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Managed Care

Abstract and Keywords

Since the mid-1980s, managed care has been one approach used to address the economic crisis in the American health-care system. This entry overviews managed care from the perspective of policy, procedure, practice, and system. Specifically, emphasis is given to understanding the emergence and history of managed care, multiple definitions, how it works, and examples of managed care plans, key legislation, existing research, its future, and implications for social-work practitioners.

Keywords: managed care, health-care reform, capitated, cost-effectiveness, cost-containment, beneficiaries

Emergence of Managed Care

Throughout U.S. history, the costs of health care have always been “managed”—in one way or another. In post–Civil War days, health care was bartered for in chickens, farm labor, or the most basic of wages. Care was “managed” one-on-one, which we now call “fee-for-service” where the patient or insurer pays each time a service is provided. Fast-forward to contemporary times where the concern of managing health-care costs has caused much debate among the public and policy makers. Among the concerns are health-care spending accounting for about 19% of the total expenditures at the state and federal levels and is the second fastest growing component of the federal budget, overshadowed only by the growth in public debt (Karger & Stoesz 2006). Health-care costs are higher in the United States than in any other industrialized nation and health spending in the United States was, as of 2002, 14% (compared with Canada at 9.1%). The most stunning expenditures since the mid-1970s are those associated with hospital care (31%), physician services (22%), and prescription drugs (11%). Hospital care costs reached $401 billion in 1999, up from $28 billion in 1970, with nearly 60% of hospital costs going to wages and caregiver benefits. The cost for physician services rose by almost 1,800% between 1970 and 1999, with a 300% increase between 1980 and 1990 alone. Pharmaceutical expenditures went from $5.5 billion in 1970 to $101 billion by 1999, a 1,800% increase (Karger & Stoesz 2006).

Given these facts, how does a society manage rising health-care costs? Early attempts at addressing these issues were met with two strategies: (a) cut the costs for governmental health programs and (b) lower overall medical costs. This was the birth of the health care reform movement and its controversial offspring, “managed care” (Lightburn & Schamess 1998).


The language used to describe managed care is derived from the field of business and economics. For example, insurer or employer becomes payer, clinician or therapist becomes provider, and patient or client becomes member or enrollee or beneficiary (Spitz, 1996). Managed care has come to be synonymous with cost-containment and the mechanism to address spiraling health-care costs. Using the most generic definition, managed care refers to “the organization of networks of providers (doctors, clinics, hospitals) into a system that is cost-effective. Institutions or individual health-care providers who are in managed care systems agree to set fees for each service or flat payments per patient.” (Karger & Stoesz 2006). Criticism of the fee-for-service model included the view that clinical services were open-ended, therapist driven, nonmeasureable, and subjectively delivered (Corcoran & Vandiver 1996). It emphasized providing sickness care after patients got sick. Proponents of managed care point to an impetus for prevention.

Managed care is also public policy, such as the Health Maintenance Act of 1973. It is a procedure, such as when intake workers prospectively screen each case for “medical necessity” of a service. It is a practice setting or approach. An example would be a provider employed by a Preferred Provider Organization (PPO) providing an 8-week smoking cessation program for members enrolled in a health maintenance organization (HMO). PPOs refer to a network of providers who remain in private practice and receive payment on a fee-for-service basis (Moniz & Gorin 2007). Managed care plans can also be seen in the behavioral health care field. Managed behavioral health care refers to plans that specifically target mental health and substance abuse services (Moniz & Gorin). These plans are usually structured as “carve outs,” which are devoted exclusively to mental health and chemical dependency issues for a defined population.

History of Managed Care

Sickness coverage has been on the minds of labor and national leaders since health care benefits were added to employment as part of collective bargaining between employee and employer during World War II. However, since the mid-1980s, federal legislation has focused on costs.

The evolution of managed care was influenced by the following key legislation:

  • 1965—Titles XVIII and XIX of the Social Security Act: This act established Medicare, which provides health coverage for workers who have become elderly or disabled and Medicaid, which covers care for very low-income Americans and is a federal–state partnership.

  • 1973—Health Maintenance Organization Act of 1973: This act required businesses with 25 or more employees to provide optional HMO coverage to their employees and was mainly enacted to promote the development of HMOs.

  • 1981—Omnibus Budget and Reconciliation Act of 1981: This act permitted state-level experimentation with Medicaid managed care by allowing states to seek federal waivers in place of their fee-for-service coverage.

  • 1982—The Tax Equity and Fiscal Responsibility Act of 1982: This act paved the way for HMOs to enroll Medicare beneficiaries; it had capitated funding based on the idea that financial incentives for prepaid plans would counter the excessive costs and utilization of medical services under Medicare and Medicaid.

  • 1983—Deficit Reduction Act of 1983: This act ushered in a prospective pricing system known as Diagnostic Related Groups (DRGs), which were federally mandated payment systems designed to control costs by using a payment system in which the hospital receives a particular amount for certain diagnoses, regardless of services provided.

  • 1997—Balanced Budget Act of 1997: This act expanded Medicare beneficiaries (for example low-income women, children, and elderly) with the introduction of Medicare Part C (also known as Medicare + Choice), in which beneficiaries were encouraged to enroll in managed care health plans.

  • 2003—Medicare Prescription Drug, Improvement, and Modernization Act of 2003: This act changed Medicare + Choice to Medicare Advantage, which now required beneficiaries to join a private health plan in order to receive prescription drug coverage (Brill & Levine 2001).

In the 1980s, federal and state governments looked at how private insurance was seemingly benefiting from cost cutting strategies (for example, restricting reimbursement) and followed suit. Medicaid and Medicare policy makers promoted managed care because they expected that capitation, competition, and participation of mainstream, commercial HMOs would expand access, save money, and improve care. By 1998, there were 346 Medicare HMOs with 6 million enrollees. However, by 2003, there were only 179 Medicare HMOs and ∼1 million Medicare enrollees had been dropped because of low reimbursement rates (Karger & Stoesz 2006). HMOs across the nation eventually exited the traditional Medicare managed care market after 3–5 years (Sparer, 2003), citing low reimbursement rates, burdensome bureaucratic oversight, and lack of familiarity with the high needs of enrollees.

By 1997, there was a total of more than 17 million individuals enrolled in the Medicaid managed care programs, up from 750,000 in 1983 (Moniz & Gorin 2007). As of 2004, states like Tennessee have enrolled 100 percent of their Medicaid population into managed care plans (Centers for Medicare and Medicaid Services, 2004, as noted in Moniz & Gorin 2007, p. 118).

Managed Care Organization and Practice

One common feature of managed care is “cost containment,” also known as “capitated care.” Capitation is the method of payment in which the provider is paid a fixed amount for each person served regardless of the actual number or nature of services delivered (Karger & Stoesz 2006). For example, under traditional Medicare, health-care providers bill the government for services they perform—known as “fee-for-service.” But with “Medicare Advantage” managed care, insurers get a set amount per person—known as “capitated,” which the insurers reimburse the providers or organizations that provided the care.

Capitation is a way of controlling costs for care and may be operationalized in two ways: provider-based and organization-based. The provider-based capitation approach assigns a consumer to a provider who receives a flat payment for services provided. In return for this per capita payment, the provider assumes the obligation to provide all services required by plan members. Organization-based capitation, in contrast, begins with a provider group or an independent practitioner group, deciding on a group contract under an arrangement in which the distribution of services is restricted to the capitated budget.

In essence, capitation programs provide all the services to a group at, say, $3,000 per person/annum. The financial goal is for the average to be less than $3,000, so that the remainder becomes profit for the managed care program. Profit may be realized in the form of reinvestment into the organization in terms of new services. In one behavioral health-care organization, the agency reinvested its “profits” into developing consumer run recovery services, which were not paid for by traditional funding mechanisms.

Some examples of managed care plans are HMOs, which are a prepaid or capitated insurance plan, in which individuals or employers pay a fixed monthly fee for services. PPOs are a type of managed care whereby an employer or insurance company contracts with a selected group of providers for services at pre-established reimbursement rates. Consumers have the choice of who to contact for the services. If a physician or provider is not on the provider list, higher expenses to the patient will result. Point-of-service plans provide financial incentives to members who elect to have their treatment services provided by “preferred providers.” Preferred providers refers to “in-network” providers whose services carry higher rates of reimbursement than if the consumer chose to see someone out-of-network. Carve-out plans are specialized health-care plans devoted exclusively to mental health and chemical dependency issues. In exchange for a negotiated payment, carve-outs oversee the behavioral health care and treatment of a defined population.


Research on whether managed care has contained costs while maintaining access and quality has been challenging for many reasons: the variety and rapid change of plans and management techniques, heterogeneity of the fee-for-service systems, spillover effect from managed care to fee-for-service programs, uncertainty about the appropriate level of analysis, the confounding influence of differences in benefit packages of managed care and fee-for-service programs, and the possibility of temporal effects in managed care performance, either a longer-term negative dose effect or positive organizational learning (Leff et al., 2005). Additionally, providers find themselves challenged by issues of limited access to certain patient groups, fixed number of patient visits, and having to turn away patients who do meet the eligibility criteria or whose reimbursement rate is so low that they are seen as a financial liability.

Despite these challenges, new findings provide a picture of how managed care is or is not impacting health-care outcomes. Results of three large-scale studies essentially reported “no differences” between fee-for-service models compared with capitated or prepaid managed care programs or other HMO model on the following variables: access for substance abuse clients (Bigelow, McFarland, McCamant, Deck, & Gabriel 2004), measures of satisfaction, use and quality of services, symptoms and functioning for clients with serious mental illness (Leff et al., 2005), and medical costs and improved treatment outcomes for specialty alcohol and drug treatment (Pollen, Freeborn, Lynch, Mullooly, & Dickinson 2006). Two other studies reported no differences in case management activities (Hromco, Moore & Nikkel 2003), nor differences in beneficiaries enrolled in a HMO compared with regular Medicare managed care (Wooldridge et al., 2001). However, earlier research does confirm that managed care achieved cost savings as much as 30–40% through the cost-control strategy of substituting less expensive out patient care for inpatient care (Zuvekas, Rupp, & Norquist 2007). While these findings suggest managed care has neither been overwhelmingly helpful or hurtful, research continues to be limited in terms of determining whether it improves the quality of care.

Trends and Future Directions

By 2015, managed care will likely undergo significant changes. From a policy perspective, the new 110th Congress already has plans to overhaul Medicare managed care in two areas: reimbursement rates to health insurance companies that run Medicare's managed care programs (that is, specifically the Medicare Advantage) and the insurers slush fund, also known as the regional stabilization fund, which ensures that certain managed care companies, like PPOs, offer their services widely. Behind this effort is a newly appointed independent panel, the Medicare Payment Advisory Commission. The topic of universal health care is back on the national table with Massachusetts and California leading the way.

At a policy level, the future of managed care will be influenced by a new generation of employers, insurers, politicians, consumers, and voters who are working to eliminate managed care procedures that promoted price discrimination for reasons of health or job status. For example, bipartisan efforts to introduce a patients' bill of rights legislation can be found in initiatives such as the Bipartisan Patient Protection Act of 2001 and a latter version that gives individuals the right to hold their HMO's accountable if poor medical decisions results in injury (Moniz & Gorin 2007). Until governmental system change occurs, provider organizations will continue with cost-containment strategies but with a mix of fee-for-service and capitated pricing arrangements. These organizations will work in tandem with a multidisciplinary group of consumers, corporate benefit managers, health care consultants, and pharmacy benefit managers to develop toolkits to help employers select and purchase a variety of health and mental health services (Substance Abuse and Mental Health Services Administration [SAMHSA], 2005).

At a practice level, the future of managed care will be influenced by consumer and provider groups. Specifically, consumer groups are working on federal legislation to balance the decision making power of managed care organizations in areas of provider choice, treatment options, and ability to sue HMOs for denial of care. Providers are increasingly developing provider-sponsored (that is therapist-owned) plans that have the competitive strategy of managed care but with a more consumer friendly approach and less dictation by insurers. Further, the principles undergirding managed care are slowly being embraced by a new generation of workforce professionals who are open to the notion that services should be collaborative, patient directed, and relatively brief so as to encourage people to return to their lives as quickly as possible, and evidence-based with measurable outcomes. Managed care has helped cement the idea that services must be evidence-based and clinicians are accountable for showing improvement by means other than opinions or observations.

Implications for Social Work

What Social Workers as Practitioners Have to Know and Do

The implications for social work to influence the future of managed care are enormous. Barusch (2006) identifies several macro level roles in which social work can shape the next generation of managed care policies, procedures, and practices. These are (a) negotiating and monitoring of each states contracts with providers, (b) ensuring that the needs of consumers are addressed in these processes, (c) advocating services to address the needs of Medicaid beneficiaries, and (d) increasing the voice of Medicaid recipients in decisions related to managed care—for example, consumer surveys, grievance procedures, hotlines, and consumer representation on advisory boards, such as Medicaid ombudsman programs.

Overall, social workers have the skills to influence the debate on managed care, particularly if issues of lack of access to health care or discrimination based on illness severity are perceived as social justice issues. Social workers need to help ensure that patients make informed choices when selecting a managed care plan. The National Association of Social Workers has developed a policy statement on managed care to serve as a guide for the profession in working as practitioners and advocates (2006).

Being with managed care since mid-1980s, can we say it has worked? Did it achieve the goals of cost containment and effectiveness, quality assurance and integrated care? The answers to these questions are varied. In some settings, managed care jump-started a whole new way of how services could be delivered, choice was offered, and care was provided. In other settings, managed care plans were flawed, punitive, confusing, and proved the detriment of individuals enrolled in its system.

Managed care has arisen to a large extent because such essential services as health and mental health have been bought and sold in the marketplace. What must accompany any future change in managed care is how to improve access and affordable and quality care for consumers. In other words, how should we truly “manage” their care? The only solution as a rising tide of prominent voices suggests (Moniz & Gorin 2007) is comprehensive, universal health and mental health coverage based on health care as a right not a commodity.


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                              Wooldridge, J., Brown, R., Foster, L., Hoag, S., Irvin, C., Kane, R., et al. (2001). Social health maintenance organizations: Transition into Medicare±Choice. Mathematica Policy Research, Washington, DC: MPR.Find this resource:

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                                  Further Reading

                                  U.S. Health Care Financing Administration.

                                  Kaiser Family Foundation Commission on Medicaid and the Uninsured.

                                  Medicare Payment Advisory Commission.