Health Maintenance Organization

What It Means

A health maintenance organization, commonly referred to as an HMO, is an organization in the United States that provides a specialized form of health insurance for a prepaid monthly fee. With a typical health insurance policy, the insurer is required to pay for medical coverage according to the terms set forth in the insurance plan (called a policy). An HMO, however, not only pays for health care but also provides avenues for patients to receive that care. In fact, in order for a member of an HMO to receive coverage for medical expenses, he or she must use doctors, hospitals, clinics, and other facilities and providers approved by the HMO. In addition, to receive nonemergency medical coverage, that person may only submit to medical procedures that have been preauthorized by the HMO. This means that if a member were to break her leg in a skiing accident and require emergency medical attention, she would not have to first seek approval from her HMO. But if that member wanted to have surgery on her inner ears to improve a non-life-threatening ailment, she would have to have the operation preapproved by her HMO.

This manner of providing medical services is one of several examples of what is called managed care. In any managed-care arrangement, the insurance company establishes some of guidelines according to which care must be provided if it is to be covered by the policy. In order to manage the care that they give to members, HMOs contract with a set of doctors, hospitals, and clinics who agree to receive more patients in exchange for charging a smaller fee. In this way, the HMO cuts costs on the money it has to pay out for members’ medical care. HMOs also try to save money by eliminating what they deem to be unnecessary procedures. To accomplish this, they require that each member select a primary care physician (PCP), who must give assent to all specialized treatment in order for those treatments to be covered. In other words, if a member of an HMO has a chronic earache, he must first see his PCP, who then chooses whether or not to refer him to an ear specialist. If the PCP does not make the referral and the patient consults the specialist regardless, that care will not be covered.

When Did It Begin

Although it was not called an HMO, the first example of prepaid, organized health care is believed by some to have occurred in Tacoma, Washington, in 1910, when the doctors at the Western Clinic provided service to lumber-mill owners and their employees for a monthly fee of 50 cents per member. Many others consider the Ross-Loss Medical Group of Los Angeles to be the first HMO. Established in 1929, that group initially offered health care to 500 employees at the Los Angeles Department of Water and Power for $1.50 per month. Shortly thereafter many other employees of Los Angeles County enrolled, and by 1951 the group had more than 35,000 members.

During the early 1930s other grassroots organizations formed agencies that resemble modern HMOs. The most notable of these was begun by the industrialist Henry Kaiser (1882–1967), who responded favorably when physician Sidney R. Garfield (1906–84) offered to treat Kaiser’s construction workers in exchange for a prepaid fee. The arrangement worked so well that Kaiser deployed it throughout his business empire. Another notable event was the founding of Blue Cross, which originally provided prepaid insurance for physicians’ services to 150 teachers at Baylor University in 1933.

It is believed that the term health maintenance organization was coined in the 1970s by physician Paul Ellwood, an adviser to the federal government on medical care. At that time, the original appeal of HMOs was dwindling, and there were fewer than 40 such organizations remaining in the United States. Ellwood was a leading figure in the push to revive this system of health care, which culminated in the passage of the Health Maintenance Organization Act of 1973, at which point the term HMO became a fixture of American medical parlance.

More Detailed Information

The Health Maintenance Organization Act of 1973 had three main provisions. First, it stated that the federal government would provide funds, in particular grants and loans (grants do not have to be repaid; loans do), to start or expand an HMO. Second, state-imposed restrictions on HMOs were to be eliminated if the federal government certified an HMO. Third, the act required all businesses with at least 25 employees to offer (upon request from the staff) an HMO option alongside standard health insurance. This final provision, which is called the dual-choice provision, allowed for the rapid growth of HMOs because it allowed them to offer more group plans to a wider range of employers, who up to this point had tended to offer more-expensive models that covered costs but did not manage care.

At the time, HMOs appeared to be a better alternative to such arrangements because they were cheaper and provided a connection to a network of health-care providers. For instance, if a person working for a technology firm were part of a group plan sponsored by an HMO, that person would pay for coverage by having a flat fee (which would be smaller than the fee for standard health insurance) deducted from each paycheck. The employer would also make some contribution to the group policy. In addition to the flat fee, the insured person might be required to pay a small fee called a co-payment for each doctor visit and prescription. In exchange, he or she would have access to all of the physicians, specialists, hospitals, and clinics approved by the HMO. Over time, however, HMOs received criticism for denying treatment to members as primary care physicians became less likely to refer HMO members to specialists. Also, as HMOs acquired more members and more providers, administrative costs skyrocketed, and these expenses were passed on to members.

There are several types of HMO, each of which offers access to a different range of providers. According to the staff model, physicians are salaried employees of the HMO itself. These doctors hold offices in HMO buildings. There is also a group model, according to which the HMO contracts with a physician group, and that group disburses funds among the physicians as it sees fit. Both the staff and the group models are regarded as closed-panel HMOs because the providers may only see patients belonging to an HMO. According to a third model, independent practice organizations (IPOs) match HMOs with independent physicians. This is called an open-panel model because the physicians maintain the freedom to serve both HMO and non-HMO patients. Since 1990 most HMOs have operated according to a network model, in which they contract with physician groups, IPOs, and independent physicians to provide care for their members.

In addition to having a primary care physician who oversees the member’s medical needs and makes referrals to specialists as needed, HMO members receive several levels of care. Most HMOs cover prescriptions, although they typically require a co-payment for this service. If a person requires overnight or extended hospital care, the HMO will usually cover room and board, laboratory tests, radiation treatment, and operating-room expenses (including the fees for the procedures, materials associated with the procedure, and the fees to the surgeons, anesthesiologists, and medical staff required to perform the procedure). Surgical fees typically require no co-payment. The HMO will not cover nonmedical expenses associated with hospital stays, such as fees for the use of televisions and telephones.

Physical therapy, both inpatient (that is, administered to patients staying in the hospital or health-care facility) and outpatient (administered to patients not required to stay at the hospital), is covered by most HMOs without co-payment. Other outpatient services that are covered by HMOs (contingent upon a referral by a PCP) include mental-health services, alcohol- and drug-abuse services, preventive health services such as checkups and physicals, and diagnoses and treatments administered by specialists. Most HMOs do not cover experimental procedures such as laser surgery for eyes and cosmetic care such as plastic surgery, unless it is required following a traumatic accident.

Recent Trends

Rising medical costs have been a concern in the United States since the early 1970s, and the passage of the HMO Act of 1973 has done little to defray these costs, as it was intended to do. In 1980 medical costs constituted 8.8 percent of the nation’s GDP (gross domestic product; the market value of all the goods and services produced within a country during a specified period). By 1993 that number had risen to 13.4 percent. Meanwhile, membership in HMOs had increased dramatically, from 6 million people in the mid-1970s to 37 million people in 1993. Membership continued to rise throughout the rest of the 1990s, peaking at more than 81 million in 1999. In 2000 membership was holding steady at more than 80 million.

After stabilizing at about 13 percent of the GDP for a few years, in 2000 medical costs continued to rise, reaching as much as 16 percent of the GDP by 2006. At the same time, HMO membership began to decrease, dropping from 80 million members in 2000 to 69.5 million in 2005. Analysts generally agree that the reason HMOs have become less popular is that most Americans want more choices available to them in their health plans. By requiring referrals from primary care physicians and preauthorization for many procedures, HMOs limit patient freedom.

HEALTH MAINTENANCE ORGANIZATIONS

HEALTH MAINTENANCE ORGANIZATIONS (HMOs), combining both provision of service and insurance functions in the health industry, have organizational antecedents in the late nineteenth century with doctors who provided medical care to members of fraternal organizations in return for a fixed periodic fee per member. By the early 1920s, Washington and Oregon hosted dozens of clinics that offered prepaid medical care, often to employees of specific firms through the employers. These built on models developed in the region's lumber mills. In the Midwest, a few doctors financed hospitals in the 1920s by selling shares in return for guaranteed access to the facilities.

In the early 1930s, the successful industrialist Henry Kaiser responded positively to the physician Sidney Gar-field's suggestion that the doctor treat Kaiser's construction firm employees in return for a modest fee per employee. This practice spread to other Kaiser facilities. The construction boom of World War II expanded Kaiser's firms and also his demand for labor; his health plan took on the general outline of a modern health maintenance organization with its own medical and hospital sites and paid physicians providing group practice care to the insured employees. At the end of the war, the plan opened membership to the general public. This Kaiser Foundation Health Plan owned medical facilities, clinics, and hospitals, and employed doctors to provide medical care in return for a fixed fee. In contrast with a health maintenance organization, formal health insurance allows the insured to select the provider and then pays the provider a fee for service. Blue Cross, established at Baylor University in 1933, was among the first to offer health insurance. Blue Cross provided insurance for physicians' services; Blue Shield, to cover hospital costs, began a few years later.

Although the precursors of the modern HMO existed well before World War II, the number of persons covered by the organizations was relatively small. This reflected the relatively low demand, and cost, of medical care. Physicians primarily diagnosed and provided palliative care; patients either recovered or they didn't. After the war, successes in developing anesthesia and antibiotics began to revolutionize medical care for ordinary citizens. Surgery became more tolerable and more successful. The intense competition for labor during the war led firms, kept by wage and price controls from raising wages, to offer health insurance to attract and keep workers. The government deemed this fringe benefit nontaxable. As this form of compensation spread during the war and continued afterward, it provided the financial wherewithal to expand demand for the amazing services that new medical technology could provide.

In explaining why competitive markets likely would fail to provide an efficient level of medical services, economists in the mid-1960s pointed to these demand-increasing features combined with the information asymmetry between sellers (physicians) and buyers (patients). Under this argument, relatively ill-informed patients depend upon well-informed doctors as their agents to provide appropriate care. Because patients increasingly carried health insurance, often through their employers, they did not have incentives to question the physicians' advice. Doctors hence could create demand for their own services. Third-party payments led to moral hazard, with neither seller nor buyer motivated to monitor costs. Adverse selection, as those consumers most likely to need insurance opted for more generous programs, joined moral hazard as factors inflating demand. Rapid changes in medical technology focused on doing more, not on containing costs. The expansion in 1965 of federal government programs to provide access to medical care for the poor (Medicaid) and the elderly (Medicare) further expanded demand.

The term "health maintenance organization" originated in the 1970s and is credited to Paul Ellwood, a policy adviser to the federal government on medical care. The term became institutionalized with the HMO Act of 1973, as the federal government struggled to control rapidly expanding medical costs. Other political and economic problems in the 1970s superseded concern for medical care costs, but by 1980, these costs accounted for 8.8 percent of gross domestic product (GDP) and were rising rapidly. In response, both private firms that paid for employees' health insurance premiums and governments that were financing care for the poor and the elderly sought mechanisms to control costs. Managed care organizations looked attractive. Managed care attempts to manage the cost and quality of medical care directly, in contrast to the passive role played by insurers under a fee-for-service arrangement. Managed care runs a full gamut of options, from managed indemnity to preferred provider organization (PPO) to point-of-service (POS) arrangements to a full health maintenance organization. Thus, the HMO is a subset of managed care.

Increasingly, however, medical plans offer a continuum of plans including an HMO, PPO, and POS. HMOs and closely related organizations do share the characteristic of providing medical care for a prepaid periodic fee. Care comes from either medical employees of the HMO or from medical practitioners with whom the HMO contracts. In some cases, the medical practitioners own the organization. Typically, customers access the medical community through an oversight doctor, the primary care physician (PCP). The PCP guides the patient via referrals if necessary to specialists in the organization or on a list approved by the organization.

As medical costs in 1993 hit 13.4 percent of GDP and industry analysts predicted a rise to 20 percent of GDP within a decade, interest in health maintenance organizations continued to grow. The loosely affiliated state and regional Blue Cross–Blue Shield organizations had been shifting since 1960 from fee-for-service insurance organizations to health maintenance organizations. HMO membership increased from roughly three million in the late 1940s to about six million in the mid-1970s. By the early 1990s, the plans enrolled about thirty-seven million people. In 2000, HMO membership was slightly greater than eighty million, down a little from 1999's almost eighty-one million. The slight decline represents an exodus of HMOs from the Medicare market in response to limits on federal government payments. Medical expenditures as a percentage of GDP dropped slightly between 1993 and 1998. Despite hopes for stabilization, costs began to rise in 2000, accounting for 13.2 percent of GDP. As the U.S. population ages, pressure mounts for more extensive insurance coverage of prescription drugs, and other payment and provision models remain even more unpopular, continued evolution of health maintenance organizations seems likely.

BIBLIOGRAPHY

Arrow, Kenneth. "Uncertainty and the Welfare Economics of Medical Care." American Economic Review 53 (1963): 941–973.

Birenbaum, Arnold. Managed Care: Made in America. Westport, Conn.: Praeger, 1997.

Cutler, David. "A Guide to Health Care Reform." Journal of Economic Perspectives 8 (1994): 13–29.

Dranove, David. The Economic Evolution of American Health Care: From Marcus Welby to Managed Care. Princeton, N.J.: Princeton University Press, 2000.

Miller, Irwin. American Health Care Blues: Blue Cross, HMOs, and Pragmatic Reform since 1960. New Brunswick, N.J.: Transaction, 1996.

Robbins, Dennis A. Managed Care on Trial: Recapturing Trust, Integrity, and Accountability in Healthcare. New York: McGraw-Hill, 1998.

Wong, Kenman L. Medicine and the Marketplace: The Moral Dimensions of Managed Care. Notre Dame, Ind.: University of Notre Dame Press, 1998.

Ann HarperFender

See alsoHealth Care ; Health Insurance ; Medicare and Medicaid .

HEALTH MAINTENANCE ORGANIZATIONS (HMOS)

Health Maintenance Organizations (HMOs) in the United States have their roots in the first decades of the twentieth century. In the early 1900s millions of Americans belonged to fraternal orders and mutual benefit societies which provided prepaid medical care to their members. Many large companies, particularly those where injuries were commonplace such as railroads, created medical departments to care for their workers.

One of the first true HMOs was established by an agreement between the employees of the Los Angeles Department of Water and Power and practice of two doctors, Donald Ross and H. Clifford Loos. This agreement exhibited the basic traits that came to distinguish HMOs. The employees paid the doctors set fees, regardless of the state of their health. In return for these payments, the doctors provided whatever medical care was necessary for the employees or their families. This was as compared to traditional fee-for-service health care, in which a patient pays no money to a doctor unless he goes in to visit, but then has to pay that doctor for the cost of their particular treatment. In essence, the employees who joined the Ross-Loos plan were agreeing to pay smaller fees for health care that they might never need, rather than risk needing to pay a large fee, a fee which conventional health insurance might not cover entirely, if they became seriously ill. In return, Ross and Loos received a solid base of patients and a steady income.

In 1938, Henry J. Kaiser (1882–1967) established an HMO for workers at his shipyard. This plan, originally known simply as Dr. Garfield and Associates, was opened to the general public after World War II (1939–1945). Renamed Kaiser Permanente in 1955, it became the first large, national HMO. At this time, there was a widespread feeling among both doctors and the general public that arrangements such as Ross-Loos and Kaiser Permanente led to inferior care, and fee-for-service care and traditional health insurance continued to dominate the U.S. health care system.

All of this began to change in the 1970s. By this time, the cost of health care had risen to the point that it was becoming difficult for some to afford. It was also placing a strain on the federal government's new Medicaire and Medicaid programs. Many began touting systems such as Ross-Loos and Kaiser Permanente as a way to control medical costs and ensure that Americans received adequate care. It was at this time that the term HMO came into use to describe such managed care systems. In 1973 Congress passed the Health Maintenance Organization Act, which removed many legal barriers to the development of HMOs, leading to the formation of more than 200 HMOs by the end of the decade.

HMOs remained a minor part of the U.S. health care system at the beginning of the 1980s. Only four percent of the U.S. population belonged to an HMO, approximately half of which were in Kaiser Permanente. As the cost of health care in the United States, already the highest in the world, continued to rise during the decade, Americans began joining HMOs in large numbers. By 1995 three-quarters of all doctors were providing service as part of a managed care plan, and nearly three-quarters of all working Americans were members of such a plan.

As HMOs rose to dominate the U.S. health care system, attention turned from their supposed benefits to their perceived flaws. HMOs gave patients little choice over which doctors they could see, a fact that made many uncomfortable. New types of managed care, known as Preferred Provider Organizations (PPOs) and Point of Service (POS) plans became increasingly popular as systems which provided many of the cost-reducing benefits of HMOs while leaving members with some options as to what doctors to see.

Yet other problems, however, remained. HMOs and other forms of managed care generally had guidelines and standards of treatment that they expected participating physicians to follow. Some patients feared, and some doctors complained, that these guidelines were more concerned with keeping HMO costs low than with ensuring patients received the best possible treatment. And while HMOs were undoubtedly less expensive for many Americans than more traditional types of insurance, they remained too expensive for most to join except as part of a plan sponsored by their employer. Smaller businesses, their employees, and the self-employed remained largely unable to join HMOs.

See also: Henry J, Kaiser, Medicare, Medicaid

FURTHER READING

"Health Maintenance Organization," [cited March 30, 1999] available from the World Wide Web @ www.encyclopedia.com/.

"Health Maintenance Organization," [cited March 30, 1999] available from the World Wide Web @ www.eb.com:180/bol/topic?eu=40537&sctn=1#s_top/.

"The HMO Page," available from the World Wide Web @ www.hmopage.org/

Jones, Rhys W. The Ultimate Hmo Handbook: How to Make the Most of the Revolution in Managed Care. T.T.M. Publishers, 1994.

"Managed Care Guide," [cited July 15, 1999] available from the World Wide Web @ www.helix.com/pathway/mangcare.htm/.

Health Maintenance Organization (HMO)

Definition
Purpose
Advantages
Disadvantages

Definition

A Health Maintenance Organization provides health care coverage to individuals who are enrolled in it. Individuals enroll in an HMO through hospitals, physicians, and other healthcare providers, or through laboratories who have a contract with the HMO.

Purpose

The purpose of an HMO is provide health care coverage at lower costs to the HMO, to the patient, and to the employers or government who offer the HMO as an insurance option. HMOs have advantages and disadvantages, but can be a very important option for many individuals.

Advantages

The advantage to the patient of an HMO over other types of health care insurance are lower costs. For example, a patient may pay a co-pay of $10 for each visit to their primary care physician with HMO coverage, as opposed to 20% with traditional indemnity health care insurance. Frequently, the laboratory fees are covered completely if they are performed at a laboratory that has a contract with the HMO. The HMO monthly premium is usually lower than traditional indemnity insurance plans as well, because the health care providers contract with an HMO to receive a greater number of patients, but in doing so, usually agree to provide care at discounted fees. Another way that most HMOs keep costs down is by setting up a system of care based on specific care plans that are overseen by the patient’s primary care physician; the patient cannot make an appointment with a specialist, and be covered by insurance, without prior authorization or referral by their primary care physician. Some HMOs do not have these restrictions, but they tend to have higher premiums. HMOs also focus on preventive healthcare programs to help prevent members from developing chronic conditions that could significantly increase their medical costs.

Disadvantages

A major disadvantage to the patient of an HMO is that his or her preferred health care provider may not have a contract with that HMO and therefore, if the patient wants to see that particular provider, he or she would have to pay for the visits out of pocket. Another disadvantage of HMOs can be that providers may end up being at a financial disadvantage because of the reduced fees required to contract with the HMO. In some areas this has led to very few healthcare providers contracting with certain HMOs and thus the members of the HMO have very little choice in whom to see. For these same reasons, some healthcare providers will not re-sign a contract with an HMO and a patient who has been seeing that healthcare provider for years may end up not being able to choose that healthcare provider for the future.

Resources

ORGANIZATIONS

National Association of Insurance Commissioners, 2301 McGee Street, Suite 800, Kansas City, MO 64108. (816)842-3600. http://www.naic.org/.

OTHER

Medline Plus a service of the National Library of Medicine and the National Institutes of Health, 8600 Rockville Pike, Bethesda, MD 20894. http://www.nlm.nih.gov/medlineplus/managedcare.htm

Renee Laux, M.S.

HEALTH MAINTENANCE ORGANIZATION (HMO)

The term "health maintenance organization" (HMO) was coined in the early 1970s to encompass various payment and organizational arrangements for health care. In an HMO, the organization is responsible for assuring that needed medical care is delivered to an enrolled population. This is unlike the typical insurer's responsibility to just pay for care. HMOs typically do not rely extensively on financial disincentives to patients (deductibles or co-payments) to control demand; and they often have providers such as physicians and hospitals share in their financial risk. Some HMOs, especially those using a group-practice model, are developing extensive information systems to monitor and improve on clinical practice patterns.

Harold Luft

(see also: Health Maintenance; Managed Care )

Bibliography

Luft, H. S. (1988). Health Maintenance Organizations: Dimensions of Performance. New Brunswick, NJ: Transaction Books.

Miller, R. H., and Luft, H. S. (1997). "Does Managed Care Lead to Better or Worse Quality of Care?" Health Affairs 16(5):7–25.