Managed Health Care: A Primer

Managed Health Care: A Primer

97-913 EPW
CRS Report for Congress
Received through the CRS Web
Managed Health Care: A Primer
September 30, 1997
Jason S. Lee
Analyst in Social Legislation
Education and Public Welfare
Congressional Research Service ˜ The Library of Congress

Managed Health Care: A Primer
Summary
Since the early 1970s, market forces have driven profound changes in the
financing and organization of health care delivery. Whereas the functions of paying
and providing for medical care were once separate, now they are joined together in
an increasing number of managed care organizations.
Between 60 to 70 million persons (approximately 20% of the U.S. population)
were enrolled in over 600 health maintenance organizations (HMOs) in 1996. In
addition, between 80 to 90 million persons were enrolled in more than 1,000
preferred provider organizations (PPOs), which is another type of managed care
organization. Altogether, over one-half of the U.S. population and almost three-
quarters of insured employees were covered by some form of managed care in 1996.
Individual practice associations (IPAs) are the most common and fastest
growing type of HMO; they account for 60% of all HMOs and 44% of HMO
enrollment. Together, staff and group model HMOs account for less than 20% of
total HMO enrollment. About three-quarters of HMOs now offer a point-of-service
(POS) option, which allows enrollees to see out-of-network providers for a higher
premium and/or coinsurance payment. The data are mixed on whether medical
expenses are higher for POS members than for traditional HMO members.
National managed care firms, also called corporate HMO chains, accounted for
88% of total HMO enrollment and 70% of all HMOs in 1995. By January 1996,
almost half of total HMO enrollment was in the seven largest national firms, up from
34% only 6 months earlier. This concentration of membership reflects mergers and
acquisitions that have been occurring at a rapid pace in the managed care industry.
For-profit HMOs enroll about 60% of all HMO members and constitute about
70% of all HMOs. Recent analyses indicate that in market areas where there are
more for-profit HMOs, net operating margins tend to be lower and annual enrollment
growth tends to be higher. However, net operating margins are increasing faster for
for-profit HMOs than for non-profit HMOs.
In 1997, the average base salary of HMO chief executive officers (CEO) was
$227,133 (the median was $195,787). This is an increase of 56% since 1991. With
bonuses and incentives added in, the mean HMO CEO salary was $310,241 (median,
$227,500). Ten percent of HMO executives make well over half a million dollars a
year.
Almost two-thirds of persons under the age of 65 are covered by employer-
sponsored insurance. Of these, in 1996, 73% received health care from a managed
care organization. Since 1993, insured workers’ enrollment in traditional indemnity
plans has dropped from about one half to under a quarter. Managed care enrollment
has been particularly rapid in HMOs with a POS option. Cost considerations are
closely associated with this change. In 1995, employers paid an average of 15% less
for HMO coverage than for traditional indemnity coverage.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
What is Managed Care? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
A Brief History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Health Maintenance Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Types of Health Maintenance Organizations . . . . . . . . . . . . . . . . . . . . . . . . 5
National Managed Care Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Trends in HMO Enrollment and Growth . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Service Utilization and Costs in HMOs . . . . . . . . . . . . . . . . . . . . . . . . . . 11
HMO and Fee-for-Service (FFS) Premiums . . . . . . . . . . . . . . . . . . . . . . . 13
Point-of-Service Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
State HMO Enrollment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Tax Status and HMO Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Compensation of HMO Executives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Preferred Provider Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Exclusive Provider Organizations (EPOs) . . . . . . . . . . . . . . . . . . . . . . . . 22
Silent Preferred Provider Organizations (PPOs) . . . . . . . . . . . . . . . . . . . . 22
Single-Service or Specialty HMOs and PPOs . . . . . . . . . . . . . . . . . . . . . . 23
Provider Sponsored Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Employer-Sponsored Health Plans and Managed Care . . . . . . . . . . . . . . . . . . . 25
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Appendix A. Characteristics of Managed Care Organizations . . . . . . . . . . . . . 28
List of Figures
Figure 1. HMO Enrollment, All Ages, 1976-1996 . . . . . . . . . . . . . . . . . . . . . . . 9
Figure 2. Number of HMOs, 1976-1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Figure 3. Utilization Rates: HMO Enrollees and the U.S. Population,
1988-1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Figure 4. Premium Changes in Employer-Sponsored Plans,
1987 to 1996 (firms larger than 200 employees) . . . . . . . . . . . . . . . . . . . . 14
Figure 5. Percentage of Population Enrolled in HMOs, by State,
as of January 1, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Figure 6. HMO Tax Status by Enrollment and Number of HMOs, 1996 . . . . . 17
Figure 7. Average Base Salary of HMO Chief Executive Officers,
1991 to 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Figure 8. National Employee Enrollment, 1993-1996 . . . . . . . . . . . . . . . . . . . 26

List of Tables
Table 1. The Nation’s 25 Largest Individual HMO Plans, 1995 . . . . . . . . . . . . . 6
Table 2. National Managed Care Firms Ranked by Total HMO Enrollment,
as of January 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Table 3. Average Premiums for All Medium and Large Employers, 1996 . . . . 13
Table 4. Percentage of Enrollees Using Any Out-of-Network
Benefits in Point-of-Service Products, 1995 . . . . . . . . . . . . . . . . . . . . . . . 15
Table 5. Salary of Chief Executive Officers in HMOs, Spring 1997 . . . . . . . . . 19
Table 6. Chief Executive Officer Salaries by Model, Location,
Enrollment and Affiliation, Spring 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Table 7. Ten Largest Individual PPOs, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Table 8. The Largest Specialty HMOs and PPOs, 1994 . . . . . . . . . . . . . . . . . . 24
Table 9. Percentage of Insured Workers Covered by Different Types
of Plans, by Firm Size, 1993 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Managed Health Care: A Primer
Introduction
Since the early 1970s, market forces have driven profound changes in the
financing and organization of health care delivery. Whereas the functions of paying
for and providing medical care once were separate, increasingly they are joined
together in the form of managed care organizations (MCOs). By 1996, about 57%
of the U.S. population was covered by some type of managed care — including 60
to 70 million persons enrolled in health maintenance organizations (HMOs) and
another 80 to 90 million enrolled in preferred provider organizations (PPOs).1
As the U.S. health care system continues to evolve, Congress faces an
abundance of issues. Legislative options range from encouraging the spread of
managed care in parts of the country (e.g., rural areas) and among subgroups of
people (e.g., the elderly) which are little affected by it, to protecting consumers from
a host of potential managed care excesses which may have deleterious effects on
access to quality health care. This CRS report provides basic information to assist
congressional committees and staff as they deliberate on a wide range of issues
relating to the managed care evolution in the U.S. health care system.
This managed care primer answers the following questions. What is meant by
managed care? What are the various types of managed care organizations and how
do they differ from one another? How does managed care differ from traditional fee-
for-service health care? It briefly reviews the history of managed care in this country,
discusses enrollment trends, describes different types of managed care organizations
(including HMOs, PPOs, provider-sponsored organizations (PSOs), and point-of-
service (POS) options), and examines basic utilization and compensation data.
Because far more data are available on HMOs than other forms of managed care
organizations, this report reflects this imbalance.
1 Health Care Financing Administration. Office of Managed Care. 1996; Standard &
Poor’s Industry Surveys, Healthcare: Managed Care, October 17, 1996. p. 7; Interstudy,
The Interstudy Competitive Edge (hereafter cited as Interstudy, The Competitive Edge), Part
II: Industry Report, Table 1, p. 20; and American Association of Health Plans, 1995-1996
HMO & PPO Trends Report (hereafter cited as AAHP, Trends).

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Additional information — on managed care strategies, on the
2
use of financial
incentives in managed care, on state
3
and federal regulation of managed care,4 and on
current legislative issues relating to managed care — will be available in future CRS
reports.
What is Managed Care?
No single definition of managed care would satisfy everyone, but certain
characteristics stand out, especially in comparison to traditional insurance. Under
traditional insurance, the insurer pays a claim when it is filed by the insured or by the
insured’s provider. The financing function of the payor or insurer is kept entirely
separate from the service delivery function of the medical professional.
Traditionally, the latter was exposed to few, if any, incentives for efficiency or cost
control.
In contrast, an important managed care strategy for controlling costs is to
contract with select providers who share financial risk for the cost of care (as is
typically done in HMOs) or who accept negotiated discounts in fee-for-service
payments (as is typically done in PPOs). Providers’ compensation may be tied, a
5
t
least in part, to their own pattern of clinical decision-making and/or resource
utilization. Managed care strategies include various forms of utilization review (e.g.,
pre-, concurrent, and post-certification; gatekeeping; and practice profiling) and case
management.6 Moreover, managed care organizations employ internal, and often,
external quality assurance processes.7
In short, managed care organizations integrate the financing and delivery of
care, institute cost controls, share financial risk with providers, and manage service
utilization. They vary in the degree of control they exercise over costs and medical
decision-making. Traditional fee-for-service or indemnity insurance offers the least
amount of cost control, although even these programs may adopt some managed care
2 U.S. Library of Congress. Congressional Research Service. Managed Health Care:
Strategies for Controlling Cost and Maintaining Quality. CRS Report, by Jason S. Lee.
Forthcoming.
3 U.S. Library of Congress. Congressional Research Service. Managed Health Care:
The Use of Financial Incentives. CRS Report 97-482, by Jason Lee and Beth Fuchs.
4 U.S. Library of Congress. Congressional Research Service. Managed Health Care:
State and Federal Regulations. CRS Report, by Beth Fuchs. Forthcoming.
5 In return, these contract providers (also called “staff,” “select” or “preferred”
providers) are assured enhanced patient volume. Managed care plans use financial
incentives (i.e., lower out-of-pocket charges) to encourage enrollees to use “in-network”
providers.
6 For more on this topic see U.S. Library of Congress. Congressional Research
Service. Managed Health Care: Strategies for Controlling Cost and Maintaining Quality.
CRS Report, by Jason S. Lee. Forthcoming
7 For a discussion of quality of care issues in the Medicare program, see U.S. Library
of Congress. Congressional Research Service. Quality of Care Issues in Medicare Reform,
CRS Report 96-581, by Jason S. Lee.

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features, such as pre-certification for hospitalization in all but emergency situations.
At the other extreme, staff-model HMOs (discussed below) tend to offer the greatest
degree of control.8
A Brief History9
Managed care, in its essential form, has been around for some time. The first
large scale managed care programs date from the turn of the century and the opening
of the West to the railroads. Prepaid group health plans were set up as clinics to
provide health services for workers isolated in lumber camps, Minnesota iron mines,
and railroad construction sites. Other early experiments included the Community
Cooperative Hospital of Elk City, Oklahoma, the first capitated physician-hospital
10
organization in the United States (founded in 1929 by Dr. Michael Shadid, who had
a major influence on many early organizations); the Ross-Loos Medical Group,
which provided health services to Los Angeles County Department of Water and
Power employees; and the Kaiser-Permanente Health Care Plan, organized in the
1930s and 1940s to provide health care for workers on dams and roads in the Pacific
Northwest and California, and later in the growing Kaiser shipbuilding business in
Oakland, California.
During these early years, expansion of managed care was slow. Few Americans
had access to a prepaid group health plan. A number of factors accounted for this,
including the increased availability of health benefits and services through indemnity
(fee-for-service) insurance during the 1940s and 1950s, resistance to prepaid health
care arrangements such as HMOs from the traditional fee-for-service medical
communities, legal restrictions imposed by state governments, the post-World War
II hospital construction boom, and the lack of available financing for start-up and
operation costs.
However, beginning in the 1970s, a number of trends coalesced to fuel
enrollment in, and numbers of, a specific type of managed care organization known
as health maintenance organizations (HMOs). Medical costs had been rising at a rate
above the rest of the economy for a number of years, which resulted in ever higher
premiums. Many individual and group purchasers came to believe that added health
benefits from advancements in medical technology had not kept pace with rising
prices. Trust in the medical establishment also began to erode, as practice variations
were brought to light, health care fraud and abuse was exposed, and inequalities in
access to care were made known. Added to this, the overall economy had slowed,
inflation was high, and third party health care purchasers (i.e., employers and the
8 See Appendix A for a summary comparison of the characteristics of the major types
of managed care organizations.
9 Fran Larkins of the Congressional Reference Division, Congressional Research
Service contributed to this section.
10 Capitation is the prepayment of a fixed-fee per person for a range of medical
services. A capitated provider accepts a predetermined amount per covered individual per
month, regardless of the number and intensity of services provided during the coverage
period.

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federal government) were alarmed to be paying an increasing share of a total health
care expenditure bill that was, in the phrase of the day, skyrocketing.
Traditional fee-for-service payment arrangements — which dominated public
and private health care delivery systems — were seen by many as an important root
cause of runaway health care costs. Doctors had little incentive to be mindful of
controlling costs and hospitals could only maintain or increase revenue under cost-
based reimbursement by increasing volume of services or their price. Prepaid plans,
such as those exemplified by the Kaiser plans in the West, which rewarded health
maintenance, were viewed by some as an antidote.11 The Nixon administration
viewed the “health maintenance strategy”12 as a way to control health care costs
through private sector initiative, rather than through price controls or more sweeping
reforms of the health care system.
The Health Maintenance Organization Act of 1973 (P.L. 93-222) and the Health
Maintenance Organization Amendments of 1976 (P.L. 94-460) encouraged the
development of HMOs by providing federal funds ($190 million from 1974 through
1980) to help qualified HMOs through their start-up period. The new law, which
13
added Title XIII to the Public Health Service Act, preempted some existing state laws
that were thought to restrict the development of HMOs. The Act also created a
certification process, whereby organizations meeting specified financial and
organizational standards could become federally qualified. Federal qualification also
allowed organizations to take advantage of the Act’s “dual choice” requirement,
which under certain circumstances required employers to offer an HMO as a health
benefit plan option.14
Health Maintenance Organizations
A health maintenance organization (HMO) is a form of health insurer. It may
be an independent entity or a line of business within an insurance company. Like
other health insurers, an HMO accepts financial risk for a defined set of health care
11 See U.S. Library of Congress. Congressional Research Service. Managed Health
Care: The Use of Financial Incentives. CRS Report 97-482, by Jason S. Lee and Beth C.
Fuchs.
1 2 The term "health maintenance organization" was coined by Dr. Paul Ellwood, who
had concluded that fee-for-service compensation arrangements created "perverse incentives"
which rewarded physicians and institutions for treating illness and then withdrew those
rewards when health was restored. Ellwood proposed a nationwide system of prepaid group
practices, which he believed would help control costs and provide effective care. This
became the focus of President Nixon’s 1971 Health Message to Congress and led to support
for development of HMOs in the 1973 HMO Act. For more on the HMO Act of 1973, see
Brown, Lawrence D. Politics and Health Care Organizations: HMOs as Federal Policy.
Brookings Institution, Washington, 1983.
1 3 Federal assistance totaled 43% of the estimated $439 million that helped support
new HMO development during this period. See Gruber, L., M. Shadle and C. Polich. From
Movement to Industry: The Growth of HMOs. Health Affairs, summer 1988. p. 203.
14 See U.S. Library of Congress. Congressional Research Service. Managed Health
Care: State and Federal Regulations. CRS Report, by Beth C. Fuchs. Forthcoming.

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benefits in return for a fixed monthly per capita premium paid by or on behalf of each
enrolled member. But unlike other insurers, HMOs directly provide or arrange for
health care services through affiliated physicians, hospitals and other providers.
Unlike traditional insurance companies, HMOs do more than finance health care.
HMOs often share financial risk with providers. In contrast to traditional
indemnity insurance compensation arrangements, which reimburse providers on a
fee-for-service basis, HMOs may partially or fully prepay or capitate providers, just
15
as the purchaser prepays the HMO. Much has been written on different incentives
that providers experience under capitation versus fee-for-service arrangements.
HMOs provide access to a limited panel of providers for a comprehensive set
of health benefits. Enrollees agree to obtain all services, except emergency and out-
of-area care, from or with the authorization of the HMO or its affiliated providers.16
Specialty care is accessed through referrals from generalists (or “gatekeepers”) and
as long as members seek care within the HMO, out-of-pocket health care costs are
minimized.
Types of Health Maintenance Organizations
There are different types of HMOs. Staff and group model HMOs were the
earliest managed care plans. In a staff model HMO, physicians are salaried
employees who, typically, provide care in HMO-owned offices and hospitals. (Start-
up capital requirements for staff model HMOs are high.) Plan enrollees must choose
a provider from the HMO’s list. The plan does not pay for unapproved, non-
emergency care received outside the HMO.17
In 1996, two of the nation’s 25 largest individual HMO plans — Harvard
Community Health Plan and Group Health Cooperative of Puget Sound — wer
18
e
staff model HMOs (see Table 1.) Only 3% of all HMOs are staff model HMOs and
they account for an even smaller share (1.3%) of total HMO enrollment.19
15 An essential characteristic of capitation compensation systems is the prepayment of
a fixed-cost per person for a range of medical services. A capitated provider accepts a
predetermined amount per covered individual per month, regardless of the number and
intensity of services provided during the coverage period. The capitation payment is, in
effect, a budgeted amount of money to be used by the provider, regardless of how little or
how much care is required by the patient. This type of arrangement results in financial risk.
1 6 This agreement is an essential feature of “pure” or “closed” HMOs. Increasingly,
HMOs offer a “point-of-service” (POS) option, which allows access to out-of-network
providers. This option is discussed in more detail below.
17 Point-of-service options have liberalized this restriction, but members must pay a
substantial share of the out-of-network provider’s bill out-of-pocket.
1 8 Harvard Community Health Plan has since merged with Pilgrim Health Care, Inc.,
to become Harvard/Pilgrim Health Care. In 1997, Group Health Cooperative of Puget
Sound affiliated, but did not merge, with Kaiser Permanente.
19 InterStudy. The InterStudy Competitive Edge. Part II: Industry Report. Table 11.

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A group model HMO contracts with one or more multi-specialty medical
groups to provide all covered services to HMO participants in exchange for a per
capita fee. Each medical group’s practice is limited, largely, to the HMO
membership and it is managed independently of the HMO. Physicians contract with
the medical group, which may compensate them on a risk-sharing, cost, or salary
basis.
Although the HMO may have formed the group practice, the medical group is
not owned by the HMO. The group practice may, however, own the HMO. In other
words, physicians may enter into profit-sharing arrangements with the HMO.
Table 1. The Nation’s 25 Largest Individual HMO Plans, 1995
Model
Rank
Plan
type
Enrollment
1
Kaiser Permanente MCP/Oakland, CA
2,459,631
Group
2
Kaiser Permanente MCP/Pasadena, CA
2,191,100
Group
3
Health Net/Woodland Hills, CA
1,339,327
Network
4
PacifiCare of California/Cypress, CA
1,214,558
Network
5
California Care/Blue Cross/Woodland, CA
931,700
Network
6
HIP of Greater N.Y./New York, N.Y.
852,555
Group
7
U.S. Healthcare—SE Pa./Blue Bell, PA
823,550
IPA
8
Keystone Health Plan/West/Pittsburgh, PA
765,875
Network
9
Medica Choice/Minneapolis, MN
693,009
IPA
10
U.S. Healthcare—New Jersey/Fairfield, NJ
662,000
IPA
11
HMO Blue/Boston, MA
652,737
IPA
12
Foundation Health—CA/Rancho Cordova, CA
649,342
Group
13
HealthPartners/Minneapolis, MN
632,694
Group
14
Harvard Comm. Health Plan/Dedham, MA
604,043
Staff
15
Keystone Health Plan/East/Philadelphia, PA
575,251
IPA
16
Grp. Health Coop. Of Puget Sound/Seattle, WA
557,852
Staff
17
U.S. Healthcare—New York/Uniondale, NY
554,000
IPA
18
Tufts Associated Health Plans/Waltham, MA
543,714
IPA
19
HMO Illinois/Chicago, IL
541,226
Group
20
Health Options/Jacksonville, FL
529,948
IPA
21
Blue Choice/Rochester, NY
517,525
IPA
22
CIGNA HealthCare of So. CA/Glendale, CA
509,265
Staff
23
FHP/California/Cerritos, CA
507,370
IPA
24
HMO Oregon/Salem, OR
483,537
IPA
25
Community Health Plan/Latham, NY
475,713
Network
TOTAL
20,267,522
Source: Hoechst Marion Roussel Managed Care Digest Series. HMO-PPO Digest, 1996. p. 10.
Data collected by SMG Marketing Group, Inc.
Note: Many “individual” HMO plans also are organized into national HMO chains.

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Group model HMOs account for 6.5% of all HMOs and 16% of total HMO
enrollment. The northern and southern California Kaiser Permanente plans — the
20
largest of all individual HMO plans — are group model HMOs, as are four more of
the nation’s 25 largest HMOs (see Table 1).
A newer variant is the individual or independent practice association, also
known as the IPA model HMO. An IPA, which has been described as "an HMO
without walls," contracts directly with physicians in independent practice,
associations of physicians in independent practices, or multispecialty group practices.
Participating physicians retain their private practices, in their own offices, but they
see HMO patients as part of that practice. Typically, IPA physicians do not have an
exclusive relationship with a single HMO.
The IPA functions much like the medical group in group model HMOs. The
HMO capitates the IPA and the IPA, in turn, compensates providers in accordance
with contractual arrangements (perhaps paying primary care physicians a fixed-fee
per enrollee, and reimbursing specialists on a discounted fee-for-service basis.) The
IPA may be responsible for coordinating the activities of member physicians,
arranging provider compensation arrangements, and conducting various utilization
management strategies. IPAs may withhold money in “risk pools” from which
providers can earn “bonuses,” but only if care is provided cost efficiently or in
accordance with other standards.
IPAs are both the most common and fastest growing type of HMO. Although
sources classify and therefore count HMO types somewhat differently, most agree
that about 60% of all HMOs were IPAs at the start of 1996. The number of IPAs
increased by 35% between 1995 and 1996. Membership increased almost as fast
(31.4%), to over 26 million members, or about 44% of the total. Eleven of the 25
21
largest individual HMOs are IPA model HMOs, including U.S. HealthCare of
Pennsylvania and Medica Choice of Minneapolis. (See Table 1.)
A network model HMO can offer the broadest provider participation of any
type of HMO because it contracts with staff, group and IPA models in combination.
For this reason, some also call it a mixed model HMO. Network HMOs may
contract with primary and specialty care provider groups as well as hospitals — a
practice which helps spread financial risk. Network model HMOs offer the leas
22
t
amount of control or management of providers’ utilization of services and resources.
20 Ibid.
21 Ibid. InterStudy reported that 58.3% of all HMOs were IPAs as of January 1, 1996.
The American Association of Health Plans (AAHP) reported that in 1995 IPAs accounted
for about 61-66% of all HMOs, and about 51% of total HMO enrollment. The higher
numbers derive from the “predominant model type” counting method rather than the “100%
method.” For details, see American Association of Health Plans, 1995-1996 Managed
Health Care Overview. p. 13. (Hereafter cited as AAHP, 1995-1996 Managed Health Care
Overview.)
2 2 If, for example, an HMO contracts with specialty providers, and pays them a
capitated amount, then primary care doctors would not be at financial risk for speciality
referrals.

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Moreover, providers typically do not have exclusive contracting relationships with
network HMOs.
Network HMOs account for between 10-13% of all HMOs, and about 6-15%
of total HMO enrollment. Four of the nation’s ten largest individual HMOs are
network model HMOs (see Table 1); namely, Health Net, PacifiCare and California
Care/Blue Cross, all of California, and Keystone of Pennsylvania.
National Managed Care Firms
National managed care firms, also called corporate HMO chains, accounted for
88% of total HMO enrollment and 70% of all HMOs in 1995. The fastest growing
23
firms in the year ending January 1, 1996 were: the Blue Cross and Blue Shield
System, United HealthCare Corporation, Aetna Health Plans, PacifiCare Health
Systems, Inc., and Harvard/Pilgrim Health Care. The seven largest national managed
care firms (see Table 2) accounted for almost half (49%) of total HMO enrollment,
compared to about one-third (34%) only 6 months earlier.24
Table 2. National Managed Care Firms Ranked by Total HMO
Enrollment, as of January 1996
Number
Total
Ran
National managed care firm
of plans
enrollment
k
1
The Blue Cross and Blue Shield
83
10,134,592
2
System
12
6,924,080
3
Kaiser Foundation Health Plans, Inc.
43
3,603,191
4
United HealthCare Corporation
12
2,227,449
5
U.S. Healthcare, Inc.
34
2,073,889
6
Prudential Health Care Plans, Inc.
6
1,904,608
7
PacifiCare Health Systems, Inc.
19
1,875,783
8
Humana, Inc.
8
1,860,926
9
Health Systems International, Inc.
11
1,851,195
10
FHP, Inc.
34
1,734,191
CIGNA Health Plans, Inc.
Source: The InterStudy Competitive Edge: HMO Industry Report 6.2. Table 28.
Trends in HMO Enrollment and Growth
In 1970, there were approximately 3 million persons enrolled in 37 HMOs in 14
states. By 1975, HMO enrollment had doubled and the number of HMOs had
increased fivefold. Enrollment growth slowed somewhat from the mid-1970s to
23 Hoechst Marion Roussel Managed Care Digest Series. HMO-PPO Digest 1996. p.
8-9.
24 Interstudy, The Competitive Edge: HMO Industry Report 6.2, 1996, p. 53-55.

CRS-9
early 1980s, but the mid-1980s witnessed an enrollment boom. Enrollment doubled
25
between 1975 and 1983, an 8 year period, and then doubled again in just 3 years.
(See Figure 1.)
Some of the factors that may have led to rapid HMO growth in the 1980s are:
! relaxation of state regulations established on behalf of traditional medical
interests to stymie competition from prepaid plans;
! passage of the Omnibus Budget Reconciliation Act (OBRA) of 1981, which
gave states greater flexibility to enroll Medicaid recipients in HMOs;26
! implementation in 1985 of the Tax Equity and Fiscal Responsibility Act of
1982 (TEFRA), which authorized the Medicare risk-contracting program;
! increasing perception among employers and other purchasers of managed care
cost savings potential; and
! expanding preference for non-group practice HMOs (i.e., independent practice
arrangements [IPAs]), which allowed greater flexibility in composition of
provider networks, location of service delivery, and choice of providers.
25 In the early years of HMO development, Kaiser Foundation Health Plans represented
a large share of total enrollment (Kaiser had almost half of total enrollment in 1978). But
growth in national HMO networks began in the late seventies and by 1986 the number of
HMO firms (defined as an organization that owns or operates distinct HMOs in two or more
states) had increased from 6 to 42 with 310 affiliated HMOs (or one-half of all HMOs).
Although Kaiser enrollment increased during this time (from 3.5 million in 1978 to 4.9
million in 1986), its representation of enrollment in national HMO firms decreased from
94% in 1978 to 31% in 1986.
e
26 In
1
9
7
2
,

M
e
d
i
c
a
i
d

c
o
n
t
r
a
c
t
e
d

w
i
t
h

o
n
l
y

t
h
r
e
e

m
a
n
a
g
e
d

c
a
r
e

p
l
a
n
s
.

B
y

1
9
9
6
,

t
h
e
r
were 500 Medicaid managed care contracting entities. Although only about a quarter
million Medicaid clients were enrolled in managed care in 1981, by June 1996, enrollment
had increased to 12.8 million (or 39% of the total Medicaid population).

CRS-10
Figure 1. HMO Enrollment, All Ages, 1976-1996
59.1
60
58.2
51.1
50
45.2
41.4
38.6
40
36.5
34.7
32.7
29.3
30
25.7
18.9
20
Millions of people in HMOs
15.1
12.5
10.2 10.8
9.1
10
7.5
8.2
6
6.3
0
1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
Sources: Gruber, Shadle, and Polich, The Growth of HMOs and American Association of Health Plans,
1995 HMO & PPO Trends Report and Interstudy, 1996, HMO Industry Report 6.2.
HMO enrollment slowed somewhat during the late 1980s and early 1990s, but
began to grow at a faster pace again in the mid-1990s. Following the failure of the
Clinton administration’s health care reform initiatives of 1993-1994, and in response
to continuing, significant increases in premiums, the private sector embraced
managed care cost control strategies with renewed fervor. Increased managed care
enrollment in employer-sponsored plans and Medicare drove this trend.
The number of HMOs increased dramatically in the mid-1980s, growing by
more than 50% between 1985 and 1986, and then by another 11% to an all time high
of 662 in 1987. (See Figure 2.) This period of growth was followed by intense
competition which drove premiums down — some would say to unrealistic levels —
in order to secure market share. Plan closings and mergers resulted. To secure
enrollment, HMOs began expanding options, integrating services, developing hybrid
organizational forms (discussed below), and enhancing efficiency.

CRS-11
Figure 2. Number of HMOs, 1976-1996
700
662
643
630
595
590
600
556 559 560 555
562
543
500
393
400
306
300
280
265
Number of HMOs
236 243
215
203
200
175 165
100
0
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
Source: Gruber, Shadle, and Polich, The Growth of HMOs , and Interstudy, 1996, HMO Industry
Report 6.2 .
According to one source, by 1996 about 20% of the U.S. population was
enrolled in HMOs. At the same time, over one-half (about 57%) of the U.S
27
.
population was covered by some form of managed care. This is almost double the
share of the population enrolled in managed care plans only 10 years ago. Much of
this growth is concentrated in a single type of HMO (the independent practice
association or IPA model HMO) and in preferred provider organizations (PPOs). A
PPO is a managed care organization, but it is not an HMO (see the section on PPOs
in this report).
Service Utilization and Costs in HMOs
HMOs tend to reduce health care costs by managing enrollees’ use of services.
They may limit hospitalizations, diagnostic tests or specialty referrals through
utilization review and by giving participating providers a financial stake in the cost
of the services they deliver. Moreover, HMOs try to select cost-effective service
providers into their networks.
In a 1996 study of the impact of managed care (defined by the presence of
HMOs, provider risk-sharing arrangements, and the involvement of employers in the
2 7 Standard & Poor’s, Industry Surveys. Healthcare: Managed Care. October 17,
1996. p. 7.

CRS-12
management of care delivered to their employees) in the 50 largest U.S. cities,
KPMG Peat Marwick found that markets with high managed care penetration had
discretionary acute care (hospital) costs 11% below the national average and 19%
below hospital costs in low managed care markets.28
Most studies have found that HMOs are able to provide medical care for less
than fee-for-service insurance partly by reducing hospital admissions and by
providing for shorter lengths of hospital stays. The relative success of HMOs in
reducing the utilization of inpatient care (the most costly type of health care event)
is shown in Figure 3. Total inpatient HMO utilization rates declined between 1988
and 1993. Overall, HMO members were hospitalized about two-thirds as often as the
population as a whole in 1993. On average, they spent about half as many days in the
hospital. Nationally, total utilization rates have also declined since 1988. Because
the national figures include HMO members, the national decline is partly explained
by increased HMO membership as well as growth in other kinds of managed care,
such as preferred provider organizations (PPOs) and the increasing use of utilization
review by FFS (indemnity) insurers.
2 8 Importantly, KPMG also found that case severity of patients admitted to hospitals
in high managed care markets was higher than the national average, yet their risk adjusted
mortality rates were 5.25% below the national average. The cost comparisons were adjusted
for differences in severity of patient mix and cost of living. See KPMG Peat Marwick. The
Impact of Managed Care on U.S. Markets, Executive Summary. 1996.

CRS-13
Figure 3. Utilization Rates: HMO Enrollees and the U.S. Population,
1988-1993
140
120
N a t
i o n
100
80
60
H M O
40
Discharges per 1,000
20
0
900
800
700
N a t i o n
600
500
400
300
Days per 1,000
H M O
200
100
0
7
6
N a t
i o n
5
4
H M O
3
2
1
Average Length of Stay (Days)
0
1988
1989
1990
1991
1992
1993
Source: Figure prepared by CRS based on Exhibit 3-3, American Association of Health Plans,
1995-1996 HMO and PPO Industry Profile.
Note: The national rates are inclusive of HMO members. HMO rates include all types of HMOs but
not other forms of managed care.

CRS-14
HMO and Fee-for-Service (FFS) Premiums
The difference between HMO and fee-for-service premiums varies from year
to year, but it is not unusual to see differences of 10% to 15% reported. Among
29
medium and large employers in 1996, the average difference between FFS and HMO
premiums for both single and family coverage was about 20%. PPO and POS
premiums were higher than HMO premiums but were lower than FFS premiums.
(See Table 3.)
Table 3. Average Premiums for All Medium and Large Employers,
1996
Employee
Family
coverage
coverage
Fee-for-
$188.27
$506.30
service
HMO
$155.77
$424.81
PPO
$173.10
$464.36
POS
$176.35
$482.81
Source: Hay/Huggins Benefits Report, v. 1. 1996, Chart 1.2.
Over the last decade, premiums for employer-sponsored health benefits have
declined precipitously. Figure 4 shows that the average annual rate of increase for
FFS, HMO, and PPO premiums has changed in tandem since 1987. (However, the
rate of increase for HMOs was about 1.5 percentage points less than FFS premiums
during this period.)30
In 1995 and 1996, the rates of increase in health insurance premiums (overall,
2.1 in 1995 and .05 in 1996) were less than increases in three key indicators:
! overall inflation as measured by the consumer price index
(3.2 in 1995, 2.9 in 1996);
! inflation in the health care sector (medical inflation) as measured by the CPI
(4.6 in 1995, 3.7 in 1996); and
! growth in workers’ earnings.
(2.7 in 1995, and 2.9 in 1996).31
29 Miller, Robert H., and Harold S. Luft. Managed Care Plan Performance since 1980.
A Literature Analysis. Journal of the American Medical Association, v. 271, no. 19; and
Foster Higgins, Survey of Employer-Sponsored Health Plans, 1996.
30 KPMG Peat Marwick, Health Benefits in 1996, p. 12, 13.
31 Ibid.

CRS-15
Figure 4. Premium Changes in Employer-Sponsored Plans,
1987 to 1996
(firms larger than 200 employees)
25%
FFS
20%
HMO
PPO
15%
10%
5%
0%
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
-5%
Source: KPMG, Health Benefits in 1996 , p. 13.
Point-of-Service Options
In an effort to make enrollment more attractive to consumers who want to retain
some freedom of choice of providers, the majority of HMOs now offer an open-
ended or point-of-service (POS) option. This allows enrollees to go to doctors who
are not in the HMO network in exchange for higher premium and/or coinsurance
payments. To exercise the POS option, an enrollee forgoes the standard 100%
coverage of costs for in-plan services for, most commonly, 70% coverage of out-of-
plan services costs. The share of HMOs offering a POS option increased from an
estimated 55% in 1992 to 73% in 1995.32
The rapid expansion of the POS option suggests that the greater flexibility
provided by the POS option attracts people to an HMO who are uncomfortable with
“lock in” arrangements. Some believe that, in time, as enrollees become more
comfortable with network providers, they will utilize the POS option less. (See
Appendix A for a comparison of the characteristics of the major types of managed
care organizations.)
Because the POS option is relatively new, the extent of added financial risk is
uncertain. According to one survey, in half of the 86 responding plans, 10% of
32 AAHP, 1995-1996 Managed Health Care Overview, p. 10, 16-17.

CRS-16
enrollees or fewer actually used an out-of-network benefit in 1995 (see Table 4.)
Utilization of the POS option appears to vary with a number of factors, including
plan type. On average, POS utilization in group model HMOs is less than half that
in network and IPA models (shown in the table). POS utilization is higher in the
Pacific and Mid-Atlantic regions, is lower among the smallest and largest HMOs, is
higher among nonprofit and non-federally qualified HMOs, and is higher among the
independently owned HMOs (not shown in the table).
According to one source, 42% of surveyed HMOs reported that average medical
expenses per enrollee were the same for POS members and traditional HMO
members, whereas the same percentage reported that medical expenses were higher
for POS members.33
Table 4. Percentage of Enrollees Using Any Out-of-Network
Benefits in Point-of-Service Products, 1995
% of Enrollees
Mean
Median
All plans
17.1%
10.0%
Primary model type
Staff
13.5
9.5
Group
6.8
5.0
Network
19.4
10.0
IPA
18.8
10.0
Source: American Association of Health Plans’
Annual HMO Industry Survey, see
http://www.aahp.org. Findings based on
“weighted” data.
State HMO Enrollment
HMO enrollment is distributed unequally across the country. (See Figure 5.)
HMO penetration, or the percentage of state population enrolled in an HMO, is
highest in the Pacific states (38%, on average, in Alaska, California, Hawaii, Oregon
and Washington), the Northeast (33%, on average, in Connecticut, Maine,
Massachusetts, New Hampshire, Rhode Island and Vermont) and the Mid-Atlantic
states (27%, on average, in New Jersey, New York and Pennsylvania). Penetration
is lowest in the East South Central states (10.5%, on average, in Alabama, Kentucky,
Mississippi and Tennessee) and the West South Central states (12.2%, on average,
in Arkansas Louisiana, Oklahoma and Texas).
33 Group Health Association of American. Annual HMO Industry Survey. Reported
in AAHP, 1995-1996 Edition, HMO & PPO Industry Profile, Table 2-15. p. 117.

CRS-17
Figure 5. Percentage of Population Enrolled in HMOs, by State,
as of January 1, 1996
29% to 45% (9)
23% to 28% (9)
14% to 22% (10)
9% to 13% (10)
1% to 8% (10)
Note: Alaska and Wyoming had no managed care enrollment.
Source : Interstudy, The Interstudy Competitive Edge: HMO Industry Report 6.2
Oregon has the highest enrollment rate (44.8%), followed by California (40.3%)
and Massachusetts (39%). Alabama, Georgia, Idaho, Iowa, Kansas, Mississippi,
Montana, North Dakota, South Dakota, and West Virginia all have HMO penetration
rates of well below 10%.34
Tax Status and HMO Performance
Some argue that the maximization of profit is the primary orientation of private
corporations. For-profit HMOs have an obligation to return revenue in excess of
expenditures to investors. In contrast, nonprofit HMOs return excess money to the
organization, in the form of capital improvement or expansion of other mission-
related activities.
In 1988, 70% of all managed care plans were for-profit; this had increased to
82% by 1996. At the start of 1996, over
35
60% of HMO enrollment was in for-profit
plans and nearly three-quarters of all HMOs were for-profit organizations (see Figure
6).

InterStudy conducted an analysis of HMO financial performance differences
across metropolitan markets by various HMO characteristics, including whether the
34 InterStudy. The InterStudy Competitive Edge: HMO Industry Report 6.2. p. 29 and
Figure 5.
35 AAHP, 1995-1996 Managed Health Care Overview.

CRS-18
plans were nonprofit or for-profit. They focused on what they considered “the most
important overall measures of an HMO’s performance,” namely, higher annual
growth rates and lower net operating margins.36
Figure 6. HMO Tax Status by Enrollment and Number of HMOs, 1996
Nonprofit
27%
Nonprofit
39%
For-profit
61%
For-
profit
73%
HMO Enrollment
HMOs
Source: Interstudy, The Competitive Edge, Part II: Industry Report, 6.2, September, 1996.
Separate analyses — in which for-profit and nonprofit HMOs were compared
on these two performance variables — were conducted for large markets (1 million
or more enrollees), medium markets (250,000 to 999,999 enrollees) and small
markets (less than 250,000 enrollees).
In large markets, metropolitan areas that had annual enrollment growth above
the median (an indicator of positive performance) had 20% more for-profit HMOs,
on average. Furthermore, in both large and medium markets, metropolitan areas
with net operating margins above the median (an indicator of negative performance)
had 16% and 14% fewer for-profit HMOs, on average. All other comparison
37
s
resulted in differences that were not statistically significant.
However, InterStudy conducted another analysis of HMOs whose operating
margins increased in 1995 compared to HMOs whose operating margins decreased.
3 6 Annual growth rate is the net change in enrollment in 1 year divided by the
enrollment at the start of the year. Net operating margin is defined as medical and
administrative expenses divided by premium revenue.
3 7 This performance analysis is based on an analysis of variance (ANOVA).
Differences are statistically significant at the p < .05 level. The Interstudy Competitive
Edge, Part III: Regional Market Analysis, v. 6, no. 2, December 1996, Tables 34 and 36.

CRS-19
It was learned that a larger percentage of for-profit HMOs than nonprofit HMOs
(34.4% versus 20.9%) had increased operating margins between 1994 and 1995.38
This finding accords with an increasingly competitive managed care environment,
typified by lower rates of premium increases, company mergers, and industry
consolidation. One source recently reported that 40% of the nation’s HMOs lost
money in 1995, and that only 35% were profitable in 1996. In contrast 90% of
HMOs were profitable in 1993 and 1994.39
For-profit HMOs spent more of the premium dollar on administrative expenses
than nonprofit HMOs (13.6% compared to 11.9%) in 1995. They also spent, on
average, a lower share of total premium revenue delivering medical care than
nonprofits (84.3% versus 88.7%).40
Compensation of HMO Executives
An HMO’s administrative expenses includes the cost of executives’ salaries.
As managed care plans have increased in number and market penetration, and the
media have published the highest salaries, there has been increased public outcry
over executive compensation. Much of this attention has focused on the salary of the
chief executive officer (CEO), who is the top official responsible to the Board of
Directors for the overall administration, growth and performance of the plan.
While it is true that some CEOs of HMOs command annual salaries well over
$1 million, averages are rarely reported in the media, and the sums often include
stock ownership and other bonuses in addition to salary per se. Figure 7 shows the
trend in average CEO base salary, assessed in February of each year, from 1991 to
1997. The number of surveyed plans expanded each year (growing to 270 plans in
1996, and 314 plans in 1997.) At the start of the decade, CEOs’ average base salary
(not including bonuses), was about $145,000. This increased 56%, to $227,000 in
1997.
The 1997 median CEO base salary ($195,787) is lower than the mean salary
($227,133) due to the fact mentioned above; namely, that some CEOs earn very large
salaries indeed. As you can see in Table 5, 10% of CEO’s received a base salary of
over $381,719. Moreover, as alluded to, executive compensation can be substantially
higher when bonuses and/or incentives are added to base salary. As the table shows,
the median annual salary with bonuses and incentives is just over a quarter million
dollars, and 10% of CEOs make well over a half million dollars a year.
38 InterStudy. The InterStudy Competitive Edge, Part II: HMO Industry Report 6.2,
December 1996. Table 32.
3 9 Center for Studying Health System Change. Patients, Profits and Health System
Change: A Wall Street Perspective. Issue Brief, no. 9, May 1997.
40 Ibid., p. 64. The share of the premium spent on medical care is known as the
“medical loss ratio.” For example, a ratio of .89 means that $0.89 of every $1.00 is spent
on the delivery of medical services. The remaining $0.11 is spent on administrative
expenses, including marketing, salaries, and profit.

CRS-20
Figure 7. Average Base Salary of HMO Chief Executive Officers, 1991 to 1997
$250,000
$227,133
$215,414
$205,418
$200,000
$185,241
$165,928
$158,623
$145,391
$150,000
$100,000
$50,000
$-
1991
1992
1993
1994
1995
1996
1997
Source: Warren Surveys, The Salary Survey , Spring 1997.
Table 5. Salary of Chief Executive Officers in HMOs, Spring 1997
No. of
10 %ile
th
Mean
Median
90 %ile
th
plans
Base salary
314
$126,390
$227,133
$195,787
$381,719
Salary with
157
$139,268
$310,241
$227,500
$583,794
bonuses/incentives
Source: Warren Surveys, The HMO Salary Survey, Spring, 1997.
Below, Table 6 shows the distribution of median CEO salaries by HMO model
type, by geographic area, by HMO enrollment, and by HMO affiliation. On average,
CEOs in staff and mixed models have the highest salaries. CEOs in the northeast and
far west have the highest salaries. CEO salary increases as HMO size increases, so
that those in the largest plans (over 200,000 enrollees) are paid about twice as much
as those in the smallest plans (under 50,000 enrollees). HMOs affiliated with
insurance companies are paid far more than those with any other affiliation. This is
probably due, at least in part, to greater enrollment in insurer-affiliated HMOs.

CRS-21
Table 6. Chief Executive Officer Salaries by Model, Location,
Enrollment and Affiliation, Spring 1997
Median
Median
salary w/
base salary
bonus
Model type
Staff
$217,300
Group
190,676
not
IPA
180,000
available
Network
190,000
Mixed
200,996
Geographic area
Northeast
$216,000
$275,000
South/Southeast
191,201
220,200
Midwest
180,000
227,500
Mountain
190,000
176,250
Farwest
200,996
247,278
HMO enrollment
Under 25,000
$167,613
$186,291
25 to 50,000
168,000
186,853
51 to 100,000
195,000
214,221
101 to 200,000
246,000
280,626
Over 200,000
324,000
475,483
Affiliation
Independent
$200,000
Physician/Hospital
183,604
not
Insurer
340,200
available
Management Co.
180,003
Source: Warren Surveys, The HMO Salary Survey, spring
1997.
Preferred Provider Organizations
In the early 1980s, a new type of managed care entity — the preferred provider
organization (PPO) — evolved which combines features of traditional indemnity
plans and HMOs. Like traditional indemnity plans, these organizations compensate
providers on a fee-for-service basis. (This is the major characteristic that
distinguishes PPOs from HMOs.) However, like HMOs, they extract discounts from
payors. Also, like HMOs, PPOs selectively contract with medical providers on the
basis of such factors as cost-efficiency, scope of services, and provider credentials.
(See Appendix A for a comparison of the characteristics of the major types of
managed care organizations.)

CRS-22
The medical providers that contract with PPOs agree to discount their fees. In
return, they expect to gain increased patient volume, faster payment of bills, and a
reduction in delinquent accounts. PPOs directly administer, or contract for, a wide
range of utilization review and case management procedures. They re-credential
participating physicians on a regular basis, collect data on providers’ practice patterns
for use in quality assurance and compensation determinations, conduct or contract
for pharmacy benefits management, and engage in physician peer review and quality
assurance.
PPO enrollees are given financial incentives to use services within the plan’s
provider network. This is how PPOs can ensure providers increased access to
patients. But PPO enrollees typically receive some payment for covered services
even if they decide to obtain care from outside providers. (According to one recent
report, less than 25% of PPO plan claim dollars are paid to out-of-network
providers. )
41 Visits to specialists usually do not require authorization by a primary
care provider, except in the case of gatekeeper model PPOs.
The greater flexibility of PPOs accounts for their popularity and also helps
explain POS use by HMOs. By 1995 there were over 1,000 operating PPOs, the vast
majority of which were medical/surgical and full-service plans. 1995 PPO
enrollment has been estimated at 80 to 90 million, which is at least one-third higher
than total HMO enrollment. The ten largest individual PPO plans are listed below
42
in Table 7.
Table 7. Ten Largest Individual PPOs, 1994
Ran
PPO
Locatio
Enrollmen
k
n
t
1
The AFFORDABLE Medical
IL
8,903,284
2
Networks
CA
4,491,105
3
Admar Corporation
TX
3,342,945
4
USA Health Network—Texas
CA
2,724,133
5
Prudent Buyer Plan
TX
2,673,911
6
Provider Networks of American, Inc.
CA
2,395,154
7
Beech Street Corporation
PA
2,150,040
8
Intergroup Services Corporation
IL
1,596,000
9
Preferred Plan
CA
1,286,583
10
USA Health Network — California
FL
1,253,845
USA Health Network — Florida
Source: American Association of Health Plans, 1995-1996 Managed Health Care
Overview, p. 22.
41 1996. Foster Higgins National Survey of Employer-sponsored Health Plans. Foster
Higgins, Survey and Research Services, 125 Broad Street, New York, NY 10004.
4 2 AAHP, 1995-1996 Managed Health Care Overview, p. 18; American Association
of Health Plans, HMO and PPO Industry Profile, 1995-1996 Edition. p. 67-68.

CRS-23
Exclusive Provider Organizations (EPOs)
Exclusive provider organizations (EPOs) differ from PPOs in one critical
respect. As the name suggests, enrollees do not receive any compensation for
unapproved care delivered outside the EPO network. According to one source, about
one-third of all PPOs offered EPOs in 1996.43
Silent Preferred Provider Organizations (PPOs)
Silent PPOs are controversial. They are brokers who purchase negotiated
discount information from PPOs and sell it to indemnity insurers, who in turn use the
information to access provider discounts. Their entitlement to such discounts is
questionable. It is not known how common this practice is.
Consider the following scenario. A patient with indemnity insurance seeks care
at a doctor’s office or hospital. After the service or treatment is provided, the doctor
or hospital bills the insurer for 80% of the full fee; the patient is responsible for the
remaining 20%. However, the insurer does not pay 80% of the full fee. Instead, the
insurer contacts a broker who: a) identifies PPOs with whom the provider contracts,
b) purchases rate discount information from a contracting PPO, and c) sells the
information to the indemnity insurer. The indemnity insurer then submits a reduced
payment to the provider, claiming that the patient was entitled to the discount through
the “silent PPO.” Providers typically accept the reduced payment because they do
not cross check claims and insurance data.
Critics of silent PPOs charge “foul” because providers receive reduced payments
without gaining increased patient volume through the “directive practices” of true
PPOs. That is, indemnity patients get the negotiated discounts available to PPO
patients, but they are not exposed to financial incentives that encourage them to use
preferred providers.4 Others argue, however, that providers can decline illegitimate
4
claims to discounts, or that they can simply refuse to contract with a PPO that allows
the organization to sell negotiated fee information to brokers.45
Single-Service or Specialty HMOs and PPOs
43 Hoechst Marion Roussel Managed Care Digest Series, HMO-PPO Digest 1996, p.
52.
44 Thus, silent PPOs are also called “non-directed” PPOs.
45 A bill introduced June 10, 1997 by Representative Burton, entitled Federal
Employees Health Care Protection Act of 1997 (H.R. 1836), would limit the use of silent
PPOs by all insurance carriers who contract with the Office of Personnel Management.
Section 5(a) requires advance written disclosure if a carrier or its subcontractor, which has
entered into a negotiated discount agreement with health care providers, does not use
financial incentives or “other forms of steerage” (such as provider directories, 1-800
numbers, or other means) to direct patients to network providers. Section 5(b) prohibits any
carrier which fails to disclose such information from accessing negotiated discounts. The
bill does not propose an outright prohibition on silent PPOs per se.

CRS-24
Experience shows that some areas of health care — such as substance abuse
treatment, behavioral or mental health services, dental care, and prescription drugs
— can be difficult to control. Because these service areas have been particularly
susceptible to rapid cost increases, managed care plans may “carve out” one or more
specialty area of care from standard medical/surgical plans. If such an area is carved
out and coverage is available, it may be managed through a single service or specialty
HMO or PPO. In some cases, enrollees must pay an additional premium for single
service or specialty coverage.
Employers and other insurers contract with specialty HMOs and PPOs using
capitation or negotiated fee-for-service compensation arrangements. At present, the
100 or so existing specialty HMOs are limited primarily to dental, vision and mental
health benefits. One source estimates that over three-quarters of such plans are
dental maintenance organizations (DMOs) and that most (87%) are for-profit
organizations.46
Specialty PPOs number about the same as specialty HMOs, but they cover a
wider range of services (including podiatry, chiropractic services and workers’
compensation). The majority (60%) of specialty PPOs cover dental,
behavioral/mental health and substance abuse services, and pharmacy and
prescription drugs. The vast majority (85%) of specialty PPOs are for-profit
organizations.
The five largest speciality HMOs and the five largest specialty PPOs are listed
in Table 8.
Table 8. The Largest Specialty HMOs and PPOs, 1994
46 AAHP, 1995-1996 Managed Health Care Overview, 1996, p.24.

CRS-25
Ran
Specialty HMO
Specialty
Location
Enrollment
k
1
APPS Dental, dba CompDent
Dental
GA
804,750
Corp.
2
PMI Dental Health Plan
Dental/
CA
781,000
Vision
3
California Dental Health Plan
Dental
CA
747,035
4
Unified Dental Care of Texas
Dental
TX
651,300
5
Oral Health Services of Florida
Dental
FL
510,588
Ran
Specialty PPO
Specialty
Location
Enrollment
k
1
Medco Behavioral Care Corp.
Mental
NJ
14,175,000
Health
2
Vision Service Plan
Vision
CA
8,100,000
3
Value Behavioral Health
Behavioral
VA
7,958,007
Health
4
American Chiropractic Network,
Chiropractic
MN
5,217,391
Inc.
5
Preferred Chiropractic Care
Chiropractic
KS
5,000,000
(PCC)
Source: American Association of Health Plans, 1995-1996 Managed Health Care Overview,
1996, p. 26, 29.
Provider-Sponsored Organizations47
Provider-sponsored organizations (PSOs) have emerged in response to
competition in the healthcare marketplace encouraged by managed care. A PSO is
a cooperative venture of a hospital and group of physicians — or some other
configuration of providers — that is provider-controlled and operated. Some contract
with other entities, such as HMOs, to gain access to the HMOs network of providers.
Not all PSOs do this though. Like HMOs, PSOs seek to combine the health service
and insurance function; but the PSO aims to eliminate the insurer or managed care
plan as an intermediary.
The term "provider sponsored organization" is a variant of terms with similar
meanings, including "physician hospital organizations (PHOs)" and "provider or
physician sponsored networks" (PSNs). "Provider service networks" also is used.
The number of organizations that fit the definition of a PSO is unknown, largely
because PSOs are generally not licensed as such, but may be licensed as HMOs or
other types of insurers. With the exception of a few states that provide for distinct
47 Beth Fuchs of the Education and Public Welfare Division, Congressional Research
Service contributed to this section.

CRS-26
PSO standards, most states require PSOs to meet the same licensing and solvency
standards as HMOs.
The Balanced Budget Act of 1997 (P.L. 195-33) authorizes PSOs that meet
certain requirements to contract with Medicare to enroll Medicare beneficiaries under
the new Medicare+Choice program (which will offer private managed care and other
types of private plans as an alternative to traditional Medicare). In general,
organizations that wish to be offered under Medicare+Choice will have to be licensed
under state law as a risk-bearing entity eligible to offer health insurance in the state.
However, a PSO will be able to seek a time-limited waiver of state law by filing an
application with the Secretary. The Secretary will have to approve the waiver if the
PSO was denied state licensing because it did not meet solvency standards that were
different from the federal standards.48 (The PSO will still have to meet state laws
not dealing with solvency that competing organizations have to meet.) This may
enable some PSOs that cannot obtain state licenses because of their inability to meet
state solvency requirements to get started. Much will depend, however, on the
specifics of the federal solvency requirements, which are to be developed through a
process of negotiated rule-making on an expedited basis. Perhaps more likely to
stimulate the establishment of PSOs is another BBA provision that allows
Medicare+Choice plans to be sponsored by organizations that have no offerings for
the under 65 market and that provides for a lower minimum enrollment number for
PSOs than for other types of Medicare+Choice plans.
Employer-Sponsored Health Plans and Managed Care49
Almost two-thirds of persons under the age of 65 are covered by employment-
based health insurance. Recent trends indicate that employers have been sensitive
50
to price differences in their choices of health plans. As shown in Figure 8, in 1993
about one-half of all insured workers were enrolled in traditional indemnity plans;
but by 1996, the share had dropped to under a quarter (23%). In 1996, almost three-
quarters (73%) of all insured working Americans received health care from a
managed care organization.
Between 1993 and 1996, growth in closed-panel HMO enrollment has been
steady, from 19% to 27%. POS enrollment nearly tripled during this period, growing
from 7% to 19%. PPO enrollment increased from 27% to 31%.
4 8 More information on the BBA treatment of PSOs can be found in: U.S. Library of
Congress. Congressional Research Service. Medicare Provisions in the Balanced Budget
Act of 1997 (BBA 97, P.L. 105-33). CRS Report 97-802, by Jennifer O’Sullivan, et al.
August 18, 1997.
4 9 The data cited in this section were collected by Foster Higgins and KPMG Peat
Marwick/Wayne State University. See Foster Higgins National Survey of Employer-
Sponsored Health Plans (A Stratified Random Sample of all U.S. Employers with 10 or
More Employees), 1997; and Jensen, Gail, M. Morrisey, S. Gaffney, and D. Liston. The
New Dominance of Managed Care: Insurance Trends in the 1990s. Health Affairs, v. 16,
no. 1. p. 125-136.
50 U.S. Congress. House. Committee on Ways and Means. 1996 Green Book, Table
C-26. p. 1027. CRS analysis of data from the March 1995 Current Population Survey.

CRS-27
Figure 8. National Employee Enrollment, 1993-1996
100%
19%
23%
27%
27%
7%
75%
15%
14%
19%
27%
50%
25%
29%
31%
Percent of Employees Enrolled
25%
48%
37%
29%
23%
0%
1993
1994
1995
1996
Indemnity
PPO
POS
HMO
Source: Foster Higgins National Survey of Employer-Sponsored Helath Plans
As shown in Table 9, the greater the number of employees in a firm the greater
the managed care penetration. However, regardless of firm size, in just 2 years there
has been a rapid rise in the share of employees enrolled in each major type of
managed care plan (HMOs, PPOs, POS plans).
Since 1993, the cost of providing indemnity insurance increased a total of 29%,
whereas the cost of providing PPO coverage increased 8% and the cost of HMO
coverage increased 3%. In 1994, the average annual health benefit cost for active
employees enrolled in an HMO was 3% less than traditional indemnity coverage
($3,385 and $3,495). By 1995, HMO coverage was 15% cheaper ($3,385 compared
to $3,739). Many observers believe that these changes in price have been closely
related to the rapid expansion of managed care enrollment in employer-sponsored
plans.

CRS-28
Table 9. Percentage of Insured Workers Covered by Different Types
of Plans, by Firm Size, 1993 and 1995
Number of Employees
1993
1-24
25-49
50-199
200-999
1,000 +
All
Firms
Indemnity
78.3%
65.2%
62.4%
44.6%
40.7%
48.9%
HMO
8.2
10.9
17.5
22.4
26.7
22.4
PPO
9.9
11.8
16.4
27.6
20.8
19.6
Point-of-Service
3.6
12.1
3.7
5.4
11.8
9.1
1995
Indemnity
30.5%
30.2%
25.1%
27.9%
26.3%
27.4%
HMO
19.2
38.9
20.6
26.6
31.0
27.5
PPO
26.8
21.4
30.6
29.2
21.7
25.0
Point-of-Service
23.5
9.5
23.7
16.3
21.0
20.1
Source: KPMG Peat Marwick/Wayne State survey of 1,953 firms in 1993 and 2,037 firms in 1995.
Jensen, Gail, M. Morrisey, S. Gaffney, and D. Liston. The New Dominance of Managed Care:
Insurance Trends in the 1990s. Health Affairs, v. 16, no. 1. p. 127.
Conclusion
Perhaps only change is certain during this time of rapid transformation in the
U.S. health care system. However, few observers would characterize managed care
as a passing phenomenon. The information presented in this report indicates how far
the health care industry has evolved — largely through internal reform rather than
legislative mandate — and also reveals the organizational variety and diversity that
exists in current models of health care financing and delivery. In the midst of this
change and uncertainty, Congress will deliberate on a host of issues surrounding
managed health care. This report provides background information that should prove
useful to participants in upcoming congressional debates.

CRS-29
Appendix A. Characteristics of Managed Care Organizations
HMOs (health maintenance organization)
PPOs
POS
(Preferred
(point-of-service)
provider
(an HMO option)
Staff
Group
IPA
Network
Characteristics
organization)

mixed
mixed
cost,
(risk or
mixed
(risk, cost,
discount possible
Compensationa
salary
cost)
(risk or cost)
or salary)
discounted cost
Network
structureb
loose
tight
tight
loose
loose
loose
Choice of
low to
providerc
high
low
low
medium
medium
high
medium
low
Controld
high
high
medium
to high
low
Source: Table prepared by the Congressional Research Service.
Note: This classification system is not an exhaustive list of types of managed care organizations or their characteristics. See the text for more detail.
The categorization scheme used here is approximate only. Distinctions among types of MCOs and even between some types of MCOs and managed
fee-for-service are becoming increasingly blurred.
“Risk” includes capitation, withhold, and bonus. “Cost” includes fee-for-service.
a

b Plans with mostly exclusive relationships with providers have “tight” network structures. “Loose” networks are composed of providers who also
contract with other organizations and/or maintain a fee-for-service line of business.
“Choice of provider” refers both to network size and whether enrollees can see non-network providers.
c
d “Control” refers to the degree of influence the plan has over network providers (through such managed care strategies as network selection,
compensation arrangements, benefit plan design, utilization management, quality assurance, and disease management.