What Managed Care Organizations Are, and How Investors Can Profit From Them

Markets Motley Fool

Most Americans get their healthcare through a managed care organization, but nearly no one truly knows the ins and outs of the health insurance program they have. Managed care organizations are plans that insurance companies set up as a framework for healthcare benefits, and the idea behind managed care is to drive behavior that minimizes costs for benefits providers while also giving plan participants financial incentives to control their healthcare expenses. As a healthcare consumer, you'll likely have to deal with a managed care organization as a participant. As an investor, you can profit from the efforts that insurers take to make their managed care organizations as financially efficient and lucrative as possible.

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Managed Care Plan Insurer

Market Capitalization

5-Year Average Annual Return

UnitedHealth (NYSE: UNH)

$179 billion

29.8%

Humana (NYSE: HUM)

$34 billion

27.6%

Centene (NYSE: CNC)

$14 billion

36.4%

Types of managed care organizations

There are several types of managed care organizations, including the following:

  • Health maintenance organizations
  • Preferred provider organizations
  • Point-of-service plans
  • Independent practice associations

In addition, fee-for-service plans are a different type of health insurance coverage that doesn't use managed care practices. Instead, the plan simply reimburses all or a portion of medical costs for services provided, irrespective of the professional providing the services.

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Health maintenance organizations

Health maintenance organizations were initially created in the early 1970s. The key attribute of the HMO is the primary care physician, a single medical professional who has primary responsibility over the patient's care. The primary care physician is typically a general practitioner who can provide initial diagnoses of a wide range of problems, but for patients, the defining characteristic is that if specialty medical services are required, then the primary care physician must refer the patient to a specific specialist. Similarly, except in emergency situations, admissions to hospitals and other medical services may need pre-authorization from the primary care physician. If you don't follow the HMO rules, then your insurance can deny coverage or give you less comprehensive benefits. HMO users must also typically visit in-network medical professionals if they want coverage for services.

Preferred provider organizations

Preferred provider organizations are groups of medical professionals, healthcare institutions, and other providers of healthcare services who gather together into a common network. A PPO doesn't absolutely require that a patient use medical professionals within the network in order to get benefits, but it reserves the best benefits for those who stay in-network. Because of the greater flexibility of PPOs compared to HMOs, premiums on PPOs are often a bit higher, but some patients prefer them because of the right to keep their own doctor as long as they're willing potentially to pay an out-of-network surcharge.

Point-of-service plans

Point-of-service plans incorporate different aspects of other managed care organizations. You'll typically choose a primary care physician from within a network of professionals, and in-network referrals are made easier than going beyond the network. Patients are also financially rewarded for staying in network by getting reduced rates, although, again, coverage for out-of-network professionals isn't completely unavailable as it might be for an HMO.

Independent practice associations

Independent practice associations are groups of physicians that make contracts with managed care organizations like HMOs, PPOs, or point-of-service plans to provide healthcare services. IPAs have been the medical profession's response to certain health insurance innovations, allowing doctors and other healthcare professionals to organize on their own and determine their own frameworks for working together to treat patients.

How to deal with managed care organizations

As a patient, choosing the right managed care organization can result in savings on healthcare costs. The most important thing to remember is that lower premiums don't always mean lower costs. HMOs often have the lowest premiums, but if you expect to run afoul of their provisions, their inflexibility can lead to lack of coverage for certain costly items. In those cases, the higher premiums that more flexible plan options charge can still be worth it if the coverage you get is more comprehensive.

As an investor, the question to ask from a health insurance provider is whether their managed care organizations are effective in controlling costs and maximizing profit. The more that a company can convince its members to take advantage of options that save costs both for members and insurers alike, the better the overall relationship will be. UnitedHealth, Humana, and Centene all have expertise in handling managed care organization frameworks, and they've been quite successful in driving long-term returns for shareholders.

Managed care organizations can be tough to navigate as a user, but they have become part of the healthcare system as we know it. By understanding managed care organizations more fully, you'll be able to make a better informed choice with your own healthcare and potentially invest more successfully in the space as well.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.