Managed cost, mismanaged care

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federally qualified HMOs for a five-year period, established guidelines for what constituted a federally qualified HMO, superseded “restrictive” state laws that “impede[d] the development of HMOs,” required employers of 25 or more workers who received health insurance benefits to give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.

Loosened restrictions

In attempting to balance the ideology of cost-control and market competition (promoted by President Nixon and other Republicans), with that of maximizing health care quality and access (promoted by Sen. Kennedy and his allies), the final bill that emerged was unable to fully realize either set of goals. Both parties were unsatisfied, but the GOP’s initial view came to have more and more sway.  Over the next two decades, a series of amendments loosened the restrictions of the bill, effectively gutting the Kennedy provisions. These amendments were signed into law by President Ford in 1976 and by President Reagan in 1988. (They stripped, among other things, the requirement that federally qualified HMOs cover “supplemental benefits,” including long-term care facilities, vision, dental, drugs, and rehabilitative services.) In addition, President Carter signed a bill in 1978 extending grant funding for HMOs, as the original five-year allotment was set to expire.

The burgeoning for-profit health insurance industry was, unsurprisingly, the loudest voice in favor of amending the HMO Act. A large group of health insurers created a lobbying outfit called the Consensus Group, which argued the law was too stringent to allow federally qualified HMOs to compete with those who chose to simply bypass the federal seal of approval (and the grants that went with it). To them, the HMO Act “require[d] HMOs to be better, more humane and more generous than the entire health and delivery system of which they are a part” (criticizing, in other words, the precise point of Senator Kennedy’s additions to the bill).

Over the course of the 1970s and 1980s, the federal government continued to actively promote HMOs as a cost-saving mechanism. The most notable example of this effort came from the Carter Administration. Secretary Joseph A. Califano Jr., President Carter’s secretary of HEW, held a marketing blitz to encourage the private sector to invest in HMOs. He held a conference on May 10, 1978, in which HEW staff, health insurance insiders, and pro-HMO business leaders addressed representatives of more than 600 corporations on why they should move toward HMOs as the primary mode of providing health care to their employees. An article in The Washington Post described Califano’s goal as being “to help reduce health care costs by supporting potentially money-saving health maintenance organizations.” According to the article, Paul Parker, the executive vice president of General Mills at the time, told the conference how the HMO his company sponsored “reduced health care costs by drastically cutting hospitalization.”