How can we put on the brakes on cost? Why is “Health Maintenance Organization” a bad word? How has it influenced our current employer-based system?

It’s certainly not the first time in history that we’ve had uncontrollable costs. Back in the 1990s, the US turned to the Health Maintenance Organizations (HMOs) as the answer to control costs. Well, they “worked” – and I use that term loosely here. The mid-90s brought some of the lowest cost trends this country has seen ~0% (Remember healthcare cost trends are historically 6-10%). If you’ve heard the term at all, HMO has a bad connotation to it, and for good reason. First though, it is helpful to understand what it’s ~supposed~ to be. Then we’ll look at what they morphed into back in the 90s.

An HMO is an insurance product that gives access to a tightly managed network of providers. It’s supposed to be more efficient through two methods. 1) Negotiate better rates with providers by guaranteeing a certain number of patients – trading lower rates for volume. 2) It is supposed to give better care and keep its members healthier than they otherwise would be. It uses the ‘gatekeeper’ model, where you have a specific primary care physician that coordinates all your care. In an ideal world, he oversees your care and refers you to specialists when such care is called for. In this hub-and-spoke model of care, he should have intimate knowledge of the patient, the drugs being taken, any treatments being performed, etc. He would also be responsible for preventing any adverse interactions – if drug A from specialist #1 can not be taken along with drug B from specialist #2. Of course, that is more relevant for the senior population who can often be on 6+ drugs at a time vs. a health individual taking 0-2 drugs at a time. On the fiscal side of things, these HMOs are given a fixed monthly premium to care for the patient, so the less money they spend on the care, the more money they get to keep. I think this incentive was a foreshadowing of potential issues, but the earliest HMOs had some success providing better care at a lower cost. Then a lot of things went wrong pretty quickly.

There are a couple key things to consider. One is that the earliest HMOs were genuine medical companies that had been in the business for decades. Some of these guys were Kaiser Permanente, Blue Cross Blue Shield, and other smaller local companies. Second, these organizations targeted small-medium sized employers so that the volume of patients was manageable for a small-medium sized group of doctors. It didn’t take long before every insurance company, including life and property insurers who had no experience in health insurance, was throwing together a haphazard group of doctors and calling it an HMO. On top of this, larger sized employers started to join HMOs and forcing thousands of employees into groups of hundreds of doctors and a handful of hospitals. If you can imagine the scene, you had doctors with little to no experience in an HMO being overwhelmed by thousands of employees who previously were able to see any doctor they wanted. The inexperienced insurance companies turned to their only weapon to stay in business – they started to deny care. To clarify, whenever care is properly managed, some care will be denied. Inherently keeping costs down involve denying wasteful spending or seeking lower cost alternatives with superior health benefit / dollar cost ratios. These inexperienced insurance companies were denying/discouraging optimal care. You can imagine all of these factors combined lead to dissatisfaction for everyone involved, especially the physicians and patients. To exacerbate those problems, it’s a pretty heartfelt news story to show a soon-to-be-retired grandpa not getting his heart medication and dying of a heartattack a few weeks later. By the late-90s with the economy roaring back and employers and employees able to afford indemnity plans again, the era of the HMO was gone. Employees pushed back hard against being forced to see an overworked primary care physician and being subject solely to his medical opinions.

The pendulum of cost and choice had swung back around. To give employees more choices but still keep an eye on costs, the PPO (Preferred Provider Organization) was invented. This insurance product gave a list of physicians and hospitals that were “in-network” that carried reduced co-pays, co-insurances, and deductibles. To go “out-of-network,” employees had to pay higher cost-sharing amounts. The other primary difference is that employees had to find their own primary care physician and were again allowed to see any doctor or go to any hospital they wanted – as long as they paid a higher amount. This really amounts to little more than a discounting system.

Today, different geographies are dominated by different systems. The HMO system still thrives in California, where it had its strongest roots and its best practices. Kaiser Permanente was founded there – we’ll look at them at a different post. The PPO product has become the dominant form in most areas, particularly the Northeast. Although, with the consolidation of insurance companies (only 4 major ones), the PPO product of today can almost feel like an indemnity product that allows employees to go anywhere. As an example, my Oxford health insurance PPO (aka. United Healthcare) offers me well over 300 potential primary care physicians within 1 mile of where I live. Heck, I have my choice of 56 acupuncturists too! Granted, I live in Manhattan, so maybe that’s a poor comparison.

Where do you live? What type & brand of insurance do you have? How much choice do you have when picking your physicians? In other words, how many primary care physicians (sometimes called internists, OBGYNs, or general practioners) can you choose from within 1 mile of where you live or work (or 5-10 miles if you’re in a suburb)?