Managed Care Terms


AAPCC - Adjusted Average Per Capita Cost

The basis for Health Maintenance Organization (HMO) or Competitive Medical Plan (CMP) reimbursement under Medicare-risk contracts. The average monthly amount received per enrollee is currently calculated as 95 percent of the average costs to deliver medical care in the fee-for-service sector. It is the Centers for Medicare & Medicaid Services’ (CMS's) best estimate of the amount of money care costs for Medicare recipients under fee-for-service Medicare in a given area. The AAPCC is made up of 122 different rate cells; 120 of them are factored for age, sex, Medicaid eligibility, institutional status, and whether a person has both part A and part B of Medicare. Separate AAPCCs are calculated - usually at the county level - for Part A services and Part B services for the aged, disabled, and people with end stage renal disease (ESRD). Adjustments are made so that the AAPCC represents the level of spending that would occur if each county contained the same mix of beneficiaries. Medicare pays health plans 95 percent of the AAPCC, adjusted for the characteristics of the enrollees in each plan. See also Medicare Risk. 

AAPPO - American Association of Preferred Provider Organizations

The leading national association of preferred provider organizations (PPOs) and affiliate organizations, and was established in 1983 to advance awareness of the benefits — greater access, choice and flexibility — that PPOs bring to American health care.  Its mission is to be the most valued and effective advocate for the PPO Industry by: educating and informing the federal and state legislative and regulatory bodies, promoting PPO Industry best practices, advancing the business needs of Preferred Provider Networks and Payers, and promoting Preferred Provider Networks and PPO benefit products to purchasers, consumers, employers and the healthcare industry at large. For additional information, go to 


A patient’s ability to obtain medical care determined by the availability of medical services, their acceptability to the patient, the location of health care facilities, transportation, hours of operation, and cost of care. 

Accounts Receivable

The balance of money owed to a client by others. 


The process by which an organization recognizes a program of study or an institution as meeting predetermined standards. Three organizations that accredit managed care plans are the National Committee for Quality Assurance (NCQA), URAC and the Joint Commission.  

ACF - Ambulatory Care Facility

A medical care center that provides a wide range of healthcare services, including preventive care, acute care, surgery, and outpatient care, in a centralized facility. Also known as a medical clinic or medical center. 

ACR - Adjusted Community Rating

See Rating, Adjusted Community Rating.  


A person trained in statistics, accounting and mathematics who conducts statistical studies such as determining insurance policy rates, dividend reserves and dividends, as well as conducts various other statistical studies. 

Acute Care

Medical treatment rendered to people whose illnesses or medical problems are short-term or don't require long-term continuing care. Unlike chronic care, acute care is often necessary for only a short time.  


The ability of a patient to take their medication or follow a treatment protocol according to the directions for which it was prescribed; a patient taking the prescribed dose of medication at the prescribed frequency for the prescribed length of time. Also referred to as compliance. 


The process of completing all validity, process, and file edits necessary to prepare a claim for final payment or denial.  


A credit or debit amount appearing at the carrier/group level on claims and administrative fee invoices sent to plan sponsors or at a claim level on adjustment advice sent to pharmacies. An adjustment can result from claims processing and/or billing errors (e.g., incorrect dispensing fee paid, incorrect pharmacy paid, incorrect administration fee billed, wrong carrier/group billed). An adjustment can also be processed against a general ledger account (e.g., bad debt or error). 

Administrative Costs

The costs assumed by a managed care plan for administrative services such as claims processing, billing, and overhead costs.  

Adverse Event

An unexpected medical problem that happens during treatment with a drug or other therapy. Adverse events do not have to be caused by the drug or therapy, and they may be mild, moderate, or severe. 

Adverse Selection

The problem of attracting members who are sicker than the general population, specifically, members who are sicker than was anticipated when developing the budget for medical costs. A tendency for utilization of health services in a population group to be higher than average or the tendency for a person who is in poor health to be enrolled in a health plan where he or she is below the average risk of the group. From an insurance perspective, adverse selection occurs when persons with poorer-than-average health status apply for, or continue, insurance coverage to a greater extent than do persons with average or better health expectations. 

Affiliated Provider

A health care provider or facility that is part of the Managed Care Organization's (MCO’s) network, usually having formal arrangements to provide services to the MCO's member. 

AHCPR - Agency for Health Care Policy and Research

See Agency for Healthcare Research and Quality. 

AHRQ - Agency for Healthcare Research and Quality

Formerly the Agency for Health Care Policy and Research (AHCPR); created by Congress in 1989 to conduct federal research into technology assessment and outcomes management and to develop practice guidelines for public dissemination. The lead Federal agency charged with improving the quality, safety, efficiency, and effectiveness of health care for all Americans. AHRQ supports health services research that will improve the quality of health care and promote evidence-based decision-making.  For additional information, go to 

Alignment of Incentives

A phrase used to describe the relatively new economic arrangements of sharing between physicians and hospitals that creates an incentive for physicians to accept capitation. 

Allowable Cost

From the context of a federally qualified Health Maintenance Organization (HMO) - the direct and indirect costs, including normal standby costs incurred, that are proper and necessary for efficient delivery of needed health care services, including provider costs, and costs for marketing, enrollment, membership, and operation of the HMO, that are specific to health care prepayment organizations. 

ALOS - Average Length of Stay

Calculated as the average number of patient days of hospitalization for each admission, expressed as an average of the population within the plan for a given period of time. 

Alternative Delivery Systems

An expression used to describe all forms of health care delivery systems other than traditional feeforservice (FFS) indemnity health care. Just about all managed care organizations are called alternative delivery systems. 

Ambulatory Care

Health services provided without the patient being admitted. Also called outpatient care. The services of ambulatory care centers, hospital outpatient departments, physicians' offices and home health care services fall under this heading provided that the patient remains at the facility less than 24 hours. No overnight stay in a hospital is required. 

AMP - Average Manufacturer Price

Average price paid to a pharmaceutical manufacturer by wholesalers for drugs distributed to retail pharmacies, net of prompt-pay (“cash”) discounts. AMP was a benchmark created by Congress in 1990 in calculating rebates owed Medicaid by pharmaceutical manufacturers. Before the enactment of the Deficit Reduction Act of 2005 (DRA), AMP data were used by the Centers for Medicare & Medicaid Services (CMS) primarily for purposes of the Medicaid drug rebate program, and disclosure of AMP data was forbidden except in certain narrow circumstances. The DRA stipulated that AMPs were to be made available to state Medicaid programs, that they were to be used to calculate federal upper limit (FUL) amounts for certain multiple-source drugs, and that states could use them to help set other reimbursement rates. 

Ancillary Services

Auxiliary or sup­plemental services, such as diagnostic services, home health services, physical therapy, and occupational therapy, used to support diagnosis and treatment of a patient’s condition. 

Anonymized Data

Previously identifiable data that have been deidentified and for which a code or other link no longer exists. A provider, third party or investigator would not be able to link anonymized information back to a specific individual.  

Anonymous Data

Under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), this refers to data that were collected without identifiers and that were never linked to an individual. Coded data are not anonymous.  

Antikickback Statute

Forbids referral kickback remuneration of any kind for Medicare and Medicaid, imposing criminal sanctions; kickbacks cannot be solicited, taken, or offered for business involving the purchase or lease of health care goods or services.  


A formal request by a covered person or provider for reconsideration of a decision, such as a utilization review recommendation, a benefit payment or administrative action.  


Appropriate health care is care for which the expected health benefit exceeds the expected negative consequences by a wide enough margin to justify treatment. This term is not to be confused with "usual and customary" or "approved" service. The extent to which a particular procedure, treatment, test, or service is clearly indicated, not excessive, adequate in quantity, and provided in the setting best suited to a patient's or member's needs. See also Medically Necessary Services. 


Approval usually is used to describe treatments or procedures that have been certified by utilization review. Can also refer to the status of certain hospitals or doctors, as members of a plan. Can describe benefits or services, which will be covered under a plan. Generally, approval is either granted by the managed care organization (MCO), third party administrator (TPA) or by the primary care physician (PCP), depending on the circumstances.  


Process of resolving a dispute or a grievance outside a court system by presenting it for decision to an impartial third party. Both sides in the dispute usually must agree in advance to the choice of arbitrator and certify that they will abide by the arbitrator's decision. Arbitration avoids costly litigation and offers a relatively speedy resolution as well as privacy for the disputants.  

ASO (Administrative Services Only) Contract

A contract under which a third party administrator (TPA) or an insurer agrees to provide administrative services to an employer in exchange for a fixed fee per employee. See also Third Party Administrator. 

ASO - Administrative Services Organization

An entity that contracts as an insurance company with a self-funded plan but where the insurance company performs administrative services only and the self-funded entity assumes all risk. 

ASP - Average Sales Price

Section 303(c) of the Medicare Modernization Act (MMA) revised the drug payment methodology by creating a new pricing system based on a drug’s ASP. Effective January 2005, Medicare began paying for the vast majority of Part B covered drugs and biologicals using a drug payment methodology based on the ASP. Manufacturers submit the ASP data for their products to the Centers for Medicare & Medicaid Services (CMS) and CMS updates ASP drug pricing files for Medicare Part B drugs on a quarterly basis. Medicare Part B drugs and biologicals not paid on a cost or prospective payment basis are paid based on the ASP methodology, and payment to providers is 106% of the ASP, less applicable beneficiary deductible and coinsurance. 

Assignment of Benefits

The payment of medical benefits directly to a provider of care rather than to a member; generally requires either a contract between the health plan and the provider, or a written release from the subscriber to the provider allowing the provider to bill the health plan; the transfer of one’s interest or policy benefits to another party.  

Assumption of Financial Risk

The risk a Health Maintenance Organization (HMO) bears on behalf of its members; according to CFR-42, each HMO must assume full financial risk on a prospective basis for the provision of basic health services, except that it may obtain insurance or make other arrangements to cover the following: for the cost of providing an aggregate value of more than $5,000 to an enrollee in any year; the cost of legitimate out-of-area care; for not more than 90% of the amount by which its costs for any fiscal year exceed 115% of its income; and to cover risk for its participating providers.  

Attrition Rate

Disenrollment expressed as a percentage of total membership; a plan with 40,000 members with a 2% attrition rate per month would need to gain 800 new members each month to retain the initial 40,000 covered lives.  


Any document designating any permission. In health care, authorization may refer to "authorization to disclose" private information, "authorization to treat" or "authorization to pay", as in "pre-authorization" required by many insurance companies and health plans. In the case of pre-authorization, the managed care organization may require approval prior to the receipt of care. 


The automatic assignment of a person to a health insurance plan (typically done under Medicaid plans). 

Average Cost (or Benefit)

The average cost (or benefit) for a unit of output (e.g., one day in a hospital for one patient) is the total cost (or benefit) of one unit of output divided by the total units of output.  

Average Cost per Claim

A financial amount, representing the sum of the medical charge and administrative charge for services provided within the categories of admissions, physician services, and outpatient claims. 

AWP (Average Wholesale Price) Discount

A cost-containment program implemented to reduce drug program costs for plan sponsors without influencing cardholders. As AWP no longer always equals the actual cost of a drug to the pharmacy, by applying a discount to AWP, a new upper limit of payment is established and savings are realized by the plan sponsors. An example is a plan sponsor with a plan that allows average wholesale price less 10% (AWP-10%).  

AWP - Average Wholesale Price

AWP was reportedly created in the 1960s by the California Medicaid program as a means by which to standardize a basis for the pharmaceutical cost component of pharmacy reimbursement. Historically, AWP was the generally accepted drug payment benchmark for many payers because it was readily available. However, AWP is now thought of as a “sticker price,” in that it rarely if ever reflects the average wholesale price actually paid after discounts have been subtracted.  Most payers base provider payment rates on AWP for drugs covered under the pharmacy and medical benefits. Based on a settlement from two national class action lawsuits, the two major publishers of drug cost data (First DataBank and Medi-Span) will cease publication of AWP on or before September 26, 2011, meaning that the industry will need to develop an alternate benchmark for prescription drug pricing. 

AWPLs - Any Willing Provider Laws

Laws that require managed care plans to contract with all health care providers that meet their terms and conditions. 

Balance Billing

The practice of a provider billing a patient for all charges not paid for by the insurance plan, because those charges are above the plan’s UCR (usual, customary, and reasonable) practice or may be considered medically unnecessary; plans are increasingly prohibiting providers from balance billing except for allowed copays, coinsurance, and deductibles.  


A method of identifying the level of performance that can be related to specific outcomes of a particular procedure, intervention, or process. The goal is to identify “best practices.” Benchmarking is frequently used as a quality improvement (QI) initiative.  

Beneficiary (also called Eligible, Enrolled, Insured or Member)

The name for a person who has health care insurance through Medicare, Medicaid, health insurance or health benefits plan. Individual who is either using or eligible to use insurance benefits, including health insurance benefits, under an insurance contract. Any person eligible as either a subscriber or a dependent for a managed care service in accordance with a contract. An individual who receives benefits from or is covered by an insurance policy or other health care financing program.  

Benefit Design

A process of determining what level of coverage or type of service should be included within a health plan or specific product, at specified rates of reimbursement, based on a multiple of relatively unstandardized and often unique factors, such as market pressure, cost, clinical effectiveness and medical evidence, legislated mandate, medical necessity, and preventive value. See also Covered Services.  

Benefit Limitations

Any provision, other than an exclusion, which restricts coverage in the Evidence of Coverage, regardless of medical necessity. Limitations are often expressed in terms of dollar amounts, length of stay, diagnosis or treatment descriptions.  

Benefit Package

Services covered by a health insurance plan and the financial terms of such coverage. These include cost, limitation on the amounts of services, and annual or lifetime spending limits.  

Best Practices

Actual practices, in use by qualified providers following the latest treatment modalities, which produce the best measurable results on a given dimension. 

Biogeneric/Biosimilar Drugs

See Follow-on Biologic Drugs. 

Biologic Drugs/Biopharmaceuticals

Products such as vaccines, blood and blood components, allergenics, somatic cells, gene therapy, tissues, and recombinant therapeutic proteins. Biologics can be composed of sugars, proteins, or nucleic acids or complex combinations of these substances, or may be living entities such as cells and tissues. Biologics are isolated from a variety of natural sources - human, animal, or microorganism - and may be produced by biotechnology methods and other cutting-edge technologies. Gene-based and cellular biologics, for example, often are at the forefront of biomedical research, and may be used to treat a variety of medical conditions for which no other treatments are available. See also Specialty Drugs. 

Blended Rating

See Rating, Blended Rating. 

Brand Name Drug

A drug that has a trade name and is protected by a patent (may be produced and sold only by the company holding the patent).  

Brand-Brand Interchange

Dispensing one brand name product for another brand name product marketed by another manufacturer.  


A salesperson who has obtained a state license to sell and service contracts of multiple health plans or insurers, and who is ordinarily considered to be an agent of the buyer, not the health plan or insurer. 

Cafeteria Plan

A flexible-benefit plan offered by many employers that gives workers a certain number of credits and a menu of benefit options on which to spend them. The list may include medical coverage, life insurance, disability coverage, vacation days and dental care. Employees who don't want a particular benefit can spend more on another, or receive the difference in cash. 


A per-member monthly payment to a provider that covers contracted services and is paid in advance of its delivery. In essence, a provider agrees to provide specified services to Health Maintenance Organization (HMO) members for this fixed, predetermined payment for a specified length of time (usually a year), regardless of how many times the member uses the service. The rate can be fixed for all members or it can be adjusted for the age and sex of the member, based on actuarial projections of medical utilization.  

Cardholder (Insured or Beneficiary)

The primary person receiving the benefit coverage in whose name the card is issued. This information is maintained in the eligibility file. If the client can provide the information, dependent names are also maintained. 

Carrier Name

This term is used to identify any plan sponsor – the underwriter of an insured account or the company name of a self-administered account. This name is often used on management reports sent to the plan sponsor.  

Carrier Number

An assigned 4-digit number that identifies the plan sponsor (insurance company, self-administered account, third-party administrator, multiple employer trust, health maintenance organization). A plan sponsor may have more than one carrier number. 


The combination used to signify both the plan sponsor (carrier) and the specific group under it. An example of a carrier/group could be: 0007/0023 

  • 0007-Carrier-ABZ Insurance Co. 
  • 0023-Group-The Marley Company 

The separation of a medical service (or a group of services) from the basic set of benefits in some way. Normally, the practice of excluding specific services from a managed care organization's (MCO’s) capitated rate. In some instances, the same provider will still provide the service, but they will be reimbursed on a fee-for-service basis. In other instances, carved out services will be provided by an entirely different provider. A payer strategy in which a payer separates ("carves-out") a portion of the benefit and hires an MCO to provide these benefits. A health care delivery and financing arrangement in which certain specific health care services that are covered benefits (e.g., behavioral health care) are administered and funded separately from general health care services. The carve-out is typically done through separate contracting or sub-contracting for services to the special population. Common carve outs include such services as psychiatric, rehab, chemical dependency and ambulatory services. Increasingly, oncology and cardiac services are being carved out. This permits the payer to create a separate health benefits package and assume greater control of their costs. Many health maintenance organizations (HMOs) and insurance companies adopt this strategy because they do not have in-house expertise related to the service "carved out." A "carve-out" is typically a service provided within a standard benefit package but delivered exclusively by a designated provider or group. This process may or may not seem transparent to the subscriber, but it often means that separate utilization review (UR) and pre-certification entities are involved as well as different payers and providers. Carve-outs are also called sub-contractors, sub-captivators or junior capitation contracts.  

Carve-Out Pharmacy Benefit

The prescription coverage benefit that is removed from the primary health care coverage plan and handled by another company (e.g., Pharmacy Benefit Manager [PBM]). 

Case Management

The monitoring and coordination of treatment rendered to patients with specific diagnosis or requiring high-cost or extensive services. Method designed to accommodate the specific health services needed by an individual through a coordinated effort to achieve the desired health outcome in a cost effective manner. The monitoring and coordination of treatment rendered to patients with specific diagnosis or requiring high-cost or extensive services. The process by which all health-related matters of a case are managed by a physician or nurse or designated health professional. Physician case managers coordinate designated components of health care, such as appropriate referral to consultants, specialists, hospitals, ancillary providers and services. Case management is intended to ensure continuity of services and accessibility to overcome rigidity, fragmented services, and the misutilization of facilities and resources. It also attempts to match the appropriate intensity of services with the patient's needs over time. 

Catastrophic Coverage for Drugs

A specific term used in the Medicare Part D plans that refers to the event of a beneficiary's total drug costs reaching a certain maximum (in 2006 that maximum was $5451.25, for example), after which the beneficiary pays a small coinsurance (like 5%) or a small co-payment for covered drug costs until the end of that calendar year.  

CDHP - Consumer Directed Health Plan

A health plan that allows beneficiaries more direct control over medical decisions and costs. Typically, this type of plan consists of several tiers – a health spending account funded by the employer and that can be rolled over from year to year. Generally, a “defined contribution,” such as a specific dollar amount is placed in this account by the employer for the employee. The deductible is funded by the employee and used after the health spending account is exhausted; and health insurance is triggered after the deductible is met. Employees also may fund medical reimbursement accounts to pay for their share of expenses.  See also Defined Contribution and High Deductible Health Plan. 

Certificate of Insurance

Document delivered to an individual that summarizes the benefits and principal provisions of a group insurance contract.  


Official authorization for use of services.  


A request by an individual (or his or her provider) to that individual's insurance company to pay for services obtained from a health care professional. An itemized statement of healthcare services and their costs provided by a hospital, physician's office, or other provider facility. Claims are submitted to the insurer or managed care plan by either the plan member or the provider for payment of the costs incurred. 

Claims Adjudication

See Adjudication. 

Claims Review

The method by which an enrollee’s health care service claims are reviewed before reimbursement is made. The purpose of this monitoring system is to validate the medical appropriateness of the provided services and to be sure the cost of the service is not excessive. 

Clinical Data Repository

That component of a computer-based patient record (CPR) which accepts, files, and stores clinical data over time from a variety of supplemental treatment and intervention systems for such purposes as practice guidelines, outcomes management, and clinical research. May also be called a data warehouse. 

Clinical Decision Support

The capability of a data system to provide key data to physicians and other clinicians in response to "flags" or triggers which are functions of embedded, provider-created rules. A system that would alert case managers that a client's eligibility for a certain service is about to be exhausted would be one example of this type of capacity. Also a key functional requirement to support clinical or critical pathways.  

Clinical or Critical Pathway

A "map" of preferred treatment/intervention activities. Outlines the types of information needed to make decisions, the timelines for applying that information, and what action needs to be taken by whom. Provides a way to monitor care "in real time." These pathways are developed by clinicians for specific diseases or events. Proactive providers are working now to develop these pathways for the majority of their interventions and developing the software capacity to distribute and store this information. 

Clinical Practice Guidelines or Management

A utilization and quality management mechanism designed to aid providers in making decisions about the most appropriate course of treatment for a specific clinical case. The development and implementation of parameters for the delivery of health-care services to plan members. 

Closed Formulary

See Formulary, Closed Formulary. 

CMS - Centers for Medicare & Medicaid Services

Formerly known as the Health Care Financing Administration (HCFA); CMS is a Federal agency within the U.S. Department of Health and Human Services (HHS). Programs for which CMS is responsible include Medicare, Medicaid, State Children's Health Insurance Program (SCHIP). 


The percentage of the costs of medical services paid by the patient. This is a characteristic of indemnity insurance and preferred provider organization (PPO) plans. The coinsurance usually is about 20% of the cost of medical services after the deductible is paid.  


A nominal fee charged to an insured member to offset costs of paperwork and administration for each office visit or pharmacy prescription filled. A cost-sharing arrangement in which a covered person pays a specified charge for a specific service, such as a fixed dollar amount for each prescription received; (e.g., $5.00 per generic prescription, $10.00 per preferred brand name prescription, and a higher charge such as $25.00 for a non-formulary product).  

COB - Coordination of Benefits

Process for determining the respective responsibilities of two or more health plans that have some financial responsibility for a medical claim. A coordination of benefits, or "non-duplication," clause in either policy prevents double payment by making one insurer the primary payer, and assuring that not more than 100 percent of the cost is covered. Standard rules determine which of two or more plans, each having COB provisions, pays its benefits in full and which becomes the supplementary payer on a claim. Provision regulating payments to eliminate duplicate coverage when a claimant is covered by multiple group plans.  

COBRA - Consolidated Omnibus Budget Reconciliation Act of 1985

A federal law that requires employers to offer continued health insurance coverage to certain employees and their beneficiaries whose group health insurance coverage has been terminated. Applies to employers with 20 or more eligible employees. Typically, it makes continued coverage available for up to 18 months. COBRA enrollees are required to pay 100% of the premium plus an additional 2% service fee.  

COC - Certificate of Coverage

A description of the benefits included in a carrier's plan. The certificate of coverage is required by state laws and represents the coverage provided under the contract issued to the employer. The certificate is provided to the employee. 

Community Rating

See Rating, Community Rating. 

Comparative Effectiveness Research/Analysis

A rigorous evaluation of the impact of different options that are available for treating a given medical condition for a particular set of patients.  Such a study may compare similar treatments, such as competing drugs, or it may analyze very different approaches, such as surgery and drug therapy.  The analysis may focus only on the relative medical benefits and risks of each option, or it may also weigh both the costs and the benefits of those options.  In some cases, a given treatment may prove to be more effective clinically or more cost-effective for a broad range of patients, but frequently a key issue is determining which specific types of patients would benefit most from it.  


Any circumstance where a member expresses dissatisfaction about any aspect of a care or service within the managed care organization (MCO), with a provider, or other members which does not rise to the level of a formal grievance.  Complaints are usually generated by a telephone call or inquiry that is generally the result of a misunderstanding or misinformation and may be resolved informally.  An unresolved complaint or a succession of related complaints may become a grievance.  See also Grievance. 


More accurately referred to as adherence. The ability of a patient to take his or her medication or follow a treatment protocol according to the directions for which it was prescribed; a patient taking the prescribed dose of medication at the prescribed frequency for the prescribed length of time.  

Concurrent Review

Review of a procedure or hospital admission done by a health care professional other than the one providing the care, during the same time frame that the care is provided. Usually conducted during a hospital confinement to determine the appropriateness of hospital confinement and the medical necessity for continued stay.  


The protection of individually identifiable information as required by state or federal law or by policy of the healthcare provider. 

Continuum of Care

Clinical services provided during a single inpatient hospitalization or for multiple conditions over a lifetime. It provides a basis for evaluating quality, cost, and utilization over the long term. A spectrum of health care options, ranging from limited care needs though tertiary care, which has become the focus for an integrated delivery system to provide the appropriate expertise for the patient without providing a more expensive setting than necessary.  


A legal agreement between a payer and a subscribing group or individual which specifies rates, performance covenants, the relationship among the parties, schedule of benefits and other pertinent conditions. The contract usually is limited to a 12-month period and is subject to renewal thereafter. Contracts are not required by statute or regulation, and less formal agreements may be made.  

Contract Provider

Any hospital, physician, skilled nursing facility, extended care facility, individual, organization, or agency licensed that has a contractual arrangement with an insurer for the provision of services under an insurance contract.  

Contract Year

A period of twelve (12) consecutive months, commencing with each Anniversary Date. May or may not coincide with a calendar year.  


A drug used to improve complexion, or to enhance beauty.  

Cost Benefit Analysis/Evaluation

An analytic method in which a program's cost is compared to the program's benefits for a period of time, expressed in dollars, as an aid in determining the best investment of resources. For example, the cost of establishing an immunization service might be compared with the total cost of medical care and lost productivity that will be eliminated as a result of more persons being immunized. Cost-benefit analysis can also be applied to specific medical tests and treatments.  

Cost Sharing

Payment method where a person is required to pay some health costs in order to receive medical care. The general set of financing arrangements whereby the consumer must pay out-of-pocket to receive care, either at the time of initiating care, or during the provision of health care services, or both. This includes deductibles, coinsurance and copayments, but not the share of the premium paid by the person enrolled. See Co-Payment and Co-insurance. 

Cost Shifting

The redistribution of payment sources. Typically, cost shifting occurs when a discount on provider services is obtained by one payer and the providers increase costs to another payer to make up the difference.  


Usually considered as a ratio, the cost-effectiveness of a drug or procedure, for example, relates the cost of that drug or procedure to the health benefits resulting from it. In health terms, it is often expressed as the cost per year per life-year saved or as the cost per quality-adjusted life-year saved.  

Coverage Gap

Under Medicare Part D prescription drug coverage, the coverage gap is when Medicare temporarily stops paying for prescriptions. Beneficiaries in the coverage gap are responsible for payment of the entire cost of medications. Also known as the donut or doughnut hole. For 2009, the initial drug coverage limit is $2,700. Once the limit is met, beneficiaries enter the coverage gap and are responsible for 100% of the next $3453 of medication costs. 

Covered Benefit

A medically necessary service that is specifically provided for under the provisions of an Evidence of Coverage. A covered benefit must always be medically necessary, but not every medically necessary service is a covered benefit. For example, some elements of custodial or maintenance care which are excluded from coverage may be medically necessary, but are not covered.  

Covered Entity

Under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), this is a health plan, a health care clearinghouse, or a health care provider who transmits any health information in electronic form in connection with a HIPAA transaction. For purposes of the HIPAA Privacy Rule, health care providers include hospitals, physicians, and other caregivers, as well as researchers who provide health care and receive, access or generate individually identifiable health care information.  

Covered Lives

Refers to the number of persons who are enrolled within a particular health plan, or for coverage by a provider network; includes enrollees and their covered dependents.  

Covered Services

A written health care benefit document that outlines the benefit package to be provided to either individual beneficiaries or a purchasing group or employer, with a corresponding sum for each service; services specified for beneficiaries by an insurer, the Centers for Medicare & Medicaid (CMS), or equivalent state program for Medicaid entitlements, in a benefit plan or managed care contract; specific services and supplies for which the federal or commercial payer will provide reimbursement; these may consist of a combination of mandatory and optional services within each state. 

CPOE - Computerized Physician Order Entry

An electronic prescribing system, generally found in hospitals. With CPOE, physicians enter orders into a computer rather than on paper. Orders are integrated with patient information, including laboratory and prescription data. The order is then automatically checked for potential errors or problems.  

CPT - Physician's Current Procedural Terminology

This code set is maintained by the American Medical Association through the CPT Editorial Panel. The CPT code set accurately describes medical, surgical, and diagnostic services and is designed to communicate uniform information about medical services and procedures among physicians, coders, patients, accreditation organizations, and payers for administrative, financial, and analytical purposes. 

CQI - Continuous Quality Improvement

A comprehensive philosophy of continuously improving the quality of a product or service by constantly monitoring operations, correcting problems, and implementing systems to better assist customers. It is a comprehensive approach for improving overall organizational performance and challenges the traditional way of doing business. It contends that most quality problems involve procedures and strategies (i.e., the process) and are not the fault of individuals. 


The process of reviewing a practitioners credentials, i.e., training, experience, or demonstrated ability, for the purpose of determining if criteria for clinical privileging are met. The recognition of professional or technical competence. The credentialing process may include registration, certification, licensure, professional association membership, or the award of a degree in the field. Credentialing also determines the quality of personnel by providing standards for evaluating competence and by defining the scope of functions and how personnel may be used. 


Systematically developed statements that can be used to assess the appropriateness of care, services, and/or outcomes.  

DAW - Dispense as Written

A notation used by a physician that will determine whether or not generic substitution is to occur when a prescription is filled. The dispensing pharmacist translates the notation of the physician when submitting a claim for payment using one of the ten DAW codes listed below (numeric values are assigned to each code for computer entry using on-line claims adjudication systems):   

  • 0=No Product Selection Indicated This is the field default value used for prescriptions when product selection is not an issue. Examples include prescriptions written for single source brand products and prescriptions written using the generic name and a generic product is dispensed.  
  • 1=Substitution Not Allowed by Prescriber This value is used when the prescriber indicates, in a manner specified by prevailing law, that the product is to be dispensed as written.  
  • 2=Substitution Allowed-Patient-Requested Product Dispensed This value is used when the prescriber has indicated, in a manner specified by prevailing law, that generic substitution is permitted but the patient requests the brand product. This situation can occur when the prescriber writes the prescription using either the brand or generic name and the product is available from multiple sources.  
  • 3=Substitution Allowed-Pharmacist-Selected Product Dispensed This value is used when the prescriber has indicated, in a manner specified by prevailing law, that generic substitution is permitted and the brand product is dispensed because the dispensing pharmacist using his/her professional judgment has determined that the brand product is the drug of choice. 
  • 4=Substitution Allowed-Generic Drug Not in Stock This value is used when the prescriber has indicated, in a manner specified by prevailing law, that generic substitution is permitted and the brand product is dispensed since a currently marketed generic is not stocked in the pharmacy. This situation exists due to the buying habits of the pharmacist, not because of the unavailability of the generic product in the marketplace. 
  • 5=Substitution Allowed-Brand Drug Dispensed as a Generic This value is used when the prescriber has indicated, in a manner specified by prevailing law, that generic substitution is permitted and the pharmacist is utilizing the brand product as the generic entity. 
  • 6=Override This value is used by various claims processors in very specific instances as defined by that claims processor and/or its client(s).  
  • 7=Substitution Not Allowed-Brand Drug Mandated by Law This value is used when the prescriber has indicated, in a manner specified by prevailing law, that generic substitution is permitted but prevailing law or regulation prohibits the substitution of a generic product even though generic versions of the product may be available in the marketplace.  
  • 8=Substitution Allowed-Generic Drug Not Available in Marketplace This value is used when the prescriber has indicated, in a manner specified by prevailing law, that generic substitution is permitted and the brand product is dispensed since the generic is not currently manufactured or distributed or is temporarily unavailable. 
  • 9=Other This value is reserved and currently not in use. The National Council for Prescription Drug Programs (NCPDP) does not recommend use of this value at the present time. Please contact NCPDP if you intend to use this value and document how it will be utilized by your organization. 
DEA - Drug Enforcement Administration

The federal agency that enforces the controlled substances laws and regulations of the United States.  It oversees the manufacture and distribution of controlled substances, and enforces laws aimed at reducing the availability of illicit controlled substances in the domestic and international markets. 

Decision Tree

The fundamental analytic tool for decision analysis, a way of displaying the temporal and logical sequence of a clinical decision problem. Its form highlights three structural components: the alternative actions that are available to the decision maker; the probabilistic events that follow from and affect these actions, such as clinical information obtained or the clinical consequences revealed; and the outcomes for the patient that are associated with each possible scenario of actions and consequences. 


A fixed amount of health care dollars required to be paid by the insured under a health insurance contract, before benefits become payable. Different components of a health plan may have separate deductibles. Usually expressed in terms of an "annual" amount.  

Defined Contribution

An employer allocates a fixed amount of money to each employee.  The employee uses those funds to purchase health care coverage.  This shifts the responsibility for payment and selection of health care plans from the employer to the employee.  See also Consumer Directed Health Plan. 

Deidentified Data

Under the Health Insurance Portability and Accountability Act of 1996 (HIPAA) Privacy Rule, data are deidentified if either (1) an experienced expert determines that the risk that certain information could be used to identify an individual is "very small" and documents and justifies the determination, or (2) the data do not include any of the following eighteen identifiers (of the individual or his/her relatives, household members, or employers) which could be used alone or in combination with other information to identify the subject: names, geographic subdivisions smaller than a state (including zip code), all elements of dates except year (unless the subject is greater than 89 years old), telephone numbers, FAX numbers, email address, Social Security numbers, medical record numbers, health plan beneficiary numbers, account numbers, certificate/license numbers, vehicle identifiers including license plates, device identifiers and serial numbers, URLs, internet protocol addresses, biometric identifiers, full face photos and comparable images, and any unique identifying number, characteristic or code; note that even if these identifiers are removed, the Privacy Rule states that information will be considered identifiable if the covered entity knows that the identity of the person may still be determined.  


An enrolled health plan member who has coverage tied to that of the subscriber; may be a spouse or an unmarried child, or a stepchild or legally adopted child of either the employee or the employee’s spouse, whose primary domicile is with the employee, except for other arrangements as approved by the plan; often dependent children status is also delineated by those under the age of 18, or children attending college full-time under a specified age.  

Dependent Coverage Code

Allows the plan sponsor to control the type of coverage each cardholder receives.  

DESI - Drug Efficacy Study Implementation

A study of drugs by the Federal Food and Drug Administration (FDA) that rates certain drugs as not safe and effective and experimental or investigational in nature. To comply in part with the 1962 amendments to the Food, Drug and Cosmetic Act, the FDA contracted in 1966 with the National Academy of Sciences/National Research Council to study drugs approved between 1938 and 1962 from the standpoint of efficacy. The DESI program evaluated over 3000 separate products and over 16,000 therapeutic claims. By 1984, FDA had completed final regulatory action on 3,443 products; of these, 2,225 were found to be effective, 1,051 were found not effective, and 167 were pending.   The ineffective drugs were designated as DESI drugs and the Omnibus Budget Reconciliation Act of 1981 prohibited payment for these drugs by Medicaid programs and under Medicare Part B. 

Diagnostic and Treatment Codes

Special codes that consist of a brief, specific description of each diagnosis or treatment and a number used to identify each diagnosis and treatment, for example, Physician’s Current Procedural Terminology (CPT) codes. 

Direct Costs

Costs that are wholly attributable to the service in question, for example, the services of professional and paraprofessional personnel, equipment, and materials. 

Disease Management

The concept of reducing health care costs and improving quality of life for individuals with chronic conditions by preventing or minimizing the effects of the disease through integrated care. Disease management programs are designed to improve the health of persons with chronic conditions and reduce associated costs from avoidable complications by identifying and treating chronic conditions more quickly and more effectively, thus slowing the progression of those diseases. Disease management is a system of coordinated heath care interventions and communications for defined patient populations with conditions where self-care efforts can be implemented. Disease management empowers individuals, working with other health care providers to manage their disease and prevent complications. 

Disease Management Measures

Indicators of a health plan’s success in treating the entirety of a disease across the continuum of care - related to the family of outcome measures that treat the disease as opposed to managing health; may include measures for major diagnostic categories (hypertension, diabetes, heart disease), primary care (patient satisfaction with service, utilization of preventive services, illness episodes per 1,000), specialty care (diagnosis – specific health status scores), acute care episodes (Average Length of Stay [ALOS] per major Diagnostic-Related Group [DRG] categories, surgeries per 1,000, readmission rates) or rehab and recovery (patient compliance, DRG-specific health status scored).  

Dispensing Fee

Contracted rate of compensation paid to a pharmacy for the processing/filling of a prescription claim. The dispensing fee is added to the negotiated formula for reimbursing ingredient cost.  

DME - Durable Medical Equipment

Items of medical equipment owned or rented which are placed in the home of an insured to facilitate treatment and/or rehabilitation. Certain medical equipment that is ordered by a doctor for use in the home. Examples are walkers, wheelchairs, or hospital beds. DME generally consist of items that can withstand repeated use. DME is primarily and customarily used to serve a medical purpose and is usually not useful to a person in the absence of illness or injury. DME is paid for under both Medicare Part B and Part A for home health services. 

Doctor Number

An identification number used primarily by Health Maintenance Organizations (HMOs) to uniquely identify each physician in their network in order to facilitate rejection of claims received for services rendered by a nonparticipating physician. (The HMO may elect to use the physician’s Drug Enforcement Administration (DEA) number in lieu of their own HMO doctor number.) This doctor number is also reported back to the HMO, or any client receiving prescription utilization reports, on their endofmonth reports. With the implementation of Health Insurance Portability and Accountability Act (HIPAA), HMOs are required to use the National Provider Identifier (NPI) for all covered transactions. See also National Provider Identifier. 


Detailed descriptions of relevant participants, evidence, assumptions, rationale, and analytic methods used in determining quality of care.  

Donut/Doughnut Hole

See Coverage Gap. 

DRGs - Diagnosis Related Groups

A classification system used to pay a hospital or other providers for their services and to categorize illness by diagnosis and treatment. A classification scheme used by Medicare that clusters patients into 468 categories on the basis of patients' illnesses, diseases and medical problems. Groupings of diagnostic categories drawn from the International Classification of Diseases and modified by the presence of a surgical procedure, patient age, presence or absence of significant comorbidities or complications, and other relevant criteria. System involving classification of medical cases and payment to hospitals on the basis of diagnosis. Used under Medicare's prospective payment system to reimburse inpatient hospitals, regardless of the cost to the hospital to provide services. See also Prospective Payment System. 

Drug Categories

Groupings that reflect therapeutic uses of drugs based on the International Classification of Diseases (ICD-9) diagnostic codes. For example, drugs may belong to the analgesic category or the antiparkinson category. Categories may also be based on an organ system, such as the cardiovascular category. In 2004, the United States Pharmacopeia (USP), a non-profit non-governmental organization, received directive from the Medicare Modernization Act (MMA) to publish guidelines on drug categories and classes. These guidelines are to be used by prescription drug plans (PDPs) in developing their formularies for the Medicare population.  

Drug Classes

Classes are subcomponents of drug categories and are based either on the chemical structure of the drug or on its "mechanism of action," i.e., how it works to achieve its results. For example, the analgesic category, or drugs which treat pain, is broken down into two classes - opioids (such as codeine or morphine) and non-opioids (such as ibuprofen or aspirin). Certain classes are subdivided into an additional level of specificity. In 2004, the United States Pharmacopeia (USP), a non-profit non-governmental organization, received directive from the Medicare Modernization Act to publish guidelines on drug categories and classes. These guidelines are to be used by prescription drug plans (PDPs) in developing their formularies for the Medicare population.  

Drug Formulary

See Formulary. 

Drug Mix

An evaluation of the type of drugs prescribed by an individual or defined population. The drug mix may reveal the rate of new drug adoption by reviewed physicians.  

Dual Eligible

A Medicare beneficiary who also receives the full range of Medicaid benefits offered in his or her state. Medicare usually pays the charges for inpatient services while Medicaid usually pays the co-pay for inpatient care in hospitals. With passage of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), the coverage for prescription drugs for dual eligibles changed from Medicaid to Medicare Part D when the Medicare Prescription Drug Benefit became effective in 2006. 

DUE - Drug Use Evaluation

A qualitative evaluation of prescription drug use, physician prescribing patterns or patient drug utilization to determine the appropriateness of drug therapy.  

DUR - Drug Utilization Review

An authorized, structured, ongoing review of health care provider prescribing, pharmacist dispensing, and patient use of medication. There are three forms of DUR: prospective (before dispensing), concurrent (at the time of prescription dispensing), and retrospective (after the therapy has been completed). Appropriate use of an integrated DUR program can curb drug misuse and abuse and monitor quality of care. DUR can reduce hospitalization and other costs related to inappropriate drug use.  

EBM - Evidence-Based Medicine

The judicious use of the best current evidence in making decisions about the care of the individual patient. Evidence-based medicine (EBM) is meant to integrate clinical expertise with the best available research evidence and patient values. EBM was initially proposed by Dr. David Sackett and colleagues at McMasters University in Ontario, Canada. 

EDI - Electronic Data Interchange

The electronic transfer of claims data or other information between two or more health care organizations; payers and providers are making an increased use of EDI. 


Criteria that, if unmet, will cause an automated claims processing system to “reject” a claim for further/manual review. 


When used in the research setting, clinical effectiveness reflects how a particular treatment performs in an actual practice environment. It differs from clinical efficacy because, for example, patients receiving a product in a typical medical practice may have comorbidities that might alter the ability of a medication to achieve its intended effect. The actual effects of treatment resulting from the drug under “real life” conditions. (e.g. patients not always remembering to take their doses, physicians often not prescribing the lowest Food and Drug Administration (FDA) recommended doses, side effects not all controlled, etc).   “Head to head” effectiveness studies with similar medications are preferable.  


The ability of a treatment to achieve the desired results under ideal study conditions. Most clinical drug trials are performed under these conditions, in which ideal patients are selected to test a product’s ability to treat infection, for instance. The potential effects of treatment resulting from the drug under optimal circumstances. (e.g. patients all taking their doses at the right times, physicians prescribing correct doses, side effects appropriately monitored, etc).    Efficacy studies are typically the foundation of new drug submissions to the Food and Drug Administration (FDA). Studies that compare the efficacy of similar drugs, rather than just efficacy compared to placebo are preferable.  

EHR - Electronic Health Record

A longitudinal electronic record of patient health information produced by encounters in one or more care settings. Included in this information are patient demographics, progress notes, problems, medications, vital signs, past medical history, immunizations, laboratory data and radiology reports. An EHR is a subset of each care delivery organization’s electronic medical record (EMR). See also Electronic Medical Record. 

Electronic Claim

Insurance claim submitted to the carrier by a central processing unit, tape diskette, direct data entry, direct wire, dial-in telephone, digital fax, or personal computer download or upload. See also Electronic Data Interchange. 

Electronic Prescribing (E-Prescribing/ePrescribing)

Prescribing medication through an automated data-entry process and transmitting the information to participating pharmacies. 

Eligibility List

A list that shows the eligible enrolled members for health care services and supplies, including their effective date. 


See Beneficiary. 

Eligible Employee

Health plan contracts outline requirements for an employee to meet eligibility requirement in the health plan, which are based on factors such as full-time or part-time employment as stipulated in the contract.  

Elligible Dependent

Person entitled to receive health benefits from someone else's plan. See also Dependent. 

EMR - Electronic Medical Record

An automated, on-line medical record that is available to any number of providers, ancillary service departments, pharmacies, and others involved in patient treatment or care; as a result of computer technology that stores, processes, and retrieves patient clinical and demographic information upon request of the user. 


A healthcare visit of any type by an enrollee to a provider of care or services. 

Encounter Record

Another word for a claim; also refers to a patient visit information record in a capitation system.  


Any person eligible, as either a subscriber or dependent, in an employee benefit plan.  See also Beneficiary and Member. 

EOB - Explanation of Benefits

A statement the health plan submits to the member and the provider that indicates: who provided the care, the kind of covered service or supply received, the allowable charge and amount billed, the amount the health plan paid, how much of the deductible has been paid, and the cost-share.  It also gives the reason for denying a claim. See also Evidence or Explanation of Coverage. 

EOC - Evidence/Explanation of Coverage

A booklet provided by the carrier to the insured summarizing benefits under an insurance plan. See also Explanation of Benefits. 

EPO - Exclusive Provider Organization

The EPO is a form of a preferred provider organization in which patients must visit a caregiver who is on its panel of providers. If a visit to an outside provider is made, the EPO will offer limited or no coverage for the office or hospital visit.  

ERISA - Employee Retirement Income Security Act of 1974

A federal law that regulates employer-sponsored benefit plans and restricts state government from regulating these plans. This law mandates reporting and disclosure requirements for group life and health plans with relevant guidance on the sponsorship, administration, minimum record retention period, servicing of plans, some claims processing, appeals regulations, and minimum mandatory clinical benefits.  

Exception Report

A list of items (i.e., procedures, drugs, physicians, etc.) that do not conform to defined limits of acceptability. For example, a drug utilization exception report may list all patients that use a higher number of prescriptions than allowed by plan guidelines.  

Exceptions Process

A course of action that allows patients to challenge the placement of a drug on a higher-cost tier or the exclusion of a particular drug from their formulary. Under the Medicare Prescription Drug Benefit, an exceptions process must be incorporated into both stand-alone prescription drug plans (PDP) and those that are part of a Medicare Advantage plan (MA-PD). Enrollees are able to request that a formulary drug be provided at a lower tier for cost-sharing (thereby reducing the patient’s co-pay) or that a non-formulary drug be provided by the plan. Because exceptions requests are coverage determinations, the plan must act within the time frame for standard coverage determinations (within 72 hours) or expedited coverage determinations (within 24 hours). See also Medicare Prescription Drug Benefit. 


Drugs not covered under the pharmacy benefit of the health plan. Examples of drug exclusions include cosmetic and fertility drugs, investigational drugs, and over-the-counter (OTC) products. Specific examples include amphetamine and non-amphetamine appetite suppressant drugs. 

Experience Rating

See Rating, Experience Rating. 

Experimental Drugs

Medications currently under investigation and not yet approved for use by the Food and Drug Administration (FDA) for any indication. There is not enough accumulated scientific data to establish medically appropriate use of the drug for treatment of a disease. However, FDA has established programs to allow patients with an immediately life-threatening disease "early access" to new treatments. Since patients who have exhausted standard therapeutic options may be willing to accept additional risks and potentially dangerous side effects from drug products still under study, these programs allow patients access to investigational drugs. Also known as Investigational Drugs. 

FDA (Food and Drug Administration) 1P Drugs

The Food and Drug Administration (FDA) classifies investigational new drug applications (INDs) and new drug applications (NDAs) to assign review priority on the basis of the drug's chemical type and potential benefit. Drugs assigned a “1P” classification contain an active ingredient that has never been marketed in the United States and appears to represent an advance over available therapy. The FDA gives these drugs an expedited review and a more rapid decision is made regarding approval for the indication of use as suggested by the manufacturer.  

FDA - Food and Drug Administration

The federal agency that reviews drug products for safety and efficacy.A drug may not be marketed in the United States unless it has received approval from the FDA. 

Fee Schedule

A listing of accepted fees or established allowances for specified medical procedures. As used in medical care plans, it usually represents the maximum amounts the program will pay for the specified procedures. The fee determined by an MCO to be acceptable for a procedure or service, which the physician agrees to accept as payment in full. Also known as a fee allowance, fee maximum, or capped fee.  

FFS - Fee-for-Service

Traditional provider reimbursement, in which the physician is paid according to the service performed. This is the reimbursement system used by conventional indemnity insurers. The full rate of charge for a patient without any type of insurance arrangement, discounted arrangement, or prepaid health plan.  

First-Dollar Coverage

Insurance coverage with no front-end deductible where coverage begins with the first dollar of expense incurred by the insured for any covered benefit.  

Flexible Benefit Plan

Program offered by some employers in which employees may choose among a number of health care benefit options. See also Cafeteria Plan.  

Follow-on Biologic Drugs

Drugs which are equivalent and homogeneous to original biopharmaceuticals in terms of quality, efficacy and safety and which are developed by manufacturers different from those of the original biopharmaceuticals.  See also Biologic Drugs/Biopharmaceuticals. 


A drug formulary or preferred drug list is a continually updated list of medications and related products supported by current evidence-based medicine, judgment of physicians, pharmacists and other experts in the diagnosis, treatment of disease and preservation of health. The primary purpose of the formulary is to encourage the use of the safe, effective and most affordable medications. There are two basic formulary types: 

Open Formulary: The payer generally provides coverage for all formulary and non-formulary drugs. The payers include the health plan, the employer, or a pharmacy benefit management company (PBM) acting on behalf of the health plan or employer. However, some drug classes such as those for cosmetic use or over-the-counter drugs may be excluded from coverage by plan design. Physicians are encouraged to prescribe formulary agents. Patients may or may not incur additional out of pocket expenses for using non-formulary drugs. 

Closed Formulary: Non-formulary drugs are not reimbursed by the payer. Formulary exception policies allow patients and physicians reimbursement and access to non-formulary medications where medically appropriate.  

Formulary Exception Process

A process intended to provide a basis for coverage determinations supported by evidence-based guidelines. Because no formulary can account for every unique patient need or therapeutic eventuality, formulary systems frequently incorporate a prior authorization procedure. This procedure does not pose an unnecessary barrier to the prescriber nor hinder a patient's ability to receive appropriate medications under the prescription drug plan, but does provide a mechanism to have medications otherwise not eligible for coverage, covered. 

Formulary Management

An integrated patient care process that enables physicians, pharmacists, and other health care professionals to work together to promote clinically sound, cost effective pharmaceutical care. The formulary management process provides the managed health care system with the ability to objectively discriminate between superior and marginally effective drug products.  

Formulary System

An ongoing process whereby a health care organization, through its physicians, pharmacists and other health care professionals, establishes policies on the use of drugs, related products and therapies, and identifies drugs, related products and therapies that are the most medically appropriate and cost effective to best serve the health interests of a given patient population.  

FSA - Flexible Spending Account

An employee benefit offered by many companies that allows employees to have pretax dollars withheld from their salaries to pay for unreimbursed medical expenses and dependent-care expenses, such as babysitting or elder care. 

FUL (Federal Upper Limit) Price

Price calculated and published by the Centers for Medicare & Medicaid Services (CMS) as the maximum amount that a state Medicaid program can pay for a multiple-source (generic) pharmaceutical. Sometimes called federal MAC or FED MAC. 


Most Health Maintenance Organizations (HMOs) rely on the primary-care physician (PCP), or “gatekeeper” to screen patients seeking medical care and effectively eliminate costly and sometimes needless referral to specialists for diagnosis and management. The gatekeeper is responsible for the administration of the patient’s treatment, and this person must coordinate and obtain authorization for all medical service’s laboratory studies, specialty referrals, and hospitalizations. In most HMOs, if an enrollee visits a specialist without prior authorization from his or her designated primarycare physician, the enrollee must pay for medical services. See also Primary Care Physician. 

Generic Drug

A drug which contains the same active ingredient as a brand name drug and which may be manufactured and marketed after the brand name drug’s patent expires. Generic drugs cost significantly less than brand name drugs, and are identical in terms of efficacy, safety, side effect profile, and dosing. 

Generic Substitution

In cases in which the patent on a specific pharmaceutical product expires and drug manufacturers produce generic versions of the original branded product, the generic version of the drug is dispensed even though the original product is prescribed. Some managed care organizations and Medicaid programs mandate generic substitution because of the generally lower cost of generic products. There are state and federal regulations regarding generic substitutions. See also Generic Drug. 

GPO - Group Purchasing Organization

A shared service which combines the purchasing power of individual organizations or facilities in order to obtain lower prices for equipment and supplies. 


Complaint from a member which is initially addressed as appealed, or as a formal written complaint, and is generally of a more complex or sophisticated nature than a Complaint.  Grievances may be administrative or medical in nature.  Administrative grievances are generally those related to benefit determination, eligibility, satisfaction with the delivery of services, or coverage issues.  Medical grievances relate to providers, quality management, medical care services, or policy and procedures dealing with medical care delivery.  See also Complaint. 

HCFA - Health Care Financing Administration

See Centers for Medicare & Medicaid Services. 

HCPCS - HCFA (Health Care Financing Administration) Procedural Coding System

Listing of services, procedures and supplies offered by physicians and other providers. HCPCS includes CPT (Current Procedural Terminology) codes, national alphanumeric codes and local alphanumeric codes. The national codes are developed in order to supplement CPT codes. They include physician services not included in CPT, as well as non-physician services such as ambulance, physical therapy and durable medical equipment. The local codes are developed by local Medicare carriers to supplement the national codes. HCPCS codes are five-digit codes, the first digit is a letter that is followed by four numbers. HCPCS codes beginning with A through V are national; those beginning with W through Z are local. 

HDHP - High Deductible Health Plan

A medical plan that has specified minimum limits for the annual deductible and maximum limits for out-of-pocket expenses.  An HDHP must have a minimum deductible of $1,000 for individual coverage or $2,000 for family coverage.  Annual out-of-pocket expenses must not exceed $5,000 for individual coverage or $10,000 for family coverage.  The amounts for deductible and out-of-pocket maximum will be indexed annually for inflation in $50 increments. 

Health Alliances

Also known as regional health alliances, these entities are purchasing pools that are responsible for negotiating health insurance for employers and employees. Alliances use their leverage as a large health care purchaser to negotiate contracts.  

Health Promotion Programs

Preventive care programs designed to educate and motivate members to prevent illness and injury and to promote good health through lifestyle choices, such as smoking cessation and dietary changes. Also known as wellness programs. 

HEDIS - Healthcare Effectiveness Data & Information Set

HEDIS® is a tool used by most of America's health plans to measure performance on important dimensions of care and service.  HEDIS® measures address a broad range of important health issues. Altogether, HEDIS® consists of 71 measures across 8 domains of care. HEDIS® is designed to provide purchasers and consumers with the information they need to reliably compare the performance of health care plans. 

HHS - Department of Health and Human Services

This department of the federal government is responsible for health-related programs and issues. Formerly HEW, the Department of Health, Education, and Welfare. The Office of Health Maintenance Organizations (OHMO) is part of HHS and detailed information on most companies is available here through the Freedom of Information Act.  

HIPAA - Health Insurance Portability and Accountability Act of 1996

A Federal law that allows persons to qualify immediately for comparable health insurance coverage when they change their employment relationships. This legislation sets a precedent for Federal involvement in insurance regulation. It sets minimum standards for regulation of the small group insurance market and for a set group in the individual insurance market in the area of portability and availability of health insurance. As a result of this law, hospitals, doctors and insurance companies are now required to share patient medical records and personal information on a wider basis. This wide-based sharing of medical records has led to privacy rules, greater computerization of records and consumer concerns about confidentiality. In addition, HIPAA required the creation of a federal law to protect personally identifiable health information. HHS has issued HIPAA privacy regulations (the HIPAA Privacy Rule) as well as other regulations under HIPAA. HIPAA gives HHS the authority to mandate the use of standards for the electronic exchange of health care data; to specify what medical and administrative code sets should be used within those standards; to require the use of national identification systems for health care patients, providers, payers (or plans), and employers (or sponsors); and to specify the types of measures required to protect the security and privacy of personally identifiable health care information. Also known as the Kennedy-Kassebaum Bill, the Kassebaum-Kennedy Bill, K2, or Public Law 104-191. 

HMO (Health Maintenance Organization) Act

A 1973 federal act (42 U.S.C., 300 et seq.) outlining requirements for federal qualification of Health Maintenance Organizations (HMOs), consisting of legal and organizational structures, financial strength requirements, marketing provisions, and health care delivery; the voluntary status of “federally qualified” is sought in order to gain credibility with employers, and the chance to gain covered lives from dual choice mandates that require employee access to such plans. 

HMO - Health Maintenance Organization

An entity that provides, offers or arranges for coverage of designated health services needed by members for a fixed, prepaid premium. HMOs offer prepaid, comprehensive health coverage for both hospital and physician services. The HMO is paid monthly premiums or capitated rates by the payers, which include employers, insurance companies, government agencies, and other groups representing covered lives. There are 4 basic models: group model, individual practice association, network model and staff model. An HMO contracts with health care providers, e.g., physicians, hospitals, and other health professionals. The members of an HMO are required to use participating or approved providers for all health services and generally all services will need to meet further approval by the HMO through its utilization program. 

  • Group Model – In the group-model HMO, the HMO contracts with a physician group, which is paid a fixed amount per patient to provide specific services. The administration of the group practice then decides how the HMO payments are distributed to each participating physician. This type of HMO is usually located in a hospital or clinic setting and may include a pharmacy. These physicians usually do not have any fee-for-service (FFS) patients. 
  • Hybrid Model – A combination of at least two managed care organizational models that are melded into a single health plan. Since its features do not uniformly fit one model, it is called a hybrid. 
  • Independent Practice Association (IPA) Model – The individual practice association contracts with independent physicians who work in their own private practices and see fee-for-service (FFS) patients as well as HMO enrollees. Physicians belonging to the IPA guarantee that the care needed by each patient for whom they are responsible will fall under a certain amount of money. They guarantee this by allowing the HMO to withhold an amount of their payments (usually about 20% per year). If, by the end of the year, the physician’s cost for treatment falls under this set amount, then the physician receives his entire “withhold fund.” If the opposite is true, the HMO can then withhold any part of this amount, at its discretion, from the fund. Essentially, the physician is put “at risk” for keeping down the treatment cost. This is the key to the HMO’s financial viability. 
  • Network Model – This type of HMO contracts with more than one physician group and may contract with single or multi-specialty groups as well as hospitals and other health care providers. A health plan that contracts with multiple physician groups to deliver health care to members. This is generally limited to large single or multi-specialty groups. Distinguished from group model plans that contract with a single medical group, IPA's that contract through an intermediary, and direct contract model plans that contract with individual physicians in the community. 
  • Point-of-Service (POS) Model – Sometimes referred to as an “open-ended” HMO. The point-of-service model is one in which the patient can receive care either by physicians contracted with the HMO or by those not contracted. Physicians not contracted with the HMO who see an HMO patient are paid according to the services performed. The patient is incentivized to use contracted providers through the fuller coverage offered for contracted care. 
  • Staff Model – The staff-model HMO is the purest form of managed care. All of the physicians in a staff-model HMO are in a centralized site, in which all clinical and perhaps inpatient services and pharmacy services are offered. The HMO holds the tightest management reigns in this setting, because none of the physicians traditionally practice on an independent fee-for-service (FFS) basis. Physicians are more likely to be employees of the HMO in this setting, because they are not in a private or group practice. 
Home Care

In contrast with inpatient and ambulatory care, home care is medical care that would ordinarily be administered in a hospital or on an outpatient basis; however, the patient is not sufficiently ambulatory to make frequent office or hospital visits. In these patients, intravenous therapy, for example, is administered at the patient’s residence, usually by a health care professional. Home care reduces the need for hospitalization and its associated costs. 

Horizontal Integration

Also called specialty integration; health entities that contain multiple groupings of similar care components along the continuum of care, with financial incentives for alignment into the larger group (such as multiple hospitals, or sub-acute care facilities, long-term care, home health, or behavioral health components), are combined in a system with the purpose of increased contracting leverage or increased chances of survival due to economies of scale and elimination of redundant overhead staff or function. See also Vertical Integration.  


A program or facility that provides special care for people who are near the end of life and for their families. Hospice care can be provided at home, in a hospice or another freestanding facility, or within a hospital. 

Hospice Care

Care designed to give supportive care to people in the final phase of a terminal illness and focus on comfort and quality of life, rather than cure. The goal is to enable patients to be comfortable and free of pain, so that they live each day as fully as possible. Aggressive methods of pain control may be used. Hospice programs generally are home-based, but they sometimes provide services away from home -- in freestanding facilities, in nursing homes, or within hospitals. The philosophy of hospice is to provide support for the patient's emotional, social, and spiritual needs as well as medical symptoms as part of treating the whole person. 

Hospital Alliance

A group of hospitals that have joined together to improve competitive positions and reduce costs by sharing common services and developing group purchasing programs.  

HRA - Health Reimbursement Arrangement

An arrangement that: is paid for solely by the employer and not provided pursuant to salary reduction election or otherwise under a cafeteria plan; reimburses the employee for medical care expenses incurred by the employee and the employee's spouse and dependents; and provides reimbursements up to a maximum dollar amount for a coverage period and any unused portion of the maximum dollar amount at the end of a coverage period is carried forward to increase the maximum reimbursement amount in subsequent coverage periods.  See also Cafeteria Plan. 

HSA - Health Savings Account

A tax-sheltered savings account that may be used by beneficiaries covered by high deductible health plans to pay for routine health care expenses.  Money remaining in the account at the end of the year may be used in the succeeding year. 

IBNR - Incurred But Not Reported Expenses

Refers to a financial accounting of all services that have been performed but, as a result of a short period of time, have not been invoiced or recorded. Estimates of costs for medical services provided for which a claim has not yet been filed. Refers to claims that reflect services already delivered, but, for whatever reason, have not yet been reimbursed. These are bills "in the pipeline." 

ICD-9-CM - International Classification of Diseases, 9th Revision, Clinical Modification

A statistical classification system consisting of a listing of diagnoses and identifying codes for reporting diagnosis of health plan enrollees identified by physicians; coding and terminology to accurately describe primary and secondary diagnosis and provide for consistent documentation for claims; the codes are revised periodically by the World Health Organization; since the Medicare Catastrophic Coverage Act of 1988, ICD-9 is mandatory for Medicare claims. ICD-9 was issued in 1979 and will be replaced by ICD-10 in 2013. 

IDS - Integrated (Health Care) Delivery Systems

Health care financing and delivery organizations created to provide a “continuum of care,” ensuring that patients get the right care at the right time from the right provider. This continuum of care from primary care provider to specialist and ancillary provider under one corporate roof guarantees that patients get cared for appropriately, thus saving money and increasing the quality of care.  

Indemnity Insurance

Traditional fee-for-service (FFS) medicine in which providers are paid according to the service performed, or beneficiaries for medical expenses incurred.  

Independent External Review

An appeals review that is conducted by a third party that is not affiliated with the health plan or a providers' association and has no conflict of interest or stake in the outcome of the review. See also Appeal. 

Indirect Costs

Usually termed overhead costs; they are the costs shared by many services concurrently. For example, maintenance, administration, equipment, electricity, and water.  

Individually Identifiable Health Information

A term used in healthcare to describe a subset of health information that identifies the individual or can reasonably be used to identify the individual. State and Federal confidentiality laws as well as the Health Insurance Portability and Accountability Act of 1996 (HIPAA) have standards and rules regarding the protection of individually identifiable health information of patients. See also HIPAA. 

Insurance Company (Plan Sponsor)

A client, also referred to as a carrier, who underwrites the insurance for individual groups. The insurance company signs the contract and is financially responsible for all bills incurred by groups insured by them. Each insurance company is assigned a unique insurance code and can generally tailor the program for their individual groups. 


See Beneficiary. 


Educational, directive (e.g., formulary or prior authorization), or consultative communications between providers, especially pharmacists to physicians.  

Investigational Drugs

See Experimental Drugs. 

IOM - Institute of Medicine

Its mission is to advance and disseminate scientific knowledge to improve human health. Established in 1970 by the National Academy of Sciences, the Institute identifies issues of medical care, research, and education. It provides objective, timely, authoritative information and advice concerning health and science policy to government, the corporate sector, the professions and the public. 

IPA - Independent Practice Association

See Health Maintenance Organization, IPA Model. 

JCAHO - The Joint Commission

See The Joint Commission. 

Kassebaum-Kennedy Health Coverage Bill

The name of legislation passed in August 1996, which began on July 1, 1997; the bill primarily benefits those who already have insurance but suddenly lose or change jobs, and also benefits the self-employed or employees of small businesses, and those who leave jobs with insurance and want to buy an individual policy; portability and fixed premiums are guaranteed for those who change jobs, as long as they have been insured for 12 months (regardless of whether they quit, are fired, or are laid off). 

Legend Drug

A drug that by law may only be obtained by prescription. 

Life Style Drugs

Drugs designed to improve the quality of life or extend the normal life span, and generally do not treat a life-threatening disease. These may include drugs that would successfully restore or improve sexual potency, restore hair growth, allow acute treatment to prevent conception (so-called morning-after pill), or reverse the effects of aging.  

Limited Data Set

Under the Health Insurance Portability and Accountability Act (HIPAA), this term refers to a set of data that may be used for research, public health or health care operations without an authorization or waiver of authorization. The limited data set is defined as Protected Health Information (PHI) that excludes the following direct identifiers of the individual or of relatives, employers or household members of the individual: names; postal address information, (other than town or city, State and zip code); telephone and FAX numbers; electronic mail addresses; Social Security Number; medical record numbers; health plan beneficiary numbers; account numbers; certificate/license numbers; vehicle identifiers and serial numbers, including license plates; device identifiers and serial numbers; web universal resource locators (URLs); internet protocol (IP) address; biometric identifiers, including finger and voice prints; full face photos, and comparable images. A covered entity must enter into a data use agreement with the recipient of a limited data set. 


Refers to the number of lives, or people, or members of a health plan or Pharmacy Benefit Manager (PBM) that are eligible for coverage or benefits. Includes both subscribers and dependents. See also Plan Member. 

LOS - Length of Stay

The duration of an episode of care for a covered person. The number of days an individual stays in a hospital or inpatient facility.  

LTC - Long-Term Care

A set of health care, personal care and social services required by persons who have lost, or never acquired, some degree of functional capacity (e.g., the chronically ill, aged, physically or mentally disabled) in an institution or at home, on a long-term basis. The term is often used narrowly to refer only to long-term institutional care such as that provided in nursing homes, homes for the mentally disabled and mental hospitals. Long-term care can be provided at home, in the community, or in various types of facilities, including nursing homes and assisted living facilities. Medicaid and long-term care insurance plans do provide some coverage for long-term care. Ambulatory services such home health care, which can also be provided on a long-term basis, are seen as alternatives to long-term institutional care. 

MA-PD - Medicare Advantage Prescription Drug Plan

A Medicare Advantage plan that offers Medicare Prescription Drug coverage and Part A and Part B benefits in one plan. 

MAC - Maximum Allowable Cost

Typically a reimbursement limit per individual multiple-source pharmaceutical entity, strength, and dosage form (e.g., $0.50 per fluoxetine 20 mg capsule). MAC price lists are established by health plans and PBMs for private-sector clients and by many states for multiple-source pharmaceuticals paid for by their Medicaid and other state-funded programs.  Private sector MACs usually are considered confidential.  

Mail-Order (Mail-Service) Pharmacy

A pharmacy whose primary business is to dispense prescription drugs or devices under prescription drug orders and to deliver the drugs or devices, usually to patients’ homes, by US mail, a common carrier, or a delivery service. 

Managed Care (Managed Health Care)

The body of clinical, financial and organizational activities designed to ensure the provision of appropriate health care services in a cost-efficient manner. Managed care techniques are most often practiced by organizations and professionals that assume risk for a defined population (e.g., health maintenance organizations). Managed care is a broad term and encompasses many different types of organizations, payment mechanisms, review mechanisms and collaborations. Managed care is sometimes used as a general term for the activity of organizing doctors, hospitals, and other providers into groups in order to enhance the quality and cost-effectiveness of health care. Managed Care Organizations (MCOs) include Health Maintenance Organizations (HMOs), Preferred Provider Organizations (PPOs), Exclusive Provider Organizations (EPOs), Independent Practice Associations (IPAs), etc. The term managed care is often misunderstood, as it refers to numerous aspects of healthcare management, payment and organization. In the purest sense, all people working in healthcare and medical insurance can be thought of as "managing care." Any system of health payment or delivery arrangements where the plan attempts to control or coordinate use of health services by its enrolled members in order to contain health expenditures, improve quality, or both. 

Managed Competition

A health insurance system that bands together employers, labor groups and others to create insurance purchasing groups; employers and other collective purchasers would make a specified contribution toward insurance purchase for the individuals in their group; the employer's set contribution acts as an incentive for insurers and providers to compete. 

Mandatory Generic Substitution

A pharmacy benefit management tool that mandates the use of a generic equivalent drug product whenever one is available. Prescribers must justify the use of a brand-name product over the use of its generic equivalent.  

Manual Rating

See Rating, Manual Rating. 

Maximum Out-of-Pocket Costs

The limit on total member copayments, deductibles, and co-insurance under a benefit contract; sometimes health plans will specify that copays be excluded from consideration. 

MBHO - Managed Behavioral Health Organization

An organization that provides behavioral health services by implementing managed care techniques. 

MCO - Managed Care Organization

A generic term applied to a managed care plan; also called Health Maintenance Organization (HMO), Preferred Provider Organization (PPO), Exclusive Provider Organization (EPO), although the MCO may not conform exactly to any of these formats. 


State programs of public assistance to eligible persons, regardless of age, whose income resources are insufficient to pay for health care. Passed into law in 1965, Title XIX of the federal Social Security Act provides matching federal funds for financing state Medicaid programs. The program covers a wide range of services. Most of the recipients are low-income women and children, but 70% of the funds pay for nursing home and other long term care services for elderly and disabled people. The federal government matches the states’ contribution on a certain minimal level of available coverage. The states’ may institute additional services, but at their own expense. 

Medical Center/Medical Clinic

See Ambulatory Care Facility. 

Medical Protocols

The guidelines physicians are asked to follow to achieve an acceptable clinical outcome. The protocol provides the caregiver with specific treatment options or steps to follow when faced with a particular set of clinical symptoms or signs or laboratory data.  

Medically Necessary Services

Services or supplies as provided by a physician or other healthcare provider to identify and treat a member’s illness or injury, which, as determined by the payor, are consistent with the symptoms, diagnosis, and treatment of the member’s condition; in accordance with the standards of good medical practice; not solely for the convenience of the member, member’s family, physician, or other healthcare provider; and furnished in the least intensive type of medical care setting required by the member’s condition. 


A national program of health insurance that has been operated by the Centers for Medicare & Medicaid Services (CMS) on behalf of the federal government since its creation by Title XVIII-Health Insurance for the Aged in 1965 as an amendment to the Social Security Act, which provides health insurance benefits primarily to persons over the age of 65 and others who are eligible for Social Security benefits, and covers the cost of hospitalization, medical care, and some related services.   

  • Part A – An insurance program (also called Hospital Insurance program) that provides basic protection against the costs of hospital and related post-hospital services for: individuals age 65 or over and eligible for retirement benefits under the Social Security or Railroad Retirement System. Part A pays for inpatient hospital, skilled nursing facility (SNF), and home health care; the Hospital Insurance program is financed from a separate trust fund, primarily funded with a payroll tax levied on employers, employees, and the self-employed. See also Medicare. 
  • Part B – The Medicare component that provides benefits to cover the costs of physicians’ professional services, whether the services are provided in a hospital, a physician’s office, an extended-care facility, a nursing home, or an insured’s home. 
  • Part D – The Medicare component that provides benefits to cover the costs of outpatient prescription drugs.  Benefits commenced on January 1, 2006, and are administered through private health plans. See also Medicare Prescription Drug Benefit and Medicare Advantage Prescription Drug Plan.   
Medicare Advantage

Previously called Medicare+Choice.  Legislation in which Medicare expanded the number of eligible private and public entity risk contractors, as part of the Balanced Budget Act of 1997 in which current Health Maintenance Organizations (HMOs) and competitive medical plans (CMPs) are automatically transitioned but must comply with new rules, while Provider-Sponsored Organizations (PSOs) also are allowed to accept Medicare risk; applications to become a Medicare+Choice demonstration site first began in 1995 as a way to encourage metropolitan areas with high numbers of Medicare eligibles, yet low percentages of Medicare HMO penetration, to develop new HMO constructs (and to test the receptivity of beneficiaries to enroll in a broad range of options) to help reduce health care costs; Medicare+Choice plans must be state licensed as risk-bearing entities except those PSOs that obtain three-year federal waivers from state licensure. 

Medicare Plus

The name given to one draft alternative to traditional Medicare, which was outlined in the Medicare Preservation Act of November 1995 and also in the congressional budget reconciliation bill (H.R. 2491), featuring the beneficiary’s choice of any plan available where they live, to include fee-for-service (FFS), coordinated care through Health Maintenance Organizations (HMOs), Preferred Provider Organizations (PPOs), Point of Service (POS) plans, and Provider Services Networks (PSNs), a $6,000 deductible plan with a medical savings account, union or association plans; the congressional budget office predicted savings of $27 billion if 24% of eligible persons enrolled by 2002.  

Medicare Prescription Drug Benefit

A stand-alone drug plan, offered by insurers and other private companies to beneficiaries that receive their Medicare Part A and/or B benefits through the Original Medicare Plan; Medicare Private Fee-for-Service Plans that don’t offer prescription drug coverage; and Medicare Cost Plans offering Medicare prescription drug coverage. These stand-alone plans add prescription drug coverage to the Original Medicare Plan and to some Medicare Cost Plans and Medicare Private Fee-for-Service Plans. Managed by commercial and private entities, these PDPs are a type of managed care and discounting. When people join a Medicare Prescription Drug Plan, they use the plan member cards that are received from the plans when they go to the pharmacies to purchase prescriptions. When they use their cards, they will normally get discounts on their prescriptions, provided that the drugs are on the approved or covered lists and they are not operating within the "donut hole". Costs will vary depending on recipients' financial situations and which Medicare Prescription Drug Plans they chose. If an individual has limited income and resources, he or she may get extra help to cover prescription drugs for little or no cost. All Medicare Prescription Drug Plans are not the same and will have varying costs, benefits, doctor choices, conveniences, and quality. See also Medicare Part D. 

Medicare Risk

Generic name given to either the product or classification of managed care delivery in support of any of the Centers for Medicare & Medicaid Services (CMS)-sponsored programs that involve an element of risk, providing care for members age 65 and older; a Medicare managed care contracting basis used in contrast to the previous fee-for-service (FFS) cost contracting. 

Medicare SELECT

A Medicare supplement that uses a preferred provider organization to supplement Medicare Part B coverage. 


See Medicare Advantage. 


Insurance provided by carriers to supplement the money reimbursed by Medicare for medical services. Since Medicare pays physicians for services according to their own fee schedule, regardless of what the physician charges, the individual may be required to pay the physician the difference between Medicare’s reimbursable charge and the physician’s fee. Medigap is meant to fill this gap in reimbursement, so that the Medicare beneficiary is not at risk for the difference.  Also referred to as a Medicare Supplement Policy. 


A participant in a health plan who makes up the plan’s enrollment. See also Beneficiary. 

Member Services

The broad range of activities that a managed care organization and its employees undertake to support the delivery of the promised benefits to members and to keep them satisfied with the company. 

MHPA - Mental Health Parity Act

A law that prohibits group health plans from applying more restrictive annual and lifetime limits on coverage for mental illness than for physical illness. 

Minimum Necessary

A Health Insurance Portability and Accountability Act of 1996 (HIPAA) Privacy Rule standard requiring that when protected health information is used or disclosed, only the information that is needed for the immediate use or disclosure should be made available by the health care provider or other covered entity. This standard does not apply to uses and disclosures for treatment purposes (so as not to interfere with treatment) or to uses and disclosures that an individual has authorized. 

MIPPA - Medicare Improvements for Patients and Providers Act of 2008

In July 2008, the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) was approved by Congress and became law. Among other provisions, the law blocked a scheduled payment reduction for physicians and provided incentives for physicians to implement electronic prescribing (e-prescribing). 

MLR - Medical Loss Ratio

The amount of revenues from health insurance premiums that is spent to pay for the medical services covered by the plan.  Usually referred to by a ratio, such as 0.96--which means that 96% of premiums were spent on purchasing medical services. The ratio between the cost to deliver medical care and the amount of money that was taken in by a plan. 

MMA - Medicare Prescription Drug, Improvement and Modernization Act of 2003

The law, enacted in 2003 provided the largest overhaul of the Medicare program in its existence. The biggest change was the introduction of a benefit for prescription drugs for Medicare beneficiaries. The prescription drug plans are not administered by the government, but rather by commercial health plans and pharmacy benefit management companies (PBMs). See also Medicare Part D, Medicare Prescription Drug Benefit and Medicare Advantage Prescription Drug Plan. 

Modified Community Rating

See Rating, Adjusted Community Rating. 

MPPPA - Medicaid Prudent Pharmaceutical Purchasing Act

Enacted as part of the Omnibus Budget Reconciliation Act of 1990 (OBRA ’90), MPPPA provides that Medicaid must receive the best discounted price of any institutional purchaser of pharmaceuticals. Thus, drug companies provide rebates to Medicaid that are the difference between the discounted price and the price at which the drug was sold. 

MSA - Medical Savings Account

An account in which individuals can accumulate contributions to pay for medical care or insurance. Some states give tax-preferred status to MSA contributions, but such contributions are still subject to federal income taxation. MSAs differ from Medical reimbursement accounts, sometimes called flexible benefits or Section 115 accounts, in that they need not be associated with an employer. MSAs are not currently recognized in federal statute. See also Flexible Spending Account. 

MSO - Management Service Organization

An entity that provides management services and administrative systems to one or more medical practices. The management services organization provides administrative and practice management services to physicians. A hospital, hospitals, or investors may typically own an MSO. Large group practices may also establish MSOs to sell management services to other physician groups. Also called physician practice management or physician management corporation. 

MTM - Medication Therapy Management

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) recognized the value of medication therapy management. The Act requires prescription drug plans (PDPs) and Medicare Advantage plans (MA-PDs) that offer prescription drug coverage to have an MTM program for those beneficiaries who meet high-risk eligibility criteria. As defined in the Medicare prescription drug benefit regulations issued by the Centers for Medicare & Medicaid Services (CMS), MTM programs are defined as programs of drug therapy management whose goal is to ensure that medications provided to the eligible beneficiaries are appropriately used to (1) optimize therapeutic outcomes through improved medication use and (2) reduce the risk of adverse events. In 2004, a group of 11 national pharmacy organizations developed a consensus document on the service components of medication therapy management.  


Refers to health care professionals from differing fields of expertise, for example: a team comprised of physicians, nurses, pharmacists and other health care providers. 

NCPDP - National Council for Prescription Drug Programs

A not-for-profit American National Standards Institute (ANSI)-accredited Standards Development Organization consisting of over 1,500 members who represent virtually all areas of the pharmacy and the health care industry. NCPDP creates and promotes the transfer of data related to medications, supplies, and services within the healthcare system through the development of standards and industry guidance. 

NCQA - National Committee for Quality Assurance

A private, not-for-profit organization dedicated to improving health care quality. Since its founding in 1990, NCQA has been a central figure in driving improvement throughout the health care system, helping to elevate the issue of health care quality to the top of the national agenda. Its mission and vision are to improve the quality of health care and to transform health care through measurement, transparency and accountability. NCQA develops quality standards and performance measures for a broad range of health care entities. Accredited health plans today face a rigorous set of more than 60 standards and must report on their performance in more than 40 areas in order to earn NCQA’s seal of approval. 

NDC - National Drug Code

A medical code set maintained by the Food and Drug Administration that contains codes for drugs. The Secretary of HHS adopted this code set as the standard for reporting drugs and biologics on standard transactions. A unique 11digit code given to drugs that identifies the labeler, product, and package size.  It is used to identify the medication in prescription drug claims. 


The group of physicians, hospitals, and other medical care professionals that a managed care organization has contracted with to deliver medical services to its members. 

Non-Formulary Drugs

Drugs not included in the formulary.  The majority of plans that use formularies have policies in place to give physicians and patients access to non-formulary drugs where medically appropriate.  

Non-Participating Provider

A provider (doctor, hospital, pharmacy, etc.) that does not sign a contract to participate in a health plan. In the Medicare Program, this refers to providers who are therefore not obligated to accept assignment on all Medicare claims. In commercial plans, non-participating providers are also called out of network providers or out of plan providers. If a beneficiary receives service from an out of network provider, the health plan (other than Medicare) may pay for the service at a reduced rate or may not pay at all. 

Non-Preferred Brand Drug

A brand name drug for which the managed care organization (MCO) has determined offers less value and cost-effectiveness than preferred brand drugs. In multiple tiered pharmacy benefit plans, such drugs are typically placed on the third tier, with generic drugs assigned to the first tier, preferred drugs assigned to the second tier and in some instances a fourth tier for specialty drugs. The member cost share increases with each tier level (first tier has lowest copayment and fourth tier the highest). 

NPI - National Provider Identifier

The Administrative Simplification provisions of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) mandated the adoption of standard unique identifiers for health care providers and health plans. The NPI is a unique identification number for covered health care providers. Covered health care providers and all health plans and health care clearinghouses must use the NPIs in the administrative and financial transactions adopted under HIPAA. The NPI is a 10-position, intelligence-free numeric identifier (10-digit number). This means that the numbers do not carry other information about healthcare providers, such as the state in which they live or their medical specialty. 

Off Label Use

The use of a drug for clinical indications other than those stated in the product labeling approved by the Food and Drug Administration (FDA). For example, a drug that has received FDA approval for the treatment of certain types of cancer (ovarian, bladder, breast) may be used to treat another type of cancer (pancreatic).  

OOP - Out-of-Pocket Costs/Expenses

The portion of payments for covered health services required to be paid by the enrollee, including co-payments, coinsurance and deductibles. 

Open Enrollment Period

A period during which subscribers in a health benefit program have an opportunity to select among health plans being offered to them, usually without evidence of insurability or waiting periods. A period of time which eligible subscribers may elect to enroll in, or transfer between, available programs providing health care coverage. Under an open enrollment requirement, a plan must accept all who apply during a specific period each year.  

OTC - Over-the-Counter Drug

A pharmaceutical that may be sold without federal or state prescription requirements, and may be purchased without a doctor’s order; coverage for selected OTC drugs is a benefit option in some plans. 

Out-of-Network Provider

A health care provider with whom a managed care organization does not have a contract to provide health care services. Typically beneficiaries must pay either all of the costs of care from an out-of-network provider or their cost-sharing requirements are greatly increased.  

Out-of-Pocket Limit

A cap placed on out-of-pocket costs, after which benefits increase to provide full coverage for the rest of the year. It is a stated dollar amount set by the insurance company, in addition to regular premiums. 


Also called health outcome, or the result of a process of prevention, detection, or treatment; an indicator of the effectiveness of health care measures upon patients. See also Outcomes Measurement. 

Outcome Measures

Healthcare quality indicators that gauge the extent to which healthcare services succeed in improving or maintaining satisfaction and patient health. A clinical outcome is the result of medical or surgical intervention or nonintervention, or the results of a specific health care service or benefit package. The valued results of care as experienced primarily by the patient but also by physicians and all other participants in the processes contributing to the outcomes. 

Outcomes Management

Providers and payers alike wish to find a method of managing care in a way that would produce the best outcomes. Managed care organizations are increasingly interested in learning to manage the outcome of care rather than just managing the cost of care. It is thought that through a database of outcomes experience, caregivers will know better which treatment modalities result in consistently better outcomes for patients. Outcomes management may lead to the development of clinical protocols. 

Outcomes Measurement

Method of systematically monitoring a patient’s medical or surgical intervention or nonintervention together with the associated responses, including measure of morbidity and functional status; findings from outcomes studies enable managed care entities to outline protocols according to their findings. See also Outcome. 

Outcomes Research

Research on measures of changes in patient outcomes, that is, patient health status and satisfaction, resulting from specific medical and health interventions. Attributing changes in outcomes to medical care requires distinguishing the effects of care from the effects of the many other factors that influence patients' health and satisfaction. Outcomes data is gaining increasing importance for patient advocacy and consumer protection. 


A patient whose length of stay or treatment cost differs substantially from the stays or costs of most other patients in a diagnosis related group. Under DRG reimbursement, outliers are given exceptional treatment subject to peer review and organization review. 

Outpatient Care

Care given a person who is not bedridden. Many surgeries and treatments are now provided on an outpatient basis, while previously they had been considered reason for inpatient hospitalization. See also Ambulatory Care. 

P&T - Pharmacy and Therapeutics Committee

An advisory committee that is responsible for developing, managing, updating, and administering the drug formulary system. P&T Committees are comprised of primary care and specialty physicians, pharmacists, and other health care professionals. Committees may also include nurses, legal experts, and administrators. 

P4P - Pay-for-Performance Programs

A program of financially structured incentives for practitioners and providers in exchange or as reward for the achievement of certain benchmarks of performance. The hope is that by offering positive rewards – both for reaching thresholds of performance and for making continuous strides in improving the quality of health care – high quality health care will be delivered on a consistent basis. This approach acknowledges the reality that financial rewards are among the most powerful tools for bringing about behavior change. 

Participating Provider

A provider who has contracted with the health plan to deliver medical services to covered persons. The provider may be a physician, hospital, pharmacy, other facility or other healthcare provider who has contractually accepted the terms and conditions set forth by the health plan. Also known as network or in-network provider. 


See Plan Sponsor. 

PBM - Pharmacy Benefit Management Companies

Organizations that manage pharmaceutical benefits for managed care organizations, other medical providers or employers.  PBMs contract with clients interested in optimizing the clinical and economic performance of their pharmacy benefit. PBM activities may include some or all of the following:  benefit plan design, creation/administration of retail and mail service networks, claims processing and managed prescription drug care services such as drug utilization review, formulary management, generic dispensing, prior authorization and disease and health management. 

PCP - Primary Care Physician/Provider

Sometimes referred to as a “gatekeeper,” the primary care physician is usually the first doctor a patient sees for an illness. This physician then treats the patient directly, refers the patient to a specialist (secondary care), or admits the patient to a hospital when necessary. Often, the primary care physician is a family physician or internist. See also Gatekeeper. 

PDP - Prescription Drug Plan

See Medicare Prescription Drug Benefit. 

Peer Review

The mechanism used by the medical staff to evaluate the quality of total health care provided by the Managed Care Organization. The evaluation covers how well services are performed by all health personnel and how appropriate the services are to meet the patients' needs. Evaluation of health care services by medical personnel with similar training. Generally, the evaluation by practicing physicians or other professionals of the effectiveness and efficiency of services ordered or performed by other members of the profession (peers). Frequently, peer review refers to the activities of the Professional Review Organizations, and also to review of research by other researchers. This is the most common method utilized in managed care for monitoring the utilization by physicians. See also Professional Review Organization. 

Per Diem Reimbursement

Reimbursement of an institution, usually a hospital, based on a set rate per day rather than on charges. Per diem reimbursement can be varied by service (e.g., medical/surgical, obstetrics, mental health, and intensive care) or can be uniform regardless of intensity of services. 

Performance Measures

Methods or instruments used to estimate or monitor how a health care provider’s actions conform to criteria and standards of quality. 

Pharmaceutical Care

A concept in providing health care defined by Hepler and Strand in 1990; it is a strategy that attempts to utilize drug therapy more efficiently to achieve definite outcomes that improve a patient’s quality of life. A pharmaceutical care system requires a reorientation of physicians, pharmacists, and nurses toward effective drug therapy outcomes. It is a set of relationships and decisions through which pharmacists, physicians, nurses, and patients work together to design, implement, and monitor a therapeutic plan that will produce specific therapeutic outcomes. 

Pharmacy Benefit Design

Contractually specifies the level of coverage and types of pharmaceutical services available to health plan members. A sound pharmacy benefit design balances patient care outcomes, costs, quality, risk management, and provision of the services that beneficiaries expect. The pharmacy benefit design establishes coverage parameters and sets liability limits. 

Pharmacy Carve Out

Within a capitation environment, pharmacy supplies and services are often provided through a carve out from the per member per month (PMPM) or pricing structure for a specified range of coverage; the most competitive regional pharmacy subcontractors, or national pharmacy benefit managers (PBMs), are capable of delivering these requirements at a savings for a commercial population. See also Pharmacy Benefit Management Companies. 

PHI - Protected Health Information

Under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), PHI includes any individually identifiable health information. Identifiable refers not only to data that is explicitly linked to a particular individual (identified information). It also includes health information with data items which reasonably could be expected to allow individual identification. Note that the definition of PHI excludes individually identifiable health information in education records covered by the Family Educational Rights and Privacy Act. It also excludes employment records held by a covered entity in its role as employer. 

PHO - Physician-Hospital Organization

A type of integrated health care system that in its simplest form is an organization that collectively commits both physicians and the hospital to payer contracts. They sometimes use existing Independent Practice Association (IPA) structures or individual physician contracting. In its most effective form, the PHO must commit the entire physician and hospital panel, without an optout, to the PHO organization. 

Plan Member

Refers to number of lives, or people, or members of a health plan or Pharmacy Benefit Manager (PBM) that are eligible for coverage or benefits. Includes both subscribers and dependents. See also Lives. 

Plan Sponsor

The company that assumes financial responsibility for an insured group. A plan sponsor can be an insurance company, third-party administration, or the company itself, if the company is self-insured. 

PMPM - Per Member Per Month

Often used in the context of pharmacy or medical costs; the cost of providing a particular medical service stated as the average cost to provide that service to one member for one month. Applies to a revenue or cost for each enrolled member each month. The number of units of something divided by member months. Often used to describe premiums or capitated payments to providers, but can also refer to the revenue or cost for each enrolled member each month. Many calculations, other than cost or premium, use PMPM as a descriptor. 

PMPY - Per Member Per Year

The cost of providing a particular medical service stated as the average cost to provide that service to one member for one year. 


See Risk Pool. 

POS - Point of Service HMO

Point of sale or point of service.  See Health Maintenance Organization, Point-of-Service Model. 

PPM - Physician Practice Management Organization

A variant of a Management Services Organization (MSO), but are physician only – not hospital. For-profit PPMs often purchase physician practices and sign multi-year contracts with physicians. PPM provides management for all support functions. 

PPO - Preferred Provider Organization

A managed care organization in which physicians are paid on a fee-for-service (FFS) schedule that is discounted, usually about 10% to 20% below normal fees, PPOs are often formed as a competitive reaction to Health Maintenance Organizations (HMOs) by physicians who contract out with insurance companies, employers, or third-party administrators. A patient can use a physician outside of the PPO providers, but he or she will have to pay a greater portion of the fee. 

PPS - Prospective Payment System

A payment method that establishes rates, prices or budgets before services are rendered and costs are incurred. Providers retain or absorb at least a portion of the difference between established revenues and actual costs. (1) The Medicare system used to pay hospitals for inpatient hospital services; based on the Diagnosis-Related Group (DRG) classification system. (2) Medicare's acute care hospital payment method for inpatient care. Prospective per-case payment rates are set at a level intended to cover operating costs in an efficient hospital for treating a typical inpatient in a given diagnosis-related group. Payments for each hospital are adjusted for differences in area wages, teaching activity, care to the poor, and other factors. Hospitals may also receive additional payments to cover extra costs associated with atypical patients (outliers) in each DRG. See also Diagnosis-Related Groups. 

Practice Guidelines

Also called practice parameters or medical protocols. Physicians may be required to follow these in order to obtain the best clinical outcome. The guideline provides the caregiver with specific treatment options or steps to follow when faced with a particular set of clinical signs or symptoms or laboratory data. The protocols can be very flexible in nature or very rigid. They are designed through an accumulated database of clinical outcomes. 

Pre-Admission Certification

The practice of reviewing claims for hospital admission before the patient actually enters the hospital. This costcontrol mechanism is intended to eliminate unnecessary hospital expenses by denying medically unnecessary admissions. 

Preexisting (Pre-Existing) Condition

A medical condition developed prior to issuance of a health insurance policy that may result in the limitation in the contract on coverage or benefits. Normally this is defined as a health problem for which the new enrollee received health care services before the date that the new health plan benefit begins. Some policies exclude coverage of such conditions and the exclusion may continue for a specific period of time or indefinitely. 

Preferred Brand Drug

A brand name drug for which the managed care organization (MCO) has determined to be a valuable, cost-effective treatment option. In multiple tiered pharmacy benefit plans, such drugs are typically placed on the second tier, with generic drugs assigned to the first tier, non-preferred drugs assigned to the third tier and in some instances a fourth tier for specialty drugs. The member cost share increases with each tier level (first tier has lowest copayment and fourth tier the highest). 

Preferred Drug List

See Formulary. 

Preferred Providers

Physicians, hospitals, and other health care providers who contract to provide health services to persons covered by a particular health plan. 

Preferred Therapeutic Class

A specific drug class or classes selected as the most appropriate for treatment of a particular disease or condition as determined by a Pharmacy and Therapeutics (P&T) Committee or similar entity using the best available scientific evidence. There is usually a reduced copayment if the patient uses a specific drug from such a class of drugs. For example, the P&T Committee may determine that H2-blocking agents rather than Proton Pump Inhibitors are the most appropriate first-line therapy for Gastro-Esophageal Reflux Disease (GERD). 


The amount paid to a carrier for providing coverage under a contract. Premiums are typically set in coverage classifications such as individual, twoparty, and family; employee and dependent unit; employee only, employee and spouse, employee and child, and employee, spouse, and child. 

Preventive Care

Health care with an emphasis on prevention, early detection, and early treatment of conditions, generally including routine physical examination, immunization, and wellness care. 

Primary Care

Basic or general health care usually rendered by general practitioners, family practitioners, internists, obstetricians and pediatricians -- who are often referred to as primary care practitioners or PCPs. Professional and related services administered by an internist, family practitioner, obstetrician-gynecologist or pediatrician in an ambulatory setting, with referral to secondary care specialists, as necessary. 

Prior Approval

A formal process for obtaining approval from a health insurer before a specific treatment, procedure, service or supply has been provided. Completing this process ensures that the patient receives full benefits for the specified services. Health insurers may require prior approval for specific services or products, including home health assistance, durable medical equipment, surgery, or skilled nursing facility stays. Prior approval is usually required for non-emergency services that are expensive or likely to be overused. Typically, prior approvals are valid for a set length of time as long as the patient’s benefits do not change between the date the approval is given and the date the service or product is provided. 

Prior Authorization

Prior authorization is an administrative tool normally used by health plans or prescription benefit management companies (PBMs) that requires prescribers to receive pre-approval for prescribing certain drugs to qualify those drugs for coverage under the terms of the pharmacy benefit plan.  The term may also refer to a commonly used managed care strategy called the "formulary exception process," which allows exceptions to a plan's formulary. Guidelines and administrative policies for prior authorization and formulary exceptions are developed by pharmacists and/or other qualified health professionals who are employed by or under contract with a health plan or PBM. Each plan develops its own guidelines, and makes its own decisions about how they are implemented and used. See also Formulary Exception Process. 

Private-Sector Health Care Programs

Signifies health care companies not directly affiliated with any federal, state, or local government. Normally, they are enterprises that perform services for a profit. 

PRO - Professional/Peer Review Organization

An organization that reviews the activities and records of a health care provider, institution, or group. The reviewer is generally a physician if a physician is the subject of the review; a group of administrators, physicians, and allied health care personnel if a hospital is the subject of the review; etc. The PRO can be state sponsored or independent.  


Any supplier of services (i.e., physician, pharmacist, case management firm, etc.). 

PSAO - Pharmacy Services Administrative Organization

An organization that is dedicated to providing prescription benefits to enrollees of managed care plans by using existing community pharmacies. The PSAO contracts as a provider group with the managed care organization so that the individual pharmacies receive negotiating representation in numbers and the prepaid health plan does not have to provide the capital necessary to start, own, and operate its own pharmacy department. 

Pure Community Rating

See Rating, Standard Community Rating. 

QA - Quality Assurance

Activities and programs intended to assure the quality of care in a defined medical setting. Such programs include peer or utilization review components to identify and remedy deficiencies in quality. The program must have a mechanism for assessing its effectiveness and may measure care against pre-established standards. A formal methodology and set of activities designed to access the quality of services provided. Quality assurance includes formal review of care, problem identification, corrective actions to remedy any deficiencies and evaluation of actions taken. See also Continuous Quality Improvement. 

QALY - Quality-Adjusted Life-Year

This unit of measure is one way to quantify health outcomes resulting from some type of intervention. The number of qualityadjusted lifeyears is the number of years at full health that would be valued equivalently to the number of years of life experienced in a less desirable health state. A year in perfect health is considered equal to 1.0 QALY. The value of a year in ill health would be discounted. 

QI - Quality Improvement

A continuous process that identifies problems in health care delivery, examines solutions to those problems, and regularly monitors the solutions for improvement. 

QIO - Quality Improvement Organization

Groups of practicing doctors and other health care experts that are paid by the federal government to check and improve the care given to Medicare patients. They must review patient complaints about the quality of care given by: inpatient hospitals, hospital outpatient departments, hospital emergency rooms, skilled nursing facilities, home health agencies, Private Fee-for-Service Plans, and ambulatory surgical centers. These doctors also review fast-track termination decisions in comprehensive outpatient rehabilitation facilities, skilled nursing facilities, and home health and hospice settings for people in Medicare Health Plans. 

QOL - Quality of Life

A patient’s perceptions of how they deal with their disease or with their every day life when suffering from a particular condition. It is subjective because information cannot be measured objectively; however, it has been in the health care literature for at least 20 years. 


According to the Institute of Medicine (IOM), the degree to which health services for individuals and populations increase the likelihood of desired health outcomes and are consistent with current professional knowledge. Quality can be defined as a measure of the degree to which delivered health services meet established professional standards and judgments of value to consumers. Quality may also be seen as the degree to which actions taken or not taken maximize the probability of beneficial health outcomes and minimize risk and other untoward outcomes, given the existing state of medical science and art. Quality is frequently described as having three dimensions: quality of input resources; quality of the process of services delivery (the use of appropriate procedures for a given condition); and quality of outcome of service use (actual improvement in condition or reduction of harmful effects). Quality is how well the health plan or health care provider keeps its members or patients healthy or treats them when they are sick. Good quality health care means doing the right thing at the right time, in the right way, for the right person - and getting the best possible results. Quality programs are commonly called Quality Assurance (QA), Total Quality Management (TQM), Quality Improvement (QI), Continuous Quality Improvement (CQI) - all referring to the process of monitoring quality in systematic ways. 

Quality of Life Measures

An assessment of the patient’s perceptions of how they deal with their disease or with their everyday life when suffering from a particular condition. It is subjective in the sense that the kinds of information cannot be measured objectively; however, it has been in the health care literature for at least 20 years. It has been used in the area of pharmaceuticals most recently in the last five or six years. Through statistical means, the indices that have been developed to measure various aspects of quality of life have been validated over time, and we know that these measures are reliable and reproducible. 

R&C - Reasonable and Customary

A term used to refer to the commonly charged or prevailing fees for health services within a geographic area. A fee is considered to be reasonable if it falls within the parameters of the average or commonly charged fee for the particular service within that specific community. 


The method that is used to determine the cost of premiums to the members of a managed healthcare or indemnity insurance plan. 

  • Adjusted Community Rating – A rating method under which a health plan or MCO divides its members into classes or groups based on demographic factors such as geography, family composition, and age, and then charges all members of a class or group the same premium. The plan cannot consider the experience of a class, group, or tier in developing premium rates. Also known as modified community rating. 
  • Blended Rating – For groups with limited recorded claim experience, a method of forecasting a group’s cost of benefits based partly on an MCO’s manual rates and partly on the group’s experience. 
  • Community Rating – A system of setting health insurance premiums by which the insurer calculates the total claims or health expenditure experience of the members within a given geographic area or "community," and uses that information to determine a rate that is common for all groups, regardless of the individual claims experience of any one group (contrasts with Experience Rating). 
  • Experience Rating – The process of setting rates partially or in whole on evaluating previous claims experience for a specific group or pool of groups. The rating system by which the Plan determines the capitation rate or premium rate is determined by the experience of the individual group enrolled, based on actual or anticipated health care use by the specific group of insureds. Each group will have a different rate based on utilization. 
  • Manual Rating – Rates based on a health plan's average claims data and adjusted for certain factors, such as group demographics or industry. A rating method under which a health plan uses the plan's average experience with all groups, and sometimes the experience of other health plans, rather than a particular group's experience to calculate the group's premium. An MCO often lists manual rates in an underwriting or rating manual. 
  • Modified Community RatingSee Rating, Adjusted Community Rating. 
  • Pure Community RatingSee Rating, Standard Community Rating. 
  • Standard Community Rating – A type of community rating in which an MCO considers only community-wide data and establishes the same financial performance goals for all risk classes. Also known as pure community rating. 

Broadly defined as a discount that occurs following a purchase wherein the manufacturer of the product returns some of the money that was paid for the product to the purchaser.  When drugs are purchased by a managed care organization (MCO), a rebate is determined based upon volume, market share and other parameters. Rebates are provided by a pharmaceutical manufacturer to MCOs, including health plans, pharmacy benefit managers (PBMs) or other type of MCOs. 


The process of sending a patient from one practitioner to another for health care services. Health plans may require that designated primary care providers authorize a referral for coverage of specialty services. 

Regional Health Alliances

See Health Alliances. 


An insurance arrangement whereby the managed care organization or provider is reimbursed by a third-party for costs exceeding a pre-set limit, usually an annual maximum. A method of limiting the risk that a provider or managed care organization assumes by purchasing insurance that becomes effective after set amount of health care services have been provided. Insurance purchased by an insurance company or health plan from another insurance company to protect itself against losses. See also Stop-Loss Insurance. 


The change or possibility of loss.  For example, physicians may be held at risk if hospitalization rates exceed agreed upon thresholds.  The sharing of risk is often employed as a utilization control mechanism within the HMO setting.  Risk is also defined in insurance terms as the possibility of loss associated with a given population. 

Risk Adjustment

A system of adjusting rates paid to managed care providers to account for the differences in beneficiary demographics, such as age, gender, race, ethnicity, medical condition, geographic location, etc. 

Risk Contract

Also known as a Medicare risk contract. A contract between a Health Maintenance Organization (HMO) or competitive medical plan (CMP) and the Centers for Medicare & Medicaid Services (CMS) to provide services to Medicare beneficiaries under which the health plan receives a fixed monthly payment for enrolled Medicare members and then must provide all services on an atrisk basis. This type of contract may be between physicians and an HMO, placing the physician at risk for costs of services provided. 

Risk Pool

A defined account (e.g., defined by size, geographic location, claim dollars that exceed a certain level per individual) to which revenue and expenses are posted. A risk pool attempts to define expected claim liabilities of a given defined account as well as required funding to support the claim liability. 


The method by which managed care organizations limit access to health care for unnecessary reasons. In most Health Maintenance Organizations (HMOs), a phone call to the physician or his or her medical office staff is required before an office visit can be arranged. “Gatekeepers” and concurrent review are other methods of screening patients. 

Secondary Care

Services provided by medical specialists who generally do not have first contact with patients (e.g., cardiologist, urologists, dermatologists). 


Health coverage in which health services are delivered by providers but the member's employer, not the insurance plan, bears the risk for any expenses incurred. These plans usually contract with a third party administrator, or an insurance company through an Administrative Services Only (ASO) arrangement, to administer the plan, including paying claims, determining eligibility, etc. 

Service Area

A geographical range where a health plan accepts members. For plans that require enrollees to use certain doctors and hospitals, it is also the area where services are provided. The plan may disenroll a member who moves out of the plan's service area. Service area is also a term used by hospitals to describe the geographic or catchment area from which the hospital may receive referrals or admissions. 

Shared Risk

An arrangement where any two entities, such as a health plan and a provider, agree to share in the risk to some contracted percentage of hospital or other medical costs that may come in over budget, but also allows the sharing of profits for care provided under budget. 

SNF - Skilled Nursing Facility

A facility, either freestanding or part of a hospital, that accepts patients in need of rehabilitation and medical care of a lesser intensity than that received in a hospital. SNFs provide a level of care that requires the daily involvement of skilled nursing or rehabilitation staff and that, as a practical matter, can’t be provided on an outpatient basis. Examples of skilled nursing facility care include the provision of such services as intravenous injections and physical therapy. The need for custodial care (for example, assistance with activities of daily living, like bathing and dressing) may not, in itself, qualify for reimbursement in a skilled nursing facility by Medicare or other health plans. 

Specialty Drugs/Pharmaceuticals

Medications generally prescribed for people with complex or ongoing medical conditions such as multiple sclerosis, hemophilia, hepatitis, and rheumatoid arthritis. These medications also typically have one or more of the following characteristics: injected or infused, but some may be taken by mouth; unique storage or shipment requirements; additional education and support required from a health care professional; usually not stocked at retail pharmacies. 

Standard Benefit Package

A set of specific health benefits that are offered by delivery systems. 

Standard Community Rating

See Rating, Standard Community Rating. 

Standard of Care

A diagnostic and treatment process that a clinician should follow for a certain type of patient, illness, or clinical circumstance. In legal terms, the level at which the average, prudent provider in a given community would practice. It is how similarly qualified practitioners would have managed the patient's care under the same or similar circumstances. 

Standards of Quality

Authoritative statement of minimum levels of acceptable performance, excellent levels of performance, or the range of acceptable performance. 

Step Therapy

The practice of beginning drug therapy for a medical condition with the most cost-effective and safest drug, and stepping up through a sequence of alternative drug therapies as a preceding treatment option fails.  Step Therapy programs apply coverage rules at the point of service when a claim is adjudicated (e.g., a first-line drug must be tried before a second-line drug can be used).  If a claim is submitted for a second-line drug and the step therapy rule was not met, the claim is rejected, and a message is transmitted to the pharmacy indicating that the patient should be treated with the first-line drug before coverage of the second-line drug can be authorized. 

Stop-Loss Insurance

A type of insurance coverage that enables provider organizations or self-funded groups to place a dollar limit on their liability for paying claims and requires the insurer issuing the insurance to reimburse the insured organization for claims paid in excess of a specified yearly maximum. 


Employment group or individual that contracts with an insurer for medical services. Person or group responsible for payment of premiums, or person whose employment is the basis for membership in a health plan. Usually synonymous with enrollee, covered individual or member. 


A separate, free-standing medical facility specializing in outpatient or same-day surgical procedures. Surgicenters drastically reduce the costs associated with hospitalizations for routine surgical procedures because extended inpatient care is not required for specific disorders. 

Technology Assessment

To evaluate new or existing diagnostic and therapeutic devices and procedures. Technology assessment evaluates the effect of a medical procedure, diagnostic tool, medical device, or pharmaceutical product. In the past, technology assessment meant primarily evaluating new equipment and focused on the clinical safety and efficacy of an intervention. However, in today’s health care world, it includes both a broader view of clinical outcome, such as the effect on a patient’s quality of life, and the effect on society, such as cost-benefit analysis. 


The use of telecommunications (i.e., wire, internet, radio, optical or electromagnetic channels transmitting text, x-ray, images, records, voice, data or video) to facilitate medical diagnosis, patient care, patient education and/or medical learning. Professional services given to a patient through an interactive telecommunications system by a practitioner at a distant site. Many rural areas are finding uses for telehealth and telemedicine in providing oncology, home health, ER, radiology and psychiatry among others. Telehealth services have been used between providers, to provide supervision of one another and to provide evaluation of patients. 

Tertiary Care

Care administered at a highly specialized medical center. It is associated with the utilization of high-cost technology resources. 

The Joint Commission

Formerly JCAHO (Joint Commission on Accreditation of Health Care Organizations); a private, non-profit organization which functions as the main accrediting body for hospitals and other provider facilities, who pay The Joint Commission for its services. The Joint Commission publishes national standards, surveys facilities on request, and awards accreditation to those that demonstrate compliance with the standards. Accreditation through The Joint Commission is voluntary, but is required for participation in Medicare. 

Therapeutic Substitution

Involves the dispensing of a chemically different drug, considered therapeutically equivalent (i.e., will achieve the same outcome) in place of a drug originally prescribed by a physician. The drugs are not generically equivalent. Therapeutic substitutions are done in accordance with procedures and protocols set up and approved by physicians in advance. Therefore, the pharmacist would not have to seek the prescribing physician’s approval for each interchange. 

Third-Party Payer

A public or private organization that pays for or underwrites coverage for health care expenses for another entity, usually an employer, such as Blue Cross and Blue Shield, Medicare, Medicaid, or commercial insurers. The individual enrollee generally pays a premium for coverage in all private and some public programs, then the organization pays bills on the patient’s behalf, which are called third-party payments; also called third-party carrier. 

Tiered Copayment Benefits

A pharmacy benefit design that financially rewards patients for using generic and preferred drugs by requiring the patient to pay progressively higher copayments for preferred brand-name and non-preferred brand-name drugs. For example, in a three-tiered benefit structure, copayments may be $5.00 for a generic, $10.00 for a preferred brand product, and $25.00 for a non-preferred brand product. 

TPA - Third-Party Administrator

A person or organization that provides certain administrative services to group benefit plans, including premium accounting, claims review and payment, claims utilization review, maintenance of employee eligibility records, and negotiations with insurers that provide stop-loss protection for large claims. These entities often serve employer health plans that are "self-insured." 


Usually refers to the exchange of information for administrative or financial purposes such as health insurance claims or payment. Under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), this is the exchange of information between two parties to carry out financial or administrative activities related to health care. 


The provision of health care by one or more health care providers. Treatment includes any consultation, referral or other exchanges of information to manage a patient's care. 


The evaluation of patient conditions for urgency and seriousness, and establishment of a priority list for multiple patients. Most commonly occurs in emergency rooms, but, can occur in any healthcare setting. In the managed care setting, triage is often performed after office hours on the telephone by a nurse or other health professional to screen patients for emergency treatment. 

Triple Option

A type of health plan in which employees may choose from a Health Maintenance Organization (HMO), a Preferred Provider Organization (PPO), and an indemnity plan. 

U&C - Usual and Customary Price

The price for a given drug or service that a pharmacy or other provider would charge a cash-paying customer without the benefit of insurance provided  through a payer or intermediary with a contract with the provider. 

UCR - Usual, Customary and Reasonable

Refers to charges for medical services, the UCR is the amount a health plan will recognize for payment for a particular medical procedure. It is typically based on what is considered "reasonable" for that procedure within the service area. Commonly charged fees for health services in a certain area. 

UM - Utilization Management

Managing the use of medical services to ensure that a patient receives necessary, appropriate, high-quality care in a cost-effective manner. As it applies to a pharmacy benefit, utilization management is any of a number of measures used to ensure appropriate medication utilization.  Such measures may include quantity limitations, step-therapy, prior authorization and/or additional steps as deemed appropriate by the health plan's Pharmacy and Therapeutics (P&T) Committee. 


A reviewer of prospective and renewing cases for appropriate pricing, risk assessment, and administrative feasibility. 


People who lack public or private health insurance. 

UR - Utilization Review

Evaluation of the necessity, appropriateness, and efficiency of the use of health care services, procedures, and facilities. In a hospital, this includes review of the appropriateness of admissions, services ordered and provided, length of a stay, and discharge practices, both on a concurrent and retrospective basis. Utilization review can be done by a peer review group, or a public agency. UR is a method of tracking, reviewing and rendering opinions regarding care provided to patients. Usually UR involves the use of protocols, benchmarks or data with which to compare specific cases to an aggregate set of cases. Those cases falling outside the protocols or range of data are reviewed individually. Managed care organizations will sometimes refuse to reimburse or pay for services which do not meet their own sets of UR standards. The practices of pre-certification, re-certification, retrospective review and concurrent review all describe UR methods. UR is one of the primary tools utilized by Integrated Delivery Systems (IDSs), Managed Care Organizations (MCOs) and health plans to control over-utilization, reduce costs and manage care. 


An independent, nonprofit organization that promotes health care quality through its accreditation and certification programs. URAC offers a wide range of quality benchmarking programs and services that keep pace with the rapid changes in the health care system, and provide a symbol of excellence for organizations to validate their commitment to quality and accountability. Its mission is to promote continuous improvement in the quality and efficiency of health care management through processes of accreditation and education. URAC has developed accreditation standards for pharmacy benefit management companies (PBMs) and specialty pharmacies. 

Urgent Care Center

A medical facility where ambulatory patients can be treated on a walk-in basis, without an appointment, and receive immediate, non-emergent care. The urgent care center may be open 24 hours a day; patients calling a Health Maintenance Organization (HMO) after hours with urgent, but not emergent, clinical problems are often referred to these facilities. 


Use of services and supplies. Utilization is commonly examined in terms of patterns or rates of use of a single service or type of service such as hospital care, physician visits, and prescription drugs. Measurement of utilization of all medical services in combination is usually done in terms of dollar expenditures. Use is expressed in rates per unit of population at risk for a given period such as the number of admissions to the hospital per 1,000 persons over age 65 per year, or the number of visits to a physician per person per year for an annual physical. 

Utilization Guidelines

A utilization review resource that indicates accepted approaches to care for common, uncomplicated healthcare services. 


Relationship between the recommended care and the substance and quality of evidence. 


The differences obtained from subtracting actual results from expected or budgeted results. 

VBBD - Value-Based Benefit Design

In VBBD, subgroups of patients are identified who would benefit most from a given treatment and cost sharing is reduced—perhaps even to zero—for that group. An example is the use of cholesterol-lowering drugs, which provide the greatest benefit to patients with previous heart attacks—a group that with the suggested refinement would be eligible for lower cost sharing than those whose only cardiac issue is high cholesterol levels. This would also require patient enrollment in disease management programs and the use of incentives to induce patients to undertake healthy behaviors. 

VBHC - Value-Based Health Care

In VBHC, not only are members/patients incented financially to utilize effective therapies as above, but financial incentives exist for providers as well. In this case, physicians who conform to best practices or are highly efficient may be placed in special high-performing networks. Members may have fewer out-of-pocket costs when utilizing these networks. 

VBID - Value-Based Insurance Design

In VBID benefit packages, patient out-of-pocket costs for health services are adjusted according to an assessment of the clinical benefit to the individual patient that is founded on the scientific evidence base. Thus, the greater the clinical benefit for the patient, the lower that patient’s cost share will be. Higher cost sharing will apply to interventions with little or no proven benefit. 

VBPD - Value-Based Pharmacy Design

In VBPD, formularies and patient copayment structures are developed according to their overall value. This may include an estimation of cost effectiveness, the ability of certain products to produce cost offsets (like reduce future hospitalizations), improved adherence, or greater effectiveness compared with other products. These assessments are made based on solid, well-accepted evidence. A highly effective product supported by many well-designed clinical studies may be placed on tier 1, whereas a product with less of an evidence base may be offered at a higher tier, with a greater patient copay. 

Vertical Integration

The connecting of dissimilar or other than strictly horizontal entities such as an Health Maintenance Organization (HMO), hospitals, physician practices, Preferred Provider Organization (PPO), or Physician-Hospital Organization (PHO) into one care system from parts that use to exist as a supplier-customer relationship; linked to enhance coordination and value to patient care and support, while aiding proper utilization by the system; may be formed through joint ventures, mergers or acquisitions, new service development, or meaningful affiliations; also called full-service integration. See also Horizontal Integration. 

Veterans Administration (VA) National Formulary

A drug formulary implemented in 1997 by the Veterans Health Administration (VHA) intended to help control costs and improve quality of prescribing in the VHA’s hospitals, ambulatory facilities, nursing homes, and other health care facilities. 

Vital Statistics

Statistics relating to births (natality), deaths (mortality), marriages, health, and disease (morbidity). Vital statistics for the United States are published by the National Center for Health Statistics. Vital statistics can be obtained from CDC, state health departments, county health departments and other agencies. An individual patient's vital statistics in a health care setting may also refer simply to blood pressure, temperature, height and weight, etc. 

Waiting Periods

The length of time an individual must wait to become eligible for benefits for a specific condition after overall coverage has begun. Also refers to the period that must pass before an employee or dependent is eligible to enroll (becomes covered) under the terms of the group health plan. 

Wellness Programs

See Health Promotion Programs. 

Withhold Fund

The portion of the monthly payment to physicians withheld by the HMO until the end of the year or other time period to create an incentive for efficient care. If the physician exceeds utilization norms in comparison with other members of his group or geographic region, he or she loses a percentage of the withhold. The principle of the withhold fund maybe applied to hospital services, specialty referrals, laboratory usage, etc. 

Workers' Compensation

Insurance that employers are required to have to cover employees who get sick or are injured on the job. A state-governed system that addresses work-related injuries. Under this system, employers assume the cost of medical treatment and wage losses stemming from a worker’s job-related injury. In return, employees give up the right to sue employers. 


The total patient evaluation, which may include laboratory assessments, radiologic series, medical history, and diagnostic procedures. 

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