Managed Care Explained: Why a Medicaid Innovation is Spreading (2023)

Managed Care Explained: Why a Medicaid Innovation is Spreading (1)

One of the most controversial state health initiatives this year is a plan in Florida to cut Medicaid costs by dramatically expanding the use of managed care. Florida lawmakers voted to move all Medicaid enrollees in the state — more than 3 million people who are poor, elderly or disabled — to commercial managed care programs.

Florida is not alone. At least a dozen other states are considering expanding managed care programs this year. That growth comes atop expansions in 20 states last year and 13 states the year before. Although most health care experts say managed care can improve care while lowering Medicaid costs, consumer advocates say states should proceed with caution.

Why do so many states want to put more Medicaid patients into managed care programs? What has been the states' experience with managed care so far? Here's a primer on how Medicaid managed care works and why so many states are turning to it now.

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What is Medicaid managed care? First, here is what managed care is not: a traditional fee-for-service plan. That model, in which the state pays doctors and hospitals directly for each service they provide, remains prevalent in many state Medicaid programs. Critics of the fee-for-service model say it results in haphazard care for patients and allows providers to drive up costs by ordering unnecessary tests and treatments.

Under managed care, states sign contracts with "managed care organizations," or MCOs, that provide medical services through their own networks of doctors and hospitals. The state pays the MCO a fixed annual fee for each Medicaid patient. And the MCO takes responsibility for overseeing each person's care. The MCO's goal is to keep patients as healthy as possible by encouraging them to get regular check-ups and inoculations while eliminating unnecessary procedures. This model of managed care is sometimes called "comprehensive care," or because of the fixed per-person cost, "capitated care."

In rural areas where coverage of doctors and hospitals can be spotty, states have been using another type of managed care called "primary care case management." In this model, states pay doctors a monthly stipend for coordinating the care of Medicaid patients.

Is managed care new? No. Private employee health plans began moving to this model in the 1970s with the rise of health maintenance organizations, or HMOs. State Medicaid programs began making the switch in 1990. Then in 1997, Congress passed a law making it easier for states to get federal permission to put Medicaid recipients under managed care. The momentum has continued since, as the steadily increasing cost of providing Medicaid has put pressure on states to find ways to save money.

How much are states using managed care now? According to the Henry J. Kaiser Family Foundation , states have enrolled 23 million people — about 40 percent of all Medicaid beneficiaries — with MCOs. Another 13 million, or 22 percent, are enrolled in primary care case management programs.

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That's a much lower adoption rate than you find in the private sector — 98 percent of Americans who receive health insurance coverage through their employer are enrolled in some form of managed care, according to Kaiser. But Medicaid presents a more challenging population, with a disproportionate number of Medicaid enrollees who suffer from chronic illnesses, mental or physical disabilities and a growing number of frail elderly patients in nursing homes.

States started using managed care with Medicaid patients that are easier to treat: children, pregnant women and young parents. Elders and adults with severe disabilities have mostly remained under traditional fee-for service Medicaid plans. That is beginning to change. In fact, many of the expansions states are making now with Medicaid managed care are aimed at these smaller populations who are much costlier to care for.

The states currently using managed care the most include Hawaii (97 percent of Medicaid patients enrolled), Tennessee (94 percent) and Arizona (90 percent). Fifteen mostly rural states, including Alabama, Iowa and Maine, use no managed care at all. Among populous states, Illinois uses the least (8 percent).

Why are states expanding managed care? By contracting out, states can leave the complicated job of delivering and financing health care to experts. Like any other form of privatization, the idea is that private providers will do a better job than states can do on their own.

But the big driver at the moment is the fiscal crisis nearly all states are experiencing. Medicaid costs are growing so fast that the program has eclipsed K-12 education as the number one item states spend money on. There's almost no way states can close massive budget gaps without squeezing big savings out of Medicaid. Managed care's fixed costs allow states to know for sure that their Medicaid bill will be no higher than what they've budgeted.

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Is the federal health care overhaul a factor? Yes. The law prevents states from slashing their Medicaid rolls. So expanding managed care is one of the few options states have to make a big dent in their Medicaid costs. At the same time, states are preparing to cover 16 million more people through Medicaid starting in 2014 when key provisions of the law kick into place. So they are trying to find more cost-effective ways of serving more people.

The Affordable Care Act also offers financial incentives for states to offer primary care case management in rural areas. Under the law, the federal government will pay 90 percent of the costs for so-called "health homes," a type of this approach that is specifically designed to care for people with chronic health conditions.

Why is managed care controversial? For as long as managed care has been around, some have complained that it does more to hold down costs than it does to provide quality health care. Critics say MCOs — at least the for-profit ones (some are nonprofits) — have an incentive to offer skimpy services and deny procedures in order to boost profits. Health care providers also complain about low reimbursement fees and excessive amounts of paperwork.

The people who run Medicaid programs in the states generally support the use of managed care to improve service and control costs, according to Matt Salo, executive director of the National Association of Medicaid Directors. But state lawmakers — sensitive to the complaints of consumers and the medical community — have been mixed in their support of the plans.

Is there a down side for states? Some states have had trouble getting health care providers to participate in managed care, particularly in rural areas. Another challenge for states is setting so-called "capitation rates." Those per-person fees need to be generous enough that MCOs can attract doctors and hospitals to participate, but not so high that states end up losing money on the deal. States also have had problems with MCOs that fail to live up to their contracts or choose not to renew. During a five-county pilot program in Florida — a program that Florida is now building upon with its new law expanding managed care — several MCOs opted to not continue their contracts, requiring Medicaid patients to find new doctors.

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Patient advocates generally oppose the states' recent move to managed care for disabled and elderly people. They say the change could disrupt services to this vulnerable population and the complex care they need does not lend itself to easy cost cutting.

Are all Medicaid managed care plans the same? No. States have taken a variety of approaches to managed care.

One way states vary is by the type of benefits they include under managed care contracts. States often exclude prescription drugs, for example, because states get special rebates that have not been available to MCOs. But under the Affordable Care Act, drug companies must make those same discounts available to health groups that contract with states.

Some states carve out mental health, drug and alcohol rehabilitation, dental and vision coverage under managed care. Other states, however, include in managed care all of the services that they traditionally provide under Medicaid.

Another big difference is whether managed care is mandatory or optional. Many states give Medicaid recipients a choice of one or more managed care plans, plus a traditional fee-for-service option. As states expand managed care, a growing number are making it mandatory.

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Finally, some states offer managed care in only certain parts of the state, although most expand the arrangement to the entire state once it has proven successful.

Do managed care plans really save money for states? The evidence generally suggests yes — although the experience varies widely by state. A study by The Lewin Group, a health care consultancy,shows that states that have tried some form of managed care have saved between 0.5 percent and 20 percent from their anticipated costs. The group's research also shows that managed care savings were biggest when applied to disabled populations. In Arizona, for example, 60 percent of its managed care savings over an 8-year period came from this high-cost group of patients.

Not all studies are so favorable, however. A Georgetown University Health Policy Institute study of Florida's five-county pilot program concluded that it "yielded little in the way of concrete evidence of either efficiencies or cost reductions." Nevertheless, Florida is counting on rolling out the same program statewide to save the state budget more than $1 billion per year.


What is the biggest advantage of a managed care plan? ›

Managed care tends to decrease or eliminate individuals' incentives to overuse services. It generally reduces patient out-of-pocket expenses and other financial barriers to health care. Managed care also has the potential to achieve better coordination of patient services.

What is managed care and how does it impact American health care? ›

Managed care plans are a type of health insurance. They have contracts with health care providers and medical facilities to provide care for members at reduced costs. These providers make up the plan's network. How much of your care the plan will pay for depends on the network's rules.

What is the biggest disadvantage of a managed care plan? ›

Con: Lack of Freedom to Choose Own Providers

For many, the primary drawback of a managed care arrangement is the fact that employees are unable to choose their own care provider. They may select their own care provider from within the network and switch their doctor at least once if they feel the care is insufficient.

What is an example of a managed care setting? ›

A good example of a managed care plan is a Health Maintenance Organization (HMO). HMOs closely manage your care. Your cost is lowest with an HMO. You are limited to seeing providers in a small local network, which also helps keep costs low.

What is the main goal of managed care? ›

The overall goal of managed care plans is to reduce costs for members while improving the quality and outcomes of their care.

What are the four goals of managed care? ›

Purchasers with vision can use managed care arrangements to achieve specific goals: improve access to care, enhance the quality of care, better manage the cost of care, increase the effectiveness of care, and facilitate prevention initiatives.

How do you explain managed care? ›

Managed Care is a health care delivery system organized to manage cost, utilization, and quality.

Why is managed care a good thing? ›

Managed care plans make it easier for people to seek care without worrying about the cost. Another advantage of managed care is that many health insurance plans operate with the use of a wide range of physicians and specialists who are connected with the insurance provider's network.

What are the two main features of managed care? ›

Managed care has two key components: utilization review and healthcare provider networks/ arrangements. Utilization review serves to screen against medical tests and treatments that are unnecessary.

What are three challenges faced by the managed care industry? ›

Key Challenges of Managed Care Contracting
  • #1. Communicating Value.
  • #2. Understanding Your Place In the Market.
  • #3. Increasing Visibility.
  • #4. Building Relationships.
  • #5. Unified Contract Management.
  • Closing Thoughts.

What are the key principles of managed care? ›

Appropriate eligibility and treatment authorization. Effective quality improvement and management. Adequate financing and payment.

What is the most common form of managed care? ›

PPOs are also the most popular form of Managed Care (Health Insurance In-Depth). Point of Service (POS) medical care limits choice, but offers lower costs when compared to HMOs and PPOs. Generally an individual chooses a primary health care physician within a health care network.

What is managed care also known as? ›

What is a managed care organization (MCO)? An MCO is a health care company. It is often called a "health plan." It is a group of doctors, hospitals and other providers who work together to meet your health care needs.

What are 5 managed care models? ›

Managed health care plans are health insurance plans that have contracts with health care providers and medical facilities.
Types of Managed Health Care Plans
  • Health maintenance organization (HMO)
  • Preferred provider organization (PPO)
  • Point of service (POS)
  • Exclusive provider organization (EPO)
2 Apr 2022

Has using a managed care approach been successful? ›

And managed care has succeeded in the marketplace by offering health insurance at lower cost than the 'unmanaged care' it has begun to replace. Having said that, it is important to recognize that not all managed care is the same and not all plans offer customers equal value for money.

What are the three basic models of managed care? ›

There are three primary types of managed care organizations: Health Maintenance Organizations (HMOs), Preferred Provider Organizations (PPOs), and Point of Service (POS) plans.

What are the characteristics of managed care? ›

The primary characteristics of managed care organizations are as follow: Managed care organizations provide preventive care.
Preferred provider organization:
  • It does not share the risk.
  • There are no restrictions on the use of specialty services.
  • Providers charge fees according to the schedule of the discount fee.

How do managed care plans reduce healthcare costs? ›

private health insurance market has shown that managed care plans reduce healthcare costs by reducing healthcare utilization (Glied 2000)[22] and by reducing prices paid to healthcare providers (Cutler et al. 2000[14]).

Why did managed care grow? ›

Why did managed care grow? +hospitals were left with many unused beds after managed care and PPS were implemented. Physicians tried resisting managed care when it first was put into play but then found they could no longer resist and had a choice of either participating or being left out.

How has managed care improved? ›

Compared with indemnity plans, managed care plans have significantly lower rates of utilization of inpatient hospitalization, lower rates of utilization of more expensive and discretionary tests, increased utilization of preventive services, and mixed results on quality as measured through outcomes (Miller and Luft, ...

Does managed care reduce quality of care? ›

Managed care plans are a cost-effective use of health care resources that improve health care access and assure quality of care.

What is the main challenge that managed care organizations continue facing today? ›

Medicaid managed care organizations are continually in a balancing act, facing tighter-than-average budgets, political pressures, and an evolving, uncertain healthcare landscape. But the COVID-19 public health emergency and related economic downturn took these issues to new levels.

What are the two most significant challenges facing healthcare managers today? ›

The respondents pointed to increasing operating expenses, rising staff costs, and slow and inadequate reimbursement rates as among the most significant financial challenges facing healthcare administrators today.

What are the six models of managed care? ›

Terms in this set (6)
  • IDS (Intregrated Delivery System. Affiliated provider sites that offer joint healthcare. ...
  • EPO (Exclusive Provider Organization. ...
  • PPO ( Preferred Provider Organization) ...
  • HMO (Health Maintence Organization) ...
  • POS (Point of Sale) ...
  • TOP (Triple Option Plan)

What is the concept of managed care development? ›

Why did the concept of managed care develop? What is the principle of managed care? Managed care was developed as a response to rising health care cost. The Principle behind managed care is that all health care provided to a patient must have a purpose.

What are the 5 core principles of management? ›

At the most fundamental level, management is a discipline that consists of a set of five general functions: planning, organizing, staffing, leading and controlling. These five functions are part of a body of practices and theories on how to be a successful manager.

What is the purpose of managed care What are three methods used to control costs? ›

Managed care plans are designed to control health care costs. The purpose is to provide quality health care that patients can afford to access. Managed care costs are controlled by increasing efficiency, eliminating the duplication of services, and discouraging the incursion of unnecessary costs.

What is the largest managed care organization in the United States? ›

UnitedHealth (Market Cap $393.39 billion) Medicaid enrollment in UnitedHealth was 7.1 million at the end of June, about 16.2 percent of its overall US enrollment of 44.1 million.

What role is managed care expected to play under the health reform? ›

Managed care organizes health care into delivery systems with potential for prevention-related surveillance, monitoring, intervention, and health services research. The electronic information systems of MCOs are still evolving and should be important components of any new national health information system.

What are advantages of participating in a managed care plan? ›

Managed care plans make it easier for people to seek care without worrying about the cost. Another advantage of managed care is that many health insurance plans operate with the use of a wide range of physicians and specialists who are connected with the insurance provider's network.

What are the advantages of a care plan? ›

Care plans are an essential aspect to providing gold standard quality care. Not only do they help define the support & care workers' roles in providing consistent care, but they enable the care team to customise the level and types of support for each person based on their individual needs.

What are advantages and disadvantages to having a Medicare managed plan? ›

Medicare Advantage offers many benefits to original Medicare, including convenient coverage, multiple plan options, and long-term savings. There are some disadvantages as well, including provider limitations, additional costs, and lack of coverage while traveling.

What is managed care in simple terms? ›

Managed Care is a health care delivery system organized to manage cost, utilization, and quality.

What are 3 important elements of an effective care plan? ›

A care plan consists of three major components: The case details, the care team, and the set of problems, goals, and tasks for that care plan.

What is purpose of care plan and why is it important? ›

A care plan outlines a person's assessed care needs and how you will meet those needs to help them stay at home. You must work with the person to prepare a care plan and make sure they understand and agree with it. After services start, you must review the plan at least once every 12 months.

What are some disadvantages of participating in a managed care plan? ›

What Are the Disadvantages of Managed Care?
  • It limits care access for those who do not have insurance or provider coverage. ...
  • The rules of managed care are extremely rigid. ...
  • People are forced to advocate for themselves. ...
  • Patients often come down to dollars and cents. ...
  • There is a loss of privacy.
14 Jun 2017

Why Managed health care is important? ›

Its main purpose is to better serve plan members by focusing on prevention and care management, which helps produce better patient outcomes and healthier lives. Managed care also helps control costs so you can save money.

Why are Medicare Advantage plans being pushed so hard? ›

Advantage plans are heavily advertised because of how they are funded. These plans' premiums are low or nonexistent because Medicare pays the carrier whenever someone enrolls. It benefits insurance companies to encourage enrollment in Advantage plans because of the money they receive from Medicare.


1. Medicare & Medicaid 101
2. Crash Course on Medicaid, Managed Care, How it all works
(Housing Alliance of Pennsylvania)
3. Managed Care and Third Party Reimbursement
(Joshua Watson)
4. Medicaid Managed Care Organization Learning Hub - Medicaid MCO Overview and Financing Presentation
(NORC at the University of Chicago)
5. ITU Medicaid Managed Care Addendum
6. Identifying and Addressing Social Needs Through Primary Care Innovation in Medicaid Managed Care
(Center for Health Care Strategies)
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