Managed Health Care: A Primer

Congressional research reportSep 30, 1997

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Managed Health Care: A Primer

September 30, 1997

Jason S. Lee

Analyst in Social Legislation

Education and Public Welfare

Congressional Research Service ˜ The Library of Congress

Managed Health Care: A Primer

Summary

Since the early 1970s, market forces have driven profound changes in the

financing and organization of health care delivery. Whereas the functions of paying

and providing for medical care were once separate, now they are joined together in

an increasing number of managed care organizations.

Between 60 to 70 million persons (approximately 20% of the U.S. population)

were enrolled in over 600 health maintenance organizations (HMOs) in 1996. In

addition, between 80 to 90 million persons were enrolled in more than 1,000

preferred provider organizations (PPOs), which is another type of managed care

organization. Altogether, over one-half of the U.S. population and almost threequarters of insured employees were covered by some form of managed care in 1996.

Individual practice associations (IPAs) are the most common and fastest

growing type of HMO; they account for 60% of all HMOs and 44% of HMO

enrollment. Together, staff and group model HMOs account for less than 20% of

total HMO enrollment. About three-quarters of HMOs now offer a point-of-service

(POS) option, which allows enrollees to see out-of-network providers for a higher

premium and/or coinsurance payment. The data are mixed on whether medical

expenses are higher for POS members than for traditional HMO members.

National managed care firms, also called corporate HMO chains, accounted for

88% of total HMO enrollment and 70% of all HMOs in 1995. By January 1996,

almost half of total HMO enrollment was in the seven largest national firms, up from

34% only 6 months earlier. This concentration of membership reflects mergers and

acquisitions that have been occurring at a rapid pace in the managed care industry.

For-profit HMOs enroll about 60% of all HMO members and constitute about

70% of all HMOs. Recent analyses indicate that in market areas where there are

more for-profit HMOs, net operating margins tend to be lower and annual enrollment

growth tends to be higher. However, net operating margins are increasing faster for

for-profit HMOs than for non-profit HMOs.

In 1997, the average base salary of HMO chief executive officers (CEO) was

$227,133 (the median was $195,787). This is an increase of 56% since 1991. With

bonuses and incentives added in, the mean HMO CEO salary was $310,241 (median,

$227,500). Ten percent of HMO executives make well over half a million dollars a

year.

Almost two-thirds of persons under the age of 65 are covered by employersponsored insurance. Of these, in 1996, 73% received health care from a managed

care organization. Since 1993, insured workers’ enrollment in traditional indemnity

plans has dropped from about one half to under a quarter. Managed care enrollment

has been particularly rapid in HMOs with a POS option. Cost considerations are

closely associated with this change. In 1995, employers paid an average of 15% less

for HMO coverage than for traditional indemnity coverage.

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

What is Managed Care? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

A Brief History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Health Maintenance Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Types of Health Maintenance Organizations . . . . . . . . . . . . . . . . . . . . . . . . 5

National Managed Care Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Trends in HMO Enrollment and Growth . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Service Utilization and Costs in HMOs . . . . . . . . . . . . . . . . . . . . . . . . . . 11

HMO and Fee-for-Service (FFS) Premiums . . . . . . . . . . . . . . . . . . . . . . . 13

Point-of-Service Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

State HMO Enrollment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Tax Status and HMO Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Compensation of HMO Executives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Preferred Provider Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Exclusive Provider Organizations (EPOs) . . . . . . . . . . . . . . . . . . . . . . . . 22

Silent Preferred Provider Organizations (PPOs) . . . . . . . . . . . . . . . . . . . . 22

Single-Service or Specialty HMOs and PPOs . . . . . . . . . . . . . . . . . . . . . . 23

Provider Sponsored Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Employer-Sponsored Health Plans and Managed Care . . . . . . . . . . . . . . . . . . . 25

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Appendix A. Characteristics of Managed Care Organizations . . . . . . . . . . . . . 28

List of Figures

Figure 1. HMO Enrollment, All Ages, 1976-1996 . . . . . . . . . . . . . . . . . . . . . . . 9

Figure 2. Number of HMOs, 1976-1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Figure 3. Utilization Rates: HMO Enrollees and the U.S. Population,

1988-1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Figure 4. Premium Changes in Employer-Sponsored Plans,

1987 to 1996 (firms larger than 200 employees) . . . . . . . . . . . . . . . . . . . . 14

Figure 5. Percentage of Population Enrolled in HMOs, by State,

as of January 1, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Figure 6. HMO Tax Status by Enrollment and Number of HMOs, 1996 . . . . . 17

Figure 7. Average Base Salary of HMO Chief Executive Officers,

1991 to 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Figure 8. National Employee Enrollment, 1993-1996 . . . . . . . . . . . . . . . . . . . 26

List of Tables

Table 1. The Nation’s 25 Largest Individual HMO Plans, 1995 . . . . . . . . . . . . . 6

Table 2. National Managed Care Firms Ranked by Total HMO Enrollment,

as of January 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Table 3. Average Premiums for All Medium and Large Employers, 1996 . . . . 13

Table 4. Percentage of Enrollees Using Any Out-of-Network

Benefits in Point-of-Service Products, 1995 . . . . . . . . . . . . . . . . . . . . . . . 15

Table 5. Salary of Chief Executive Officers in HMOs, Spring 1997 . . . . . . . . . 19

Table 6. Chief Executive Officer Salaries by Model, Location,

Enrollment and Affiliation, Spring 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Table 7. Ten Largest Individual PPOs, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Table 8. The Largest Specialty HMOs and PPOs, 1994 . . . . . . . . . . . . . . . . . . 24

Table 9. Percentage of Insured Workers Covered by Different Types

of Plans, by Firm Size, 1993 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Managed Health Care: A Primer

Introduction

Since the early 1970s, market forces have driven profound changes in the

financing and organization of health care delivery. Whereas the functions of paying

for and providing medical care once were separate, increasingly they are joined

together in the form of managed care organizations (MCOs). By 1996, about 57%

of the U.S. population was covered by some type of managed care — including 60

to 70 million persons enrolled in health maintenance organizations (HMOs) and

another 80 to 90 million enrolled in preferred provider organizations (PPOs).1

As the U.S. health care system continues to evolve, Congress faces an

abundance of issues. Legislative options range from encouraging the spread of

managed care in parts of the country (e.g., rural areas) and among subgroups of

people (e.g., the elderly) which are little affected by it, to protecting consumers from

a host of potential managed care excesses which may have deleterious effects on

access to quality health care. This CRS report provides basic information to assist

congressional committees and staff as they deliberate on a wide range of issues

relating to the managed care evolution in the U.S. health care system.

This managed care primer answers the following questions. What is meant by

managed care? What are the various types of managed care organizations and how

do they differ from one another? How does managed care differ from traditional feefor-service health care? It briefly reviews the history of managed care in this country,

discusses enrollment trends, describes different types of managed care organizations

(including HMOs, PPOs, provider-sponsored organizations (PSOs), and point-ofservice (POS) options), and examines basic utilization and compensation data.

Because far more data are available on HMOs than other forms of managed care

organizations, this report reflects this imbalance.

Health Care Financing Administration. Office of Managed Care. 1996; Standard &

Poor’s Industry Surveys, Healthcare: Managed Care, October 17, 1996. p. 7; Interstudy,

The Interstudy Competitive Edge (hereafter cited as Interstudy, The Competitive Edge), Part

II: Industry Report, Table 1, p. 20; and American Association of Health Plans, 1995-1996

HMO & PPO Trends Report (hereafter cited as AAHP, Trends).

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Additional information — on managed care strategies,2 on the use of financial

incentives in managed care,3 on state and federal regulation of managed care,4 and on

current legislative issues relating to managed care — will be available in future CRS

reports.

What is Managed Care?

No single definition of managed care would satisfy everyone, but certain

characteristics stand out, especially in comparison to traditional insurance. Under

traditional insurance, the insurer pays a claim when it is filed by the insured or by the

insured’s provider. The financing function of the payor or insurer is kept entirely

separate from the service delivery function of the medical professional.

Traditionally, the latter was exposed to few, if any, incentives for efficiency or cost

control.

In contrast, an important managed care strategy for controlling costs is to

contract with select providers who share financial risk for the cost of care (as is

typically done in HMOs) or who accept negotiated discounts in fee-for-service

payments (as is typically done in PPOs).5 Providers’ compensation may be tied, at

least in part, to their own pattern of clinical decision-making and/or resource

utilization. Managed care strategies include various forms of utilization review (e.g.,

pre-, concurrent, and post-certification; gatekeeping; and practice profiling) and case

management.6 Moreover, managed care organizations employ internal, and often,

external quality assurance processes.7

In short, managed care organizations integrate the financing and delivery of

care, institute cost controls, share financial risk with providers, and manage service

utilization. They vary in the degree of control they exercise over costs and medical

decision-making. Traditional fee-for-service or indemnity insurance offers the least

amount of cost control, although even these programs may adopt some managed care

U.S. Library of Congress. Congressional Research Service. Managed Health Care:

Strategies for Controlling Cost and Maintaining Quality. CRS Report, by Jason S. Lee.

Forthcoming.

U.S. Library of Congress. Congressional Research Service. Managed Health Care:

The Use of Financial Incentives. CRS Report 97-482, by Jason Lee and Beth Fuchs.

U.S. Library of Congress. Congressional Research Service. Managed Health Care:

State and Federal Regulations. CRS Report, by Beth Fuchs. Forthcoming.

In return, these contract providers (also called “staff,” “select” or “preferred”

providers) are assured enhanced patient volume. Managed care plans use financial

incentives (i.e., lower out-of-pocket charges) to encourage enrollees to use “in-network”

providers.

For more on this topic see U.S. Library of Congress. Congressional Research

Service. Managed Health Care: Strategies for Controlling Cost and Maintaining Quality.

CRS Report, by Jason S. Lee. Forthcoming

For a discussion of quality of care issues in the Medicare program, see U.S. Library

of Congress. Congressional Research Service. Quality of Care Issues in Medicare Reform,

CRS Report 96-581, by Jason S. Lee.

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features, such as pre-certification for hospitalization in all but emergency situations.

At the other extreme, staff-model HMOs (discussed below) tend to offer the greatest

degree of control.8

A Brief History9

Managed care, in its essential form, has been around for some time. The first

large scale managed care programs date from the turn of the century and the opening

of the West to the railroads. Prepaid group health plans were set up as clinics to

provide health services for workers isolated in lumber camps, Minnesota iron mines,

and railroad construction sites. Other early experiments included the Community

Cooperative Hospital of Elk City, Oklahoma, the first capitated10 physician-hospital

organization in the United States (founded in 1929 by Dr. Michael Shadid, who had

a major influence on many early organizations); the Ross-Loos Medical Group,

which provided health services to Los Angeles County Department of Water and

Power employees; and the Kaiser-Permanente Health Care Plan, organized in the

1930s and 1940s to provide health care for workers on dams and roads in the Pacific

Northwest and California, and later in the growing Kaiser shipbuilding business in

Oakland, California.

During these early years, expansion of managed care was slow. Few Americans

had access to a prepaid group health plan. A number of factors accounted for this,

including the increased availability of health benefits and services through indemnity

(fee-for-service) insurance during the 1940s and 1950s, resistance to prepaid health

care arrangements such as HMOs from the traditional fee-for-service medical

communities, legal restrictions imposed by state governments, the post-World War

II hospital construction boom, and the lack of available financing for start-up and

operation costs.

However, beginning in the 1970s, a number of trends coalesced to fuel

enrollment in, and numbers of, a specific type of managed care organization known

as health maintenance organizations (HMOs). Medical costs had been rising at a rate

above the rest of the economy for a number of years, which resulted in ever higher

premiums. Many individual and group purchasers came to believe that added health

benefits from advancements in medical technology had not kept pace with rising

prices. Trust in the medical establishment also began to erode, as practice variations

were brought to light, health care fraud and abuse was exposed, and inequalities in

access to care were made known. Added to this, the overall economy had slowed,

inflation was high, and third party health care purchasers (i.e., employers and the

See Appendix A for a summary comparison of the characteristics of the major types

of managed care organizations.

Fran Larkins of the Congressional Reference Division, Congressional Research

Service contributed to this section.

Capitation is the prepayment of a fixed-fee per person for a range of medical

services. A capitated provider accepts a predetermined amount per covered individual per

month, regardless of the number and intensity of services provided during the coverage

period.

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federal government) were alarmed to be paying an increasing share of a total health

care expenditure bill that was, in the phrase of the day, skyrocketing.

Traditional fee-for-service payment arrangements — which dominated public

and private health care delivery systems — were seen by many as an important root

cause of runaway health care costs. Doctors had little incentive to be mindful of

controlling costs and hospitals could only maintain or increase revenue under costbased reimbursement by increasing volume of services or their price. Prepaid plans,

such as those exemplified by the Kaiser plans in the West, which rewarded health

maintenance, were viewed by some as an antidote.11 The Nixon administration

viewed the “health maintenance strategy”12 as a way to control health care costs

through private sector initiative, rather than through price controls or more sweeping

reforms of the health care system.

The Health Maintenance Organization Act of 1973 (P.L. 93-222) and the Health

Maintenance Organization Amendments of 1976 (P.L. 94-460) encouraged the

development of HMOs by providing federal funds ($190 million from 1974 through

1980) to help qualified HMOs through their start-up period.13 The new law, which

added Title XIII to the Public Health Service Act, preempted some existing state laws

that were thought to restrict the development of HMOs. The Act also created a

certification process, whereby organizations meeting specified financial and

organizational standards could become federally qualified. Federal qualification also

allowed organizations to take advantage of the Act’s “dual choice” requirement,

which under certain circumstances required employers to offer an HMO as a health

benefit plan option.14

Health Maintenance Organizations

A health maintenance organization (HMO) is a form of health insurer. It may

be an independent entity or a line of business within an insurance company. Like

other health insurers, an HMO accepts financial risk for a defined set of health care

See U.S. Library of Congress. Congressional Research Service. Managed Health

Care: The Use of Financial Incentives. CRS Report 97-482, by Jason S. Lee and Beth C.

Fuchs.

The term "health maintenance organization" was coined by Dr. Paul Ellwood, who

had concluded that fee-for-service compensation arrangements created "perverse incentives"

which rewarded physicians and institutions for treating illness and then withdrew those

rewards when health was restored. Ellwood proposed a nationwide system of prepaid group

practices, which he believed would help control costs and provide effective care. This

became the focus of President Nixon’s 1971 Health Message to Congress and led to support

for development of HMOs in the 1973 HMO Act. For more on the HMO Act of 1973, see

Brown, Lawrence D. Politics and Health Care Organizations: HMOs as Federal Policy.

Brookings Institution, Washington, 1983.

Federal assistance totaled 43% of the estimated $439 million that helped support

new HMO development during this period. See Gruber, L., M. Shadle and C. Polich. From

Movement to Industry: The Growth of HMOs. Health Affairs, summer 1988. p. 203.

See U.S. Library of Congress. Congressional Research Service. Managed Health

Care: State and Federal Regulations. CRS Report, by Beth C. Fuchs. Forthcoming.

CRS-5

benefits in return for a fixed monthly per capita premium paid by or on behalf of each

enrolled member. But unlike other insurers, HMOs directly provide or arrange for

health care services through affiliated physicians, hospitals and other providers.

Unlike traditional insurance companies, HMOs do more than finance health care.

HMOs often share financial risk with providers. In contrast to traditional

indemnity insurance compensation arrangements, which reimburse providers on a

fee-for-service basis, HMOs may partially or fully prepay or capitate15 providers, just

as the purchaser prepays the HMO. Much has been written on different incentives

that providers experience under capitation versus fee-for-service arrangements.

HMOs provide access to a limited panel of providers for a comprehensive set

of health benefits. Enrollees agree to obtain all services, except emergency and outof-area care, from or with the authorization of the HMO or its affiliated providers.16

Specialty care is accessed through referrals from generalists (or “gatekeepers”) and

as long as members seek care within the HMO, out-of-pocket health care costs are

minimized.

Types of Health Maintenance Organizations

There are different types of HMOs. Staff and group model HMOs were the

earliest managed care plans. In a staff model HMO, physicians are salaried

employees who, typically, provide care in HMO-owned offices and hospitals. (Startup capital requirements for staff model HMOs are high.) Plan enrollees must choose

a provider from the HMO’s list. The plan does not pay for unapproved, nonemergency care received outside the HMO.17

In 1996, two of the nation’s 25 largest individual HMO plans — Harvard

Community Health Plan and Group Health Cooperative of Puget Sound18 — were

staff model HMOs (see Table 1.) Only 3% of all HMOs are staff model HMOs and

they account for an even smaller share (1.3%) of total HMO enrollment.19

An essential characteristic of capitation compensation systems is the prepayment of

a fixed-cost per person for a range of medical services. A capitated provider accepts a

predetermined amount per covered individual per month, regardless of the number and

intensity of services provided during the coverage period. The capitation payment is, in

effect, a budgeted amount of money to be used by the provider, regardless of how little or

how much care is required by the patient. This type of arrangement results in financial risk.

This agreement is an essential feature of “pure” or “closed” HMOs. Increasingly,

HMOs offer a “point-of-service” (POS) option, which allows access to out-of-network

providers. This option is discussed in more detail below.

Point-of-service options have liberalized this restriction, but members must pay a

substantial share of the out-of-network provider’s bill out-of-pocket.

Harvard Community Health Plan has since merged with Pilgrim Health Care, Inc.,

to become Harvard/Pilgrim Health Care. In 1997, Group Health Cooperative of Puget

Sound affiliated, but did not merge, with Kaiser Permanente.

InterStudy. The InterStudy Competitive Edge. Part II: Industry Report. Table 11.

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A group model HMO contracts with one or more multi-specialty medical

groups to provide all covered services to HMO participants in exchange for a per

capita fee. Each medical group’s practice is limited, largely, to the HMO

membership and it is managed independently of the HMO. Physicians contract with

the medical group, which may compensate them on a risk-sharing, cost, or salary

basis.

Although the HMO may have formed the group practice, the medical group is

not owned by the HMO. The group practice may, however, own the HMO. In other

words, physicians may enter into profit-sharing arrangements with the HMO.

Table 1. The Nation’s 25 Largest Individual HMO Plans, 1995

Rank

Model

type

Plan

Enrollment

Kaiser Permanente MCP/Oakland, CA

Kaiser Permanente MCP/Pasadena, CA

Health Net/Woodland Hills, CA

PacifiCare of California/Cypress, CA

California Care/Blue Cross/Woodland, CA

HIP of Greater N.Y./New York, N.Y.

U.S. Healthcare—SE Pa./Blue Bell, PA

Keystone Health Plan/West/Pittsburgh, PA

Medica Choice/Minneapolis, MN

U.S. Healthcare—New Jersey/Fairfield, NJ

HMO Blue/Boston, MA

Foundation Health—CA/Rancho Cordova, CA

HealthPartners/Minneapolis, MN

Harvard Comm. Health Plan/Dedham, MA

Keystone Health Plan/East/Philadelphia, PA

Grp. Health Coop. Of Puget Sound/Seattle, WA

U.S. Healthcare—New York/Uniondale, NY

Tufts Associated Health Plans/Waltham, MA

HMO Illinois/Chicago, IL

Health Options/Jacksonville, FL

Blue Choice/Rochester, NY

CIGNA HealthCare of So. CA/Glendale, CA

FHP/California/Cerritos, CA

HMO Oregon/Salem, OR

Community Health Plan/Latham, NY

TOTAL

2,459,631

2,191,100

1,339,327

1,214,558

931,700

852,555

823,550

765,875

693,009

662,000

652,737

649,342

632,694

604,043

575,251

557,852

554,000

543,714

541,226

529,948

517,525

509,265

507,370

483,537

475,713

Group

Network

Group

IPA

Network

IPA

Group

Staff

IPA

Staff

IPA

Group

IPA

Staff

IPA

Network

20,267,522

Source: Hoechst Marion Roussel Managed Care Digest Series. HMO-PPO Digest, 1996. p. 10.

Data collected by SMG Marketing Group, Inc.

Note: Many “individual” HMO plans also are organized into national HMO chains.

CRS-7

Group model HMOs account for 6.5% of all HMOs and 16% of total HMO

enrollment.20 The northern and southern California Kaiser Permanente plans — the

largest of all individual HMO plans — are group model HMOs, as are four more of

the nation’s 25 largest HMOs (see Table 1).

A newer variant is the individual or independent practice association, also

known as the IPA model HMO. An IPA, which has been described as "an HMO

without walls," contracts directly with physicians in independent practice,

associations of physicians in independent practices, or multispecialty group practices.

Participating physicians retain their private practices, in their own offices, but they

see HMO patients as part of that practice. Typically, IPA physicians do not have an

exclusive relationship with a single HMO.

The IPA functions much like the medical group in group model HMOs. The

HMO capitates the IPA and the IPA, in turn, compensates providers in accordance

with contractual arrangements (perhaps paying primary care physicians a fixed-fee

per enrollee, and reimbursing specialists on a discounted fee-for-service basis.) The

IPA may be responsible for coordinating the activities of member physicians,

arranging provider compensation arrangements, and conducting various utilization

management strategies. IPAs may withhold money in “risk pools” from which

providers can earn “bonuses,” but only if care is provided cost efficiently or in

accordance with other standards.

IPAs are both the most common and fastest growing type of HMO. Although

sources classify and therefore count HMO types somewhat differently, most agree

that about 60% of all HMOs were IPAs at the start of 1996. The number of IPAs

increased by 35% between 1995 and 1996. Membership increased almost as fast

(31.4%), to over 26 million members, or about 44% of the total.21 Eleven of the 25

largest individual HMOs are IPA model HMOs, including U.S. HealthCare of

Pennsylvania and Medica Choice of Minneapolis. (See Table 1.)

A network model HMO can offer the broadest provider participation of any

type of HMO because it contracts with staff, group and IPA models in combination.

For this reason, some also call it a mixed model HMO. Network HMOs may

contract with primary and specialty care provider groups as well as hospitals — a

practice which helps spread financial risk.22 Network model HMOs offer the least

amount of control or management of providers’ utilization of services and resources.

Ibid.

Ibid. InterStudy reported that 58.3% of all HMOs were IPAs as of January 1, 1996.

The American Association of Health Plans (AAHP) reported that in 1995 IPAs accounted

for about 61-66% of all HMOs, and about 51% of total HMO enrollment. The higher

numbers derive from the “predominant model type” counting method rather than the “100%

method.” For details, see American Association of Health Plans, 1995-1996 Managed

Health Care Overview. p. 13. (Hereafter cited as AAHP, 1995-1996 Managed Health Care

Overview.)

If, for example, an HMO contracts with specialty providers, and pays them a

capitated amount, then primary care doctors would not be at financial risk for speciality

referrals.

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Moreover, providers typically do not have exclusive contracting relationships with

network HMOs.

Network HMOs account for between 10-13% of all HMOs, and about 6-15%

of total HMO enrollment. Four of the nation’s ten largest individual HMOs are

network model HMOs (see Table 1); namely, Health Net, PacifiCare and California

Care/Blue Cross, all of California, and Keystone of Pennsylvania.

National Managed Care Firms

National managed care firms, also called corporate HMO chains, accounted for

88% of total HMO enrollment and 70% of all HMOs in 1995.23 The fastest growing

firms in the year ending January 1, 1996 were: the Blue Cross and Blue Shield

System, United HealthCare Corporation, Aetna Health Plans, PacifiCare Health

Systems, Inc., and Harvard/Pilgrim Health Care. The seven largest national managed

care firms (see Table 2) accounted for almost half (49%) of total HMO enrollment,

compared to about one-third (34%) only 6 months earlier.24

Table 2. National Managed Care Firms Ranked by Total HMO

Enrollment, as of January 1996

Ran

National managed care firm

The Blue Cross and Blue Shield

System

Kaiser Foundation Health Plans, Inc.

United HealthCare Corporation

U.S. Healthcare, Inc.

Prudential Health Care Plans, Inc.

PacifiCare Health Systems, Inc.

Humana, Inc.

Health Systems International, Inc.

FHP, Inc.

CIGNA Health Plans, Inc.

Number

of plans

Total

enrollment

10,134,592

6,924,080

3,603,191

2,227,449

2,073,889

1,904,608

1,875,783

1,860,926

1,851,195

1,734,191

Source: The InterStudy Competitive Edge: HMO Industry Report 6.2. Table 28.

Trends in HMO Enrollment and Growth

In 1970, there were approximately 3 million persons enrolled in 37 HMOs in 14

states. By 1975, HMO enrollment had doubled and the number of HMOs had

increased fivefold. Enrollment growth slowed somewhat from the mid-1970s to

Hoechst Marion Roussel Managed Care Digest Series. HMO-PPO Digest 1996. p.

Interstudy, The Competitive Edge: HMO Industry Report 6.2, 1996, p. 53-55.

8-9.

CRS-9

early 1980s, but the mid-1980s witnessed an enrollment boom.25 Enrollment doubled

between 1975 and 1983, an 8 year period, and then doubled again in just 3 years.

(See Figure 1.)

Some of the factors that may have led to rapid HMO growth in the 1980s are:

! relaxation of state regulations established on behalf of traditional medical

interests to stymie competition from prepaid plans;

! passage of the Omnibus Budget Reconciliation Act (OBRA) of 1981, which

gave states greater flexibility to enroll Medicaid recipients in HMOs;26

! implementation in 1985 of the Tax Equity and Fiscal Responsibility Act of

1982 (TEFRA), which authorized the Medicare risk-contracting program;

! increasing perception among employers and other purchasers of managed care

cost savings potential; and

! expanding preference for non-group practice HMOs (i.e., independent practice

arrangements [IPAs]), which allowed greater flexibility in composition of

provider networks, location of service delivery, and choice of providers.

In the early years of HMO development, Kaiser Foundation Health Plans represented

a large share of total enrollment (Kaiser had almost half of total enrollment in 1978). But

growth in national HMO networks began in the late seventies and by 1986 the number of

HMO firms (defined as an organization that owns or operates distinct HMOs in two or more

states) had increased from 6 to 42 with 310 affiliated HMOs (or one-half of all HMOs).

Although Kaiser enrollment increased during this time (from 3.5 million in 1978 to 4.9

million in 1986), its representation of enrollment in national HMO firms decreased from

94% in 1978 to 31% in 1986.

were 500 Medicaid managed care contracting entities. Although only about a quarter

million Medicaid clients were enrolled in managed care in 1981, by June 1996, enrollment

had increased to 12.8 million (or 39% of the total Medicaid population).

CRS-10

Figure 1. HMO Enrollment, All Ages, 1976-1996

58.2

59.1

51.1

Millions of people in HMOs

45.2

41.4

38.6

36.5

34.7

32.7

29.3

25.7

18.9

15.1

12.5

6.3

7.5

8.2

9.1

10.2 10.8

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

Sources: Gruber, Shadle, and Polich, The Growth of HMOs and American Association of Health Plans,

1995 HMO & PPO Trends Report and Interstudy, 1996, HMO Industry Report 6.2.

HMO enrollment slowed somewhat during the late 1980s and early 1990s, but

began to grow at a faster pace again in the mid-1990s. Following the failure of the

Clinton administration’s health care reform initiatives of 1993-1994, and in response

to continuing, significant increases in premiums, the private sector embraced

managed care cost control strategies with renewed fervor. Increased managed care

enrollment in employer-sponsored plans and Medicare drove this trend.

The number of HMOs increased dramatically in the mid-1980s, growing by

more than 50% between 1985 and 1986, and then by another 11% to an all time high

of 662 in 1987. (See Figure 2.) This period of growth was followed by intense

competition which drove premiums down — some would say to unrealistic levels —

in order to secure market share. Plan closings and mergers resulted. To secure

enrollment, HMOs began expanding options, integrating services, developing hybrid

organizational forms (discussed below), and enhancing efficiency.

CRS-11

Figure 2. Number of HMOs, 1976-1996

700

662

643

595

600

630

590

556 559 560 555

562

543

Number of HMOs

500

393

400

306

300

265

280

236 243

203

200

175

215

165

100

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

Source: Gruber, Shadle, and Polich, The Growth of HMOs , and Interstudy, 1996, HMO Industry

Report 6.2 .

According to one source, by 1996 about 20% of the U.S. population was

enrolled in HMOs.27 At the same time, over one-half (about 57%) of the U.S.

population was covered by some form of managed care. This is almost double the

share of the population enrolled in managed care plans only 10 years ago. Much of

this growth is concentrated in a single type of HMO (the independent practice

association or IPA model HMO) and in preferred provider organizations (PPOs). A

PPO is a managed care organization, but it is not an HMO (see the section on PPOs

in this report).

Service Utilization and Costs in HMOs

HMOs tend to reduce health care costs by managing enrollees’ use of services.

They may limit hospitalizations, diagnostic tests or specialty referrals through

utilization review and by giving participating providers a financial stake in the cost

of the services they deliver. Moreover, HMOs try to select cost-effective service

providers into their networks.

In a 1996 study of the impact of managed care (defined by the presence of

HMOs, provider risk-sharing arrangements, and the involvement of employers in the

Standard & Poor’s, Industry Surveys. Healthcare: Managed Care. October 17,

1996. p. 7.

CRS-12

management of care delivered to their employees) in the 50 largest U.S. cities,

KPMG Peat Marwick found that markets with high managed care penetration had

discretionary acute care (hospital) costs 11% below the national average and 19%

below hospital costs in low managed care markets.28

Most studies have found that HMOs are able to provide medical care for less

than fee-for-service insurance partly by reducing hospital admissions and by

providing for shorter lengths of hospital stays. The relative success of HMOs in

reducing the utilization of inpatient care (the most costly type of health care event)

is shown in Figure 3. Total inpatient HMO utilization rates declined between 1988

and 1993. Overall, HMO members were hospitalized about two-thirds as often as the

population as a whole in 1993. On average, they spent about half as many days in the

hospital. Nationally, total utilization rates have also declined since 1988. Because

the national figures include HMO members, the national decline is partly explained

by increased HMO membership as well as growth in other kinds of managed care,

such as preferred provider organizations (PPOs) and the increasing use of utilization

review by FFS (indemnity) insurers.

Importantly, KPMG also found that case severity of patients admitted to hospitals

in high managed care markets was higher than the national average, yet their risk adjusted

mortality rates were 5.25% below the national average. The cost comparisons were adjusted

for differences in severity of patient mix and cost of living. See KPMG Peat Marwick. The

Impact of Managed Care on U.S. Markets, Executive Summary. 1996.

CRS-13

Figure 3. Utilization Rates: HMO Enrollees and the U.S. Population,

1988-1993

140

120

Discharges per 1,000

N a t i o n

100

HM O

900

800

700

Days per 1,000

Nation

600

500

400

300

HMO

200

100

Average Length of Stay (Days)

N a t i o n

HMO

1988

1989

1990

1991

1992

1993

Source: Figure prepared by CRS based on Exhibit 3-3, American Association of Health Plans,

1995-1996 HMO and PPO Industry Profile.

Note: The national rates are inclusive of HMO members. HMO rates include all types of HMOs but

not other forms of managed care.

CRS-14

HMO and Fee-for-Service (FFS) Premiums

The difference between HMO and fee-for-service premiums varies from year

to year, but it is not unusual to see differences of 10% to 15% reported.29 Among

medium and large employers in 1996, the average difference between FFS and HMO

premiums for both single and family coverage was about 20%. PPO and POS

premiums were higher than HMO premiums but were lower than FFS premiums.

(See Table 3.)

Table 3. Average Premiums for All Medium and Large Employers,

1996

Employee

coverage

Family

coverage

Fee-forservice

$188.27

$506.30

HMO

$155.77

$424.81

PPO

$173.10

$464.36

POS

$176.35

$482.81

Source: Hay/Huggins Benefits Report, v. 1. 1996, Chart 1.2.

Over the last decade, premiums for employer-sponsored health benefits have

declined precipitously. Figure 4 shows that the average annual rate of increase for

FFS, HMO, and PPO premiums has changed in tandem since 1987. (However, the

rate of increase for HMOs was about 1.5 percentage points less than FFS premiums

during this period.)30

In 1995 and 1996, the rates of increase in health insurance premiums (overall,

2.1 in 1995 and .05 in 1996) were less than increases in three key indicators:

! overall inflation as measured by the consumer price index

(3.2 in 1995, 2.9 in 1996);

! inflation in the health care sector (medical inflation) as measured by the CPI

(4.6 in 1995, 3.7 in 1996); and

! growth in workers’ earnings.

(2.7 in 1995, and 2.9 in 1996).31

Miller, Robert H., and Harold S. Luft. Managed Care Plan Performance since 1980.

A Literature Analysis. Journal of the American Medical Association, v. 271, no. 19; and

Foster Higgins, Survey of Employer-Sponsored Health Plans, 1996.

KPMG Peat Marwick, Health Benefits in 1996, p. 12, 13.

Ibid.

CRS-15

Figure 4. Premium Changes in Employer-Sponsored Plans,

1987 to 1996

(firms larger than 200 employees)

25%

FFS

20%

HMO

PPO

15%

10%

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

-5%

Source: KPMG, Health Benefits in 1996 , p. 13.

Point-of-Service Options

In an effort to make enrollment more attractive to consumers who want to retain

some freedom of choice of providers, the majority of HMOs now offer an openended or point-of-service (POS) option. This allows enrollees to go to doctors who

are not in the HMO network in exchange for higher premium and/or coinsurance

payments. To exercise the POS option, an enrollee forgoes the standard 100%

coverage of costs for in-plan services for, most commonly, 70% coverage of out-ofplan services costs. The share of HMOs offering a POS option increased from an

estimated 55% in 1992 to 73% in 1995.32

The rapid expansion of the POS option suggests that the greater flexibility

provided by the POS option attracts people to an HMO who are uncomfortable with

“lock in” arrangements. Some believe that, in time, as enrollees become more

comfortable with network providers, they will utilize the POS option less. (See

Appendix A for a comparison of the characteristics of the major types of managed

care organizations.)

Because the POS option is relatively new, the extent of added financial risk is

uncertain. According to one survey, in half of the 86 responding plans, 10% of

AAHP, 1995-1996 Managed Health Care Overview, p. 10, 16-17.

CRS-16

enrollees or fewer actually used an out-of-network benefit in 1995 (see Table 4.)

Utilization of the POS option appears to vary with a number of factors, including

plan type. On average, POS utilization in group model HMOs is less than half that

in network and IPA models (shown in the table). POS utilization is higher in the

Pacific and Mid-Atlantic regions, is lower among the smallest and largest HMOs, is

higher among nonprofit and non-federally qualified HMOs, and is higher among the

independently owned HMOs (not shown in the table).

According to one source, 42% of surveyed HMOs reported that average medical

expenses per enrollee were the same for POS members and traditional HMO

members, whereas the same percentage reported that medical expenses were higher

for POS members.33

Table 4. Percentage of Enrollees Using Any Out-of-Network

Benefits in Point-of-Service Products, 1995

% of Enrollees

Mean

Median

17.1%

10.0%

Staff

13.5

9.5

Group

6.8

5.0

Network

19.4

10.0

IPA

18.8

10.0

All plans

Primary model type

Source: American Association of Health Plans’

Annual

HMO

Industry

Survey,

see

http://www.aahp.org.

Findings based on

“weighted” data.

State HMO Enrollment

HMO enrollment is distributed unequally across the country. (See Figure 5.)

HMO penetration, or the percentage of state population enrolled in an HMO, is

highest in the Pacific states (38%, on average, in Alaska, California, Hawaii, Oregon

and Washington), the Northeast (33%, on average, in Connecticut, Maine,

Massachusetts, New Hampshire, Rhode Island and Vermont) and the Mid-Atlantic

states (27%, on average, in New Jersey, New York and Pennsylvania). Penetration

is lowest in the East South Central states (10.5%, on average, in Alabama, Kentucky,

Mississippi and Tennessee) and the West South Central states (12.2%, on average,

in Arkansas Louisiana, Oklahoma and Texas).

Group Health Association of American. Annual HMO Industry Survey. Reported

in AAHP, 1995-1996 Edition, HMO & PPO Industry Profile, Table 2-15. p. 117.

CRS-17

Figure 5. Percentage of Population Enrolled in HMOs, by State,

as of January 1, 1996

29% to 45% (9)

23% to 28% (9)

14% to 22% (10)

9% to 13% (10)

1% to 8% (10)

Note: Alaska and Wyoming had no managed care enrollment.

Source : Interstudy, The Interstudy Competitive Edge: HMO Industry Report 6.2

Oregon has the highest enrollment rate (44.8%), followed by California (40.3%)

and Massachusetts (39%). Alabama, Georgia, Idaho, Iowa, Kansas, Mississippi,

Montana, North Dakota, South Dakota, and West Virginia all have HMO penetration

rates of well below 10%.34

Tax Status and HMO Performance

Some argue that the maximization of profit is the primary orientation of private

corporations. For-profit HMOs have an obligation to return revenue in excess of

expenditures to investors. In contrast, nonprofit HMOs return excess money to the

organization, in the form of capital improvement or expansion of other missionrelated activities.

In 1988, 70% of all managed care plans were for-profit; this had increased to

82% by 1996.35 At the start of 1996, over 60% of HMO enrollment was in for-profit

plans and nearly three-quarters of all HMOs were for-profit organizations (see Figure

6).

InterStudy conducted an analysis of HMO financial performance differences

across metropolitan markets by various HMO characteristics, including whether the

InterStudy. The InterStudy Competitive Edge: HMO Industry Report 6.2. p. 29 and

Figure 5.

AAHP, 1995-1996 Managed Health Care Overview.

CRS-18

plans were nonprofit or for-profit. They focused on what they considered “the most

important overall measures of an HMO’s performance,” namely, higher annual

growth rates and lower net operating margins.36

Figure 6. HMO Tax Status by Enrollment and Number of HMOs, 1996

Nonprofit

27%

Nonprofit

39%

For-profit

61%

HMO Enrollment

Forprofit

73%

HMOs

Source: Interstudy, The Competitive Edge, Part II: Industry Report, 6.2, September, 1996.

Separate analyses — in which for-profit and nonprofit HMOs were compared

on these two performance variables — were conducted for large markets (1 million

or more enrollees), medium markets (250,000 to 999,999 enrollees) and small

markets (less than 250,000 enrollees).

In large markets, metropolitan areas that had annual enrollment growth above

the median (an indicator of positive performance) had 20% more for-profit HMOs,

on average. Furthermore, in both large and medium markets, metropolitan areas

with net operating margins above the median (an indicator of negative performance)

had 16% and 14% fewer for-profit HMOs, on average.37 All other comparisons

resulted in differences that were not statistically significant.

However, InterStudy conducted another analysis of HMOs whose operating

margins increased in 1995 compared to HMOs whose operating margins decreased.

Annual growth rate is the net change in enrollment in 1 year divided by the

enrollment at the start of the year. Net operating margin is defined as medical and

administrative expenses divided by premium revenue.

This performance analysis is based on an analysis of variance (ANOVA).

Differences are statistically significant at the p < .05 level. The Interstudy Competitive

Edge, Part III: Regional Market Analysis, v. 6, no. 2, December 1996, Tables 34 and 36.

CRS-19

It was learned that a larger percentage of for-profit HMOs than nonprofit HMOs

(34.4% versus 20.9%) had increased operating margins between 1994 and 1995.38

This finding accords with an increasingly competitive managed care environment,

typified by lower rates of premium increases, company mergers, and industry

consolidation. One source recently reported that 40% of the nation’s HMOs lost

money in 1995, and that only 35% were profitable in 1996. In contrast 90% of

HMOs were profitable in 1993 and 1994.39

For-profit HMOs spent more of the premium dollar on administrative expenses

than nonprofit HMOs (13.6% compared to 11.9%) in 1995. They also spent, on

average, a lower share of total premium revenue delivering medical care than

nonprofits (84.3% versus 88.7%).40

Compensation of HMO Executives

An HMO’s administrative expenses includes the cost of executives’ salaries.

As managed care plans have increased in number and market penetration, and the

media have published the highest salaries, there has been increased public outcry

over executive compensation. Much of this attention has focused on the salary of the

chief executive officer (CEO), who is the top official responsible to the Board of

Directors for the overall administration, growth and performance of the plan.

While it is true that some CEOs of HMOs command annual salaries well over

$1 million, averages are rarely reported in the media, and the sums often include

stock ownership and other bonuses in addition to salary per se. Figure 7 shows the

trend in average CEO base salary, assessed in February of each year, from 1991 to

1997. The number of surveyed plans expanded each year (growing to 270 plans in

1996, and 314 plans in 1997.) At the start of the decade, CEOs’ average base salary

(not including bonuses), was about $145,000. This increased 56%, to $227,000 in

1997.

The 1997 median CEO base salary ($195,787) is lower than the mean salary

($227,133) due to the fact mentioned above; namely, that some CEOs earn very large

salaries indeed. As you can see in Table 5, 10% of CEO’s received a base salary of

over $381,719. Moreover, as alluded to, executive compensation can be substantially

higher when bonuses and/or incentives are added to base salary. As the table shows,

the median annual salary with bonuses and incentives is just over a quarter million

dollars, and 10% of CEOs make well over a half million dollars a year.

InterStudy. The InterStudy Competitive Edge, Part II: HMO Industry Report 6.2,

December 1996. Table 32.

Center for Studying Health System Change. Patients, Profits and Health System

Change: A Wall Street Perspective. Issue Brief, no. 9, May 1997.

Ibid., p. 64. The share of the premium spent on medical care is known as the

“medical loss ratio.” For example, a ratio of .89 means that $0.89 of every $1.00 is spent

on the delivery of medical services. The remaining $0.11 is spent on administrative

expenses, including marketing, salaries, and profit.

CRS-20

Figure 7. Average Base Salary of HMO Chief Executive Officers, 1991 to 1997

$250,000

$227,133

$215,414

$205,418

$200,000

$185,241

$158,623

$150,000

$165,928

$145,391

$100,000

$50,000

$1991

1992

1993

1994

1995

1996

1997

Source: Warren Surveys, The Salary Survey , Spring 1997.

Table 5. Salary of Chief Executive Officers in HMOs, Spring 1997

No. of

plans

10th %ile

Mean

Median

90th %ile

Base salary

314

$126,390

$227,133

$195,787

$381,719

Salary with

bonuses/incentives

157

$139,268

$310,241

$227,500

$583,794

Source: Warren Surveys, The HMO Salary Survey, Spring, 1997.

Below, Table 6 shows the distribution of median CEO salaries by HMO model

type, by geographic area, by HMO enrollment, and by HMO affiliation. On average,

CEOs in staff and mixed models have the highest salaries. CEOs in the northeast and

far west have the highest salaries. CEO salary increases as HMO size increases, so

that those in the largest plans (over 200,000 enrollees) are paid about twice as much

as those in the smallest plans (under 50,000 enrollees). HMOs affiliated with

insurance companies are paid far more than those with any other affiliation. This is

probably due, at least in part, to greater enrollment in insurer-affiliated HMOs.

CRS-21

Table 6. Chief Executive Officer Salaries by Model, Location,

Enrollment and Affiliation, Spring 1997

Median

base salary

Median

salary w/

bonus

Model type

Staff

Group

IPA

Network

Mixed

$217,300

190,676

180,000

190,000

200,996

not

available

Geographic area

Northeast

South/Southeast

Midwest

Mountain

Farwest

$216,000

191,201

180,000

190,000

200,996

$275,000

220,200

227,500

176,250

247,278

$167,613

168,000

195,000

246,000

324,000

$186,291

186,853

214,221

280,626

475,483

$200,000

183,604

340,200

180,003

not

available

HMO enrollment

Under 25,000

25 to 50,000

51 to 100,000

101 to 200,000

Over 200,000

Affiliation

Independent

Physician/Hospital

Insurer

Management Co.

Source: Warren Surveys, The HMO Salary Survey, spring

1997.

Preferred Provider Organizations

In the early 1980s, a new type of managed care entity — the preferred provider

organization (PPO) — evolved which combines features of traditional indemnity

plans and HMOs. Like traditional indemnity plans, these organizations compensate

providers on a fee-for-service basis. (This is the major characteristic that

distinguishes PPOs from HMOs.) However, like HMOs, they extract discounts from

payors. Also, like HMOs, PPOs selectively contract with medical providers on the

basis of such factors as cost-efficiency, scope of services, and provider credentials.

(See Appendix A for a comparison of the characteristics of the major types of

managed care organizations.)

CRS-22

The medical providers that contract with PPOs agree to discount their fees. In

return, they expect to gain increased patient volume, faster payment of bills, and a

reduction in delinquent accounts. PPOs directly administer, or contract for, a wide

range of utilization review and case management procedures. They re-credential

participating physicians on a regular basis, collect data on providers’ practice patterns

for use in quality assurance and compensation determinations, conduct or contract

for pharmacy benefits management, and engage in physician peer review and quality

assurance.

PPO enrollees are given financial incentives to use services within the plan’s

provider network. This is how PPOs can ensure providers increased access to

patients. But PPO enrollees typically receive some payment for covered services

even if they decide to obtain care from outside providers. (According to one recent

report, less than 25% of PPO plan claim dollars are paid to out-of-network

providers.41) Visits to specialists usually do not require authorization by a primary

care provider, except in the case of gatekeeper model PPOs.

The greater flexibility of PPOs accounts for their popularity and also helps

explain POS use by HMOs. By 1995 there were over 1,000 operating PPOs, the vast

majority of which were medical/surgical and full-service plans. 1995 PPO

enrollment has been estimated at 80 to 90 million, which is at least one-third higher

than total HMO enrollment.42 The ten largest individual PPO plans are listed below

in Table 7.

Table 7. Ten Largest Individual PPOs, 1994

Ran

PPO

The AFFORDABLE Medical

Networks

Admar Corporation

USA Health Network—Texas

Prudent Buyer Plan

Provider Networks of American, Inc.

Beech Street Corporation

Intergroup Services Corporation

Preferred Plan

USA Health Network — California

USA Health Network — Florida

Locatio

Enrollmen

8,903,284

4,491,105

3,342,945

2,724,133

2,673,911

2,395,154

2,150,040

1,596,000

1,286,583

1,253,845

Source: American Association of Health Plans, 1995-1996 Managed Health Care

Overview, p. 22.

1996. Foster Higgins National Survey of Employer-sponsored Health Plans. Foster

Higgins, Survey and Research Services, 125 Broad Street, New York, NY 10004.

AAHP, 1995-1996 Managed Health Care Overview, p. 18; American Association

of Health Plans, HMO and PPO Industry Profile, 1995-1996 Edition. p. 67-68.

CRS-23

Exclusive Provider Organizations (EPOs)

Exclusive provider organizations (EPOs) differ from PPOs in one critical

respect. As the name suggests, enrollees do not receive any compensation for

unapproved care delivered outside the EPO network. According to one source, about

one-third of all PPOs offered EPOs in 1996.43

Silent Preferred Provider Organizations (PPOs)

Silent PPOs are controversial. They are brokers who purchase negotiated

discount information from PPOs and sell it to indemnity insurers, who in turn use the

information to access provider discounts. Their entitlement to such discounts is

questionable. It is not known how common this practice is.

Consider the following scenario. A patient with indemnity insurance seeks care

at a doctor’s office or hospital. After the service or treatment is provided, the doctor

or hospital bills the insurer for 80% of the full fee; the patient is responsible for the

remaining 20%. However, the insurer does not pay 80% of the full fee. Instead, the

insurer contacts a broker who: a) identifies PPOs with whom the provider contracts,

b) purchases rate discount information from a contracting PPO, and c) sells the

information to the indemnity insurer. The indemnity insurer then submits a reduced

payment to the provider, claiming that the patient was entitled to the discount through

the “silent PPO.” Providers typically accept the reduced payment because they do

not cross check claims and insurance data.

Critics of silent PPOs charge “foul” because providers receive reduced payments

without gaining increased patient volume through the “directive practices” of true

PPOs. That is, indemnity patients get the negotiated discounts available to PPO

patients, but they are not exposed to financial incentives that encourage them to use

preferred providers.44 Others argue, however, that providers can decline illegitimate

claims to discounts, or that they can simply refuse to contract with a PPO that allows

the organization to sell negotiated fee information to brokers.45

Single-Service or Specialty HMOs and PPOs

Hoechst Marion Roussel Managed Care Digest Series, HMO-PPO Digest 1996, p.

Thus, silent PPOs are also called “non-directed” PPOs.

52.

A bill introduced June 10, 1997 by Representative Burton, entitled Federal

Employees Health Care Protection Act of 1997 (H.R. 1836), would limit the use of silent

PPOs by all insurance carriers who contract with the Office of Personnel Management.

Section 5(a) requires advance written disclosure if a carrier or its subcontractor, which has

entered into a negotiated discount agreement with health care providers, does not use

financial incentives or “other forms of steerage” (such as provider directories, 1-800

numbers, or other means) to direct patients to network providers. Section 5(b) prohibits any

carrier which fails to disclose such information from accessing negotiated discounts. The

bill does not propose an outright prohibition on silent PPOs per se.

CRS-24

Experience shows that some areas of health care — such as substance abuse

treatment, behavioral or mental health services, dental care, and prescription drugs

— can be difficult to control. Because these service areas have been particularly

susceptible to rapid cost increases, managed care plans may “carve out” one or more

specialty area of care from standard medical/surgical plans. If such an area is carved

out and coverage is available, it may be managed through a single service or specialty

HMO or PPO. In some cases, enrollees must pay an additional premium for single

service or specialty coverage.

Employers and other insurers contract with specialty HMOs and PPOs using

capitation or negotiated fee-for-service compensation arrangements. At present, the

100 or so existing specialty HMOs are limited primarily to dental, vision and mental

health benefits. One source estimates that over three-quarters of such plans are

dental maintenance organizations (DMOs) and that most (87%) are for-profit

organizations.46

Specialty PPOs number about the same as specialty HMOs, but they cover a

wider range of services (including podiatry, chiropractic services and workers’

compensation).

The majority (60%) of specialty PPOs cover dental,

behavioral/mental health and substance abuse services, and pharmacy and

prescription drugs. The vast majority (85%) of specialty PPOs are for-profit

organizations.

The five largest speciality HMOs and the five largest specialty PPOs are listed

in Table 8.

Table 8. The Largest Specialty HMOs and PPOs, 1994

AAHP, 1995-1996 Managed Health Care Overview, 1996, p.24.

CRS-25

Ran

Specialty

Location

Enrollment

Dental

804,750

Dental/

Vision

Dental

781,000

747,035

651,300

510,588

Specialty PPO

Specialty

Location

Enrollment

Medco Behavioral Care Corp.

14,175,000

Vision Service Plan

Value Behavioral Health

8,100,000

7,958,007

American Chiropractic Network,

Inc.

Preferred Chiropractic Care

(PCC)

Mental

Health

Vision

Behavioral

Health

Chiropractic

5,217,391

Chiropractic

5,000,000

Specialty HMO

APPS Dental, dba CompDent

Corp.

PMI Dental Health Plan

California Dental Health Plan

Unified Dental Care of Texas

Oral Health Services of Florida

Ran

Source: American Association of Health Plans, 1995-1996 Managed Health Care Overview,

1996, p. 26, 29.

Provider-Sponsored Organizations47

Provider-sponsored organizations (PSOs) have emerged in response to

competition in the healthcare marketplace encouraged by managed care. A PSO is

a cooperative venture of a hospital and group of physicians — or some other

configuration of providers — that is provider-controlled and operated. Some contract

with other entities, such as HMOs, to gain access to the HMOs network of providers.

Not all PSOs do this though. Like HMOs, PSOs seek to combine the health service

and insurance function; but the PSO aims to eliminate the insurer or managed care

plan as an intermediary.

The term "provider sponsored organization" is a variant of terms with similar

meanings, including "physician hospital organizations (PHOs)" and "provider or

physician sponsored networks" (PSNs). "Provider service networks" also is used.

The number of organizations that fit the definition of a PSO is unknown, largely

because PSOs are generally not licensed as such, but may be licensed as HMOs or

other types of insurers. With the exception of a few states that provide for distinct

Beth Fuchs of the Education and Public Welfare Division, Congressional Research

Service contributed to this section.

CRS-26

PSO standards, most states require PSOs to meet the same licensing and solvency

standards as HMOs.

The Balanced Budget Act of 1997 (P.L. 195-33) authorizes PSOs that meet

certain requirements to contract with Medicare to enroll Medicare beneficiaries under

the new Medicare+Choice program (which will offer private managed care and other

types of private plans as an alternative to traditional Medicare). In general,

organizations that wish to be offered under Medicare+Choice will have to be licensed

under state law as a risk-bearing entity eligible to offer health insurance in the state.

However, a PSO will be able to seek a time-limited waiver of state law by filing an

application with the Secretary. The Secretary will have to approve the waiver if the

PSO was denied state licensing because it did not meet solvency standards that were

different from the federal standards.48 (The PSO will still have to meet state laws

not dealing with solvency that competing organizations have to meet.) This may

enable some PSOs that cannot obtain state licenses because of their inability to meet

state solvency requirements to get started. Much will depend, however, on the

specifics of the federal solvency requirements, which are to be developed through a

process of negotiated rule-making on an expedited basis. Perhaps more likely to

stimulate the establishment of PSOs is another BBA provision that allows

Medicare+Choice plans to be sponsored by organizations that have no offerings for

the under 65 market and that provides for a lower minimum enrollment number for

PSOs than for other types of Medicare+Choice plans.

Employer-Sponsored Health Plans and Managed Care49

Almost two-thirds of persons under the age of 65 are covered by employmentbased health insurance.50 Recent trends indicate that employers have been sensitive

to price differences in their choices of health plans. As shown in Figure 8, in 1993

about one-half of all insured workers were enrolled in traditional indemnity plans;

but by 1996, the share had dropped to under a quarter (23%). In 1996, almost threequarters (73%) of all insured working Americans received health care from a

managed care organization.

Between 1993 and 1996, growth in closed-panel HMO enrollment has been

steady, from 19% to 27%. POS enrollment nearly tripled during this period, growing

from 7% to 19%. PPO enrollment increased from 27% to 31%.

More information on the BBA treatment of PSOs can be found in: U.S. Library of

Congress. Congressional Research Service. Medicare Provisions in the Balanced Budget

Act of 1997 (BBA 97, P.L. 105-33). CRS Report 97-802, by Jennifer O’Sullivan, et al.

August 18, 1997.

The data cited in this section were collected by Foster Higgins and KPMG Peat

Marwick/Wayne State University. See Foster Higgins National Survey of EmployerSponsored Health Plans (A Stratified Random Sample of all U.S. Employers with 10 or

More Employees), 1997; and Jensen, Gail, M. Morrisey, S. Gaffney, and D. Liston. The

New Dominance of Managed Care: Insurance Trends in the 1990s. Health Affairs, v. 16,

no. 1. p. 125-136.

U.S. Congress. House. Committee on Ways and Means. 1996 Green Book, Table

C-26. p. 1027. CRS analysis of data from the March 1995 Current Population Survey.

CRS-27

Figure 8. National Employee Enrollment, 1993-1996

100%

Percent of Employees Enrolled

19%

75%

23%

27%

15%

14%

27%

50%

19%

25%

29%

31%

25%

48%

37%

29%

23%

1993

1994

Indemnity

1995

PPO

POS

1996

HMO

Source: Foster Higgins National Survey of Employer-Sponsored Helath Plans

As shown in Table 9, the greater the number of employees in a firm the greater

the managed care penetration. However, regardless of firm size, in just 2 years there

has been a rapid rise in the share of employees enrolled in each major type of

managed care plan (HMOs, PPOs, POS plans).

Since 1993, the cost of providing indemnity insurance increased a total of 29%,

whereas the cost of providing PPO coverage increased 8% and the cost of HMO

coverage increased 3%. In 1994, the average annual health benefit cost for active

employees enrolled in an HMO was 3% less than traditional indemnity coverage

($3,385 and $3,495). By 1995, HMO coverage was 15% cheaper ($3,385 compared

to $3,739). Many observers believe that these changes in price have been closely

related to the rapid expansion of managed care enrollment in employer-sponsored

plans.

CRS-28

Table 9. Percentage of Insured Workers Covered by Different Types

of Plans, by Firm Size, 1993 and 1995

Number of Employees

1993

1-24

25-49

50-199

200-999

1,000 +

All

Firms

Indemnity

HMO

PPO

Point-of-Service

78.3%

8.2

9.9

3.6

65.2%

10.9

11.8

12.1

62.4%

17.5

16.4

3.7

44.6%

22.4

27.6

5.4

40.7%

26.7

20.8

11.8

48.9%

22.4

19.6

9.1

30.5%

19.2

26.8

23.5

30.2%

38.9

21.4

9.5

25.1%

20.6

30.6

23.7

27.9%

26.6

29.2

16.3

26.3%

31.0

21.7

21.0

27.4%

27.5

25.0

20.1

1995

Indemnity

HMO

PPO

Point-of-Service

Source: KPMG Peat Marwick/Wayne State survey of 1,953 firms in 1993 and 2,037 firms in 1995.

Jensen, Gail, M. Morrisey, S. Gaffney, and D. Liston. The New Dominance of Managed Care:

Insurance Trends in the 1990s. Health Affairs, v. 16, no. 1. p. 127.

Conclusion

Perhaps only change is certain during this time of rapid transformation in the

U.S. health care system. However, few observers would characterize managed care

as a passing phenomenon. The information presented in this report indicates how far

the health care industry has evolved — largely through internal reform rather than

legislative mandate — and also reveals the organizational variety and diversity that

exists in current models of health care financing and delivery. In the midst of this

change and uncertainty, Congress will deliberate on a host of issues surrounding

managed health care. This report provides background information that should prove

useful to participants in upcoming congressional debates.

CRS-29

Appendix A. Characteristics of Managed Care Organizations

HMOs (health maintenance organization)

PPOs

(Preferred

provider

organization)

Staff

Group

IPA

Network

Compensation

salary

mixed

(risk or

cost)

mixed

(risk or cost)

mixed

(risk, cost,

or salary)

discounted cost

Network

structureb

tight

loose

Choice of

providerc

low

medium

low to

medium

high

Controld

high

medium

to high

low

Characteristics

POS

(point-of-service)

(an HMO option)

cost,

discount possible

loose

high

low

Source: Table prepared by the Congressional Research Service.

Note: This classification system is not an exhaustive list of types of managed care organizations or their characteristics. See the text for more detail.

The categorization scheme used here is approximate only. Distinctions among types of MCOs and even between some types of MCOs and managed

fee-for-service are becoming increasingly blurred.

“Risk” includes capitation, withhold, and bonus. “Cost” includes fee-for-service.

Plans with mostly exclusive relationships with providers have “tight” network structures. “Loose” networks are composed of providers who also

contract with other organizations and/or maintain a fee-for-service line of business.

“Choice of provider” refers both to network size and whether enrollees can see non-network providers.

“Control” refers to the degree of influence the plan has over network providers (through such managed care strategies as network selection,

compensation arrangements, benefit plan design, utilization management, quality assurance, and disease management.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.