A common type of health insurance in the U.S., managed care plans utilize deals with healthcare providers and facilities to offer care to plan members at reduced rates.^[1]

Participants in these plans either have private insurance, such as employer-sponsored coverage, or government-provided Medicare or Medicaid insurance.

Managed care plans seek to control healthcare costs and the use of services while maintaining quality. As a patient, your healthcare typically costs less if you go to a provider or facility within a managed care network and costs more if you seek care outside that network.

Learn More: Do I Need Health Insurance Coverage?

What is a managed care plan?

Managed care plans utilize deals with hospitals, doctors, and healthcare providers to supply services to the plans’ insured members at agreed-upon discounted rates. Americans generally access these plans through their employers or through the federally run Medicare and Medicaid programs.^[2]

These plans operate on three basic principles: cost, utilization, and quality. The plans strive to reduce healthcare expenses and utilization while attempting to improve healthcare quality.

Four types of managed care plans are available:

• Health maintenance organization (HMO)

• Preferred provider organization (PPO)

• Point of sale (POS)

• Exclusive provider organization (EPO)^[3]

Today, the majority of insured Americans access healthcare through managed care plans. McKinsey’s Center for U.S. Health System Reform reported in 2022 that these plans account for 82% of offerings from health insurers.^[4]

In the U.S., managed care dates back to 1929, when doctors in California and Oklahoma set up new arrangements for patients to pay for and receive healthcare. But this care type didn’t come to the forefront until the 1970s. Managed care plans significantly reduced healthcare costs in the 1980s and 1990s by removing unnecessary hospitalizations and making healthcare providers and doctors provide discounted costs for services, according to the National Council on Disability.^[5]

How do managed care plans work?

The healthcare networks established by health insurance companies — such as Aetna CVS Health, Anthem, and UnitedHealth Group — are at the heart of managed care plans. Members of these networks, including hospitals and doctors, agree to deliver care at lower rates.

In many cases, you’ll pay less for services delivered by providers in your plan’s network and more for services delivered by providers out of the plan’s network.

One way managed care plans keep costs down is known as pre-authorization. In some instances, a plan participant may need to gain approval, or pre-authorization, before a hospital stay or major procedure. A participant might also be required to get a referral from their primary care physician before seeing a specialist.

Managed care plan features

Managed care plans include several common features. Read more about these features to further understand how managed care plans work.

• Preventive care incentives: Some managed care plans give incentives like payments and vouchers to participants who take advantage of preventive care, such as screenings, wellness checkups, and vaccinations. These incentives aim to prevent or catch costly-to-treat conditions.

• Provider networks: These networks include a group of hospitals, doctors, and other healthcare providers that deliver services to participants in a managed care plan at reduced rates. It’s generally cheaper for participants to use in-network providers than out-of-network providers.^[6]

• Primary care providers (PCP): Primary care providers include doctors, nurse practitioners, clinical nurse specialists, and physician assistants who treat common medical problems. A PCP typically manages a patient’s overall care, including whether to refer them to a healthcare specialist.

• Prescription drug tiers: Depending on the care plan, prescription drugs are divided into three, four, or five tiers based on cost, availability, and effectiveness. Tier 1 drugs, which often include generic medications, are generally the cheapest option. The top tier comprises the highest-priced drugs, such as specialty medications.

• Pre-authorization: Also known as prior authorization, prior approval, and precertification, pre-authorization means a healthcare provider must seek permission from a managed care plan before offering a certain service or prescribing a certain drug. If the plan doesn’t give prior authorization, it won’t cover the service or drug.^[7]

Learn More: How to Get Health Insurance Without a Job

Types of managed care plans or organizations

Managed care plans, also called managed care organizations, fall into four categories that differ based on a number of factors and operating guidelines.

Health maintenance organization (HMO)

A health maintenance organization (HMO) offers care to plan participants through a network of hospitals, doctors, and other healthcare providers at an agreed-upon, discounted rate. If you belong to an HMO, you choose a primary care physician who oversees your care, including mandated referrals to specialists. An HMO limits doctors to prescribing certain drugs.

HMOs operate within certain geographic service areas, so you must live or work in an HMO’s service territory to be a member. With the exception of emergency care, out-of-network care typically isn’t covered.

HMO premiums tend to be the lowest among managed care plans.

Preferred provider organization (PPO)

Preferred provider organizations (PPOs) are less restrictive than HMOs.

If you’re a member of a PPO, you can go to any provider you wish, but you’ll pay less in out-of-pocket costs if you use a provider within the PPO’s network. Unlike an HMO, a PPO doesn’t make you select a primary care physician or require a doctor’s referral to see a specialist.

Because of the freedom afforded by PPOs, premiums generally cost more than other managed care plans. Despite that, PPOs are the most common type of managed care plan in the U.S., according to the Kaiser Family Foundation.^[8]

Point of service (POS)

Basically a hybrid of an HMO and PPO, a point-of-service (POS) plan allows you to be treated by any doctor you want. But if you see a doctor outside the network, your out-of-pocket costs will be higher.

If you’re a member of a POS plan, you usually need to pick a primary care physician and obtain a referral from that physician before getting specialty care, which matches HMO member requirements.

Premiums for POS plans typically cost less than PPO premiums but more than HMO premiums.

Exclusive provider organization (EPO)

An exclusive provider organization (EPO) provides coverage only if you use doctors, hospitals, and other healthcare providers within its network. Exceptions exist for needed emergency care or if the care you need isn’t available from a network provider. If you do use an out-of-network provider, you might end up paying the entire medical bill.

You don’t need to select a primary care physician or obtain a referral for a specialist if you’re in an EPO plan. Premiums for EPOs generally cost less than PPOs but higher than HMOs.

Benefits of managed care plans

Here are four benefits of managed care plans:

• Lowers cost of services: Because managed care plans negotiate discounted rates with healthcare providers, a patient typically pays less for care than someone without insurance does.

• Reduces out-of-pocket costs: In some cases, managed care plans may pass along cost savings to plan participants in the form of lower out-of-pocket costs, including deductibles and copays.

• Decreases likelihood of overusing services: Managed care organizations aim to decrease the likelihood of services being overused. The organizations do this through measures like requiring prior authorization for hospital stays or specialty care and substituting lower-cost generic drugs for brand-name drugs.

• Improves health outcomes:  In part because of its emphasis on quality, managed care may lead to better patient well-being, such as preventing diseases and improving quality of life.

See More: What’s the Difference Between Deductible and Out-of-Pocket in Health Insurance?

Disadvantages of managed care plans

Here are four disadvantages of managed care plans:

• Targets healthy populations: Some providers may resist treating patients with a chronic illness or complex medical condition. It may be easier to meet managed care targets and potentially more lucrative to treat healthier patients with fewer problems.^[9]

• Lacks access for some: Some people, such as those who have mental health issues or live in rural areas, may lack adequate access to managed care.

• Limits some care: Depending on the managed care plan type, access to care may be restricted by the higher cost of out-of-network providers or the rules surrounding specialist referrals.

• Lengthens wait times: In some instances, a participant in a managed care plan may be forced to wait days or even weeks for an appointment with a primary care provider.

Managed care FAQs