Tuesday, May 31, 2011

The Concept of Managed Care

I was listening to talk radio on my way home this evening, as I occasionally do to keep awake, and I heard Phil Valentine discussing the ever-present issue of healthcare. He was dissing the very concept of managed care.

The gist of his argument went something like this: "Joe Blow needs procedure X. Either Joe or the insurance company he pays (or the government entity that subsidizes his health care, although that's un-American) needs to pay for procedure X that Joe needs. The Guvmint shouldn't give Joe's healthcare providers a fixed amount of money to cover his healthcare needs and certainly shouldn't have the ability to say, 'Joe, the cost of your procedure exceeds the limit the Guvmint set, so we're cutting you off.'" All this was in response to a statement from some Democrat who thought it a reasonable idea that the "Guvmint" should offer a provider a fixed amount to cover a patient's health expenses for a period of time (like a year).

Phil apparently isn't even trying to understand the concept of managed care. I happen to work (indirectly) for a "Payer" that makes contracts with managed care organizations (MCOs), so I have an idea what he's missing.

The principle of managed care is to keep the "enrollees" or "patients" of the managed care system healthy. The MCO enters into a binding contract to pay for a patient's medical needs for the duration of the contract. That's an important point: the MCO must pay for all medical procedures that the patient needs.

The Payer in this system gives the MCO a certain amount of money for the patient for a specific period of time, usually a year. The amount can vary, depending on the patient's age and any pre-existing conditions of the patient (such as diabetes or just age), but the MCO gets this amount regardless of the actual cost of procedures that the patient needs during that period of time. Note that, due to the contract, the MCO must pay for the patient's medical needs, even if the cost exceeds the amount paid by the Payer.

Obviously the MCO will lose money if the cost of a given patient's care exceeds the amount it receives from the Payer. This means that the MCO has an economic incentive to keep the patient healthy. This is how a managed care system uses the free-market forces that Phil adores so much to control costs. The MCO wants to enter the contract to get that "money per patient payout" from the Payer (the "Guvmint" in this case), but the MCO doesn't want to pay for expensive medical procedures for a patient, like a hospitalization. If the MCO can keep the cost of a given patient's care below the annual payment from the Payer, it makes a profit. If it can keep the overall cost of patient medical expenses below the overall payment for all patients, it makes an overall profit on its contracts.

Consequently, it's in the financial interest of the MCO to monitor patients and address any potential health problems as early as possible, before they develop into serious problems that require an expensive hospital stay. That is how managed care systems that provide fixed amounts of money for patients save money for the Payer.

Compare this to a Fee For Service (FFS) system, such as Phil proposes, in which the Payer picks up the bill for every procedure a patient needs. In an FFS system, the incentive for the provider is to maximize the number of billable services for the patient. If the patient has a developing condition that could be treated cheaply if treated early, the provider actually has a financial incentive to wait until the condition becomes more serious, so they can charge the Payer for more procedures and more expensive procedures to treat it.

I hope it’s clear now why an MCO system is at least potentially more economical for the Payer than an FFS system. Certainly there are potential abuse issues in an MCO system (such as disputes over whether a particular procedure is “needed” for a particular patient and arguments over what the annual payment for a given patient should be), but the underlying principle of an MCO system is to encourage providers to keep patients as healthy as possible, so they don’t need expensive procedures. Whatever it is, it ain't "evil socialism."

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