduce administrative costs, eliminate complicated claims forms and procedures, and minimize unnecessary tests.

Managed care sponsors accomplish these tasks by reviewing each patient's needs before treatment, requiring a second opinion before allowing doctors to administer care, providing authorization before hospitalization, and administering prior approval of services performed by specialists. Critics of managed care claim that some techniques the sponsors use—such as giving bonuses to doctors for reducing hospitalization time—lead to under treatment. Some plans also offer controversial bonuses to doctors for avoiding expensive tests and costly services performed by specialists.

On the plus side, managed care plan sponsors also have more of an incentive to emphasize preventive maintenance procedures that can help patients avoid serious future health problems and expenses. For instance, they typically provide physicals and checkups at little or no charge to their members, which helps them detect and prevent many long-term complications. Many plans offer cancer screenings, pre-natal care, stress reduction classes, programs to help members stop smoking, and other services that save the sponsor money in the long run. Some plans also offer financial compensation to members who lose weight or achieve fitness goals.

Another difference between traditional health insurance and managed care plans is that members typically have less freedom to choose their health care providers and have less control over the quality and delivery of care in a managed system. Participants in managed care plans usually must select a "primary care physician" from a list of doctors provided by the plan sponsor. The sponsor pays the health care provider a predetermined price for each covered service. The individual participant may have to meet a deductible and make a small co-payment.

The trend away from traditional fee-for-service health care plans has been steady over the last 25 years. According to statistics from the U.S. Department of Labor, fee-for-service plans accounted for 96 percent of health care plans offered by medium and large public employers in 1984 and 20 years later they account for less than 15 percent of employer provided health insurance. Managed health care policies have effectively displaced traditional fee-for-service health insurance plans. These new plans come in three flavors: health management organizations (HMOs), preferred provider organizations (PPOs), and point of service plans (POSs).

HMOs

HMOs provide a wide range of comprehensive health care services to their members in exchange for a fixed periodic payment. In most cases, participants must select a "primary care physician" from a list of approved providers which usually includes internists, pediatricians, and general practitioners. These doctors act as "gatekeepers" to coordinate all the basic health care needs for their patients. A patient with a knee injury, for example, would be required to see his or her primary care physician, who would then decide whether referral to a specialist for surgery or rehabilitation was warranted. In this way, the primary care physician helps eliminate unnecessary care that would cause an increase in plan costs. Another way in which HMOs seek to reduce costs is by providing care only within a restricted geographical area. Most HMOs provide local service and do not cover visits to doctors or hospitals outside the network except when the patient is traveling or has an emergency.

HMOs can be classified into four organizational models that define the relationship between plan sponsors, physicians, and subscribers. Under the first model, called individual practice associations (IPA), HMO sponsors contract with independent physicians who agree to deliver services to enrollees for a fee. Under this plan, the sponsor pays the provider on a per capita, or fee-for-service, basis each time it treats a plan member. Under the second model, the group plan, HMOs contract with groups of physicians to deliver client services. The sponsor then compensates the medical group on a negotiated per capita rate. The physicians determine how they will compensate each member of their group.

A third model, the network model, is similar to the group model but the HMO contracts with various groups of physicians based on the specialty that a particular group of doctors practices. Enrollees then obtain their service from a network of providers based on their specialized needs. Under the fourth model, the staff arrangement, doctors are actually employed by the managed care plan sponsor. The HMO owns the facility and pays salaries to the doctors on its staff. This type of arrangement allows the greatest control over costs but also entails the highest start-up costs.

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