In the health care industry, the term 'managed care' describes a system of techniques employed by insurance service providers in an effort to reduce the cost of supplying health care benefits to their program subscribers. Managed care plans, most typically found in the form of Health Maintenance Organizations and Preferred Provider Organizations (HMOs and PPOs) are also intended to improve the quality of the health care services received by insured participants.

HMOs and PPOs are a product of the Nixon era, when The U.S. Congress enacted the Health Organization Maintenance Act of 1973, which encouraged the growth of HMOs, the first type of managed care plans to take root in the United States. Pursuing the goal of increasing efficiency in providing health care services to members, managed care plans are credited with keeping health care costs in check during the 1980s. This was possible by the significant lowering of incidences of unnecessary hospitalizations and the spurring of competition among providers, thereby decreasing rates charged by participating doctors and medical facilities. This was basically the beginning of the end of the not-for-profit health care industry. Managed care plans are administrative systems meant to provide maximum efficiency and also maximum profit.

With managed care, it is characteristic to have a network of selected doctors, each responsible for providing services to specific enrollees. Each enrollee is assigned a primary physician who is responsible for their overall individual care. Any type of specialty health care services needed requires a referral from the primary care physician (PCP) to the specialist physician. Hospital admission for other than emergency treatment also requires pre-approval and authorization from the PCP. Additionally, health care services obtained from a practitioner outside of the network are usually not covered under the plan.

There are several advantages to policyholders who subscribe to HMOs and PPOs, although these are sometimes debated among opponents of managed care systems. In exchange for an annual subscriber payment, members have access to fees from health care providers that are significantly discounted from their normal rates. For PPOs, which typically employ a deductible payment amount coupled with a coinsurance feature, commonly 80/20, any service charges greater than the amount allowed by the insurer are written off by the provider as a discount.

Another advantage to managed care is that a doctor within the network is often compensated for each member assigned to him or her for primary care, even if that member has no occasion to utilize any medical services. In this respect, it is in the providers' best interest to actively promote wellness among their patients and some managed care programs even provide financial incentives to members who stay healthy and don't require health care services.