Managed cost, mismanaged care

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 1970, the Nixon Administration asked Paul Ellwood to consult on an effort to develop a health care reform proposal. Ellwood had been formulating a model of reform inspired by the success of the early prepaid group practices. He is widely credited as the coiner of the phrase “Health Maintenance Organization,” or HMO, to describe the types of organizations pioneered by Henry Kaiser and his contemporaries.

Though Ellwood had been developing his ideas for years, they were most clearly expressed to the public in a 1971 article titled “Health Maintenance Strategy” in the journal Medical Care. In it, he described his proposal for a national strategy to create incentives for 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.