The Development And Growth Of Managed Care

History of Managed Care

In the strictest sense, the very earliest forms of group health insurance were managed care. Such insurance was started as a prepaid health plan, under a contract with Baylor University Hospitals, in the late 1920s. This led to the eventual development of today's Blue Cross/Blue Shield plans, most of which were started as prepaid plans. However, these early prepaid plans differed greatly from today's managed care programs, in that they had no provider restrictions or utilization management programs. Insurance companies introduced major medical and comprehensive medical plans in the 1950s and 1960s, and group health coverage grew tremendously. However, as medical plan costs began to spiral upward, the health insurance industry was compelled to start addressing employer concerns. During the 1970s, most traditional health insurers developed few products to compete directly with the newly emerging HMOs, preferring instead to encourage clients to use plan design techniques alone to control cost increases. During this time, insurance companies, TPAs, and the benefits consulting community recommended a variety of refinements to existing indemnity (fee for service) health plans—from greater employee contributions to expanded coverage for "cost-effective" forms of treatment, such as home health care or generic drugs.

However, for the most part, these efforts provided only short-term relief, and there is little evidence today to prove that plan design changes alone led to long-term cost control of indemnity insurance plans. This lack of significant positive results from incremental efforts, coupled with growing competition from HMOs in the late 1970s and 1980s, forced insurers and many Blues plans to develop new managed care products and to add more aggressive utilization management (UM) protocols to their traditional indemnity programs. Simultaneously, many insurers were purchasing or developing their own local HMO plans.

In fact, the origins of today's managed care plans are founded in health maintenance organizations. The HMO concept is not new, and its earliest roots parallel those of the prepaid plans before World War II. While some of the earlier prepaid plans evolved into Blues plans, others evolved into HMOs. Several group practice-based HMOs were established in the Pacific Northwest and California, but the most well-known plan—Kaiser Permanente—was started in the early 1930s by Sidney Garfield, MD, to serve workers building an aqueduct to bring fresh water from the Colorado River to the city of Los Angeles. Kaiser opened to the general public following World War II and has continued on a steady growth that has brought it to a premier position nationally, serving 8.2 million members, in nine states and the District of Columbia, by 2004.

Other HMOs started in Washington, D.C., New York City, and Minneapolis, although their initial development was slow because of heavy opposition from the proponents of fee-for-service (FFS) medicine. Major HMO growth began after the passage and enactment of the HMO Act of 1973 (P.L. 93–222). The act, named and promoted as the "health maintenance strategy" by Dr Paul Ellwood, consisted of federal grants and loans to organizations wishing to investigate the feasibility of what would be called "federally qualified HMOs."

The federal government continued to nurture the growth of the HMO industry through the 1970s and early 1980s, and the Department of Health and Human Services issued hundreds of millions of dollars to start-up HMOs. However, as part of its overall reduction in federal government regulation, the Reagan Administration encouraged HMOs to look to private capital sources for future funding and expansion. Many smaller plans, especially those in early development, did not survive the 1980s, while others consolidated or were purchased by large national insurance companies that were expanding their managed care capabilities. In fact, by 2003, corporate HMO chains and national insurance companies owned over 220 licensed HMOs operating in the United States, covering almost 42 million members, which was over 58 percent of total national HMO enrollment. Managed care had not only become mainstream health care, it had become big business.

In the late 1970s and 1980s, PPOs also grew rapidly, sponsored heavily by national insurance companies, third-party administrators, Blue Cross/Blue Shield plans, and even hospital organizations, and which needed to offer their customers alternatives to compete against emerging HMOs. PPOs gained quick popularity with employers that wanted cost savings but were unwilling to reduce provider choice as much as required in HMOs.

In 1983, there were about 115 PPOs. By 1999, that number had increased to more than 1125 plans, covering an estimated 98.3 million members nationwide, including those in specialty PPOs (e.g., mental health benefit treatment). Similar to the direction of HMO ownership, corporate chains and national insurance companies operated more than 70 percent of the PPO plans by 1999. Total national PPO enrollment topped 113 million by 2003.

Early PPO plans were primarily discounted fee arrangements with little focus on utilization control, and, as a result, many employers never achieved long-term cost savings. PPO companies responded by increasing the monitoring of utilization, implementing quality control, and surveying member satisfaction. In some structural aspects, PPOs resemble individual practice association (IPA) model HMOs, since both organizations contract with private practice physicians. However, opponents argue that PPOs are a weak form of managed care, coupled with rich benefits, which make them more expensive than HMOs. While average PPO costs are typically higher than HMO costs, the broader provider networks, the availability of coverage outside of network and generally less restrictive UM requirement have led to PPO enrollment nearly doubling that of HMO. PPOs are the largest part of the group health market today and will likely continue to be a factor for some time.