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Managed Care
Introduction
Surprisingly, U.S. managed care has been in existence for almost a century. In 1910, the Western Clinic of Tacoma, Washington offered medical services through its network of doctors and nurses for the premium payment of $0.50 per member per month. Nearly one hundred years later, managed care organizations (MCOs) have changed dramatically with increased complexity and significance to the U.S. healthcare market. Aggregate revenues for MCOs in the S&P 500 index grew 30% in 2006 to $212.4 billion while earnings per share estimates are expected to increase by 15% for 2007. The purpose of this paper is to analyze the United States’ managed care industry in understanding the sources of profitability.
Managed Care History
From 1910 - 1970, MCOs were a small part of the healthcare landscape (see Exhibit 1 for industry timeline). As increasing medical costs placed budget constraints on government programs, it was believed that the traditional way of delivering healthcare was financially wasteful since healthcare providers (doctors, hospitals, etc.) had no incentive to keep costs to a minimum. In 1973, U.S. Congress passed the Health Maintenance Organization (HMO) Act, which required all employers with greater than 25 employees to offer two federally certified HMO plans for its workers. Unfortunately for the industry, obtaining federal certification was not an easy process. Strict requirements pertaining to minimum benefit standards, quality assurance, and financial stability made it difficult for HMOs to comply. However, during the Carter and Reagan administrations (early 1980’s), issuance of the regulations became a priority and growth ensu ...