What ails health care

Public Interest, Spring, 2005 by David Gratzer

Congressional enthusiasm was more tempered but did eventually cement around the HMO Act of 1973. The legislation counted Senator Ted Kennedy as one of its chief proponents. To facilitate the start-up and expansion of HMOs, the act offered an interesting mix of deregulation and regulation: It overrode state laws that had restricted the development of HMOs but also required any company with 25 or more employees to offer two HMO plans as part of its benefits package. And Washington gave a remarkable incentive for companies entering the HMO business: $1.6 billion (adjusted for inflation) in grants and loans.

White House support for HMOs continued after Nixon resigned. In the late 1970s, pushed by the White House, Congress again moved, amending the HMO Act to further subsidize managed care. But while Washington was keen on HMOs, the rest of the country was more hesitant: In 1980, total enrollment was only 10 million.

Rising health costs changed that. In a few short years, employers would completely rethink the way they offered health benefits. In 1988, three quarters of American workers with employer-sponsored health insurance were covered by traditional (indemnity) plans; by the end of the 1990s, those indemnity plans represented only 14 percent of the market. By 1998, HMO enrollment had soared to 79 million--an eightfold increase in eighteen years.

The attraction of managed care in general, and HMOs in particular, was clear. HMOs held down costs with a variety of techniques, such as paying family doctors not to refer patients to specialists and utilization reviews of medical practices. To eke out even greater savings, HMOs used their enormous buying power to push hospitals for discounts. For a health-care industry used to the tranquility of indemnity plans--send a bill to the insurance company, get a check back with no questions asked--HMOs represented a perfect storm.

As a cost-saving system, managed care was a smashing success. By the late 1990s, health spending was increasing by slightly less than the overall growth of the economy, leaving expenditures at about 13 percent of GDP, amounting to $300 billion less than the Congressional Budget Office's projection. For every privately insured American, that translated into savings of $2,000 a year. In the private insurance market, where managed care had the greatest impact, premiums remained relatively stable in the mid- to late 1990s. Private health spending per capita grew at a meager rate (just 2 percent, for instance, in 1996). Through much of the mid 1990s, hospital spending actually dropped. In 1997, for instance, it fell 5.3 percent.

... and its fall

Managed care, it seemed, was a miracle cure. In 1995, House Republicans, under the leadership of Speaker Newt Gingrich, even suggested that HMOs would help rein in the cost of Medicare and Medicaid. The Republican plan won applause from, among others, Vermont Governor Howard Dean. Rarely had an idea been so widely embraced. Despite these measurable successes, however, a backlash was brewing.