Managed Care v Fee for Service: Trying to Make Sense of the US healthcare system
Since moving to Europe, I’ve had the pleasure to engage with a number of European digital health companies. I’ve also worked with a few to help them understand the US market and how they can also become part of it.
Well, for others of you who work in the US, you probably realize that explaining the US health system is like explaining the rules of American football. There are rules and regulations, of course, but they aren’t clear and obvious just by watching or trying to dive in. (I would argue that football is far easier to understand but I have certainly had some heated discussions about it).
Because anytime I go ahead and explain some basics about our insurance schemes, costs, types of healthcare systems, all my clients and colleagues end with them looking at me with a deer in headlights ‘you have got to be kidding me’ look. Without fail.
I understand. Even when I explain it, I realize how convoluted the US health system is. When researching my recent book on telehealth, I had the realization that the US demonstrates every type of payment and supplier model out there. That would be fine except that isn’t the end of it.
Recently, I was explaining the difference between managed care plans and fee for service (FFS) and what evidence is required for payment and reimbursement. Working on this, I thought others might find this overview useful.
Or causing further confusion. I did make it as simple as possible. Here we go…
Managed Care Plans
Managed care plans are health insurance plans designed to manage cost, utilization, and quality. They typically involve a network of healthcare providers who agree to comply with the plan’s policies and procedures, which aim to control costs while maintaining a certain level of care (I do not use quality care because this has generally been problematic in what that definition is with cherry picking patients. Value based are is supposed to alleviate some of this but that is a whole other topic). Patients have to choose from a set list of specialists and doctors that they can see. Between them, there are some that are more or less strict, but in general, there are specific rules to be able to use them…and get reimbursed.
Types of Managed Care Plans
Health Maintenance Organizations (HMOs): With an HMO, you're required to pick a primary care physician (PCP) who becomes your go-to person for all your medical needs. If you need to see a specialist or get certain tests done, you can't just go on your own—you'll need a referral from your PCP. The idea is to streamline your care and make sure everything is coordinated. This can be great for keeping organized, but it does mean you have to stick within a specific network of doctors and hospitals. If you go outside this network, reimbursement may not be full and you can get stuck with the bill. This is why we often make sure things are paid for and covered before getting care. Something that seems unbelievable to most Europeans.
Preferred Provider Organizations (PPOs): PPOs were made to have (relatively) more flexibility and choice. With a PPO, you don't have to worry about getting a referral from a primary care physician to see a specialist—you're free to visit any clinician you want, inside or outside of the network. But, if you stay within the network, you'll pay less out of pocket. However you can still see out-of-network doctors if you prefer or need to. This makes PPOs a popular choice for people who value having control over their healthcare decisions and don't want to be limited by a network. I have generally, for example, chosen PPO plans when given the choice.
Exclusive Provider Organizations (EPOs): EPOs are like a mix between HMOs and PPOs. With an EPO, you're required to stay within a designated network of doctors and hospitals, much like an HMO, but you don't need a referral to see a specialist, similar to a PPO. There is a catch, though. You have to use the providers in your network, or you'll be paying out of pocket with few exceptions. EPOs are a good option if you want some more flexibility. It also works better if you’re in an area with tons of clinicians who take that insurance.
Point of Service (POS) Plans: POS plans are another type of mix of HMO and PPO. These plans require you to select a primary care physician (PCP) who will handle your general healthcare and give you referrals if you need to see a specialist. However, unlike with an HMO, POS plans give you the freedom to see out-of-network providers although it does cost more. It’s basically having the structure of an HMO with the flexibility of a PPO. Saying that, it is best for patients who want the convenience of sticking to in-network against the higher costs of venturing outside it.
In general, our out of pocket costs are high. This is why these restrictions influence behaviour - no one wants to have to pay the difference which can be hundreds, thousands, and even tens of thousands of dollars.
Criteria and Evidence for Coverage for Managed Care Plans aka ‘We had to make this even more complicated’
Evidence-Based Guidelines: When it comes to deciding what gets covered, managed care plans don’t just wing it. They rely heavily on evidence-based guidelines, which are developed from research and clinical studies, aiming to ensure that the treatments and services covered are not only effective but also cost-efficient. Their goal is finding the sweet spot between providing the best possible care and keeping costs in check. So, when your doctor recommends a treatment, the insurance company is likely to compare it against these guidelines to decide if it’s going to be covered.
Utilization Management (UM): How do they do this? There is an entire industry around this called Utilization Management. Managed care plans use various tools under the umbrella of "utilization management" to make sure that the care you're getting is necessary and not just padding the bill. (I have not heard of any other country having this entire industry.) One common technique is prior authorization, where your doctor has to get approval from your insurance before moving forward with certain treatments. Then there's step therapy, which is like a "try this first" approach. For example, if you need medication, you might have to start with a cheaper, generic or more established (meaning older) option before moving on to something newer or more expensive. Concurrent review is another tactic, where your ongoing treatments are reviewed in real-time to ensure everything is still necessary. All these measures are supposedly about making sure you're getting what you need without overspending. But the real goal is spending less. Most clinicians find it overstepping and hinders their care and decision making. I’m emergency medicine so this doesn’t affect us nearly as much, but ask any other US physician and you will hear some horror stories about this process.
Network Restrictions: Managed care plans are all about networks, whether one is in- or out- of network which affects reimbursement. These plans typically cover services from doctors, hospitals, and other clinicians within their network. If you go outside this network, you might find yourself footing the bill, unless it’s an emergency or you’ve gotten prior approval to go out-of-network. The idea here is to keep costs down and steer you toward providers that the plan has negotiated rates with. The goal is to get discounted rates and manage costs.
This is the basics of managed care plans. On the other hand, we still have some fee for service plans.
Fee-for-Service (FFS) Plans
FFS plans, also known as indemnity plans, allow patients to visit any healthcare provider or facility and pay for each service received. The insurer then reimburses the patient or the provider for covered services. This seems much easier to understand as it is fairly direct - you get a service, you have to pay or get insurance to pay for that service. In general, these are far less common as they end up being more expensive to pay for.
FFS allows for:
Flexibility in Provider Choice: Patients can choose any healthcare provider without needing referrals or network restrictions.
Reimbursement Model: Physicians and clinicians are paid for each service they provide, leading to a model that can incentivize a higher volume of services rather than cost efficiency. This model, of course, is not favored if trying to cut costs since the determination of payment is by necessity and there are not the same restrictions as managed care plans.
Types of Fee for Service plans
Traditional Fee-for-Service (Indemnity) Plans: Under traditional FFS plans, patients pay a premium to their insurer, who then reimburses them for a portion of the cost of services after the deductible is met. The reimbursement is usually a percentage of the ‘usual and customary’ charges for that service.These plans offer the highest level of freedom in choosing doctors, hospitals, and other healthcare providers. There is no network, so patients can see any provider they choose. But patients often face higher out-of-pocket costs, including higher premiums, deductibles, and coinsurance. These plans are generally more expensive due to the flexibility and lack of managed care restrictions.
Managed Fee-for-Service Plans: These plans combine elements of traditional FFS with some managed care features. For example, they might require pre-authorization for certain high-cost procedures or hospital stays. These plans are less flexible than traditional FFS, as these plans may require some coordination with the insurance provider. Generally the costs are lower than traditional FFS plans because of having some managed care aspects, but they are higher than HMO and PPO plans.
Medicare Fee-for-Service Plans: Medicare, the federal health insurance program primarily for people aged 65 and older, operates a traditional FFS model known as Original Medicare. It includes Part A (hospital insurance) and Part B (medical insurance). Under this system, clinicians are reimbursed for each service provided to Medicare beneficiaries. This is fairly flexible for patients as they can see any doctor that accepts Medicare without any need of referral (a real patient satisfier, for sure). Medicare Part B costs a monthly premium, however, and patients still are responsible for deductibles and coinsurance. Often, patients get Medigap to cover additional out of pocket costs.
Yes, even Medicare is more complicated than simply a federal insurance to cover certain populations. (Note that Medicare Part C functions more like a managed care plan. No, I'm not trying to make your life worse). The good news is that everyone loves to take and be enrolled in Medicare because it pays out. In the world of digital medicine, Medicare has also often been open to paying for telehealth, RPM etc earlier than other insurance types.
Employer-Sponsored Fee-for-Service Plans: Some employers offer FFS plans as part of their benefits package and work similarly to traditional FFS plans. But often they also include managed care components, such as a requirement to use a specific network for certain services. Because they are employer sponsored, there is room to negotiate rates for the entire employee group. This is especially true for bigger companies. Still, they often have higher out of pocket costs compared to employer sponsored HMOs and PPOs.
Veterans Affairs (VA) Fee-for-Service: Another federal program that covers veterans, the VA offers healthcare services within the context of the VA healthcare system. This means veterans generally must use a network of VA hospitals and clinics, but in some cases the VA reimburses non-VA providers on a FFS basis. This allows for more flexibility especially for those who cannot access or the care is not available at the VA facilities. Generally, veterans have lower out of pocket costs compared to civilian FFS plans but there are obviously more restrictions on where they can get and access care.
Criteria and Evidence for Coverage for FFS plans
Medical Necessity: FFS plans generally cover services deemed medically necessary. The definition of medical necessity can vary but often includes considerations of whether the service is reasonable, necessary, and appropriate based on clinical standards of care. These decisions are generally made by the clinician/physician which is more of a clinician satisfier than the restrictions on managed care plans.
Less Utilization Management: Compared to managed care plans, FFS plans usually have less stringent UM. There is often less oversight on the volume and cost of services, potentially leading to higher overall healthcare expenditures. This is often why FFS goes out of fashion in numerous countries and economies - it is expensive. Insurance schemes are created to alleviate this, although the US solution of managed care is not necessarily the best one.
Fee Schedules: Reimbursement rates are often based on predetermined fee schedules, which can vary by region and specific insurance plan. This is how our insurance reimbursement gets so complicated. Unless you are paying cash, there are so many factors into what is reimbursed…and this is one example of that.
*Quick overview of High-Deductible Health Plans (HDHPs) which technically are structured like managed care plans. However it’s worth mentioning as you will see them in commercial insurance structures.
HDHPs have higher deductibles than traditional insurance plans and are often paired with Health Savings Accounts (HSAs). This way, patients have some control over their spending. Or at the very least, can see where their HSA money is going. HSA are also interesting as they can be used as investments as well.
These plans can be structured as an HMO, PPO, or EPO, so network rules vary.
HDHPs have lower premiums but higher out-of-pocket costs until the deductible is met. Preventive care is often covered before the deductible is met. After the deductible is met, services are generally covered for the rest of that year. Up until a certain amount.
Comparative Analysis of Managed Care and FFS
So how do we make sense of these two groups? Here’s the quick overview of what we discussed.
Cost Control:
Managed Care: More proactive in managing costs through network restrictions, utilization review, and evidence-based guidelines.
FFS: Less emphasis on cost control, leading to potentially higher healthcare spending due to the volume-driven nature of service provision.
Clinician Choice:
Managed Care: Limited to network clinicians, with requirements for referrals and prior authorizations.
FFS: Generally more freedom to choose doctors and specialists without network limitations or referral requirements. Except for the ones that end up being a hybrid (VA, employer etc)
Quality of Care:
Managed Care: Focus on preventive care and evidence-based treatment guidelines aimed at ‘maintaining quality’ while controlling costs. There has never been a surefire way to maintain quality using these measures, but this is what they are selling.
FFS: There is a lack of coordinated care and oversight which some believe decreases quality. That is up for debate but it can lead to variability in the appropriateness of services.
Patient Experience:
Managed Care: Is more restrictive due to network and referral requirements but often offers lower out-of-pocket costs for in-network services. It ends up cheaper for patients if they are in-network. It does, however, take knowing how to play the reimbursement game to ensure it happens.
FFS: Offers flexibility and ease of access but may result in higher out-of-pocket costs. There is, unfortunately, no incentive to curb costs and there is a risk of wrongdoers offering unnecessary services. Most physicians do not do this and do right by their patients. But there are always exceptions and people taking advantage. An unfortunate byproduct of the human condition.
Good luck to all working or trying to build in the US! There is no respite from the chaos but when you do figure it out, it is often worth it.