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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 HarperFender

See alsoHealth Care ; Health Insurance ; Medicare and Medicaid .

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Health Maintenance Organizations (HMOS)

HEALTH MAINTENANCE ORGANIZATIONS (HMOS)


Health Maintenance Organizations (HMOs) in the United States have their roots in the first decades of the twentieth century. In the early 1900s millions of Americans belonged to fraternal orders and mutual benefit societies which provided prepaid medical care to their members. Many large companies, particularly those where injuries were commonplace such as railroads, created medical departments to care for their workers.

One of the first true HMOs was established by an agreement between the employees of the Los Angeles Department of Water and Power and practice of two doctors, Donald Ross and H. Clifford Loos. This agreement exhibited the basic traits that came to distinguish HMOs. The employees paid the doctors set fees, regardless of the state of their health. In return for these payments, the doctors provided whatever medical care was necessary for the employees or their families. This was as compared to traditional fee-for-service health care, in which a patient pays no money to a doctor unless he goes in to visit, but then has to pay that doctor for the cost of their particular treatment. In essence, the employees who joined the Ross-Loos plan were agreeing to pay smaller fees for health care that they might never need, rather than risk needing to pay a large fee, a fee which conventional health insurance might not cover entirely, if they became seriously ill. In return, Ross and Loos received a solid base of patients and a steady income.

In 1938, Henry J. Kaiser (18821967) established an HMO for workers at his shipyard. This plan, originally known simply as Dr. Garfield and Associates, was opened to the general public after World War II (19391945). Renamed Kaiser Permanente in 1955, it became the first large, national HMO. At this time, there was a widespread feeling among both doctors and the general public that arrangements such as Ross-Loos and Kaiser Permanente led to inferior care, and fee-for-service care and traditional health insurance continued to dominate the U.S. health care system.

All of this began to change in the 1970s. By this time, the cost of health care had risen to the point that it was becoming difficult for some to afford. It was also placing a strain on the federal government's new Medicaire and Medicaid programs. Many began touting systems such as Ross-Loos and Kaiser Permanente as a way to control medical costs and ensure that Americans received adequate care. It was at this time that the term HMO came into use to describe such managed care systems. In 1973 Congress passed the Health Maintenance Organization Act, which removed many legal barriers to the development of HMOs, leading to the formation of more than 200 HMOs by the end of the decade.

HMOs remained a minor part of the U.S. health care system at the beginning of the 1980s. Only four percent of the U.S. population belonged to an HMO, approximately half of which were in Kaiser Permanente. As the cost of health care in the United States, already the highest in the world, continued to rise during the decade, Americans began joining HMOs in large numbers. By 1995 three-quarters of all doctors were providing service as part of a managed care plan, and nearly three-quarters of all working Americans were members of such a plan.

As HMOs rose to dominate the U.S. health care system, attention turned from their supposed benefits to their perceived flaws. HMOs gave patients little choice over which doctors they could see, a fact that made many uncomfortable. New types of managed care, known as Preferred Provider Organizations (PPOs) and Point of Service (POS) plans became increasingly popular as systems which provided many of the cost-reducing benefits of HMOs while leaving members with some options as to what doctors to see.

Yet other problems, however, remained. HMOs and other forms of managed care generally had guidelines and standards of treatment that they expected participating physicians to follow. Some patients feared, and some doctors complained, that these guidelines were more concerned with keeping HMO costs low than with ensuring patients received the best possible treatment. And while HMOs were undoubtedly less expensive for many Americans than more traditional types of insurance, they remained too expensive for most to join except as part of a plan sponsored by their employer. Smaller businesses, their employees, and the self-employed remained largely unable to join HMOs.

See also: Henry J, Kaiser, Medicare, Medicaid

FURTHER READING

"Health Maintenance Organization," [cited March 30, 1999] available from the World Wide Web @ www.encyclopedia.com/.

"Health Maintenance Organization," [cited March 30, 1999] available from the World Wide Web @ www.eb.com:180/bol/topic?eu=40537&sctn=1#s_top/.

"The HMO Page," available from the World Wide Web @ www.hmopage.org/

Jones, Rhys W. The Ultimate Hmo Handbook: How to Make the Most of the Revolution in Managed Care. T.T.M. Publishers, 1994.

"Managed Care Guide," [cited July 15, 1999] available from the World Wide Web @ www.helix.com/pathway/mangcare.htm/.

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health maintenance organization

health maintenance organization (HMO), type of prepaid medical service in which members pay a monthly or yearly fee for all health care, including hospitalization. The term "health maintenance organization" was coined by a health policy analyst, Dr. Paul Ellwood, in the early 1970s. Most HMOs involve physicians engaged in group practice. Because costs to patients are fixed in advance, preventive medicine is stressed, to avoid costly hospitalization. One criticism of HMOs is that patients can use only doctors and specialists who are associated with the organization. Many people who have had a long-standing relationship with a family doctor or specialist have balked at what they see as a limitation of choice. "Open-ended" HMOs offer members the option of seeing a doctor who is not part of the HMO, but the patient must pay additional costs. Proponents of HMOs say that they make health care available to more people and that their emphasis on prevention results in earlier diagnosis and increased health-care savings. Numerous complaints (and lawsuits) have arisen, however, over HMOs' refusals to approve various treatments, and over the concern that the organizations skimp on care in order to realize profits. By 1996 most states had enacted laws restricting HMO rules that were seen as detrimental to patients' health. In 1997 there were 66.8 million Americans enrolled in HMOs. See also health insurance; managed health care.

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Health Maintenance Organization (HMO)

HEALTH MAINTENANCE ORGANIZATION (HMO)

The term "health maintenance organization" (HMO) was coined in the early 1970s to encompass various payment and organizational arrangements for health care. In an HMO, the organization is responsible for assuring that needed medical care is delivered to an enrolled population. This is unlike the typical insurer's responsibility to just pay for care. HMOs typically do not rely extensively on financial disincentives to patients (deductibles or co-payments) to control demand; and they often have providers such as physicians and hospitals share in their financial risk. Some HMOs, especially those using a group-practice model, are developing extensive information systems to monitor and improve on clinical practice patterns.

Harold Luft

(see also: Health Maintenance; Managed Care )

Bibliography

Luft, H. S. (1988). Health Maintenance Organizations: Dimensions of Performance. New Brunswick, NJ: Transaction Books.

Miller, R. H., and Luft, H. S. (1997). "Does Managed Care Lead to Better or Worse Quality of Care?" Health Affairs 16(5):725.

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health maintenance organization

health main·te·nance or·ga·ni·za·tion (abbr.: HMO) • n. a health insurance organization to which subscribers pay a predetermined fee in return for a range of medical services from physicians and healthcare workers registered with the organization.

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