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What Is Managed Care? - Definition, History & Systems

Instructor: Kendra Kennedy
This healthcare lesson will define managed care in an understandable format, providing a brief history and giving a description of the three basic delivery systems, or insurance plan options.

Managed Care Definition

When someone mentions healthcare, any number of thoughts might arise, particularly because it is a very general term for a very large and in-depth topic. More often than not, when someone hears the term managed care, the same situation occurs. What image comes to mind when you hear managed care? You may be surprised to find out that managed care (also known as managed care organization, or MCO) actually describes a specific type of health insurance, which is insurance that pays for medical expenses.

Managed care is defined as health insurance that contracts with specific healthcare providers in order to reduce the costs of services to patients, who are known as members. Simply put, the health insurance company and a provider (physician, nurse practitioner, physician's assistant, surgeon, specialist, hospital, etc.) create a legal agreement or contract in which the provider agrees to offer specific services at reduced costs. In turn, the insurance company agrees to limit their members' options to the providers who signed contracts, driving members toward these providers.

History of Managed Care Organizations

Now that you have a definition of managed care, let's look at a bit of history surrounding MCOs in the U.S. Although many people think that managed care emerged in the mid-1970s, managed care has actually been used in the United States for over 100 years. In 1910, the Western Clinic in Tacoma, Washington, offered lumber mill owners and their employees medical services with their specific providers for a monthly payment of 50 cents per member. The clinic ensured a flow of patients, while its patients received care at affordable rates. This is an example of a small, private managed care health insurer. However, the majority of people in the United States are more familiar with larger managed care health insurers, like Anthem and Cigna, or government programs like Medicare and Medicaid.

Managed Care Delivery Systems

There are three basic health delivery system options in managed care, better known as insurance plan options. They are health maintenance organizations (HMO), preferred provider organizations (PPO), and point of service (POS) plans. It is important to mention that insurance organizations do not have to offer all three options.

HMOs require their members to select a contracted primary care doctor who will coordinate their care with other contracted specialists and facilities, specific to each member's healthcare needs. The HMO will pay for member services that are provided by contracted providers only. They refer to their contracted providers as in-network. If the member decides to see a doctor that is not contracted, referred to as out-of-network, then the HMO will likely not pay for the services, and the member will have to pay for these services out of his or her own pocket.

PPOs allow members to use providers that are both contracted and not-contracted. In general, the PPO will pay in full for the member's services provided by a contracted (in-network) provider, while they may only pay for partial services from the non-contracted (out-of-network) provider.

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