Managed Care Career Overview


Introduction

The term "managed care" describes healthcare systems assembled specifically to deliver services in ways that improve quality and control costs. Executives in the managed care field often describe themselves as working in "the insurance business" even though the field encompasses more than insurance operations. Major functions include assembling and maintaining networks of providers to deliver services, marketing those services as a health plan (primarily to employers for their workers), supplying financial services (including processing claims), and evaluating services. These functions may all exist within a single organization, or they may be provided through separate organizations or combinations of organizations.

When considering the major functions, you may at first find the field of managed care almost indistinguishable from the field of acute care. (See Acute Care Career Overview.) There are actually many differences, but perhaps the key distinguishing feature relates to how providers are paid for serving patients. The traditional approach that once dominated acute care involved the indemnity or fee-for-service payment approach, where the amount paid for a particular service, such as a tonsillectomy, would be the same regardless of the provider. Managed care organizations use different approaches that include per diem, per case, and per capita payments, as noted below.


Career Opportunities in Managed Care

Managed care presents a wide variety of career opportunities for managers at the entry, middle, and senior levels within managed care organizations and in provider organizations such as hospitals and health systems. These opportunities vary by function and specialty. It is important to note that someone can have a managed care career and not work for a managed care plan. For example, positions such as managed care administrator and contract negotiator may be found in provider organizations as well as managed care organizations.

Each management level in the managed care sector has its own responsibilities, qualifications, salary range, and typical work hours. To find out what to expect as an entry-level manager, mid-level manager, and senior-level executive, click on the links below:


Managed Care Plan Highlights

All managed care plans are not the same. Two important dimensions differentiate plans: health plan design and the health plan's ownership.

Plan Design

The most familiar types of health plans are health maintenance organizations (HMO), preferred provider organizations (PPO), and point-of-service plans (POS). The design of these plans varies by the amount of flexibility their members have in choosing a care provider.

HMO plans are the most restrictive, requiring members to use physicians and hospitals from a network of providers with which the HMO has negotiated rates. Some HMOs require members to choose primary care physicians, sometimes called gatekeepers, who decide whether to refer patients for further care by specialist providers.

PPO plans allow greater freedom for plan members to choose physicians inside or outside of the health plan network. PPO members who choose out-of-plan physicians or providers can expect to pay additional out-of-pocket costs for this benefit.

POS plans combine elements of HMOs and PPOs. Members select in-network primary care physicians and may choose out-of-network providers (without requiring physician referrals). Members can expect to pay higher plan deductibles and co-insurance amounts for this benefit, or may rely on referrals by their primary care physicians.

Plan Ownership

Plan ownership is characterized by for-profit and nonprofit managed care organizations. HMOs were the earliest managed care organizations, and the first of these, started in the 1930s, were nonprofit plans. Often they formed to meet the healthcare needs of specific communities or industry workers such as steelworkers, power and light workers, etc.

The increasing cost of healthcare services became a concern for the federal government and employers in the 1970s and 1980s. When both turned to managed care as a promising approach for containing healthcare costs, they created appealing business opportunities for healthcare entrepreneurs. During the 1980s, some HMOs converted to for-profit status, and some traditional indemnity insurers created or acquired their own HMOs. By the 1990s, some local healthcare providers, including hospitals and medical group practices, started their own captive HMOs. As a result of the growth in the number of plans and price competition, many provider-sponsored plans went out of business.

Today, in certain markets where favorable conditions exist, some providers are again taking control of local HMOs.1 As recently as 1981, almost 90 percent of HMO enrollees were in nonprofit plans. By 1993, 52 percent were enrolled in for-profit plans, and in 2000, about 63 percent of enrollees were in for-profit plans.2 Some of the most well-known nonprofit managed care organizations are Kaiser Permanente, which encompasses nine states plus Washington, D.C., and serves 8.4 million members, and the Blue Cross Blue Shield Association, which has more than 40 member plans nationally and serves nearly 30 percent (86 million members) of the U.S. population through indemnity or managed care plans.3


Managed Care Statistics

The market for managed care services exists because private health insurance has become an increasing proportion of U.S. national health expenditures, which increased from 25 percent in 1965 to 35 percent in 2001.4 In 2001, employers provided health insurance coverage for 63 percent of all insured Americans, while the government covered another 25 percent of the insured population through such programs as Medicare and Medicaid.5

Recently, the proportion of workers insured through traditional employer-provided indemnity plans has fallen substantially while the proportion of workers under managed care plans has increased dramatically. In 1988, 73 percent of workers had indemnity-type coverage, with only 27 percent under HMO or PPO plans. By 2001, nearly 5 percent of workers had indemnity coverage while over 95 percent were in HMOs, PPOs, or POS plans.6 In contrast, in 2003 the federal Medicare program covered 41.5 million beneficiaries with almost 90 percent under a traditional fee-for-service plan. Under Medicaid, the federal-state partnership insurance program, 48 programs offered a managed care option, while 42 of these programs required beneficiaries to enroll in managed care plans.7

Even so, overall employer-based health plan enrollment has been shrinking, particularly because of higher unemployment and a trend among small employers to drop coverage. This situation has been working to the advantage of larger managed care organizations where over the past five years enrollment in the five largest firms has grown an average of 8 percent per year compared with 0.3 percent growth for all managed care firms combined.8

The managed care industry is predicted to experience continued consolidation. In 1997, 652 HMOs were operating in the U.S., compared with 490 in 2002 and a projected 425 in 2004.9 Much of this consolidation has occurred among smaller plans, particularly those with fewer than 50,000 members. Provider-sponsored plans also have left the marketplace. Industry watchers expect further consolidation from BCBS, which already saw a decrease from 134 plans in 1986 to 42 in 2003; continuing this trend, BCBS may retain only 25 or 30 plans within the next five years.10


Key Managed Care Definitions

Managed care executives face management challenges that define the context of their work. Recognizing and understanding the following terms should provide insight into the career of a managed care executive.

Administrative Loss Ratio

Sales, general, and administrative costs are the overhead expenses associated with operating a managed care organization. These expenses are termed ALR when expressed as a percentage of revenues. Plans covering many small groups and self-funded employers would be expected to have a higher ALR than organizations serving just a few large employers.

Carve Outs

Carve outs are payments made to providers for specific services not covered under the contracted rate. For example, if a hospital is paid per diem (or "by day"), it may "carve out" the cost of an implant, prosthetic, or particularly expensive drug so the hospital can afford to cover the cost of providing that service to the patient. For example, some implants cost from $10,000 to $15,000. Were a hospital to receive only $1,200 per diem for a patient who needs a $15,000 implant, the hospital would suffer a significant financial loss.

Investment Income

Managed care plans are insurance companies that are regulated at the state level of government. Often states require insurance companies to maintain specified levels of reserve capital, usually in the form of interest-bearing assets in proportion to the amount of risk premiums they write.

Medical Loss Ratio

The cost of administering benefits to enrollees is the medical benefit expense. The MLR is the ratio between medical benefit expenses and the amount of money coming in to a plan from its members. A lower ratio is preferable.

Per Capita

Payment is fixed and negotiated in advance for each person enrolled in a health plan. In theory, the per capita amounts are fixed for each member of a health plan regardless of the number or nature of services provided to the health plan member. Typically, premiums paid by consumers for managed care plans are lower than those paid for fee-for-service health coverage.

Per Case

Payment is negotiated at a fixed rate for each hospitalized patient based on the patient's diagnosis. In addition, per case rates can be used for certain high-cost or high-volume procedures.

Per Diem

With per diem payments, hospitals and other facilities are paid "by day" for specific services. Often there is a payment breakdown according to the type of service a patient is receiving such as medical per diem, surgical per diem, obstetrics per diem, etc.

PMPM

PMPM stands for "per member per month," which is a standard unit of measure for comparing revenues and expenses.

Risk and Non-Risk Sources of Revenue

Funds come into managed care organizations through two sources. One is from the premiums charged to cover enrollee healthcare expenses. This is risk-based revenue; the plan assumes the risk—on behalf of an employer—that revenues will exceed costs.

A second source is from non-risk fees associated with providing services—such as claims processing, access to provider networks, and pharmacy benefit management services—to employers that self-fund against employee healthcare expenses. For example, rather than pay premiums to insurers, employers set aside money (which is usually invested) to pay for employee health costs. Such arrangements remove the risk from managed care organizations, placing it with employers. It is estimated that more than half of total health insurance membership is self-funded.

Spread and Profitability

Most managed care organizations are profitable when the prices (premiums) that plans charge exceed their costs. Being able to accurately predict medical cost trends in order to adjust premiums underlies profitable performance.


Managed care executives should recognize how the field is changing and how the following trends will affect them, healthcare groups, and the communities they serve. Succeeding in a competitive marketplace requires executives to be proactive in initiating change and competent in dealing with operating and financial risks.

  • Managed care will remain a sector with low profit margins that will stay in the low single digits. Profits reached 1.8 percent in 1999 and 4.4 percent in 2002.
  • Premiums will continue to increase as they have for the past four years. Premiums increased 11.2 percent for employer-sponsored plans in 2004.11 Increasing premiums should maintain or even improve profit margins.
  • Medical expenses can be expected to rise, although the rate of increase may not be as rapid as in the past. This trend would indicate that careful pricing will remain a crucial success factor.
  • Many managed care companies will pursue more business with self-funded employer services and other opportunities involving non-risk-based business, such as pharmacy benefit management.
  • Commercial insurers and Blue Cross Blue Shield plans will continue to consolidate, increasing economies of scale and improving technology investments to meet state statutory capital requirements.12

American College of Healthcare Executives

Academy of Managed Care Providers

Agency for Healthcare Research and Quality

Managed Care On-Line

National Committee for Quality Assurance


Notes

  1. Modern Healthcare, July 19, 2004, p. 6.
  2. Centers for Medicare & Medicaid Services, "Health Care Industry Market Update: Managed Care," March 24, 2003, citing study by InterStudy, p. 11.
  3. Ibid., 12.
  4. Ibid., 9.
  5. Ibid., 36.
  6. Ibid., 10.
  7. Ibid., 11.
  8. Ibid., 9.
  9. Centers for Medicare & Medicaid Services, "Health Care Industry Market Update: Managed Care," March 24, 2003, citing study by InterStudy and JPMorgan, p. 35.
  10. Centers for Medicare & Medicaid Services, "Health Care Industry Market Update: Managed Care," March 24, 2003, citing study by InterStudy, p. 35.
  11. NewsNow, American Hospital Association, September 9, 2004.
  12. Centers for Medicare & Medicaid Services, "Health Care Industry Market Update: Managed Care," March 24, 2003, citing study by InterStudy, p. 7.