The People vs. Managed Care

If HMOs had been created to increase expenses, reduce care, remove physicians from decision-making, and create havoc in the relationship between physicians and patients, one could call them a tremendous success.

The defenders of managed care argue that HMOs were the solution to inflation in medical costs. The opposite is true. Total national health expenditures were 73.2 billion in 1970. By 1997, they had increased to 1,092.4 billion. According to the Health Care Financing Administration (HCFA), national health expenditures will total $2.1 trillion by 2002. Two reasons for the expected increase in costs are the increases in expenditures in the HMO-dominated private sector, and lack of expectation that managed care will produce savings.

In the field of psychiatry, there was no financial reason before the advent of managed care to believe that there was unreasonable inflation. An in-depth study of utilization and cost of psychiatric care published in 1972(7) concluded that "The available data indicates that hospital care for mental conditions in all types of hospitals for up to 365 days per admission can be provided for a representative working population for about $4.50 per covered person at 1969 hospital cost levels. This is equal to about six or seven percent of the cost for all conditions. Physicians' in-hospital service for these patients, at 1969 fee levels, would cost in the neighborhood of 60 to 70 cents per covered person. Major medical coverage of outpatient psychiatric care at 1969 fee levels, at 80 percent of charges after a deductible of $100, would cost about $2.15 per covered person....Limited first-dollar coverage of outpatient psychiatric care, as under the United Auto Workers and Group Health Insurance programs, had benefit costs in 1970 in the range of $1.80 to $2.40 per covered person." These and other figures indicate that there is no evidence for unbridled inflation in the years before the enactment of the HMOs legislation.

Elsewhere here we have indicated that medical expenses were increasing. The reasons are many:

In the late 1960s, Paul M. Ellwood Jr., M.D., a private practicing pediatric neurologist, coined the term "health maintenance organization". He convinced President Richard M. Nixon to make competing HMOs the centerpiece of his health-care program.

Dr. Ellwood, who was also Clinical Professor of Neurology, Pediatrics, and Physical Medicine and Rehabilitation at the University of Minnesota, also became chief executive of both the InterStudy think tank in Minnesota and the Jackson Hole Group in Wyoming. He not only sponsored ideas used by Mr. Nixon in the early 1970's, but was one of the principal architects of President Clinton's "managed care competition" concept.

The progression of HMO thinking can be traced through some 58 of Dr. Ellwood's papers between 1966 and 1997.

In 1966(8), he wrote:

It has been shown that the course to be taken in developing a system of quality control will include the following steps:

These four simple steps, described for a rehabilitation program, indicate that vastly improved quality control systems can be developed in the very near future, and for every kind of common disability.

"Outcome management" became a central piece in Dr. Ellwood's thinking, well represented in his Shattuck lecture of 1988(9), when he advocated for clinical guidelines; measurement of the functioning and well-being of patients, along with disease-specific clinical outcomes, and analysis and dissemination of results.

In the same lecture, Dr. Ellwood saw the federal HMO legislation as the product of a "health crisis".

Costs were surging. Patients were beginning to challenge the authority of doctors, and doubts were being raised about the efficacy of some expensive medical procedures.

The result was not outcome management, the result, in Dr. Ellwood's words, was "a mass movement toward a health care system influenced by market forces, incentive-based payment arrangements, and aggregation of providers". A scientific idea had been derailed into a very substantial shift of power from physicians to the insurance companies and business.

In 1996(10), Dr. Ellwood was asked what happened to derail his vision. Dr. Ellwood's answer:

Once power went from physicians and patients to the entrepreneurs, the emphasis changed from quality to cost containment.

What about quality through "outcome management"? In 1996(10), many years into the HMO revolution, Dr. Ellwood was hopeful: "We've reached a point where the business community realizes that it can control costs and is prepared to shift to emphasizing quality." Unfortunately, costs have continued to increase, so that business may not be ready as yet for quality.

Dr. Ellwood's long time associate is economist Alain C. Enthoven. In 1978, he gave the Shattuck Lecture. The reason to mention it more than 20 years later, is to remember the early thinking of the HMO leaders.

Dr. Enthoven said,

An economically rational health plan will have built-in incentives for cost effectiveness. It will reward people for finding ways to deliver better care at less cost....physicians will accept responsibility for providing comprehensive health-care services to defined populations, largely for a prospective per capita payment.

Some of the arguments in favor of this fully capitated system were accompanied with almost insulting remarks:

I believe that a great deal of 'flat-of the-curve medicine' is being practiced in the United States today - that is, application of health-care resources yielding no discernible or valuable health benefit.

Dr. Enthoven did not present his evidence, which he said was "suggestive, not conclusive"

Both Dr. Enthoven and Dr. Ellwood(11) have moved to consider ideas that are far removed from their initial proposals. One of them is the "After-tax Medical Savings Account", "an approach worth trying", and under which

Drs. Ellwood and Enthoven are against pre-tax MSAs, but their support of post-tax MSAs seems to clash with their early ideas.

The impact of managed care on American medicine will be the subject of much debate in years to come. As of 1999, we are impressed that the prophecies of early managed care critics seem to have become realities.

A few years after the implementation of managed care strategies, papers started to appear in the leading medical journals questioning the approach and predicting that it would fail. Writing in the New England Journal of Medicine in 1984, Eli Ginzberg(12) summarized the concerns of Arnold Relman, M.D. and others, and warned that American medicine appeared to be turning into a business. The invasion of for-profit outfits would lead to the monetarization of medical care, which is precisely what we saw in subsequent years with the predominance of for-profit HMOs.

Even if this could lead to temporary and apparent savings, William B. Schwartz, M.D.(13) and others were writing in the 1980s that the HMO driven cost-containment strategies applied to the wrong components of care. The wrong forces acting in the wrong direction could only produce inevitable failure.