ABSTRACT

This chapter describes managed care and its cost-cutting potential and aims to health maintenance organizations (HMO) as a form of health care organization that combines the functions of insurance and the provision of care. It discusses the HMO and its organizational relatives, and assesses the theory and evidence on their effects. The chapter explores the market effects of managed care on providers, insurers, and the adoption of new health care technology. Managed care features a health care delivery structure involving the integration of insurers, payment mechanisms, and a host of providers, including physicians and hospitals. The probability and characteristics of contracts between individual managed care organizations and hospitals appear to depend on three sets of factors: plan characteristics, hospital characteristics, and market characteristics. Economic and organizational theories have suggested that managed care will differ from more traditional fee-for-service plans. Conceptually, it would seem fairly simple to compare health care costs in managed care and fee-for-service plans.