The Origins of Managed Health Care - Jones & …

1 7/9/08 10:28 AM Page 1. Jones and Bartlett Publishers, LLC. NOT FOR SALE OR DISTRIBUTION. C HAPTER. 1. The Origins of Managed Health care LEARNING OBJECTIVES. Understand how Managed care came into being Understand the forces that have shaped Managed care in the past Understand the major obstacles to Managed care historically Understand the major forces shaping Managed care today M A N A G E D C A R E : T H E E A R LY Y E A R S. (PRE 1970). Sometimes cited as the first example of a Health maintenance organization (HMO), the Western Clinic in Tacoma, Washington, began in 1910 to offer, ex- clusively through its own providers, a broad range of medical services in return for a premium payment of $ per member per month. The program was avail- able to lumber mill owners and their employees, and it served to ensure a flow of patients and revenues for the clinic. A similar program that was later developed in Tacoma expanded to 20 sites in Oregon and Washington.

2 1. 7/9/08 10:28 AM Page 2. Jones and Bartlett Publishers, LLC. NOT FOR SALE OR DISTRIBUTION. 2 C HAPTER 1 T HE O RIGINS OF M ANAGED H EALTH C ARE. In 1929, Dr. Michael Shadid established a rural farmers' cooperative Health plan in Elk City, Oklahoma. Participating farmers purchased shares for $50 each to raise capital for a new hospital; in return, they received medical care at a dis- count. Because of the medical community's opposition to this new concept, Sha- did lost his membership in the county medical society and was threatened with suspension of his license to practice medicine. Some 20 years later, however, he was vindicated through an out-of-court settlement in his favor of an antitrust suit against the county and state medical societies. In 1934, the Farmers Union as- sumed control of both the hospital and the Health plan. As Starr noted,1 Health insurance itself is of relatively recent origin . In 1929, Baylor Hospital in Texas agreed to provide some 1,500 teachers with prepaid care at its hospital, an arrangement that represented the Origins of Blue Cross.

3 The pro- gram was subsequently expanded to include other employers and hospitals, ini- tially through single hospital plans. Starting in 1939, a number of state medical societies, such as that in California, created Blue Shield plans to cover physician services. At the time, commercial Health insurance was not a factor. The formation of the various Blue Cross and Blue Shield plans, as well as the beginning of many HMOs, in the midst of the Great Depression came about not because consumers were demanding insurance against the risk of medical ex- penses or because nonphysician entrepreneurs were seeking to establish a business, but rather because providers wanted to maintain and enhance patient revenues. Many of these developments were threatening to organized medicine. In 1932, the American Medical Association (AMA) adopted a strong position against pre- paid group practices, favoring instead indemnity-type insurance that protects the policyholder from expenses by reimbursement.

4 The AMA took this stance in re- sponse to the prepaid group practices in existence at the time (although few in number) and to the findings in 1932 of the Committee on the Cost of Medical care a highly visible private group of leaders from medicine, dentistry, public Health , consumers, and so forth that recommended the expansion of group practice as an efficient Health care delivery system. The AMA's opposition set the tone for continued state and local medical society resistance to prepaid group practice at the state and local medical society levels. The period immediately surrounding World War II saw the formation of sev- eral HMOs, some of which remain prominent today. They represent a diversity of Origins , as the initial impetus came variously from employers seeking benefits for their employees, providers seeking patient revenues, consumers seeking ac- cess to improved and affordable Health care , and even a housing lending agency 7/9/08 10:28 AM Page 3.

5 Jones and Bartlett Publishers, LLC. NOT FOR SALE OR DISTRIBUTION. M A N A G E D C A R E : T H E E A R LY Y E A R S ( P R E - 1 9 7 0 ) 3. seeking a reduction in the number of foreclosures. The following are examples of early HMOs: The Kaiser Foundation Health Plans were started in 1937 by Dr. Sidney Garfield at the request of the Kaiser construction company. The purpose was to finance medical care for workers who were building an aqueduct in the southern California desert to transport water from the Colorado River to Los Angeles and, subsequently, for workers who were constructing the Grand Coulee Dam in Washington State. A similar program was established in 1942 at Kaiser shipbuilding plants in the San Francisco Bay area. In 1937, the Home Owner's Loan Corporation organized the Group Health Association (GHA) in Washington, , to reduce the number of mortgage defaults by families who had large medical expenses. It was a non- profit consumer cooperative, with the board of directors elected periodically by the enrollees.

6 The District of Columbia Medical Society opposed the for- mation of GHA, seeking to restrict hospital admitting privileges for GHA. physicians and threatening to expel those physicians from the medical so- ciety. A bitter antitrust battle ensued that culminated in the Supreme Court's ruling in favor of GHA. In 1994, GHA was facing insolvency de- spite an enrollment of some 128,000 members. Humana Health Plans, a for-profit publicly traded corporation, acquired GHA but has since dis- banded it. The membership now belongs to the Kaiser Foundation Health Plan of the Mid-Atlantic. In 1944, in response to the needs of New York City seeking coverage for its em- ployees, the Health Insurance Plan (HIP) of Greater New York was formed. In 1947, consumers in Seattle organized 400 families, who contributed $100 each, to form the Group Health Cooperative of Puget Sound. Pre- dictably, the Kings County Medical Society opposed the cooperative. These pioneer prepaid group practices encountered varying degrees of opposition from local medical societies.

7 The early independent practice association (IPA) model HMOs, which con- tract with physicians in independent fee-for-service practice, were developed as a way of competing with group-practice-based HMOs. The basic structure was created in 1954, when the San Joaquin County Medical Society in California formed the San Joaquin Medical Foundation in response to competition from the Kaiser Foundation Health Plans. The San Joaquin Medical Foundation estab- lished a relative value fee schedule for paying physicians, heard grievances against 7/9/08 10:28 AM Page 4. Jones and Bartlett Publishers, LLC. NOT FOR SALE OR DISTRIBUTION. 4 C HAPTER 1 T HE O RIGINS OF M ANAGED H EALTH C ARE. physicians, and monitored the quality of Health care . It received a license from the state to accept a set monthly fee ( , capitation payment) to provide for each per- son enrolled in the plan all the Health care services that he or she needed, making it the first IPA model HMO.

8 Only in later years did nonprovider entrepreneurs form for-profit HMOs in significant numbers. THE ADOLESCENT YEARS OF Managed . care : 1970 1985. Through the 1960s and into the early 1970s, HMOs played only a modest role in the financing and delivery of Health care . Although they were a significant pres- ence in a few communities, such as the Seattle area and parts of California, the total number of HMOs nationwide in 1970 fell somewhere in the 30s, the exact number depending on the definition. From then until the early to mid-1990s, HMOs expanded at an ever-increasing rate. However, beginning in the early to mid-1990s, HMOs consolidated through mergers and acquisitions, resulting in a decline in the number of such plans beginning in the late 1990s, as discussed later in this chapter. The major boost to the HMO movement during this period was the enact- ment in 1973 of the federal Health Maintenance Organization Act. That act au- thorized start-up funding and, more important, ensured access to the employer-based Health insurance market.

9 The act evolved from discussions that Dr. Paul Ellwood had in 1970 with the officials of the Department of Health , Education and Welfare (which later became the Department of Health and Human Services). Ellwood had participated in designing the Health Planning Act of 1966 during the presidency of Lyndon Johnson. Ellwood, sometimes referred to as the father of the modern HMO movement, was asked in the early years of the Nixon administration to devise ways of con- straining the increases in the Medicare budget. His conversations with federal of- ficials led to a proposal to reimburse HMOs for Medicare beneficiaries' Health care through a capitation system (a proposal that was not enacted until 1982) and laid the groundwork for what became the HMO Act of 1973. The emphasis on HMOs at this time reflected the perspective that the fee-for-service system, by re- warding physicians for providing more services rather than for providing appro- priate services, incorporated the wrong incentives.

10 Also, the term Health maintenance organization was coined then as a substitute for prepaid group practice, principally because it had greater public appeal. 7/9/08 10:28 AM Page 5. Jones and Bartlett Publishers, LLC. NOT FOR SALE OR DISTRIBUTION. THE ADOLESCENT YEARS OF Managed care : 1970 1985 5. The main features of the HMO Act were these: It made grants and loans available for the planning and start-up phases of new HMOs as well as for service area expansions for existing HMOs. It overrode state laws that restricted the development of HMOs if the HMOs met federal requirements for certification. Most important of all, it required employers with 25 or more employees that offered indemnity coverage also to offer up to two different types of feder- ally qualified HMO options if the plans made a formal request. For workers under collective bargaining agreements, the union had to agree to the offer- ing. Many HMOs were reluctant to exercise the mandate, fearing that mak- ing such a request would antagonize employers and cause them to discourage employees from enrolling.