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Managed Care and Children

What Is Managed Care?, Trends in Managed Care among Children

Since the early 1980s the health care system in the United States has been radically transformed from one dominated by fee-for-service arrangements to one dominated by managed care. Between 1980 and 2000 the number of Americans enrolled in some form of managed care rose fourteenfold. By that year, an estimated 140 million people were enrolled in health maintenance organizations (HMOs), one form of managed care. Because many children are beneficiaries of employment-based insurance, they are increasingly enrolled in managed-care plans, along with their parents. It is estimated that as of 1996, half of all insured children were enrolled in managed-care plans. Children are also being enrolled in managed-care plans through the nationwide conversion of state Medicaid programs from fee-for-service to managed care, and through the adoption of the State Child Health Insurance Program (SCHIP), which was enacted by Congress in 1997 to extend health insurance to low-income children who are ineligible for Medicaid, but whose family incomes are too low to afford private insurance. By 2000 most states had implemented managed-care programs for Medicaid and SCHIP beneficiaries.

What Is Managed Care?

The term managed care refers to a variety of health care financing and delivery arrangements. The single unifying characteristic of these various approaches is that those enrolled are either encouraged or required to obtain care through a network of participating providers–providers that are selected by the managed-care organization and agree to abide by to the rules of that organization. This is in contrast to fee-for-service arrangements, in which patients typically may seek care from any licensed health care professional or organization, and providers may perform services based on their individual judgments about what care is appropriate or needed. Under fee-for-service, however, an insurer may decide after the fact not to reimburse the health care provider or the patient for certain services received.

The primary purposes of limiting the range of providers available to enrolled patients under managed care are twofold: to control the patient's access to services, and to control the behavior of the providers. A limited network of providers not only restricts utilization to those providers in the plan, but also permits the plan to control participating providers with respect to patient utilization. By controlling access and utilization, plans can better control costs.

The ways in which managed-care plans control access and utilization varies among the different managed-care models. Plans vary in terms of the degree of risk that is placed on the physicians (as opposed to the plan or the payer); the relationship among the physicians within the network; and the exclusivity of the relationship between the plan (or an intermediary) and the medical group.

HMO plans generally have two defining characteristics: providers are at direct or indirect financial risk for providing services, and enrollees usually have no coverage for out-of-network use. The types of HMO plans are distinguished from each other by the type of physicians organization that delivers the services, and by the exclusivity of the relationship between the plan or intermediary and large medical groups.

Preferred provider organization (PPO) plans have three defining characteristics. First, they do not capitate or put their network physician members at risk. (Capitation is defined as a single payment to a provider per member per month of service, regardless of patient encounters.) PPOs generally pay physicians on a fee-for-service basis, often at a discount from usual, customary, and reasonable charges. Second, enrollees in a PPO plan usually receive services from a network of solo or small-group physicians and a network of hospitals that have nonexclusive relationships with the PPO (though some PPO enrollees receive services from large group practices). Third, PPO enrollees receive some benefit coverage if they obtain health care services from a non-network provider.

Point-of-service (POS) plans may be thought of as HMOs with a PPO wraparound. They are defined by one typical characteristic. When services are needed (the point-of-service), enrollees can choose to obtain services out-of-network and still obtain some coverage for that service. POS-plan enrollees pay higher premiums than do those enrolled in traditional HMOs.

Trends in Managed Care among Children

Since 1973, when Congress enacted the Health Maintenance Organization Act to support the development of HMOs, managed care has rapidly taken hold. By 1995 nearly three-quarters of Americans who received their health insurance through an employer were enrolled in a managed-care plan, up from 51 percent just two years earlier. Total membership in insurer-sponsored managed care at the end of the 1990's approached $132 million. This widespread move toward managed care is largely a reflection of payers' interest in controlling their costs. Employers and government sponsors face increasing pressure to contain costs, including those related to health insurance for their employees. In some employer plans, as well as most Medicaid and SCHIP programs, consumers are no longer given the choice between managed care and open fee-for-service but are required to accept managed-care enrollment. Although both health insurance premium increases and Medicaid spending growth slowed in the late 1990s and into the twenty-first century, fore-casters have predicted that managed care will continue to assume a greater proportion of the market.

The largest increases in managed-care enrollment have occurred in the private market. In 1996, 43 percent of insured persons were enrolled in HMOs. Managed care has also has taken over government insurance programs such as Medicaid. Since the early 1980s, when federal restrictions on managed-care enrollment were significantly relaxed, the number of Medicaid beneficiaries enrolled in managed care has risen. As a result, national enrollment rates in managed care grew fivefold during the 1990s. In California, where managed-care penetration is the greatest, half of all children with Medicaid coverage were enrolled in managed-care organizations in 1999. All states with SCHIP programs enroll participants in managed-care plans. Since Medicaid managed care involves mostly children, and SCHIP is exclusively for children, the adoption of managed care by these programs is significant. Indeed, managed care is becoming the norm for children. Nearly half of all insured children were enrolled in managed-care plans in 1996.

Is Managed Care Good or Bad for Children?

Most observers agree that the transition from fee-for service arrangements to managed care presents both challenges and opportunities in the provision of services to children. Managed care has the potential to affect access to health care, the quality of care received, and health care costs in countless ways. Advocates of managed care contend that it can result in improvements over fee-for-service through improved coordination and convenience of health services, an emphasis on prevention, and establishing a medical home or continuity in health care. Opponents of managed care argue the opposite, contending that it has the potential to create barriers for children through financial disincentives to provide quality care, limitations on providers and services, and other system-related obstacles to care, particularly specialty care. Which of these perspectives is correct remains an unresolved question.

Quality Access and Costs

Access. A major advantage of managed care over traditional fee-for-service delivery systems is that managed-care plans normally have more comprehensive information about their enrolled populations and can more effectively track service-use patterns. Managed-care plans can use data systems to develop strategies aimed at improving access to care and the quality of services received by children. A potential disadvantage is the strong incentive to control costs, which may limit needed medical services, particularly for vulnerable populations.

Despite these theoretical advantages and disadvantages, neither has been definitively proven. Studies assessing the impact of managed care on access to care among Medicaid-enrolled children in the early 1980s found that the use of routine preventive services was the same or slightly increased under Medicaid managed care compared to fee-for-service. However, compliance was below the recommended standards for check-ups set by the American Academy of Pediatrics and the federal Early Periodic Screening, Diagnostic, and Treatment (EPSDT) program, which is a component of Medicaid specifying benefits that must be made available to enrolled children. Several more recent studies confirm this general finding. Researchers who examined eighteen access indicators found that only three of them showed statistically significant differences between children enrolled in managed care and children enrolled in traditional health plans. Children enrolled in managed care were more likely to receive physician services, more likely to have access to office-based care during evening or weekend hours, and more likely to report being very satisfied with the overall quality of care. However, the analysis also revealed some problem areas, including challenges getting appointments and contacting medical providers by telephone. Lack of strong evidence of differences in access to care has been found in other recent studies, as well.

One exception to this general finding relates to access to specialty medical care. There is evidence that children in managed-care plans face greater difficulties than others in obtaining pediatric specialty services. This is especially problematic for children with special health care needs (such as disabilities and chronic health problems) who are enrolled in plans that are more restrictive in terms of parents' ability to self-refer their children for specialty care.

Among general populations of HMO enrollees, children get more primary and preventive care, but they also get less specialist care and experience more provider access and organizational barriers to care. HMO enrollees are more likely to report a regular source of care than those enrolled in other types of insurance, but they are more likely to report access problems related to the organization of care delivery.

Quality. Little is known about the quality of care children receive in managed-care settings. Detecting differences related to quality is impeded by imprecise definitions of quality, as well as the lack of uniform methods of measuring it. While measuring quality is problematic regardless of the population of interest or the type of plans within which the population is enrolled, the lack of consistent and reliable methods of assessing quality in managed-care settings (especially given its widespread and rapid adoption), is of concern to many.

Nonetheless, some studies have attempted to assess the quality of managed care for children. By and large, these studies rely on parents' reported satisfaction with care and other services within the plan. (To date, no studies have been published that examined clinical differences or other direct measures of health status.) In general, the results are mixed. One major study found that over 95 percent of families generally reported high levels of satisfaction with their children's care regardless of the type of plan in which they are enrolled. This study found no strong evidence of significant differences in satisfaction with care or quality of care between children enrolled in managed care and fee-for-service health plans. This is in contrast to another study, which found evidence that families and providers are sometimes less satisfied under managed care.

Such mixed findings are also found when examining the experience of children in Medicaid managed care. One major study found no significant differences in parents' ratings of the health care experience comparing those of children in Medicaid managed care versus fee-for-service, while another found that Medicaid managed-care enrollees were slightly more satisfied than their counterparts in fee-for-service plans. Interestingly, it appears that racial and ethnic minorities are generally less satisfied than their white counterparts. One study that found such differences concluded that language barriers largely account for the racial and ethnic disparities in satisfaction with care in Medicaid managed-care plans. These findings suggest the need for further research with diverse populations, such as African Americans, where language is not an issue in receiving care.

More research has been conducted on the impact of managed-care enrollment among general populations (rather than by age) and the majority of this work has focused on patient satisfaction. In general, these studies report that satisfaction with overall care was lower among HMOs, which also received fewer excellent ratings from enrollees regarding their visits with physicians. In addition, HMO enrollees were less confident that their physicians would refer them to needed specialty care than were consumers in non-HMO plans. All together, HMOs scored lower on eight out of nine satisfaction measures, with differences ranging from 3 to 7 percentage points, and enrollees reporting less satisfaction, lower levels of care, and less trust in their physicians.

Costs. Managed-care plans are nearly always designed to achieve some cost-savings. Despite this, few studies have examined the extent to which this promise is realized. Moreover, the bulk of pediatric research conducted thus far has focused on Medicaid populations. By and large, the research suggests that the extent to which managed care can lead to savings, at least among low-income children, is unclear. One major analysis of twelve evaluations of Medicaid managed-care programs for children found that seven studies reported a decrease in costs, two reported increased costs, and the remaining studies had mixed, unchanged, or unknown results. Other research has found savings up to 15 percent among children on welfare in managed care (compared with traditional fee-for-service Medicaid), while other experiments have produced little or no savings.

Among the general population, the findings are more certain. Compared to fee-for-service, enrollment in managed care has led to cost savings, particularly lower out-of-pocket costs for patients. Specifically, 10 percent of families enrolled in HMOs in one study paid more than $1,000 in out-of-pocket expenses, compared with 17 percent of families enrolled in other types of plans. Consequently, HMO enrollees were less likely to cite financial problems as a barrier to care. However, they were more likely to report administrative barriers to care. It appears, though, that future cost savings may be limited, largely because lower costs to patients have translated into reduced profits for the health plans. As plans attempt to recoup these profits, out-of-pocket costs, such as co-payments for services, may rise.


Because of the variability in managed-care plan organization and financing, much of the literature on managed care appears contradictory in its findings. In general, the research suggests that the extent to which managed care improves or impedes children's access to and utilization of quality care depends on the of type of managed care, the health status of children who are enrolled, and the circumstances under which they are enrolled (voluntary versus mandatory enrollment).

However, lack of more definitive data on access, quality, and costs, particularly among nonpoor children, suggests a need for more research on this subject. More and better information of the impact of managed-care enrollment on costs and quality are especially needed. These remain areas in which most information is anecdotal and largely speculative. Given that managed care is likely to remain a major, if not dominant, method of health care financing and delivery, it is critical that more is understood about its impact on children, so that any needed modifications in the design and organization can be made.


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