Last Updated 01 Apr 2020

Managed Health Care

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Within the past thirty to forty years, the scope and cost of health care coverage and services has drastically changed, altering the manner in which health care was previously managed. There are several factors that have affected the cost of health care coverage over the course of the past two to three decades. One of these factors is the introduction and rapidly increasing enrollment in managed health care insurance plans. Managed care health insurance plans can, in most cases, help to alleviate the rising costs of effective medical coverage.

Another important factor that has affected health care costs is the invention and implementation of new medical technologies. As prominent researchers and economic analysts have discovered, there is a distinct and direct correlation between advancing medical technologies and rising health care costs. Medical innovation has been proven time and again to be an important determinant of health care cost growth. It would appear that managed care health insurance plans, which attempt to lower health care costs, and highly expensive new medical innovations and procedures are at cross purposes, pulling against one another in very different directions.

Market-level comparisons have found the cost growth of health care in markets with greater managed care penetration to be generally slower than that of non-managed care health insurance markets. However, managed care is unlikely to prevent the share of gross domestic product spent on health care from rising unless the cost-increasing nature of new medical technologies changes. Managed care health insurance plans differ greatly from indemnity fee-for-service, or FFS, insurance plans.

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Since the early 1970's, rapidly growing enrollment in managed care health insurance plans has transformed the health insurance market in the United States. Virtually nonexistent in most markets three decades ago, managed care health plans covered 63 percent of the nation's employees by 1994. Managed care incorporates a range of features that allow the insurer greater influence in the process of care delivery.

Managed care plans aggressively contract for lower prices from physicians and hospitals and attempt to constrain the use of health care services by monitoring providers and changing provider incentives. Health insurance providers that operate under the fee-for-service concept grant the consumer much more freedom of choice concerning doctors and treatment programs, thus freeing the consumer of any feelings of discontent with "interfering" insurance companies. Consumers of indemnity plans, however, pay a price for that freedom by way of drastically higher rates and little knowledgeable input on doctors, specialists and nearby hospitals that will fit their particular needs.

Many of today's health insurance consumers choose to place their trust in a managed care insurance company, relying on the expertise of the provider to support and facilitate their various medical treatments and needs. Health maintenance organizations, commonly known as HMOs, have emerged as the clear leader of managed care providers. Other types of managed care plans include preferred provider organizations, point of service plans and managed indemnity plans. Most studies focus on HMOs and so do not describe variation in the type of HMO or in the extent of the level of management in non-HMO plans. HMOs have effectively reduced health care expenditures (Scheid, 2003)

A natural assumption would be that the quality of care would be lowered as insurance rates go down and remain reasonable and affordable. However, these cost savings have been achieved, according to most evidence, without significant reductions in the quality of care (Bransford, 2006). This suggests that managed care health insurance plans -HMOs in particular- tend to reduce inefficiencies in the health care system.

In fact, a study that examined changes in hospital expenses in California found as much as a forty-four percent slower rate of hospital care cost growth in markets with high HMO penetration relative to markets with low HMO penetration (Cooper, & Gottlieb, 2000) There are two main types of services that managed care health insurance companies use to categorize and label their treatments and procedures. These categories are known as complementary services and substitutive services. These two terms apply to new innovations in medical technology and the amount of money spent to provide the technology to the consumer.

Complementary services are those whose use increases with the use of the new technology. Complementary services are attractive to the consumer, who, understandably, desires the latest, most effective medical technology to treat themselves and their loved ones. For example, suppose an improvement were to be made in the field of diagnostic imaging. This improvement could provide clearer, higher quality images, thus leading to more favorable surgery outcomes. The likelihood of a better surgical outcome may result in more individuals electing to receive surgical treatment. The development of this new technology in diagnostic imaging would, no doubt, have been highly expensive. Also, the costs associated with an illness in which there is an increased need for surgery are usually quite high.

If an innovation leads to greater use of complementary services, expenditures raise more than would be predicted by simply examining the direct expenditures on the innovation. In this case, imaging and surgery are complementary technologies. This example suggests that the use of complementary services may increase the costs associated with use of new innovations by as much as fifty percent. Substitutive services, on the other hand, differ in that they are not provided because of the use of new technologies.

The savings associated with the avoidance of these services offset the costs of the technological innovations and complementary services. If the innovation results in improved health outcomes, substitution away from services that would have been consumed later may also occur. It is also hoped that this type of substitution would accompany most preventive services and many other innovations that yield a reduction in morbidity in the long-run. Evidence suggests that medical innovation has led to higher expenditures on health care services. It appears that if the rising cost of health care that results from technological advances remain unchecked by managed care, the effect of technological progress will tend to offset any cost savings achieved by managed care through lower prices or lower use of established services.

Factors such as population increases, extended life expectancies and overall inflation have contributed to rising health care costs. However, studies have proven that important advances in specific areas of medical technology have had the most intense effect on health care costs. This finding still applies when it is considered in terms of managed care health insurance plans to a certain undeniable extent (Scheid, 2003). Studies have been conducted during many periods over the course of the past several decades, focusing on substantial increases in health care costs in direct correlation to particular medical procedures and fields. Among these procedures and fields are child birth, radiation therapy, coronary bypass surgery, and nuclear medicine and cancer treatments. For example, the innovation of cesarean sections used during problematic child deliveries has increased health care costs.

The various medical personnel must all be compensated for their time and labor: the anesthesiologists, the surgeon, the nurses, etc. Also raising health care costs are fetal monitoring and ultrasound techniques. In the case of breast and other cancers, radiation therapy, as well as combination therapies that include chemotherapy has contributed to rising health care costs. One field of medical practice which has become notorious for being costs-increasing is the study and treatment of heart attacks.

In the treatment of heart attacks, the prime cost-increasing technologies were the introduction of intra-coronary streptokinase infusion and coronary bypass surgery. A study performed by Glenn P. Mays, Gary Claxton, and Justin White; (2004), using Medicare claims from 1994 to 2001, report a four percent annual increase in the average reimbursement for treating elderly heart attack patients. They attribute the majority of this increase to the diffusion of new technologies for performing invasive revascularization procedures. Over the period of the study, cardiac catheterization rates rose from eleven percent to forty-one percent of heart attack patients. Bypass rates rose from five percent to thirteen percent, and angioplasty rates rose from one percent to twelve percent.

The population studied by Glenn P. Mays, Gary Claxton, and Justin White; (2004) was overwhelmingly enrolled in traditional FFS Medicare; therefore, any finding must represent a spillover. Furthermore, they do not address the likelihood of receiving a related service, coronary bypass surgery, so we have an incomplete picture of how practice patterns change over the period of time studied. Different approaches are used to determine the impact of new technologies and innovations on health care costs. One approach, called the affirmative approach, focuses on individual technologies or diseases. This approach suffers from an inability to access the aggregate impact of technology on cost growth.

The body of evidence suggests that the impact of technology varies by disease. One study notes that in certain areas, technology clearly lowers costs, particularly when that technology facilitates complete cure or prevention of a disease (Scheid, 2003). One example of this type of innovation is the Salk-Sabin polio vaccine, which is inexpensive to develop and manufacture and almost completely eliminates the high costs of polio treatment. Another approach that is used to examine the effect of technology on health care costs is known as the residual approach. This approach views technological advances as being the sole reason for rising health care costs simply because the innovations are so expensive that there must be a method of which to pay for the invention and further development of the technology.

The differences between health care givers and the companies that provide the health care insurance have blurred substantially. A decade ago managed health care organizations was referred to as an alternative delivery systems. However, today in the United States, managed health care organizations are now the leading form of health insurance coverage. Every individuals currently living in the United States of America has a need for affordable and accessible health care coverage. Over the last thirty to forty years, the extent and cost of health care coverage have significantly changed; therefore, altering the method in which health care is managed.

The demand for health care has expanded because of changes in the age population, increasing incomes, and improvement in medical technology. Elderly people demand more health care and health care systems must supply the expected quality if health care. The improvement of medical technology has largely increased treatments to enable people to have a good quality of life. The resource factors such as land, labor, income, capital, goods and services cause shifts in the managed care. The increase in the health care price reduces people's income and this means that the health care price is more expensive in comparing to other goods and services. An increase in income leads to an increase in demand and vice versa. However, a decrease in income will reduce the amount of health care treatments.

The relationship between price and quality of health care demanded indicates the quantity of health care services that can be obtained at conceivable price. A change in price leads to a movement along the demand curve. For example if the price of eye surgery rose significantly, then people would seek another alternative of treatment. This would lead to a fall in the demand, but when income or prices of health care services change, the demand curve will shift. If the level of cost changes then the supply curve will shift. For example if the doctors or nurses income increases, this process will increase health care cost.

Managed care plans substituted the traditional fee for service system. The plans provide a number of economic incentives for health care providers, patients, and payers to cut health care cost. The increased enrollment will reduce the health care expenditures through reduction of price and quantity. Currently, the new plans are popular among public sector of health care programs such as Medicaid and Medicare. Medicaid and Medicare is a joint federal and state-run program that provides health coverage to selected low-income individuals who cannot provide their own health insurance and senior citizens over 65 years of age.

Government intervention contributes to an increase of health care cost and creates inefficiencies, while big employers are cutting benefits, demanding higher contributions from their employees and saying there is more of the same to come, smaller and medium-sized employers offering health care plans dropped in 2002. People might demand a better Medicare of Medicaid program, but they will be affected by escalating health care costs. The private insurers will be under even more pressure, as they will have to provide policies tailored to the needs and budgets of their clients.

They will increasingly have to keep costs down by using their bargaining power. People in this country demand health care because they want to be healthy. This trend has been fueling managed health care systems for the last forty years. Changes in health care structure are influenced in this country by macroeconomic conditions and the standard of living. Government agencies have a tremendous impact on regulating and controlling of health care spending. Changes in age structure, increasing real incomes, and improvements in medical technology have all fueled this desire for better health care.

Bransford, C.L. (2006). The Exercise of Authority by Social Workers in a Managed Mental Health Care Organization: A Critical Ethnography. Journal of Progressive Human Services, 17 (2), 63-85.

Cooper, C. C., & Gottlieb, M. C. (2000) Ethical issues with managed care: Challenges facing counseling psychology. The Counseling Psychologist, 28, 179-236.

Glenn P. Mays, Gary Claxton, and Justin White; 2004; Managed Care Rebound?  Recent Changes in Health Plans' Cost Containment Strategies: (Health Affairs, August 11, 2004)

Scheid, T.L. (2003). Managed care and the rationalization of mental health services: Journal of Health and Social Behavior, 44 (2), 146-161.


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