Health Maintenance Organizations

HEALTH MAINTENANCE ORGANIZATIONS

HEALTH MAINTENANCE ORGANIZATIONS (HMOs), combining both provision of service and insurance functions in the health industry, have organizational antecedents in the late nineteenth century with doctors who provided medical care to members of fraternal organizations in return for a fixed periodic fee per member. By the early 1920s, Washington and Oregon hosted dozens of clinics that offered prepaid medical care, often to employees of specific firms through the employers. These built on models developed in the region's lumber mills. In the Midwest, a few doctors financed hospitals in the 1920s by selling shares in return for guaranteed access to the facilities.

In the early 1930s, the successful industrialist Henry Kaiser responded positively to the physician Sidney Gar-field's suggestion that the doctor treat Kaiser's construction firm employees in return for a modest fee per employee. This practice spread to other Kaiser facilities. The construction boom of World War II expanded Kaiser's firms and also his demand for labor; his health plan took on the general outline of a modern health maintenance organization with its own medical and hospital sites and paid physicians providing group practice care to the insured employees. At the end of the war, the plan opened membership to the general public. This Kaiser Foundation Health Plan owned medical facilities, clinics, and hospitals, and employed doctors to provide medical care in return for a fixed fee. In contrast with a health maintenance organization, formal health insurance allows the insured to select the provider and then pays the provider a fee for service. Blue Cross, established at Baylor University in 1933, was among the first to offer health insurance. Blue Cross provided insurance for physicians' services; Blue Shield, to cover hospital costs, began a few years later.

Although the precursors of the modern HMO existed well before World War II, the number of persons covered by the organizations was relatively small. This reflected the relatively low demand, and cost, of medical care. Physicians primarily diagnosed and provided palliative care; patients either recovered or they didn't. After the war, successes in developing anesthesia and antibiotics began to revolutionize medical care for ordinary citizens. Surgery became more tolerable and more successful. The intense competition for labor during the war led firms, kept by wage and price controls from raising wages, to offer health insurance to attract and keep workers. The government deemed this fringe benefit nontaxable. As this form of compensation spread during the war and continued afterward, it provided the financial wherewithal to expand demand for the amazing services that new medical technology could provide.

In explaining why competitive markets likely would fail to provide an efficient level of medical services, economists in the mid-1960s pointed to these demand-increasing features combined with the information asymmetry between sellers (physicians) and buyers (patients). Under this argument, relatively ill-informed patients depend upon well-informed doctors as their agents to provide appropriate care. Because patients increasingly carried health insurance, often through their employers, they did not have incentives to question the physicians' advice. Doctors hence could create demand for their own services. Third-party payments led to moral hazard, with neither seller nor buyer motivated to monitor costs. Adverse selection, as those consumers most likely to need insurance opted for more generous programs, joined moral hazard as factors inflating demand. Rapid changes in medical technology focused on doing more, not on containing costs. The expansion in 1965 of federal government programs to provide access to medical care for the poor (Medicaid) and the elderly (Medicare) further expanded demand.

The term "health maintenance organization" originated in the 1970s and is credited to Paul Ellwood, a policy adviser to the federal government on medical care. The term became institutionalized with the HMO Act of 1973, as the federal government struggled to control rapidly expanding medical costs. Other political and economic problems in the 1970s superseded concern for medical care costs, but by 1980, these costs accounted for 8.8 percent of gross domestic product (GDP) and were rising rapidly. In response, both private firms that paid for employees' health insurance premiums and governments that were financing care for the poor and the elderly sought mechanisms to control costs. Managed care organizations looked attractive. Managed care attempts to manage the cost and quality of medical care directly, in contrast to the passive role played by insurers under a fee-for-service arrangement. Managed care runs a full gamut of options, from managed indemnity to preferred provider organization (PPO) to point-of-service (POS) arrangements to a full health maintenance organization. Thus, the HMO is a subset of managed care.

Increasingly, however, medical plans offer a continuum of plans including an HMO, PPO, and POS. HMOs and closely related organizations do share the characteristic of providing medical care for a prepaid periodic fee. Care comes from either medical employees of the HMO or from medical practitioners with whom the HMO contracts. In some cases, the medical practitioners own the organization. Typically, customers access the medical community through an oversight doctor, the primary care physician (PCP). The PCP guides the patient via referrals if necessary to specialists in the organization or on a list approved by the organization.

As medical costs in 1993 hit 13.4 percent of GDP and industry analysts predicted a rise to 20 percent of GDP within a decade, interest in health maintenance organizations continued to grow. The loosely affiliated state and regional Blue Cross–Blue Shield organizations had been shifting since 1960 from fee-for-service insurance organizations to health maintenance organizations. HMO membership increased from roughly three million in the late 1940s to about six million in the mid-1970s. By the early 1990s, the plans enrolled about thirty-seven million people. In 2000, HMO membership was slightly greater than eighty million, down a little from 1999's almost eighty-one million. The slight decline represents an exodus of HMOs from the Medicare market in response to limits on federal government payments. Medical expenditures as a percentage of GDP dropped slightly between 1993 and 1998. Despite hopes for stabilization, costs began to rise in 2000, accounting for 13.2 percent of GDP. As the U.S. population ages, pressure mounts for more extensive insurance coverage of prescription drugs, and other payment and provision models remain even more unpopular, continued evolution of health maintenance organizations seems likely.

BIBLIOGRAPHY

Arrow, Kenneth. "Uncertainty and the Welfare Economics of Medical Care." American Economic Review 53 (1963): 941–973.

Birenbaum, Arnold. Managed Care: Made in America. Westport, Conn.: Praeger, 1997.

Cutler, David. "A Guide to Health Care Reform." Journal of Economic Perspectives 8 (1994): 13–29.

Dranove, David. The Economic Evolution of American Health Care: From Marcus Welby to Managed Care. Princeton, N.J.: Princeton University Press, 2000.

Miller, Irwin. American Health Care Blues: Blue Cross, HMOs, and Pragmatic Reform since 1960. New Brunswick, N.J.: Transaction, 1996.

Robbins, Dennis A. Managed Care on Trial: Recapturing Trust, Integrity, and Accountability in Healthcare. New York: McGraw-Hill, 1998.

Wong, Kenman L. Medicine and the Marketplace: The Moral Dimensions of Managed Care. Notre Dame, Ind.: University of Notre Dame Press, 1998.

Ann Harper Fender

See also Health Care ; Health Insurance ; Medicare and Medicaid .