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quality assurance monitoring in HMOs (both internally by HMO staff and externally by regulatory agencies), and the impact of financial incentives on ordering of services and specialty referrals by HMO physicians.4 The intent of this paper is to describe the range of utilization management and quality assurance strategies that are used by HMOs and then to evaluate their actual implementation. The paper begins with a brief discussion of the methodology used in preparing this paper. The second section describes the organizational structure of existing HMOs, and the third discusses market, structural, and operational factors affecting HMO performance. The fourth section discusses the approaches to utilization management and quality assurance, and the fifth section evaluates the performance of utilization management and quality assurance programs in HMOs. In the sixth section, there is a review of existing research on physician risk incentives in HMOs, while the seventh section addresses some additional policy and research issues. The final section of this paper contains five condensed case histories.

Except for the discussions on the organizational structure of licensed HMOs, the term HMO is generically in this paper to cover all closed systems in which physicians are partly or fully capitated for delivery of care and where enrollees may receive services only from contracting providers.5 All state-licensed prepaid medical plans are included in this definition, regardless of whether they are federally qualified and offer a full range of benefits.

Methodology

This paper reflects the authors' experience as health care consultants for an international accounting firm. During the past 3 years, we have had the opportunity to analyze the health benefits offered by numerous employers in both the public and private sectors and to help design their managed care programs. (By managed care, we refer to any program that channels patients to a specific set of health care providers.) During the same time, we and our associates have conducted operational reviews of over 20 HMOs, ranging from local to regional and multistate plans. In general, the HMO reviews have involved an analysis of financial, actuarial, enrollment, and utilization trends in the context of benefit design, premium pricing, marketing practices, claims processing procedures, contractual arrangements with providers, utilization review, and management reporting procedures.

This managed care and HMO consulting experience provides the background for this paper. To supplement our experience, we reviewed the health services research literature for HMO-related studies. In describing



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