Managed cost, mismanaged care

Managed care begins to catch on

Due in part to the efforts of the federal government, HMO enrollment steadily climbed throughout this period, though HMO enrollees remained overall a small portion of the American population. In 1970, 3 million Americans were enrolled in HMOs; that number climbed to 10 million in 1980 and to 32 million in 1990. The business model of HMOs was changing, too.  According to data from the Kaiser Family Foundation, 88 percent of HMOs were not-for-profits in 1981. By 1993, only 48 percent of HMOs were not-for-profits.

The overall health insurance industry, however, was still dominated by traditional fee-for-service insurers. In 1988, the earliest year that such data is available, 73 percent of American workers with health insurance had a traditional fee-for-service plan, with the remaining 27 percent in some form of managed care.

Those figures were soon to reverse at an astonishing speed — a process that was driven by the proliferation of other forms of managed care, most notably Preferred Provider Organizations (PPOs) and Point of Service (POS) plans.

These were variations on the basic principles of HMOs: capitation (in which physicians are paid a set amount for each patient per period of time, regardless of the services rendered), gatekeeper physicians (a primary care physician assigned to a patient who must approve all referrals to specialists for those services to be covered by insurance), and networked doctors (doctors who contract with the same insurance plan; depending on the type of managed care plan, doctors outside that network might be more expensive for patients, or might not be covered by insurance at all).  They offered some greater flexibility than the “pure” HMOs that had sprouted in the 1970s and 1980s, but retained the underlying principle: to control cost and make a profit.

The managed care explosion of the 1990s

By 1993, managed care had become the primary form of health coverage in America. 46 percent of workers had a fee-for-service plan, with 54 percent in managed care. In 1996, only 27 percent were left in fee-for-service; in 1999, only 10 percent.

What caused the enrollment explosion? According to Dr. Himmelstein, one major factor in this was the concern among corporations that health care costs were growing too quickly. “There was a perception and a reality that costs were an issue,” he said. “They were an issue for the first time for corporate purchasers of care. It wasn’t just out-of-pocket costs that were going up, but you had the auto industry for instance beginning to say, ‘We can’t afford these [rising health insurance costs].’ In the ’90s that was certainly a major push.”

Dr. Jim Scott agreed: “If you’re an employer, it wasn’t such a big deal when it was a fairly small increase [as it was throughout the 1970s], but then it compounded over the years. That’s why by the late ’80s and early ’90s, [employers] were going ‘Whoa, we can’t afford this continued rate of inflation.’” (See box titled, “The root of rising health care costs.”)

While noting the reality of rising health care costs, Himmelstein said the important question is “how you respond to those cost pressures.” Many employers saw managed care as the solution, and were undoubtedly helped to this belief by the efforts of the federal government over the previous two decades.

Himmelstein contends that corporate interests — and their allies in government — were not merely responding to cost pressure, but exploited the trend toward cost concerns as an opportunity for an “offensive measure.” They used the rising cost pressures of health care as a “crowbar,” he said, in order to advance their own agenda: the transformation of health insurance into a for-profit industry, with the spread of managed care plans as the primary instrument. In the 1990s, they found a partner in the New Democrats.

Coming next week: the New Democrats, proselytizing in favor of market solutions, subordinate concerns about quality of care to an all-consuming desire to control costs and ignore what some say was a patently obvious conflict between the interests of for-profit insurers and those of the patients that the insurers were being relied on to serve. 

This article has been edited (March 5, 2013) to make clear that Paul Ellwood was working with the Nixon administration to formulate an HMO-based strategy for health care reform even prior to his 1971 “Health Maintenance Strategy” article.