Updated December 28, 2014.

Most insured people in the United States have some sort of managed care health insurance. If you have an HMO or PPO, then you have a managed care health plan. However, that doesn’t necessarily mean you understand what, exactly, managed care is and how it works. But, you need to if you want to use your health insurance wisely and get the most from it.

What Is Managed Care Health Insurance?

Managed care is a type of health insurance that tries to control health care costs by managing the care than the health plan’s members receive.

  Each type of managed care health plan takes a different approach as to how they manage plan members’ medical care.

To understand managed care, you must first understand what managed care replaced. Prior to managed care, most health insurance plans were indemnity plans. If you were covered by an indemnity plan, you could go to any doctor or any hospital and get whatever care you wanted. You submitted a bill to your health insurance company. Your insurer paid its percentage of the bill, and you paid your percentage of the bill. There were no discounts or restrictions. Consumers were generally happy with indemnity plans, but they grew expensive because they placed so few restrictions on the care they would pay for.

As health care costs escalated, health insurance companies, employers providing health insurance, and the government began looking for ways to keep costs in check, while also keeping health plan members both healthy and happy with their health insurance plans. Thus was created managed care health insurance in which the health care that plan members receive is carefully managed in order to better manage costs and quality.

What Types of Health Insurance Plans Are Managed Care?

Currently, there are four common types of managed care health insurance plans in the United States:

1. HMO or Health Maintenance Organization
2. PPO or Preferred Provider Organization
3. EPO or Exclusive Provider Organization
4. POS or Point of Service plan

Learn more about each type of managed care plan and how managed care plans differ in “HMO, PPO, EPO & POS—What’s the Difference & Which Is Best.”

How Does a Managed Care Plan Work?

Managed care plans work by carefully managing the care that each health plan member gets to make sure it's necessary, quality care provided by the best type of health care provider for that situation and in the best, most cost-effective setting.

For example, a managed care plan would be much more likely to arrange for you to get your daily wound care and dressing changes in an outpatient clinic or at home with a home health care nurse than for you to stay in the hospital for wound care and dressing changes. An old-fashioned indemnity plan would pay it's share of the bill no matter where you got the care.

Each type of managed care plan manages the care its members get in a slightly different way. However, they all use some combination of the same principals.

• Limit the medical care that health plan members receive to care that is truly medically necessary.
  Plans may do this by restricting which health care providers can order certain types of care, by requiring pre-authorization before you get certain types of care, by requiring referrals to receive specialty services, and by the utilization review process.
• Limit plan members’ choice.
  Plans may do this by limiting plan members to using a restricted network of health care providers that have agreed to one or more of the following:
  • Give the health plan a discount.
  • Adhere to the health plan’s quality care guidelines.
  • Become an employee of the health plan. (Only certain managed care plans actually employ the health care providers and own the hospitals.)
• Incentivize plan members to choose frugal health care options.
  Examples include:
  • Charging a higher coinsurance for out-of-network care (or not paying for out-of-network care at all.)
  • Charging higher copayments for brand-name drugs than for generic drugs.

  What to Expect From Managed Care Health Insurance

  
  If you have managed care health insurance, you need to understand how your specific type of health plan works so you can use it wisely. Become familiar with
  
  • The plan’s provider network and whether or not you’re allowed to get care out-of-network.
  • Whether or not you’re required to have a primary care physician.
  • Whether or when you must have health care services pre-authorized.
  • How much you’re expected to pay in the form of deductibles, copayments, and coinsurance for different health care services.
  • Whether or not your current prescription drugs are covered on your health plan’s drug formulary.