Tools
Managed Care
Definition/Introduction
Managed care is a healthcare financing and delivery approac that uses organized provider networks, utilization management, quality measurement, care coordination and financial incentives to promote appropriate, high-quality, and cost-effective care for individuals and populations.[1][2] Managed care emerged in response to rapidly rising healthcare expenditures and fragmented healthcare delivery to improve quality while controlling costs through coordinated care and evidence-based resource utilization. The precise definition of managed care has evolved over several decades.[3] The following features are typical in most definitions of managed care:
- Contracted provider networks;
- Utilization management;
- Quality management and performance measurement;
- Patient cost-sharing structures that encourage use of participating providers; and
- Financial incentives or risk-sharing arrangements for participating providers.[1]
Initially, managed care was largely synonymous with the health maintenance organization (HMO) model.[4] In the traditional HMO model, patients select a primary care provider (PCP) who serves as the priary point of contact and coordinates care, including referrals to specialists and other healthcare services. Historically, many HMOs used capitation, in which providers received a fixed per-member-per-month (PMPM) payment, although contemporary HMOs use a variety of reimburement arrangements. Patients generally receive coverage only for services provided or authorized within the HMO's contracted provider network.
Many contemporary HMOs use either traditional gatekeeper or open-access models that allow patients to self-refer to certain specialists; however, covered services generally remain limited to in-network providers. HMOs use utilization management and quality management programs to monitor healthcare utilization, adherence to evidence-based practice, and quality performance. Performance data are routinely shared with participating providers, and financial incentives may be tied to utilization, quality, and population health metrics. For patients, the primary financial incentive is lower out-of-pocket costs for receiving care within the contracted provider network.
Not all managed care occurs through an HMO-type arrangement.[2] In response to demand for greater provider choice and increased physician autonomy, the preferred provider organization (PPO) model emerged. PPOs maintain contracted provider networks and employ utilization and quality management programs but generally do not require referrals from a PCP. Patients have greater flexibility to receive coverage from both in-network and out-of-network clinicians, although they receive the highest level of insurance coverage when using in-network providers. Participating providers typically agree to discounted reimbursement rates and may participate in value-based incentive programs tied to quality and utilization performance.
Point-of-service (POS) plans combine features of HMOs and PPOs. Patients may receive care through a PCP-coordinated pathway or seek care outside the network, although out-of-network services generally result in higher patient cost-sharing. Out-of-pocket costs depend on how care is accessed. Patients have the option of following the traditional HMO gatekeeper model or self-refer to network or out-of-network specialists. Services obtained outside the network generally require greater patient cost-sharing. POS plans therefore provide greater flexibility than HMOs while maintaining financial incentives that encourage use of network providers.
Contemporary managed care has expanded beyond traditional HMO, PPO, and POS models to incorporate accountable care organizations (ACO), value-based payment arrangements, care management, disease management, population health initiatives, and quality improvement programs that emphasize coordinated, evidence-based, and patient-centered care. An ACO is a group of physicians, hospitals, and other healthcare professionals that voluntarily or contractually coordinate care for a defined patient population and are collectively accountable for quality, cost, and patient outcomes. Unlike traditional health insurance products such as HMOs and PPOs, ACOs generally do not restrict patients to a defined provider network or require referrals for specialty care. Instead, participating providers are held accountable for achieving quality and cost benchmarks and may share in financial savings when predefined performance and quality targets are met. Although many ACOs continue to use fee-for-service reimbursement as the underlying payment mechanism, ACO contracts layer financial accountability for quality and total cost of care onto that payment structure. Depending on the model, participating organizations may receive shared savings when expenditures are below established bechmarks and quality requirements are met, and some models also require participants to assume financial responsibility for losses when expenditures exceed benchmarks.
Although ACOs have improved performance on several measures of quality and reduced spending in some settings, evidence that they have reduced racial, ethnic, and socioeconomic disparities is more limited. Historically, ACOs serving larger proportions of racial and ethnic minority patients and socioeconomically disadvantaged populations often face greater resource constraints and social risk and may demonstrate lower performance on certain quality measures. In response, CMS launched initiatives to promote health equity through enhanced financial incentives, health equity planning, and support for providers in rural and underserved areas. However, early evidence indicates that these interventions have had limited success, highlighting the need for broader strategies that address structural inequities and the social determinants of health.[5]
A corresponding evolution in healthcare reimbursement has accompanied the evolution of managed care. Managed care encompasses a broad spectrum of reimbursement arrangements, ranging from traditional fee-for-service payment to prospective models such as capitation, in which providers receive a fixed PMPM payment regardless of the number of services delivered.[2][6] Increasingly, these approaches are combined into hybrid payment models that align financial incentives with quality, efficiency, and population health outcomes.[7] Consequently, managed care principles now extend beyond traditional insurance products and are incorporated into commercial insurance, Medicare Advantage, Medicaid managed care organizations, ACOs, and other value-based healthcare delivery systems.
Managed care and value-based care are related but distinct concepts. Managed care describes the broader organization and financing of healthcare delivery, including provider networks, utilization management, care coordination, and financial incentives. Value-based payment is a reimbursement approach that ties some portion of payment to quality, outcomes, efficiency, or total cost of care.
Issues of Concern
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Issues of Concern
A central concern in managed care is aligning provider reimbursement with healthcare utilization.[1][8] Payment models such as capitation create financial incentives to deliver efficient, evidence-based care while avoiding unnecessary services. Under a capitated payment arrangement, providers receive a fixed PMPM payment to manage a patient's care regardless of the number of services provided. If providers consistently deliver substantially more tests, procedures, referrals, or office visits than anticipated for their patient population (overutilization), the cost of providing care may exceed the capitated payment, resulting in financial losses. Conversely, if providers deliver fewer medically necessary services than expected (underutilization), they may retain more of the capitated payment, creating concern that financial incentives could discourage necessary care. Modern managed care programs attempt to minimize these competing incentives through utilization management, quality performance measures, preventive care requirements, and risk-adjusted payment models that recognize patients with chronic diseases, multiple comorbidities, or greater medical complexity appropriately require more healthcare services than healthier individuals. Risk-adjusted models account for differences in expected healthcare needs and costs, providing higher payments or adjusted benchmarks for providers caring for more medically complex populations rather than applying the same expectations to all patients. The goal is to align financial incentives with the delivery of clinically appropriate, evidence-based care so that clinicians are neither financially penalized for treating sicker patients nor rewarded for withholding medically necessary services.
Managed care has also been associated with increased administrative burden and concerns regarding professional autonomy.[1][6] Clinicians must navigate utilization management requirements, prior authorization, quality reporting, and appeals processes that increase administrative costs and consume substantial clinical and administrative time. These activities have been associated with provider burnout, reduced professional satisfaction, and delayed patient care.[7][9] In its 2025 Physician Prior Authorization Survey, the American Medical Association reported that physician practices submit an average of 40 prior authorization requests per physician each week, while practice staff spend approximately 13 hours per physician per week managing the process. Overall, 94% of physician respondents reported that prior authorization contributes to professional burnout.[American Medical Association. 2025 Physician Prior Authorization Survey] From a clinical perspective, multiple surveys indicate that some physicians consider altering their clinical decisions to avoid the administrative burden of obtaining prior authorization.[9][10][11] Although many claim denials result from administrative or documentation issues rather than lack of medical necessity, appeals require additional resources and are infrequently pursued despite evidence that a substantial proportion of appealed denials are overturned.
Another concern is that financial incentives may unintentionally discourage providers from caring for medically complex or socially vulnerable patients if these individuals are perceived as requiring greater healthcare utilization.[6][12] This type of patient selection, sometimes referred to as "cherry-picking," could reduce access to care for patients with chronic illness or greater medical complexity. Although risk-adjusted payment models are designed to reduce financial disincentives for caring for medically complex patients, disparities in healthcare access and quality persist. Studies have shown that some managed care organizations and ACOs continue to demonstrate lower participation in underserved communities and lower performance on certain quality measures among socially vulnerable populations. For example, ACO participation has been lower among physicians serving communities with higher proportions of Black, uninsured, and socioeconomically disadvantaged patients. ACOs serving larger minority populations have, in some studies, demonstrated lower performance on certain Medicare quality measures and persistent disparities in access to surgical care despite the implementation of value-based payment reforms.[13][14]
The growing use of artificial intelligence (AI) in utilization management has introduced additional concerns regarding transparency, accountability, and clinical oversight.[15][National Association of Insurance Commissioners. Artificial Intelligence in Health Insurance: The Use and Regulation of AI in Utilization Management] AI may improve administrative efficiency by accelerating routine approvals and streamlining utilization review workflows. However, clinicians and policymakers have expressed concern that AI-assisted decision-making could contribute to inappropriate denials of medically necessary care if human clinical judgment is not maintained.[American Medical Association. 2025 Physician Prior Authorization Survey] Consequently, the National Association of Insurance Commissioners (NAIC) recommends that AI-supported utilization management systems incorporate transparency, meaningful human oversight, and clinical review, particularly when coverage denials are issued.[National Association of Insurance Commissioners. Artificial Intelligence in Health Insurance: The Use and Regulation of AI in Utilization Management] As managed care continues to evolve through value-based payment models, expanding use of AI, and population health initiatives, balancing cost containment with equitable access, clinician autonomy, transparency, and high-quality patient care remains an ongoing challenge.
Clinical Significance
Managed care plays a central role in modern healthcare delivery by promoting coordinated, evidence-based, and value-conscious care while seeking to improve patient outcomes and reduce unnecessary healthcare expenditures.[3][16] Through care coordination, preventive services, utilization management, and quality measurement, managed care encourages clinicians to deliver appropriate care while minimizing unnecessary tests, procedures, and hospitalizations. These principles have also influenced contemporary value-based healthcare and population health initiatives.
Evidence suggests that appropriately implemented managed care programs can improve healthcare efficiency without compromising clinical outcomes. For example, a 10-year comparative study conducted in Switzerland found that participation in managed care was associated with substantial and sustained reductions in healthcare expenditures, inpatient mortality, hospitalizations, and hospital length of stay compared with traditional fee-for-service care.[17] The observed cost savings were largely attributed to improved care coordination, fewer unnecessary subspecialty consultations, and more efficient inpatient resource utilization.[17]
Managed care principles have also influenced national efforts to reduce low-value care. In 2012, the American Board of Internal Medicine Foundation and 9 specialty societies launched the Choosing Wisely campaign to encourage conversations between clinicians and patients about avoiding tests and treatments that provide little clinical benefit, may expose patients to unnecessary harm, and increase healthcare costs.[18] More than a decade after its introduction, studies suggest that initiatives such as Choosing Wisely have improved awareness of low-value care. However, researchers have concluded that sustained improvements require both clinician-led ("bottom-up") efforts and organizational ("top-down") strategies to reinforce evidence-based practice and appropriate resource utilization.[19][20][21]
Despite these advances, unnecessary healthcare utilization remains a significant challenge, with estimates suggesting that approximately one-quarter of U.S. healthcare spending may be attributable to waste.[22] Consequently, managed care continues to evolve through value-based payment models, quality improvement initiatives, preventive care programs, and population health strategies designed to improve care coordination, optimize resource utilization, enhance patient outcomes, and promote high-value healthcare delivery.[22][23]
Nursing, Allied Health, and Interprofessional Team Interventions
Managed care is a healthcare financing and delivery model that integrates care coordination, provider networks, utilization management, quality improvement, and value-based reimbursement to promote high-quality, evidence-based, and cost-effective healthcare. Effective implementation requires collaboration among healthcare professionals to balance appropriate resource utilization with timely access to medically necessary care while maintaining patient safety and quality outcomes.
Physicians and advanced practice providers play a central role by delivering evidence-based care, coordinating referrals, documenting medical necessity, and participating in quality improvement initiatives that support preventive care, chronic disease management, and population health. Nurses contribute through patient assessment, education, care coordination, discharge planning, transitions of care, and monitoring for changes in clinical status that may require escalation of care. Pharmacists optimize medication therapy by promoting formulary stewardship, identifying therapeutic alternatives, assisting with prior authorization when necessary, monitoring medication adherence and adverse drug events, and educating patients about appropriate medication use. Case managers, care coordinators, social workers, behavioral health professionals, therapists, and other allied health professionals help address social determinants of health, improve care transitions, facilitate access to community resources, reduce potential avoidable hospitalizations and readmissions, and promote adherence to treatment plans.
Successful managed care depends on effective interprofessional communication and shared decision-making among clinicians, patients, payers, and healthcare organizations. Clear documentation of clinical reasoning, proactive communication about coverage and prior authorization requirements, timely exchange of information during care transitions, and coordinated management of patients who are medically complex improve continuity of care while minimizing unnecessary testing, duplicate services, medication errors, and treatment delays. Participation in quality measurement, utilization review, and continuous quality improvement initiatives further supports evidence-based practice and responsible resource stewardship.
A collaborative, patient-centered approach enables healthcare teams to balance cost containment with high-quality clinical care while maintaining equitable access to medically appropriate services. Effective skills, strategic planning, interprofessional communication, and coordinated care among physicians, advanced practice providers, nurses, pharmacists, case managers, social workers, and other healthcare professionals enhance patient-centered care, clinical outcomes, patient safety, healthcare value, and overall team performance within managed care systems.
References
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