Managed care organizations became popular to corporations in this country because they offer the potential to control healthcare costs, which traditional indemnity insurance plans lack.

When managed care organizations began, their approach - managing both the financing and delivery of healthcare - was very different than that of traditional indemnity insurers, which only handled the financing of healthcare.

Yet, in the past 20 years so many different varieties of insurance plans have evolved -- both managed and unmanaged -- that it is difficult to draw a sharp dividing line between them anymore. Rather, it is helpful to see them as two ends of a continuum of options: On one end of this continuum is unmanaged care, or traditional indemnity insurance. On the opposite end are the most managed types of organizations, called Exclusive Provider Organizations (EPOs).

In these organizations, physicians of the managed care organization work closely with other physicians to control healthcare delivery decisions. In an EPO, utilization management becomes a global, organizational concern, which starts the minute the member enrolls in the plan.

In between these extremes are many other types of insurance plans and managed care organizations.

As you move along the continuum from indemnity insurance plans to Health Maintenace Organizations (HMOs), you find that organizations have progressively greater control over the delivery of care. A parallel continuum goes in the same direction -- more control usually limits the choices that providers and members are able to make. Providers are subject to utilization management policies and members are more limited in their choice of providers.

The information that follows outlines the different types of insurance plans along this continuum.

Note: When discussing managed care organizations, it is helpful to understand that:

• Many HMOs are organizations, with corporate bylaws, boards of directors, and many levels of management and staff. Yet many other managed care organizations are not organizations in the strict sense of the word. PPOs, for example, may exist only as a loose network of providers, linked by a central corporate administration.

  Also, many HMOs, Preferred Provider Organizations (PPOs) and Point of Service Plans (POSs) are offered by insurance companies, in which case they are not separate organizations, but products of plans that the companies offer. However, for the purpose of this discussion, "managed care organization" refers to all managed care organizations and plans.

• Managed care organizations have different ways of referring to the individuals they cover. HMOs usually use the term "member." PPOs and EPOs usually use the term "subscriber."

Health Maintenance Organizations

HMOs are responsible for both the financing and the delivery of comprehensive healthcare to their enrolled members. They can be viewed as a combination of an insurer and a healthcare-delivery system. These two functions are usually more tightly integrated in a HMO than in other managed care organizations.

Payors, providers and members are closely linked:

• Payors: The administrators of the HMO contract with providers (physicians, hospitals and ancillary healthcare providers) to deliver healthcare to their members. The administrators market the plan, enroll members, collect and disburse fees, and maintain profitability of the organization.

• Providers: HMOs work with a well-defined group of providers, including primary care physicians (family practitioners, general practitioners, internists, pediatricians, and sometimes obstetricians/gynecologists), so that they can provide comprehensive care to members. The HMO also has relationships with specialists, hospitals and ancillary providers so that members are able to receive those services when necessary.

• Members: HMOs have a well-defined group of members. Members or their employers pay a fixed amount per month for access to comprehensive health services, usually including preventive and rehabilitative care. These members are covered for all healthcare services received from the HMO providers.

• HMOs are regulated by federal and state laws. They are required to provide comprehensive healthcare services for their members and carefully monitor the quality of that care.

HMOs and Costs

HMOs are typically the most effective type of managed care organization for controlling costs because of the following features:

• HMO administrators have some control over resources. They monitor and influence physician practice patterns much more extensively than traditional insurers. In some cases, they employ physicians directly or are able to structure the physicians' compensation package so as to influence their behavior. In other cases, physicians accept the influence of HMO managers because they want to remain in the network and receive an assured volume of patients.

• Primary care physicians (PCPs) are usually expected to work with HMO administrators to control resources, by monitoring their referrals to specialists and their admission to hospitals. PCPs are expected to offer appropriate, high quality care in the most cost-effective way.

• In most HMOs, primary care physicians act as gatekeepers to the HMO's resources. Members cannot see specialists or be admitted to the hospital, except in emergencies, without first seeing their PCP, if they want to receive coverage for these services. Gatekeepers are also called primary care case managers because of their role in managing and coordinating a member's overall healthcare.

• Plan benefits encourage low-cost preventive care, annual checkups, well-baby care and other preventive care. These services are almost always covered. Office visits to primary care physicians typically cost $5 to $10.

Providers are given financial incentives to encourage efficient use of the organization's overall resources. They are paid a base compensation of salary, fee for service, or capitation. Capitation is a flat rate per month for every member, regardless of how much the members use the medical services. On top of their base compensation, providers may receive financial incentives, such as bonuses, or may even incur penalties based on their performance.

Types of HMOs

In general, HMOs are divided into six types:

• Staff
• Group
• Network
• IPA
• Direct Contract
• Mixed

HMOs are categorized depending on the way they address several key variables, including:

• What kind of contractual relationship does the HMO have with providers?

• How exclusive is the relationship between the HMO and the providers?

• Are physicians allowed to see patients outside the HMO?

• Is the organization an open panel or a closed panel? In open-panel HMOs, any qualified physician who accepts the HMO's contract is allowed to join. In closed-panel HMOs, only selected providers are allowed to participate in the HMO. Providers are selected by HMO administrators, either individually or as part of a group.

• Where do the HMO physicians practice?

1. Staff Model HMO

The staff model HMO is the most highly managed of the managed care organizations. In this model:

• Physicians are employees of the HMO.

• Physicians see only HMO members.

• Members are covered only when visiting HMO providers, unless HMO physicians refer them to providers outside the network.

• The HMO is closed panel, meaning that only employee-physicians are allowed to participate.

• Care is provided at one or more centralized clinics.

• Some staff-model HMOs are quite large, with many clinics over a large geographical area.

• Members choose a primary care physician when they enroll. That physician is then the manager of the member's overall care.

• Primary care physicians act as gatekeepers to the HMO's resources, choosing the most appropriate and cost-effective level of care for members at every stage of treatment. Their goal is to minimize the use of high-cost resources, such as specialists and hospitals, substituting less costly resources whenever possible.

• Primary care physicians are usually paid a salary, plus a bonus if the physician meets certain targets or the plan maintains overall profitability. Some patient-advocacy groups say this can mean less-than-ideal care.

• The practice patterns of physicians are closely monitored by a medical director. Questionable practices are reviewed by a board of physician's peers, a process called peer review.

2. Group Model HMO

In a group model HMO, the HMO contracts with a group practice of physicians.

• The physicians are partners in the group practice, not employees.

• In some group models, physicians continue to see patients outside the HMO.

• Members are covered only when visiting HMO providers, unless HMO physicians refer them outside the network.

• This type of HMO is closed panel, because a physician must be a member of the group practice to participate.

• Physicians work out of their group practice office(s). The physician group is responsible for maintaining the office facilities, medical records, and support staff.

• Groups are typically multi-specialty groups.

• The physicians in a group practice are a cohesive group, which allows global cost-containment strategies to be reasonably effective:

• The HMO and physician group management are able to easily monitor practice patterns and use of resources among the physicians in the group.

• Primary care physicians are used as gatekeepers.

• The HMO typically pays the group on a capitation basis, i.e., a certain fixed rate, per member, per month for a well-defined set of services. Some groups are paid on a fee-for-service basis. Individual physicians are then reimbursed by the group, either on a capitated, fee-for-service or salary basis.

3. Network Model HMO

A network model is an expanded group model in which the HMO teams up with several group practices.

• The HMO contracts with more than one group practice; physicians are affiliated with one of the groups.

• Physicians may or may not have an exclusive relationship with the HMO.

• Members are covered only when visiting HMO providers, unless HMO physicians refer them outside the network.

• A network model can be open or closed panel. The HMO may allow any group that meets their criteria to join the network, assuming they agree to accept the HMO's rates of reimbursements and utilization management procedures.

• Physicians practice out of several group practice offices, which they maintain.

The HMO may link up with existing physician groups, or assist physicians in forming groups to join the network. The HMO may contract with just a few large, multi-specialty groups or many smaller groups of primary care physicians. The latter case is called a primary care network.

4. IPA Model HMO

• An IPA model is built around an Independent Practice Association (IPA), or an association of independent physicians.

• The HMO contracts with the management of the IPA for medical services. Individual physicians are members of the IPA.

• Physicians usually retain the right to see patients other than HMO members. Physicians may even contract with more than one HMO.

• Members are covered only when visiting IPA providers, unless IPA physicians refer them outside the network.

• IPAs are open panel. The IPA is open to all community physicians who meet certain professional criteria and agree to accept the HMO's rates of reimbursement and utilization management procedures.

• Physicians retain individual practices, in separate offices, which they administer and maintain.

5. Direct Contract HMO

A direct contract HMO is similar to an IPA, except that HMO administrators have a direct contract with each participating physician, instead of with a group or an association of physicians.

• The HMO contracts directly with each individual physician in the HMO.
• Physicians may or may not retain the right to see non-HMO patients.
• Members are covered only when visiting HMO providers, unless HMO physicians refer them outside the network.
• May be closed or open panel.
• Physicians practice in a variety of settings, either individual offices or group practices.

6. Mixed Model

This type of HMO represents a combination of the other five HMO models.

As HMOs evolve, they are increasingly mixing the features of various models, blurring the dividing lines between them.

HMO administrators may mix models to create larger physician pools and to obtain more flexible arrangements with providers. They may end up creating uncategorizable plans that bridge the span between traditional indemnity insurance and traditional HMOs. As HMO administrators continue to come up with more models, categories of HMO types could blur even further.

In mixed-model HMOs, administrators may contract with:

• Both a group practice of physicians and an IPA.
• Several group practices, as in a network model, and several independent physicians, as in a direct contract model.

It is less common to see staff model HMOs mixed with other types.

Exclusive Provider Organizations

A subset of an HMO is an Exclusive Provider Organization, another type of managed care.

An EPO:

• Does not routinely cover services members receive from out-of-network providers.

• Always uses primary care physicians as gatekeepers.

• Selects and contracts with a limited panel of preferred providers who cover all major specialties and broad geographical areas, in order to provide medical services for their members.

• Either negotiates steep discounted fee-for-service rates of reimbursement or capitated rates with their network providers.

• Is regulated by state insurance laws.

• Can "rent" its provider network to another major purchaser, either employers or insurance companies who have not developed their own EPOs.

Most EPOs can be thought of as HMOs with the limitations on provider choice and coverage for out-of-network services.

Preferred Provider Organizations

A Preferred Provider Organization falls between indemnity insurance and HMOs.

PPOs evolved to address a major concern consumers had with HMOs: limited provider choice.

PPOs attempt to offer the feature of provider choice found in indemnity insurance, yet maintain some of the managed care provisions found in HMOs. PPOs are organizations that assemble a large panel of providers, called preferred providers. Their main features are:

• The PPO administrators assemble a panel of providers who will accept discounted rates for their services, in exchange for being part of the panel and getting a larger pool of potential patients. Some PPOs carefully select the panel of providers based on their low cost for services and/or reputation for quality. Others include any qualified providers who agree to accept their rates.

• PPO administrators pursue good geographical coverage of an area when assembling the panel, to make the PPO available to as many potential members as possible.

• When members use the preferred providers, they are provided coverage for healthcare, with lower deductibles and lower rates of coinsurance than when using non-participating providers.

• Members may use physicians other than the preferred providers, but are charged higher deductibles and higher rates of coinsurance.

• PPOs do not necessarily contract for full responsibility to provide comprehensive medical care for their members as an HMO does. Instead, some PPOs act more like service brokers, offering their lower-priced networks of providers to employers, to insurance companies who have not developed their own PPOs, the government, and other major groups who purchase healthcare services. These groups then enroll their employees or subscribers in the PPO.

• a payor - an insurance company or self-insured employer
• a group of providers - either a group of physicians or a hospital
• a group that is neither payor nor provider, but simply a network developer

If either providers or network developers assemble the network, they then "rent" network access to an insurance company or an employer, who then enrolls their members or employees.

Point of Service Plans

Point of Service Plans, or open-ended plans, are transitional managed care products that can be viewed as hybrids of HMOs and indemnity insurance. They were developed to combine the effective management features of HMOs with the provider choice found in indemnity plans. The POS' main features are:

• Members of a POS enroll in an HMO-like network.

• Members are allowed to use outside physicians, at significantly lower coverage levels.

• Members do not have to decide which benefit plan to take advantage of until they need healthcare services (at the point of service).

POSs start with an HMO-like network, but still provide benefits to patients who go outside this network to see a provider of their choice.

Healthcare Delivery Today

No longer do the country's large commercial carriers offer only indemnity insurance; they also offer managed indemnity plans, which is a typical indemnity plan with utilization management features. These plans perform utilization management to review the medical need for expensive procedures, such as non-emergency surgery, long-term hospital stays, certain diagnostic tests and experimental procedures.

Utilization management gives insurers a way to exercise some control over a patient's care, and allows them to intervene before treatment decisions are made, to see if more cost-effective alternatives exist.

In addition, these large commercial carriers offer fully developed managed care plans.

Today, an insurance company is likely to:

• Develop its own managed care plan - an HMO, PPO or POS - in order to be able to offer it to its clients.

• Contract with an existing HMO, PPO or POS, to enroll some of its clients.

• Team up with providers and managed care organizations to develop an integrated service network, a large-scale managed care organization that consists of a completely integrated network of providers, insurers, and managed care organizations.

A commercial insurance company can then give its clients the choice of a full range of healthcare plans -- from traditional indemnity insurance to managed care plans -- all administered by the insurer.

The government, one of the country's largest insurers through the Medicare and Medicaid programs, has also moved aggressively into offering managed care products.