Regulating Managed Care: Theory, Practice, and Future Options

In 1995, nearly three out of four Americans with health insurance coverage provided by their employers received their health care through managed care plans: health maintenance organizations (HMOs), preferred provider organizations, and point-of-service plans. This is a dramatic change from a decade earlier, when fewer than three out of ten people were enrolled in such plans. ¹ The rapid rise of managed care was spurred by the dramatic escalation in health care spending in the late 1980s and early 1990s. As health care budgets grew dramatically, many consumers were encouraged —or required—to sign up for managed care through the employer or government programs (Medicaid and Medicare) that paid a large part of the bill for their care.

Managed care was seen as a necessary component of the drive to bring health costs under control. The traditional fee-for-service health care system—in which patients first sought care, then asked their insurance plans to pay for it—was believed to have offered perverse incentives that drove up spending. Consumers could see any doctor, whether generalist or specialist, as often as they wanted: the choice was theirs. Doctors and hospitals were rewarded for providing more services, regardless of their value or necessity. Managed care turned this system on its head. Incentives that encouraged providers to see patients frequently and to test and treat them aggressively were replaced by incentives that encouraged the delay or denial of care.

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