Dr. Molly Droge is the chair of the subcommittee on access to care at the American Academy of Pediatrics. Growing up in West Texas, she lived next door to an old general practice doctor. She didn’t know him well, but, as she told Remapping Debate, “I did know his reputation in the town, and I knew what his patients thought of him.” He was known for doing everything he could to help his patients, and would often do it without any payment at all. “He got a bowl of tomatoes in the summer, or he got two chickens for whatever care that he had provided someone,” Dr. Droge said. “There was a trust there. And that’s the way I thought doctors acted.”
When Dr. Droge entered pediatric practice in the early 1980s, she joined a managed care organization in Dallas run by Cigna HealthCare and was surprised at how different it was from what she had imagined medicine to be. She found the managed care organization was “all about maximizing profit.” She had difficulty getting necessary referrals for patients. She was forced to try several different medications on patients before she would be allowed to administer the one she knew to be best from the outset, because the best medication wasn’t part of Cigna HealthCare’s list of approved drugs. “Physicians really had to work to make sure that our patients got the care that they needed. It was not a given,” she said.
Dr. Droge’s story is hardly unique. On the contrary, from interviews with health care experts and doctors, as well as in Remapping Debate’s own research into the history of managed care, it appears that the defining feature of the managed care era is a profound rhetorical and practical shift — politically and among health care advocates, observers, providers, and insurers — away from a focus on quality of care and towards an obsession with cost control.
How did this happen? Health care experts suggested the existence of two powerful forces working in tandem. First was the birth and development of the market-based, for-profit health insurance industry, built on the back of what was once a progressive model for how to maximize quality of care: the prepaid group practice, which was later adapted into “managed care.” Second was the spread of an ideology that subordinated quality concerns to cost control while asserting that both could be achieved — an ideology that held particular sway among the New Democrats of the 1990s.
Tracing these two forces requires starting at the origins of managed care: the prepaid group practices that appeared on the West Coast of the United States as early as 1929.
Origins of managed care
The prepaid group practice originated as an attempt to meet comprehensively the health care needs of specific defined communities. The first such practice, the Ross-Loos Medical Group, was created in 1929 by two doctors to care for employees of the Los Angeles Department of Water and Power. Kaiser Permanente, the most famous of the early prepaid group practices and the one most responsible for bringing the model to national attention, was founded by Henry Kaiser during World War II as a medical program for employees of his shipyards and steel mills. Kaiser opened the plan to the public after the war.
Members of these practices would pay an upfront monthly subscription fee, and in return would have all of their health care needs met. The practices were generally physician-led and multispecialty, with the intent of fostering collaboration among doctors and providing all health services under one roof — a plausible prospect for a relatively small practice in an era before the growth of advanced medical technology and countless specialties and sub-specialties. Physicians in such practices were often paid on salary rather than for services rendered.
According to a paper published by the Tufts Managed Care Institute in 1998, the premiums for prepaid group practices “were as expensive or more expensive than other insurance, but their coverage and benefits were superior, including a major emphasis on preventive care, outpatient care, well-child care services, immunizations, and other services not covered by [others].”
Dr. David Himmelstein, a professor of public health at the City University of New York School of Public Health at Hunter College, a visiting professor at Harvard Medical School, and a co-founder of Physicians for a National Health Program (PNHP), sees these early plans as motivated by the desire to find a new model for providing better care: “The prepaid-group-practice era was characterized by a great deal of altruism and [the] conviction[s] that organized prepaid group practice was a better way to care for people and that you could do more for them.”
Dr. Ida Hellander, the director of policy and programs at PNHP, agrees. Cost control “was not the primary motivation,” she said. “The primary motivation was to find a better way of practicing medicine.”
Dr. Georges Benjamin, executive director of the American Public Health Association, added, “It was very much about care over cost.” And Dr. Marc Bard, co-director and physician leader at the Tufts Health Care Institute, said prepaid group practices were “deeply committed to an egalitarian model…The whole idea was that the care provided should be based on the care needed, not on anything else.”
Dr. Jim Scott, president-elect and vice president of internal affairs at the National Physicians Alliance, a multi-specialty medical trade association, noted the practices were seen as radically progressive, but they proved a remarkable success. “They were vilified as socialist or communist organizations, but in fact they delivered demonstrably superior care at a higher value. In other words, good care at a reasonable cost.”
Despite their reputation as radical outfits and their consequent demonization by the American Medical Association and others, the success of the prepaid group practices ultimately caught the eye of some who felt that, with a little tweaking, they could become the key to a revolution in American medicine. Chief among them was Paul Ellwood, a pediatric neurologist who was discontented with the American medical system.
Managed care as public policy: the theoretical origins
In 1971, Ellwood published an article titled Health Maintenance Strategy in the journal Medical Care. The article coined the phrase “Health Maintenance Organization,” or HMO, to describe the types of organizations pioneered by Henry Kaiser and his contemporaries. It proposed a national strategy of incentivizing the creation and growth of HMOs with federal funds and eliminating any legal barriers to their proliferation.
Ellwood positioned his strategy as a response to the lack of regulation in the American health care system. “Since payment is based upon the number of physician contacts and hospital days used,” he wrote in the article, “the greater the number of contacts and days, the greater the reward to the provider. The consumer, unable to judge his own treatment needs, pays for whatever he is told he needs.” To Ellwood, this lack of regulation meant health care provision “works against the consumer’s interest” and that though care is generally good, “no matter how hard each provider works, services are not available to everyone who needs them.”
Ellwood believed effective government regulation of the health care system was not an option: “Regulation of such scope and complexity would be difficult even in industries which produce easily identifiable goods. It is virtually impossible to do so in a service industry in which professional judgment is required on the level of individual nurses or doctors dealing with individual patients.” The only choice, as he saw it, was to force the industry to self-regulate, and the only way to achieve that was to create a system of competitive market mechanisms in which HMOs, which he felt were “capable of producing services more economically and effectively than conventional providers by integrating and coordinating the many elements of health care,” would compete with one another over cost and quality.
David Himmelstein said the HMO strategy was from the outset intended to create a for-profit health insurance industry dominated by large conglomerates. “The strategy can only be participated in by an organization that includes a large number of primary care doctors, a large number of specialists, and a hospital offering a full range of services,” he said. He estimated that such an organization requires a population base of at least 3,000 to 4,000 people. “Half of the country lives in regions without the population density to support more than one such organization. So what [Ellwood] was really saying was, we’re going to have health care delivered by very large-scale organizations and managed like a business.”
Indeed, Ellwood hoped his strategy would create a free market health care economy which “could stimulate a course of change in the health industry that would have some of the classical aspects of the Industrial Revolution — conversion to larger units of production, technological innovation, division of labor, substitution of capital for labor, vigorous competition, and profitability as the mandatory condition of survival.”
Himmelstein believes the Ellwood article was a major turning point in transforming the American health care field from a not-for-profit system into a for-profit industry. Ellwood, he said, was the first person to make the argument that the provision of health insurance, and hence the provision of health care could have the characteristics of industrial production. “Before that there were really professional incentives — ‘we can do better, organizing ourselves in a better way.’” Ellwood’s argument laid the theoretical groundwork for corporate interests to begin a relentless scramble for profit, but it took an act of public policy to fully open the door.
Managed care as public policy: the political origins
According to Theodore Marmor, a professor emeritus of both political science and public policy and management at the Yale School of Management and the co-author of Politics, Health, and Health Care, Ellwood’s ideas caught the eye of a group of what Marmor called “liberal Republicans from California” in the Nixon Administration. They included Robert Finch, the secretary of Health, Education and Welfare (HEW) and later a private counselor to the president, and Lewis Butler, an assistant secretary at HEW. They encouraged President Nixon to use Ellwood’s ideas as the model for a reform proposal, and on February 18, 1971, Nixon announced a new national health strategy centered on HMOs.
Nixon’s motives for embracing Ellwood’s strategy are not entirely clear. Marmor believes he was looking for “a model of cost containment” in response to the increased rate of health care inflation, which at that point was just beginning to outpace the overall rate of inflation. Himmelstein suspects it was in part a defensive measure designed to neutralize the threat to business interests posed by Senator Ted Kennedy’s single-payer national health insurance bill. (See box titled, “Democrats fight for single payer.”)
“They had to respond with something,” Himmelstein said, “and there was a rising tide of calls for something that would negatively affect the corporate interest in health care,” by which Himmelstein meant a national health program. As evidence, Himmelstein pointed to President Nixon’s announcement of his adoption of the HMO strategy. In that statement, Nixon said, “The purpose of this program is simply this: I want America to have the finest health care in the world — and I want every American to be able to have that care when he needs it.” This adoption of the language of universal coverage, Himmelstein said, was “a direct response to Kennedy. And that’s pretty clearly what was the motivation for Nixon, at that moment, to jump in with that initiative.”
Nixon’s true motives, however, might best be revealed by his infamous White House tapes. A recording from February 17, 1971 captured a conversation between President Nixon and John Ehrlichman, the president’s chief domestic advisor. On the tape, which has been transcribed by the Presidential Recordings Program at the University of Virginia, Ehrlichman brought up the idea of incentivizing the creation of HMOs as a model for reform. Nixon was initially hesitant (“You know I’m not too keen on any of these damn medical programs”), but Ehrlichman argued, “This is a private enterprise one…Edgar Kaiser is running his Permanente deal for profit, and the reason that he can do it… All the incentives are toward less medical care, because the less care they give them, the more money they make.” Nixon’s response: “Well, that appeals to me…Not bad.” He announced his HMO plan the next day.
Democrats fight for single payer
The traditional Democratic stance on health care reform was to create a national single-payer health system. The closest that effort came to success, and the measure that some believe Nixon attempted to neutralize by adopting Ellwood’s HMO strategy, was the Kennedy-Griffiths Health Security Act, proposed in 1970 by Senator Ted Kennedy and Congresswoman Martha Griffiths, both Democrats. The act would have insured all Americans under a federal single-payer health plan, to be financed through payroll taxes.
Kennedy described the goal of the program as follows: “The program calls on the federal government to make sure that every American can pay for health care, that every American has good health care offered to him in ways suited to his needs, and that enough providers, facilities, and equipment are available to do the job.”
Congressman John Sieberling, a freshman member of the House of Representatives at the time and another Democrat, co-sponsored the bill. He later described its failure: “The bill had a formidable set of opponents, including not only the insurance industry, but also the health care provider ‘industry’ — doctors, hospitals, pharmaceutical manufacturers, and their respective trade associations. Some labor organizations and a few employers favored it, but the voting public was largely apathetic. Faced with powerful opposition and lacking any strong public pressure or presidential leadership, Congress, as might be expected, took no action.”
After the bill’s defeat, Senator Kennedy largely gave up on a complete overhaul of the U.S. health care system. Instead, he attempted to find ways to modify the existing system in order to provide higher quality health care to more Americans. His first effort was to try to incorporate patient-protective provisions into the HMO Act of 1973.
Over the next two years, congress developed a bill based on Ellwood’s model of reform. The final legislation, the HMO Act of 1973, was a compromise between the bill that emerged from the House of Representatives, which was sponsored by Congressman Paul Rogers and aligned fairly closely with President Nixon’s proposal, and the Senate version of the bill, sponsored by Senator Ted Kennedy. Both men were Democrats.
The Health Maintenance Organization Act of 1973.
The HMO Act of 1973 appropriated $375 million (more than $1.9 billion in today’s dollars) in grants and contracts to federally qualified HMOs for a five-year period, established guidelines for what constituted a federally qualified HMO, superseded “restrictive” state laws that “impede[d] the development of HMOs,” required employers of 25 or more workers who received health insurance benefits to give their employees an HMO option if there was an HMO in the area (the “dual choice” requirement), and empowered the secretary of HEW to regulate HMOs receiving financial assistance under the act. In other words, it offered federal money (and the prospect of new enrollees) to HMOs that were willing to abide by a relatively strict set of rules (HMOs not getting federal funding could ignore the rules).
In addition, the bill included provisions added by Senator Kennedy that were intended to ensure that HMOs would be a vehicle for maximizing the quality of health care and providing it to those who were currently uninsured.
These provisions included an open-enrollment rule that required federally qualified HMOs to accept any person who applied, regardless of medical history, and a community-rating rule that required HMOs to charge all subscribers the same premium, regardless of their history of using services.
Dr. Philip Caper, a member of Senator Kennedy’s staff, told The New York Times in 1975 that the motivation behind Kennedy’s additions was to “get away from the antisocial practices in health insurance…The private sector has not assumed their social responsibility. They are in it to make money. The government should get involved to do what private industry has not done.” That is, provide the highest possible quality care at an affordable price.
According to Theodore Marmor, “The HMO Act of 1973 set in motion the developments that emerged in the ’90s” — referring to the for-profit, conglomerate model that came to dominate U.S. health care in that period.