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Managed Care Organizations


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Managed care organizations (MCO) are firms thatuse a variety of approached to ensure they provide cheap andaffordable healthcare services in the US. The development of the MCOscan be traced back to the early 1970s after the legislation of theHealth Maintenance Organization Act of 1973. After their incursion,MCOs oversaw a decrease in the cost of healthcare in the early years.However, as time progressed, the patients and the health careprovider commenced complaining about the nature of the deal they weregetting. Most of the patients complained about the poor service,while the physicians complained about the low remuneration. After thecriticism and the backlash from the main stakeholders, scholarsdeclared that MCOs were becoming obsolete.


The phrase managed care, sometimes referred to asmanaged health care, is a term used in the United States to depict avariety of approaches whose intention is to reduce the cost ofproviding quality health care. The organizations that employ theseapproaches or give services to the people in need of affordable butquality are known as managed care organizations (MCO). The dynamismof managed care field has made it challenging to describe thedifferent types of MCO available in the US. Currently, various firmsthat provide managed health care exist in the US. Each of these firmsoperates differently due to their business model and approach towardsreducing the cost of health care. According to Wagner &ampKongstvedt (2007), the difference in MCOs is rooted in historicalcategorization, which identifies and separates the different types ofMCOs. This essay discusses MCO and identifies the various types ofMCOs that can be found in the US today. Further, the paper discussesthe challenges facing MCOs and the causative agents of these hurdles.


The development of MCOs dates back to the early1970s after the enactment of the Health Maintenance Organization Actof 1973. However, the approached and techniques used by the MCOs wereformulated by health maintenance organizations. In the past, thedifference between the different types of MCOs was evident and clearfor everyone to differentiate. However, as more players entered themarket, it became harder for individuals to distinguish between theMCOs and traditional health care subsidies, such as insurance. Today,the differences between MCOs and traditional health insuranceproviders have narrowed to the extent that it is difficult to tell ifan organization is an MCO or an insurance company. Nevertheless,scholars and economists have attempted to differentiate between thetwo in a bid to ensure order in the healthcare industry. Wagner &ampKongstvedt (2007) in their article identified two main types of MCOs:&quotIndependentPractice Association (IPA) and Management Service Organization(MSO)&quot.

An IPA is an association of physicians or doctorswho aggregate together and allocate some of their time to givingservices to managed care program. The term IPA has also been used torefer to an association of firms, which contract with independentdoctors or physicians with the aim of providing services to managedcare programs at a predetermined retainer fee. The IPAs in the UnitedStates can be limited liability companies or sometimes they areformed as S corporation, which is taxed under subchapter S of the IRcode. Usually, these IPAs are not established to generate profits,but they tend to make profits. These IPA often negotiate or bargaintheir contracts as a group the insurance companies in a bid to reducethe cost of care for patients (Kongstvedt, 2001).

In the US, health maintenance organizations (HMOs)or any other managed care programs often contract the IPAs, which inturn employ services of an independent physician. The physiciancontracted by the IPA is obligated to consult or treat patients atdiscounted rates or on capitation basis (Kongstvedt, 2001). IPA canalso fall under different categories. The most common IPAsencapsulated all specialties. However, in some cases, an IPA can beformed for specific specialty only. For instance, an IPA composed ofphysicians or doctors who treat cancer patients only. Other IPAs canfocus on primary care only.

Besides the IPAs, the MSOs are also considered asa category of the MCO. A health care MSO is an organization developedwith the aim of providing administrative and management services toother firms in the healthcare industry. Groups of physicians ordoctors usually own MSOs in the US, and the purpose of these groupsis to ensure that doctors are relieved of all non-healthcare issues,thus giving them time to focus on the medical aspect. MSO have beenknown to procure services as a group. As a result, they often achieveeconomies of scale. The benefit from economies of scale usuallytrickles down to the physician who can utilize the cost merit whenbrokering with health plans (Knight, 1997 Kongstvedt, 2009).

Experts believe that after the introduction ofMCOs, the cost of healthcare in the United States dropped. Due to itsinitial success, many employers moved their employees from theirindemnity plan to managed care plans that were less expensive yetprovided quality services. The MCOs, which act as intermediariesbetween patient and physician secured their position by shifting riskto the health care provider through capitation plans. However, aftera while, the physicians could not handle all the risk and they begandemanding an increase in the amount they were paid for theirservices. The resulting effect of this was that experts projected arise in the cost of medical care. Consequently, some scholars startedpredicting the end of MCO by stating that it had outlived itsusefulness (Sekri, 2000).

The development of MCO in the US conditioned boththe providers and patients to believe that they could get unlimitedmedical care choices at very low prices. However, after the incursionof the MCOs into the mainstream there was an outrage from bothdoctors and their patients because the patients were not receivingthe unlimited and unrestrained service of choice at the affordableprices they expected. The physicians, on the other hand, felt thattheir services were being undervalued. This reaction towards theconstraints found in managed care plans has been attributed to thepromises made by MCOs that remained unfulfilled. Most MCOs promisetheir patients unrationed care, which according to the physicians isnear impossible to provide due to the bargain factor initiated byMCOs. As a result, many patients tend to complain that MCO providessubstandard health care, in a bid to reduce the cost that patientspay.

The ensure that the MCOs were held to their word,some states in the United States have passed legislation which allowsindividuals to sue health care plans for malpractice (Sekri, 2000).This move has ensured that practicing physicians maintainhigh-quality medical service even if the cost of providing theservice is cheap. In spite of this, the complaints against managedstill prevailed. Sekri (2000) was of the opinion that the criticismagainst MCOs would not end unless the costs of medical servicesincreased to match the physicians’ demands. However, this movewould imply that the MCOs are not delivering on their promise foraffordable healthcare service since the patients would have to paymore to access health care.

Currently, many stakeholders in the healthcareindustries do use the term MCO because of the negative reputationthat accompanies this term. However, the early success of the MCOsprompted the development of other strategic health care systems,which combined the traditional indemnity with the techniques used byMCOs. These new systems were created to combat the inherent weaknessin the MCOs’ strategies as well as reduce the cost of health careservices. According to Wagner &amp Kongstvedt (2007), the newsystems created were known as management care overlays, and they weredesigned to ensure that individual could maintain their choice ofinsurance health cover. Despite the use of a different name, themanagement care overlay are still managed by MCOs, but the techniquesand approaches used are different from the earlier form of managedcare in a bid to ensure both the physician and the patients are notaffected by the issues which plagued the previous technique.


Managed care was formulated in the US with theobjective of decreasing the cost of medical care. Since the incursionof managed care, the organizations in charge (MCO) have attempted toreduce the cost of medical care. However, this has not beensuccessful as anticipated with both the patients and the physicianscomplaining that they were not receiving what they expected. Patientshave criticized MCOs for poor medical care they receive. On the otherhand, physicians are complaining that the negotiated fees may belower than they had anticipated. Hence, they may be unable to providethe right quality of service at the stipulated rates. Despite all thecriticism that accompanies MCOs, evidence from the literaturesuggests that MCOs have contributed positively in controlling thecost of providing health care in the US. As a result, it has beenachieved without influencing the quality of services that physicianprovide. The ability to maintain quality has been attributed to thelegislation, which allows individuals to sue healthcare plans in thecase of malpractice.


Knight, W. (1997). Managed Care Contracting. Aspen: Aspen Publication.

Kongstvedt, P. R. (2001). The Managed Health Care Handbook (4th ed.). Aspen: Asen Publisher Inc.

Kongstvedt, P. R. (2009). Managed Care: What It Is and How It Works. Boston: Jones &amp Bartlett Learning.

Sekri, N. K. (2000). Managed Care: the US Experience. Bulletin of the World Health Organization, 78(6), 830-844.

Wagner, E. R., &amp Kongstvedt, P. R. (2007, September 2). Types of and Integrated Health Care Delivery System. Retrieved November 25, 2016, from http://www.jblearning.com/samples/0763739839/39839_CH02_019_040.pdf