Managed cost, mismanaged care
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 300,000 to 400,000 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.