In response to the soaring health care costs of the early 1970’s, the U.S. government provided incentives to for-profit health care providers, setting a precedent for the trend toward managed care that shaped American health care policy in the late twentieth century.
In the early twentieth century, most medical services in the United States were provided at relatively little cost to the patient, who typically assumed complete financial responsibility for treatment. Advances in medical technology soon resulted in increased costs for surgeries and other complex medical treatments, however, prompting the development of the first health insurance plan, Blue Cross, in the 1930’s. Early health insurance plans were limited in scope, usually covering only inpatient hospital care; as a result, physicians and hospitals continued to keep costs low. These traditional health insurance plans, known as indemnity or fee-for-service plans because they reimbursed health care providers for the costs of care, grew slowly but steadily throughout the twentieth century as increasing numbers of employers and labor unions provided insurance coverage for their employees and members.
The introduction of Medicare
Shortly after the establishment of Medicare and Medicaid, annual increases in medical costs began to outpace the general rate of inflation in the United States. As health care costs continued to soar in the late 1960’s and early 1970’s, the health care sector—with the encouragement of the federal government—began to turn toward health maintenance organizations (HMOs) as a possible solution.
The origins of the health maintenance organization have been traced to a small number of health plans that provided prepaid hospital care in the 1920’s and 1930’s. Among these were the precursor to the original Blue Cross
PGPs proved particularly popular with government agencies seeking to insure large groups of employees and their families at relatively low cost. Although some of these plans, such as Blue Cross, evolved into traditional fee-for-service insurance plans, many survived for decades as PGPs. The most successful, the Kaiser Permanente
In the midst of continuing inflationary pressures in the early 1970’s, Dr. Paul Ellwood, a pediatric neurologist and president of the American Rehabilitation Association, began a campaign to persuade both the U.S. Congress and President Richard M. Nixon’s administration to promote a private alternative to proposals to expand Medicare and Medicaid. Citing the initial success of a pilot program, Ellwood suggested that the federal and state governments should work with private concerns to develop a competitive system of health care providers that would both provide and cover the costs of medical care in exchange for fixed reimbursements. By emphasizing preventive care and exerting tight controls over services provided to patients, these providers, which Ellwood dubbed “health maintenance organizations,” would drive down health care costs with a minimum of government intervention.
An essential element of HMO plans would be “capitation,” or the setting of fixed reimbursements for the treatment of individual patients in order to limit expenditures and eliminate financial incentives for physicians to provide extensive treatment to patients. Services that participating physicians and hospitals provided would be subject to review by the HMO, which could deny services or offer lower-cost alternatives. Emphasizing the potential benefits of HMOs for businesses and investors, Ellwood and Edgar F. Kaiser, the son of Henry Kaiser, lobbied both Congress and the president to enact legislation that would foster the development of HMOs. In 1970, Nixon announced that HMOs would be the central focus of his administration’s health care policy.
In 1971, Senator Ted Kennedy of Massachusetts and Congresswoman Martha Griffiths of Michigan proposed the Health Security Act, which would have expanded Medicare to provide health insurance coverage to all Americans—a practice criticized by conservative politicians and the medical profession as “socialized medicine.” As an alternative to this legislation, Nixon, in a 1972 address to Congress, proposed legislation fostering the development of HMOs. With additional support from labor unions, which regarded HMOs as a low-cost alternative to conventional health insurance for their members, HMO legislation moved rapidly through Congress in the early 1970’s. With his proposal for government-sponsored national health insurance defeated, Kennedy cosponsored the Senate version of the legislation.
By the time the HMO bill was sent to the president for his signature, Congress had added several provisions to the act that the Nixon administration had not proposed and to which it objected, such as ongoing regulation of HMOs. Nevertheless, on December 29, 1973, Nixon signed the Health Maintenance Organization Act into law.
The act was designed to encourage the private sector to invest in for-profit HMOs, in the belief that competition for subscribers would produce incentives to lower costs while providing a high quality of care. The act created a system of federal qualification for HMOs that required them to meet certain standards (such as a minimum benefits package), provided grants to both new and established HMOs, and prohibited states from imposing certain restrictions on HMOs. In addition, the act included a provision requiring employers with twenty-five or more employees to offer HMO plans to their employees in addition to traditional health insurance plans. Known as the “dual-choice provision,” this portion of the act was instrumental in the establishment of new HMOs and the dramatic growth of established HMOs such as Kaiser Permanente, whose membership reached three million in 1976.
As health care costs continued to rise in the 1980’s and 1990’s, American health policy began a trend toward “managed care” plans, which include HMOs, preferred provider organizations (PPOs), and point-of-service (POS) plans. Certain features of traditional indemnity plans can also be described as managed care features, such as requirements that some services be approved in advance. In addition, government-operated health providers such as state Medicaid programs, public health clinics, and community mental health centers began to adopt the managed care model.
As the role of managed care grew in American health care, HMOs were both praised for their efficiency and emphasis on preventive medicine and criticized as the creators of a health care system in which cost containment takes precedence over intensive, individualized treatment of patients. Public concerns about the denial of coverage to patients for expensive treatments, resulting in some cases in the death or disability of those patients, inspired a number of lawsuits and regulatory actions that slowed the growth of HMOs. At the beginning of the twenty-first century, however, HMOs remained an influential force in the shaping of American health care policy.
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Baldor, Robert A. Managed Care Made Simple. 2d ed. Malden, Mass.: Blackwell Science, 1998. Guide to managed health care for health care professionals provides a clear, jargon-free historical perspective on the development of HMOs and managed care in the United States. -
Coddington, Dean C., Elizabeth A. Fischer, Keith D. Moore, and Richard L. Clark. Beyond Managed Care: How Consumers and Technology Are Changing the Future of Health Care. San Francisco: Jossey-Bass, 2000. Analysis of managed health care focuses primarily on implications for future changes in health care policy but also provides a clearly written historical overview of HMOs. -
Smith, Richard Dean. The Rise and Fall of Managed Care: A Comprehensive History of a Mass Medical Movement. Bristol, Ind.: Wyndham Hall Press, 2001. Describes how HMOs, touted as the solution to cost and access problems in health care in the 1970’s and 1980’s, fell short of expectations and argues that managed care is an unmitigated failure. -
Stevens, Rosemary E., Charles E. Rosenberg, and Lawton R. Burns, eds. History and Health Policy in the United States: Putting the Past Back In. New Brunswick, N.J.: Rutgers University Press, 2006. Collection of scholarly essays on the history of American health care policy includes substantial information on the origins of managed care and the role of Nixon in the development of the HMO industry.
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