The HMO Revolution How It Happened, What It Means
Fein, Rashi
SHORTLY BEFORE writing this essay I received a questionnaire from the Democratic Senatorial Campaign Committee. It asked that I choose between the Democratic and Republican positions on...
...This [the expensive hospital room] is not exclusionary...
...how to articulate an effective interventionist and redistributive agenda...
...it is impossible to analyze long- and intermediate-run impacts in the very short run...
...If research is needed, it is research on how to overcome skepticism, DISSENT / Spring 1998 n 29 THE HMO REVOLUTION cynicism, even antipathy, toward government, its programs, and personnel...
...2) how few of our friends belonged to Group Health, incorrectly viewing it as akin to "clinic" medicine...
...Physicians willing to treat particular patients whom they believe they can help often find themselves at odds with other physicians in their group and with its business managers...
...Although no longer able to enroll in traditional indemnity insurance, I am aware that most Americans have far fewer options: 50 percent of employees enrolled in HMOs have no choice (that is, their employer offers only one HMO), and 25 percent can choose from among only two plans...
...THAT DID not turn out to be the case...
...These problems are not limited to the forprofit sector...
...I noted that they had been effective in dealing with govDISSENT / Spring 1998 • 33 THE HMO REVOLUTION ernment and could be even more effective if they welded an alliance with their patients and potential patients (a not entirely welcome suggestion...
...The story un32 n DISSENT / Spring 1998 folded in predictable fashion: health insurance, purchased with tax-free dollars, was a good buy (and the more so the higher one's tax bracket...
...The answer, "You can still go to your physician...
...Consider what has happened...
...Even as I complained, the school's leaders, who believed in the concept of prepaid group practice, were working to establish the first PPG in Massachusetts, the Harvard Community Health Plan (HCHP...
...They derived from views about the nature of a just society and a belief in the possibilities of government intervention to overcome the failures of market capitalism and to deal with problems engendered by the maldistribution of income...
...Physicians who fear that they will be told what to do and for whom to do it, and that business managers and cost-effectiveness "experts" will control clinical practice, have reason to fear...
...Declining union membership and the weakening strength of labor made it possible to do so...
...True, not all Americans benefited: many were unemployed or not in the labor force, many worked for employers who did not provide health insurance, many would lose insurance coverage (especially for "preexisting conditions") if they changed employers and so faced "job-lock...
...Economic opportunities attracted entrepreneurs and Wall Street dollars, resulting in the growth of for-profit medicine...
...New patterns of employer assistance for the purchase of insurance and continuing increases in the cost of the old indemnity plans as healthier, younger subscribers shifted to HMOs, assured the growth of managed-care enrollment...
...I will discuss some of the characteristics of a healthier health system and ask what would be required to create it...
...The answer, as with Watergate and Irangate, is "a lot and very early...
...The last thirty years of my life as an economist have been spent at Harvard Medical School...
...Being prepaid group practice oriented, I cannot help but raise this matter...
...These go beyond the fact that recent premium increases for HMO coverage suggest that we have returned to the familiar pattern of escalating expenditures...
...that is, that employers offer employees a federally approved HMO option if one existed in the area...
...I was also reassured by peer-review relationships...
...Employers argued that the new system was not only socially responsible, but more equitable because all employees would receive the same dollar assistance...
...Luke's-Roosevelt is not unique: Mount Sinai Hospital's Room 106, 11 West, is available to those willing and able to make a "non-exclusionary" payment of $1,000 a day beyond insurance reimbursement...
...I MPORTANTLY, competition also exerts pressures on not-for-profits to behave like forprofit providers who recognize that the way to flourish is to avoid patients who need a lot of care...
...Important incremental reforms were not enacted...
...It was very different in 1961...
...I ask what catalyzed these changes and why they continue in the face of disquietude among key participants: insurance subscribers, patients, physicians, and other providers...
...Voluntary health insurance spread, and an increasing percentage of Americans were insured with contributions from employers...
...A St...
...Almost fifty years ago, Harry Truman, defeated in his efforts to enact national health insurance (NHI), set up the President's Commission on the Health Needs of the Nation in order to leave a legacy of reform proposals for the organization and financing of health care...
...To understand today's American health-care system, one must understand its historical development, the way it grew and the soil it grew in, the social, economic, and political forces at play, the experiences, traditions, and attitudes of the population...
...Today, twenty-five years later, the plan has well over a million subscribers...
...The second factor meant that physicians, busy focusing on government, failed to realize they were about to lose their independence to corporate interests...
...As a consequence, today's HMOs are different constructs than earlier PPGs...
...Even if, later, they become dissatisfied with the clinical controls exerted by the HMO, they dare not leave: leaving means losing one's patient base...
...Health-care systems, after all, are social constructs that reflect the societies in which they are embedded...
...In 1961, when I took leave from the University of North Carolina and moved to Washington to serve on the staff of President Kennedy's Council of Economic Advisers, my family and I joined Group Health Association (GHA), a prepaid group practice (PPG...
...Looking back, three things stand out: (1) how little well-educated individuals who had never encountered a prepaid group practice understood about its characteristics...
...Our current condition will change and the trend line that now prompts pessimism can be altered...
...ToTHE HMO REVOLUTION day, Washington abounds with capitated health plans of all kinds...
...Nevertheless, the Democratic Senatorial Campaign Committee does not consider any of these as critical issues...
...The new definition of equity is based on the proposition that existing income inequalities are irrelevant in determining equitable distribution...
...This should come as no surprise: it is difficult to assess, let alone measure, a revolution in progress...
...So equity is at war with equality...
...I entered the field of health economics almost five decades ago when medical care could do much less for patients and, not unrelatedly, was far less costly...
...This can result in better medicine for more people—especially when HMO physicians and subscribers are self-selected, when DISSENT / Spring 1998 2 35 THE HMO REVOLUTION they join the organization because they believe in it and in its goals...
...how to negate the advantages of dollars mobilized against such candidates and measures—put simply, how to move a nation...
...So America embarked on a radical restructuring of its health-care delivery system...
...today, employers force employees into managed-care constructs...
...Chat prepaid group practice organizations were not found throughout America was brought home to me in 1968 when I moved to Harvard and learned that the only available health plan provided Blue Cross-Blue Shield (BC-BS) indemnity coverage...
...I was reassured by medical ethics and the medical ethos: while fee-for-service physicians might do "too much," presumably no physician would do "too little...
...It should come as no surprise that the objective of for-profit medicine is to make a profit...
...PREPAID GROUP PRACTICE...
...In addition the theory held that employees who paid a greater portion of the insurance cost would be more cost conscious and would reduce their (presumably profligate) utilization of medical care, thus further lowering premiums...
...Because such plans guaranteed the delivery of all "necessary" care in return for a prepaid premium, providers faced predetermined healthcare budgets and assumed financial risks...
...And PPGs also had a monetary incentive to deliver preventive care and keep subscribers healthy rather than treating them only when they became ill...
...My comments were treated with a certain skepticism: government remained the "enemy...
...Their CEOs know that the ability to pay dividends and to raise capital for expansion (as well as the value of their own stock and stock options) depends upon the HMO's economic performance...
...This, we felt, would guarantee higher quality than the alternative: selecting a physician out of the yellow pages or through referrals by friends who were as unable as we were to judge "quality...
...Many of today's problems derive from an ethos in which health-care and policy decisions are driven almost exclusively by competitive cost-cutting and economic considerations—and by the fact that forprofit firms have imposed their behavior patterns on the health-care field...
...Con34 n DISSENT/Spring 1998 sequently, trade-offs between cost and quality, and freedom and restriction, are heavily influenced by the desire to minimize private costs and contain government expenditures...
...My account will be a highly personal one, and so I begin with a brief attempt at full disclosure...
...How did it happen that the mergers of community and teaching hospitals are covered on the business pages rather than in the local news section...
...RASH...
...In 1943, Group Health had been the focus of a unanimous Supreme Court decision that held that the American Medical Association (AMA) had imposed illegal restraints on physicians affiliated with Group Health by depriving them of hospital facilities and essential professional contacts...
...3) how small were the differences in my monthly deductions for the available health plans, given the small premiums and the large employer contributions...
...But not-for-profits also find it difficult to maintain quality while competing with plans that offer lower premiums by cutting corners...
...The number of Americans with inadequate health insurance is growing, the Medicare-reform debate has barely begun, a revolution in the delivery of health care is under way...
...In Part II [forthcoming in Dissent, Summer 1998], I shall briefly raise other troubling health-care issues, but will argue that our health system is still evolving...
...Surely, it would be difficult, if not impossible, to find another social sector directly touching all Americans that has undergone as rapid and remarkable a transformation— and, curiously, a transformation in which the chief protagonists (that is, patients and physicians) are dissatisfied...
...As more and more individuals are pushed into HMOs, more and more physicians discover that is where their patients are...
...Whatever my skepticism about particular administrations, concerns about the arbitrary use of government power, and anger at government's sins of omission and commission, I continue to believe that an activist government, committed to redistribution, is necessary if we are to achieve greater equity, and not only in health-care, for all Americans...
...That decision did not alter AMA attitudes toward prepaid group practice, but it did affect behavior...
...As the number of HMOs grew, employers discovered that just as they negotiated the price of steel, paper, or other "inputs" (including labor), they could negotiate prices for health insurance...
...I reminded them that they knew where Albany, N.Y., and Washington, D.C., were located, when the legislatures were in session, who headed the relevant committees...
...Perhaps price moderation is a one-time savings: there is little one can do as an encore once hospitalization rates and the length of physician visits have been reduced to minimum levels...
...Thus far the record indicates that cost pressures did moderate and that evidence of quality deterioration is anecdotal...
...IN PART I of this essay I discuss the current system of medical care, focusing on the changes in familiar and long-standing delivery patterns and relationships, the growth of Health Maintenance Organizations (HMOs) and managed care, and the problems thus engendered...
...Truman was not the first national leader to support NHI or to sponsor a commission on medical care...
...The concept of corporate control was foreign...
...Furthermore, our attempts to measure are confounded by the sharp differences in the performance of individual HMOs ("when you've seen one HMO, you've seen one HMO"), in state regulatory efforts, and in levels of managed-care enrollment...
...We are forced to rely on theory and on our understanding of the forces at play rather than on evidence...
...Facing opposition from many practicing physicians as well as business community ignorance and apathy, HCHP almost fell into bankruptcy...
...One important reason for concern about the cost-quality trade-off relates to the growth of for-profit HMOs, now accounting for 75 percent of all HMOs and enrolling over 50 percent of all subscribers...
...Those of us who over the years called for more preventive care and for more reliance on clinical evidence and data recognized the deficiencies of the previous "cottage industry" medical practice...
...Nevertheless, there are important reasons for concern...
...Just as ConAgra is not Brooks Farm writ large, Oxford Health Plans is not an amplified version of Michael Shadid's 1929 Farmers' Union Hospital Association medical cooperative in Elk City, Oklahoma...
...The principles of capitation, under which a monthly premium paid for all necessary care, were appealing...
...Politically, the happy circumstance was that in HMOs conservatives saw the future and competitive markets, liberals saw the past and cooperative ventures, and ubiquitous economists saw the present and a more rational, incentivedriven world...
...Yet, to survive did not mean to flourish...
...I believed these factors would protect me from underservicing...
...medical-care expenditures were a much smaller percentage of the Gross Domestic Product...
...It is more than troubling that we are not engaged in a national debate on the organization and financing of health care...
...by individuals whose employer has selected a plan that does not include the physician who has been treating them and in whom they have confidence...
...My choice is from among four HMO plans, each offering two programs that differ on the level of reimbursement for care outside the plan's physician and hospital network...
...Since even the national health-insurance proposals sponsored by Presidents Nixon, Carter, and Clinton covered most Americans through their employment, the existing voluntary employer-based system appeared to be strong, effective, and stable...
...This contrasted with earlier programs in which employees who selected more expensive plans (often higherincome employees) received more dollar assistance...
...How could, how did this happen...
...The data and analyses are incomplete...
...They accept growth as evidence of satisfaction (almost as if the growth in the number of hungry and homeless persons is evidence of what "they" prefer...
...You don't need a letter of reference or an Ivy League degree...
...America's health-care system did not take the shape it did because of gaps in knowledge and understanding...
...36 n DISSENT / Spring 1998...
...There has not been a "shortage" of health-care research, but of political strength and will...
...FEIN is professor of the economics of medicine at Harvard Medical School...
...So, too, do we, their patients...
...In the last decade our health-delivery system has changed markedly from fee-for-service to capitation, from independent practitioners to managed-care organizations, from a sector characterized in largest measure by not-for-profit entities (except for pharmaceuticals and clinical laboratories), to a sector in which for-profit providers and institutions are steadily expanding their share of the market...
...Employers argued that the new market system would lower total health-care costs by providing incentives for "responsible" behavior at the point where enrollment decisions were made...
...In Milton Friedman's phrase, we would be "free to choose," although, clearly, lower-income individuals and families would be restricted in their freedom (ability) to choose the more expensive programs...
...My examination of health-care problems and possible solutions will necessarily refer to American character and values...
...In part the change is due to an altered external environment...
...A different level of payroll deduction is required for each of the eight choices...
...Government officials make similar decisions for Medicaid, though not yet for Medicare, recipients...
...They fear that, absent such legislation, not-for-profits will be forced to choose between participating in a race to the bottom or going under...
...It is instructive to examine the reports rendered by such commissions and ask the question, "What did they know and when did they know it...
...Consequently, many employers reduced their percentage contribution to insurance, ceased covering dependents, and limited employee choice to a single inexpensive health plan...
...It would be incorrect to assume that the principles embodied in capitation are faulty...
...Consider that the vocabulary used to discuss health care and public policy is increasingly the language of the marketplace: market shares, rates of return, mergers and acquisitions, stock options, and (presumably beneficial) competition...
...It is within my professional lifetime that medicine entered its "Golden Age": more phy30 n DISSENT / Spring 1998 sicians, more specialization, more equipment, more technology, more science, more pharmaceuticals, more therapeutic interventions (many of them remarkably beneficial), increased life expectancy (at all ages), and more and more dollars...
...The economist in me understood that feeforservice medicine could lead to unnecessary utilization of health services, since it was in the physician's economic interest to provide more, rather than less, care...
...But employers quickly realized that they gained only when employees selected less expensive plans, and that the larger the employer contribution, the weaker was the economic incentive (or pressure) for employees to do that...
...The presence of for-profit medicine has a dynamic that deeply affects not-forprofits...
...Furthermore, corporate and government decision makers believe that HMOs and managedcare entities can and will deliver efficient care that reduces expenditures without affecting the quality of medical intervention or the number of interventions of value...
...Given a level of basic assistance, inequities presumably do not arise so long as consumption disparities are based on what one does with one's own dollars...
...Yet we know there is reason to worry: as health-care costs increase (if only because of advances in medicine and an aging population) and employers insist on holding premiums steady or severely limiting their growth, the length of patient visits will decline, time between visits will increase, there will be more interference with clinical decisions, and quality of care will suffer...
...The structure of prepaid group practice, the clinical data it generates, the fact that it serves a defined population, that there is a "denominator," make it possible to measure performance: rates of immunization, prenatal care, mammograms, and so on...
...It DISSENT / Spring 1998 n 31 THE HMO REVOLUTION was hoped that the resulting change in the incentive to provide ever more services would slow down the growth of health expenditures...
...The truthful and helpful answer, "Organize," regrettably, works only in the longer run...
...Nevertheless, one might have anticipated physician resistance to developments that constrained their clinical independence and reduced their incomes...
...Nevertheless, I also was aware of the potential symmetrical negative impact of a fixed capitation payment— that is, why deliver the services if the subscriber has already paid the premium...
...answers are not clear-cut but matters of judgment...
...We were reassured that GHA accepted responsibility for the actions of its associated personnel and, thus, put its "seal of approval" on the skills and knowledge of its physicians...
...Costs are reduced by enrolling healthy patients and inducing sicker ones to disenroll by not responding to their needs...
...Luke's-Roosevelt Hospital Center representative argued that people should be allowed to buy whatever they might want with their own dollars and stated, "If you want to question the whole underpinnings of capitalist society, it was an argument that seems to have been settled some time ago...
...These differences reflect the fact that regardless of the plan's total cost, the university contributes the same fixed dollar amount (calculated as a percentage of the premium of the lowest-cost plan) toward whatever coverage the employee selects...
...It enabled Group Health, the only PPG in Washington and one of the few in the nation, to survive...
...The future is not predetermined...
...It asked that I choose between the Democratic and Republican positions on nine "critical" issues: crime, the balanced budget, environmental protection, campaign-finance reform, education, religious freedom, reproductive choice, tax policy, and national defense...
...Nevertheless, we must not substitute waste in the form of administrative expenses (already higher than in other nations and growing rapidly), as well as high executive salaries and profits, for earlier wasteful overutilization of services...
...And today, though they are united on incremental reforms such as increased access for children, Democratic members of Congress do not share an overarching position on healthcare delivery, financing, or the ways to achieve universal access...
...today we allocate a much larger slice (14 percent) of a much larger pie...
...I have met physicians who recognize those pressures and incentives and hope they are not succumbing to them, who spend their evenings reviewing the day's cases because of a nagging concern that they may have shaded THE HMO REVOLUTION their clinical decisions "unduly" in the direction of under-treatment...
...Its silence, therefore, probably stems from a desire not to remind us (can we forget...
...Finally, we were aware that Group Health Association had been formed by individuals (both lay and medical) who viewed it as a kind of nonprofit cooperative, as an expression of a value system, not simply as a provider of care...
...The HMO act provided loan funds to emerging HMOs, developed standards for federal HMO approval, and required "dual choice...
...Because of these interactions, several notforprofit HMOs have called for federal standards and regulations that would apply to all HMOs, thus enabling them to compete with for-profits while retaining (what they see as) their community ethos...
...Consequently, continued HMO expansion does not imply that subscribers or physicians are pleased with these new arrangements...
...During those years I came to be impressed with the technical aspects of medicine and the contributions they can make to a better life...
...The plan had to be marketed, first to employers and then to their employees, a task made more difficult because staff physicians were averse even to HCHP informational advertising that simply made known its availability, lest their colleagues accuse them of "unethical" behavior...
...Surely we need not tolerate a situation in which, in 1994, for-profit HMOs such as Well Point and United Health Care used less than 80 percent of their premium dollars for medical care (while Kaiser could allocate over 96 percent to care and operate successfully...
...Nevertheless, analysts, drawing the fallacious conclusion that the various parties to the drama of growth are exercising their free and unfettered choice, infer that those who enroll in and those who provide managed care must prefer such arrangements...
...It is not unlike the definition in the ill-fated Clinton insurance plan, where individuals could enroll in one of three generic plans (indemnity with maximum choice, managed care with opportunity to step outside the system, and more restricted managed care), at different cost to the subscriber...
...At first, employers included these newer and less expensive plans as additional options for their employees, while continuing to pay the same fixed percentage (sometimes as high as 100 percent) of the costs of the plan the employee selected...
...Indeed, in the 1980s, rising health-care costs gave employers an incentive to cut back on insurance...
...After all, it is much easier for both employers and employees to register differences in premiums than to assess differences in quality...
...that the president's efforts on behalf of universal health care, a centerpiece of his first term, came to nothing...
...Nevertheless, the enactment of Medicare and Medicaid in 1965, and the 1972 amendments extending Medicare to the disabled, suggested that over time vulnerable groups who fell outside the employment-linked insurance system would be protected through continuing incremental reforms...
...This led employers to a more "sophisticated" approach under which they contributed a fixed dollar amount (often, as at Harvard, based on the costs of the least expensive option) to whichever plan the employee chose...
...Many of the solutions we seek to today's health care problems were available decades ago...
...how to organize support for candidates who favor progressive measures...
...But fear should not lead to paralysis...
...Our family chose to enroll in Group Health because we felt that a prepaid group practice could deliver higher quality medical care more conveniently with primary care and specialty practitioners as well as laboratories and medical records all located in one institutional setting...
...I recall meeting with clinicians at one of America's premier teaching hospitals...
...Indeed, under arrangements found in many managed-care organizations, the primary-care physician, "at risk" for the extra tests, consultations, and treatments, is not unhappy when he can disengage from a "challenging" patient...
...Since that performance is influenced by costs, HMO physicians face both subtle and overt pressures (and may be offered economic rewards) to limit orders for tests, drug prescriptions, specialist referrals, and hospital utilization...
...The story has a dynamic quality...
...I am often asked, "What can I do about it...
...Illness falls on a continuum...
...Conversely, they did not know where or when the Federated Department Stores, GM, or CBS boards met, let alone how to "lobby" such boards...
...The Harvard story reflects general developments in American healthcare...
...This became advantageous when, as a result of the ability of HMOs and capitated plans to control physician behavior, restrict expensive hospital utilization, and limit patient choice of providers, competing managedcare delivery/insurance organizations were often able to offer employers premiums THE HMO REVOLUTION substantially lower than those available from traditional indemnity plans...
...They supported the enactment of federal Health Maintenance Organization (HMO) legislation, designed to stimulate the development of capitated insurance/delivery organizations (including, but not limited to, PPGs...
...a secure job, even if in an HMO, had a certain appeal...
...A version of this equity definition appeared in an October 19, 1997 New York Times article dealing with luxury hospital rooms and titled "Life Styles of the Rich and Ailing...
...The first factor meant that physicians no longer could assume that traditional solo practice would be economically rewarding...
...We can act to alter current trends and future outcomes...
...In the 1940s and 1950s America made a fateful decision: as the result of changes in collective-bargaining patterns, National Labor Relations Board (NLRB) regulations, and the federal tax code, access to health insurance became linked to employment...
...In the real world, decisions about healthinsurance options for employees are made by corporate financial officers...
...Nevertheless, my attitudes about the importance of health-care as a social good and as a "right" rather than a privilege were formed long before I joined a medical faculty...
...If insurance won't cover it, simply pay out of pocket," is truthful, but hardly helpful...
...Potential opposition was muted by two factors: the large and growing oversupply of physicians and their longstanding view of government as the enemy...
...I protested and wrote the dean: "I should have hoped that [Harvard] would not discriminate against any prepaid group practice plans...
...Unlike my 1961 belief in prepaid group practice as a way of enhancing quality and strengthening the cooperative community, today's arguments for HMOs revolve around the economic opportunity to purchase the same health-care product at a lower price...
...Surely the committee is aware that millions of Americans have restricted access to health care and are worried about the rapidly expanding managed-care environment...
...Medicine, after all, is not only a science, but an art...
...HMOs and managed care do have positive attributes...
...They fear (as should we) that critical decisions may be heavily influenced by the HMO balance sheets...
...They therefore sign up with every managed-care organization that will have them...
...Those who have long decried "piece work" should recognize the deficiencies of the feeforservice model...
...There were fewer physicians, nurses, hospital beds, and resources of every kind...
...In Part II of this essay I will explore what a better health world might look like and what changes would be required in America and American medicine to achieve that better world...
...practicing together, physicians could monitor each other's performance...
...HEALTH MAINTENANCE ORGANIZATIONS...
...THE ROLE OF EMPLOYERS...
...This is most obvious when not-forprofits convert into for-profits in order to raise funds for capital expansion...
...That, however, is not the situation that prevails today...
...In the early seventies this legislation was designed to "make the world safe for HMOs...
...Perhaps there are none in the Boston area and the issue is academic...
...In the early seventies, the ideological barriers against PPGs began to crumble...
...FOR-PROFIT MEDICINE...
...New health-care insurance/delivery organizations reduced employer health-insurance costs and fit with American ideology about efficiency and free-market competition...
...Because premium contributions no longer were dependent on employee choice, employer expenditures were predictable and minimized...
...Today, three decades after my letter of complaint, Harvard no longer even includes a traditional indemnity policy as an insurance option...
...The dynamic that I describe has not yet played out...
...Conservative Californians in the Nixon administration were acquainted with Kaiser (a large and well-respected PPG on the West Coast) and the nature and quality of its delivery system...
...Fifty years ago we spent less than 5 percent of our Gross National Product (GNP) on medical care...
...It is wasteful and, since all societies have limited resources that make it impossible for the private and public sectors to do everything that is worth doing, such waste is hurtful...
...In the absence of a national social insurance program providing health coverage, this seemed beneficial...
Vol. 45 • April 1998 • No. 2
