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October 30, 2009

Managed Care: In the Beginning

Filed under: Managed Care — Doctor @ 12:18 am

What we now know as Managed Care has its roots in a number of prepaid healthcare arrangements from the early 20th century. The earliest example we could find comes from the Puget Sound Area and dates back to 1910, when the Western Clinic in Tacoma, Washington provided a wide range of medical services to lumber mill owners and their employees for a very reasonable monthly premium of 50cents.

In 1929, a managed care pioneer by the name of Dr. Michael Shadid began a cooperative health plan for rural farmers in Elk City, Oklahoma. The members who enrolled in his plan paid a predetermined fee and received medical care from Dr. Shadid. In the same year, the Ross-Loos Medical Group was established in Los Angeles, and it provided prepaid services to county employees and employees of the city’s department of Water and power. Its members paid a premium of $1.50 a month. In 1982, the Ross-Loos Medical Group came to be known as CIGNA Healthcare.

Also in 1929, the Baylor Hospital of Dallas, Texas initiated a prepaid system that provided medical care to about 1500 teachers. This was the birth of the health care company we know today as Blue Cross. Because Blue Cross only provided coverage for hospital services, the Blue Shield plans were created to cover doctor services, hence the name Blue Cross/Blue Shield. The premiums for this coverage were subsidized through government tax breaks, keeping them reasonably low.

Dr. Sidney Garfield and several of his associates ran a similar prepaid health plan in 1933. Together, they provided medical care to 5,000 construction workers at an aqueduct project in LA. Workers compensation insurance companies contracted with them to cover accident cases, while the construction workers contributed from their own wages for other medical services.

A few years later, Dr. Garfield set up a similar medical program for Henry J. Kaiser, providing prepaid medical care to his workers at the Grand Coulee Dam. This was the beginning of the Kaiser Foundation Health Plans, which provided comprehensive medical care to Kaiser Construction Company workers and families. After the second world war, Kaiser made his medical care plan available to the public, believing he could provide millions of Americans with comprehensive, pre-paid medical care at affordable prices. 10 years later, the Kaiser Permanente health plan had more than half a million members enrolled, and a growing network of clinics and hospitals.

Over the same period, several other prepaid group insurance plans developed, such as the Group Health Association (GHA) in Washington, DC, a non-profit consumer cooperative founded in 1937 to lower the rate of mortgage loan defaults that resulted from crippling medical expenses. Other similar organizations included the Health Insurance Plan (HIP) of Greater NY, founded in 1944 to cover city employees, and the Group Health Cooperative of Puget Sound, in Seattle, WA, formed after the war in 1947 by 400 families, each contributing $100.

With the 2nd world war raging in the 1940’s, labor was in short supply, and the government imposed wage controls. To deal with this situation, employers begun to offer health insurance as a fringe benefit to attract more workers. The government sought to encourage this new development, offering businesses income tax exemptions for health care related expenses. This begun the current trend of the employer as a health insurance supplier.

Initially, Blue Cross charged the same premium to everyone, regardless of sex, age or pre-existing conditions. This may have been because the Blue Cross was a quasi-profit organization, created and run by hospitals whose focus was on signing up new hospital patients. This changed as more private insurers entered the market. As bottom-line driven organizations, they revamped the rating system, basing it on relative risk. In this way, they were able to charge the riskiest potential customers higher rates or avoid insuring them altogether. To survive in the changing health care market, Blue Cross adopted the same rating systems. In time, they lost their tax advantage and today, they are virtually identical to most other health insurance companies.

These early health insurance companies were indemnity organizations, reimbursing health care providers on a fee-for-service basis. However, as improved medical technology and bureaucratic inefficiencies rose, more and more non-profit health maintenance organizations (HMOs) were founded. Their goal was to achieve better management of services and to emphasize preventive care while controlling health care costs. A similar pattern played out, as the HMOs became increasingly successful. Private insurers coveted their success and soon enough, for-profit HMOs proliferated, and once again dominated the market.

The enactment of the Medicare and Medicaid legislation in 1965 was a landmark in the history of managed health care, by extending coverage to millions of additional Americans. It also hastened the end of segregation in hospitals, as segregated wards were ineligible for federal payments.

In the early ’70s, a nationwide focus on health care developed, with interest groups pushing for reforms in the healthcare system, particularly cost, access to services for the uninsured, the poor and for minorities, delivery systems and consumer rights. The result was the HMO Act of 1973, which had three main provisions:

· Grants and loans were provided for the planning and start-up of new HMOs, and for the expansion of existing HMOs
· State-imposed restrictions on HMOs’ development were overridden if the HMO was federally certified
· The dual choice provision, which required that employers with 25 or more employees offer federally certified HMOs in addition to the traditional indemnity coverage

Managed care has since grown steadily throughout the ’70s, ’80s and 90s. In 1996, more than 600 HMOs were in operation, with almost 65 million members – that is one-fourth of the country’s population! There has been a gradual transition to managed care programs, as enrollment surged from 40% in 1990, to 90% today. All indications are that this trend will continue.

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