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How Managed Care Contracts Impact Reimbursement

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Reimbursement under managed care contracts differs from traditional fee-for-service reimbursement models.  But how do managed care contracts impact reimbursement? Managed care contracts may feature value-based payment models where reimbursement is tied to achieving certain health outcomes, rather than a straightforward fee-for-service reimbursement model many providers are familiar with.

For providers looking to maximize the benefit that their managed care contracts provide, understanding exactly how your managed care plan may impact reimbursement is crucial. This is particularly salient for providers transitioning from a fee-for-service-based model.

What is Managed Care?

Managed care is a healthcare delivery model that seeks to provide high-quality healthcare while controlling rising costs. A managed care organization and healthcare provider, or physician, achieve this by integrating reimbursement with health outcomes, quality, and utilization, while also delivering standardized care across the entire managed care network.

Managed care organizations (MCO) exist primarily in four forms:

  • Health Maintenance Organizations (HMO)
  • Preferred Provider Organizations (PPO)
  • Point of Service (POS) Organizations
  • Exclusive Provider Organizations (EPO)

A managed care organization’s structure has the potential to impact reimbursement. Let’s take an in-depth look at the characteristics of each.

Think you need a little more background information? Follow the links provided for a review of “What is a managed care contract?” and “What is a managed care organization?”!

Health Maintenance Organizations (HMO)

In an HMO health plan, the organization is both the insurer and provider of a set of defined services. Patients within an HMO network must use an in-network provider for service coverage. The healthcare organization manages the quality and scope of care provided and standardizes that care across its network. Typically, preventative care is also provided, which is an important avenue through which utilization levels and costs are managed.

HMOs can be organized as either a group model or entered into a separate contract with clinicians. Services are provided at facilities with an agreement to be a part of the network.

Under an HMO model, the majority of services offered are reimbursed through capitation payments, which are defined payments for each enrolled plan member they administer healthcare services.

Preferred Provider Organization (PPO)

Under a PPO arrangement, the MCO consists of a network of healthcare providers, such as hospitals and doctors. They have entered into a contract with a third-party entity to deliver healthcare services to individuals covered under the plan. PPOs offer financial incentives to enrollees to seek in-network providers, yet provide covered persons more control over their health care decisions. For example, under a PPO plan, a covered person can typically refer themselves to a provider, whereas in an HMO health plan, referrals are typically made by the primary care provider.

While PPOs generally give enrollees greater flexibility, providers are still bound by the terms found in the managed care payor contracts that give them access to the network. These terms define everything from medically necessary treatments to how records must be kept. The terms in the managed care contract will also determine how providers are reimbursed.

Under a PPO managed care plan, reimbursement may follow a discounted fee-for-service-based model, where providers are contractually obligated to provide covered persons with specific services at a discounted cost. This may also be accompanied by a utilization review mechanism embedded in the contract to manage costs over time.

Point of Service Organizations (POS)

POSs are less common than either PPOs and HMOs. A POS system combines features of both an HMO and PPO, with costs for covered persons falling somewhere between the two. Under a POS plan, a covered individual is required to have a primary care provider, but can also self-refer to other in-network specialists as needed.

Exclusive Provider Organization (EPO)

Under an EPO plan, patients aren’t required to choose a primary care provider, but can instead choose other in-network providers without a referral.

Reimbursement Models

We’ve outlined the four primary types of MCOs in today’s healthcare landscape, and briefly touched on the differences in reimbursement between an HMO and a PPO. Whereas an HMO managed care arrangement will typically reimburse based on a capitation arrangement, a PPO’s reimbursement model may be a discounted fee-for-service.

While fee-for-service based payment models have been in use for decades, value-based reimbursement models like capitation are becoming increasingly common. Value-based reimbursement models link health outcomes with reimbursement and have allowed MCOs to better forecast and manage rising healthcare costs.

Let’s take an in-depth look at these two reimbursement models so that providers can better understand how managed care contracts can impact reimbursement.


Fee-for-service-based reimbursement has been around for decades and continues to be a common feature across the healthcare industry. Under a fee-for-service model, providers are reimbursed for each service they provide to a covered individual.

Fee-for-service is not considered managed care, though some managed-care plans may carve out specific services that are offered on a fee-for-service basis by providers in the network.

Fee-for-service models are often accompanied by one or more methods to try to control costs. One of the primary critiques of fee-for-service models is that providers are incentivized to provide more services because they are paid for each service rendered to the patient. Methods to control costs under a fee-for-service based model include:

  • Utilization reviews, sometimes by a third-party entity
  • Discounted fees
  • Benefit limitations
  • Limited networks

Value-Based Care Reimbursement Models

We’ve talked about capitation, which is one form of reimbursement under a value-based care model. Under a capitation arrangement, providers are typically reimbursed a defined amount per month for each enrolled plan member they are providing healthcare services to.

Within this type of reimbursement arrangement, providers take on a portion of the risk for delivering care to their patients. For example, if a patient’s healthcare costs exceed the capitation payment, the provider is usually responsible for the remaining costs.

An example of a managed care arrangement with capitation reimbursement is a Medicaid comprehensive-risk-based plan. Under these plans, capitation payments are made to the managed care providers on a basis known as per member per month (PMPM), whereby the state pays the provider for each covered individual they provide healthcare services for each month.

Value-based reimbursement models like those seen in managed care plans for Medicaid services are inherently risk-sharing. This means that providers share a portion of the risk for any rise in healthcare costs. Put another way, if a covered person’s healthcare costs exceed the capitation paid by the plan, the provider will be responsible for the remaining portion. This type of risk-based arrangement incentivizes providers to achieve better health outcomes and lower utilization rates. This lowers their risk of being accountable for any utilization that exceeds the capitation payment.

Capitation payments aren’t the only value-based reimbursement model out there. Shared savings programs like bundled payments have also been attempted in recent years, most notably through the Bundled Payment for Care Improvement initiative, which allowed providers to group together payments for items and services given during an episode of care for a covered individual.

Implications of Value-Based Care Reimbursement for Providers

Value-based care models link the quality of care to the financing of that care, and in doing so, promise to drive down money costs while improving the quality of care. For providers, there are many implications of this reimbursement model. Among others, these include:

  • Using a data-driven approach to succeed under these models, both to fully understand the costs of care they are providing and to understand how successful specific programs are at delivering quality healthcare.
  • Understanding how to communicate the unique value they provide to payors in order to gain entry to the network and achieve more favorable contract terms while negotiating managed care contracts.
  • Value-based care contracts require deep integration between the Information Technology (IT) and healthcare space to track health outcomes, measure program performance, and assess efficiency.

Closing Thoughts

Managed care contracts restructure how reimbursement occurs between payors and providers. Whereas under a fee-for-service-based arrangement, reimbursement occurs for each service provided to a covered individual. Under a managed-care contract, reimbursement is tied to health outcomes and the quality of care provided. Known as a value-based care, managed-care systems are using value-based contracting to help drive down costs and improve healthcare quality.

For providers, a notable difference between fee-for-service and managed-care payor contracts is that value-based managed care contracts distribute risk between the provider and payor. Managing that risk is a key requirement to successfully navigating value-based contracting. At the same time, providers must understand how to effectively communicate their value to payors in order to maximize the benefit this reimbursement structure provides. Understanding how to do so can be challenging, yet it is essential for successfully managing the contract negotiation process.


“Payment Policy in Medicaid Managed Care

“Health Insurance Plan Types and Definitions”

“Provider payment and delivery systems”

“Managed care”

“What is Managed Healthcare?”

“Understanding the Value-Based Reimbursement Model Landscape”

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