The most dramatic change that the majority of patients have experienced in the last few years is the replacement of "indemnity" insurance with some sort of for-profit HMO or "managed care" insurance, primarily as part of an effort to reduce medical care costs. In order to understand how and why managed care has become the predominant form of health care insurance, it helps to be aware of how our overall medical insurance system developed and what effect this had on the cost of medical care in general.

  Today, most of us expect our employers to provide health insurance as a "benefit" of employment, but don't realize how recently this became the rule rather than the exception.

Prior to World War II, almost no one had insurance for any type of medical care. Doctor bills were almost always paid out-of-pocket (or by barter, or not at all) and hospital care (in itself, a rarity) was usually administered in private hospitals for the rich, and in municipal or charity hospitals for the rest of the population.

In the immediate post-war period, wage and price controls instituted during the war were maintained to prevent runaway inflation, but employers were allowed to provide health insurance as a tax-free "fringe" benefit. Initially, this consisted of hospital coverage (Blue Cross). But, as unions began to bargain for "raises" each year, it was gradually expanded to include "major medical" insurance, which had the advantage of being tax-deductible to employers and tax-free to employees.

  By the mid-1960s, full indemnity medical insurance (including "first dollar" coverage with no deductibles, no co-payments, no determination of "medical necessity,"  no restriction on which doctors were seen or how often, and no limitation on the fees that re-imbursement would cover) had become standard for employer-provided medical insurance at major companies and in union-negotiated contracts. In fact, most people came to regard the provision of health care insurance as an employer's obligation. This movement was paralleled in the government sector when, in 1964,  Congress established Medicare (national health care insurance for the "over-65") and Medicaid (state-based health insurance for the indigent).

  By the early 1970's, this now widespread system of full indemnity, "no questions asked" medical care insurance that was in place for the elderly, the poor and those who worked for large companies or belonged to powerful unions (which made medical care available on a scale never before seen in our history) had two unfortunate but predictable effects.

  Firstly, this system created a situation in which almost no one involved had an incentive to worry about cost. Most patients did not pay directly for their services and, more often than not, had full coverage, so their only direct concern was their physical well-being. They didn't need to worry about the cost of frequent doctor visits or the necessity of expensive laboratory tests or the fees their doctors charged.  Similarly, doctors were largely untouched by patient behavior that might have influenced  costs. Because their patients never had to pay the bills and because more testing was more likely to benefit than to harm their patients, doctors were not inclined to limit patient visits, the number or kind of tests they ordered or their fees. Insurance companies just paid the bills and passed on the costs to the employers or the taxpayers during the following year. Employers negotiated with unions, but mostly just paid more for the insurance the following year and passed on the cost in the price of their products.

  The result was that, by the mid-1970's medical care prices had begun to increase by almost 15% per year. And, when combined with an explosion of very effective, but very expensive medical technology that enabled doctors to diagnose and treat many previously incurable diseases, overall yearly health care expenditures began to increase even faster.

  Secondly,  because large employers often obtained remarkably rich benefit packages at discounted rates, people who sought insurance as individuals or who were self-employed or who worked for smaller companies were usually offered options that were less generous and more expensive, or were forced to do without health care insurance at all.

The early responses to the looming health care crisis consisted of employers' and insurers' attempts to reduce costs by modifying indemnity insurance plans to include deductibles (patients were required to pay the first few hundred dollars out of their pockets before their insurance would pay anything) and co-payments (insurance would pay for only some portion -- usually 80% -- of subsequent expenses) in the hope that this would not only shift some of the cost to employees, but also discourage them as patients from "consuming" medical services indiscriminately.

 At the same time, the explosive growth in Medicare and Medicaid expenditures led both state and federal governments to try to control costs by limiting both re-imbursement rates and doctors' fees, and by setting up huge bureaucracies whose major task seemed to be to declare as many services as possible "not medically necessary."

  Unfortunately, because of the ever increasing demand for the even more rapidly increasing advances in medical care, and because the deductibles and co-payments were not large enough or were sometimes "forgiven" by doctors who were able to increase their fees to compensate, these attempts were unsuccessful in curbing the growth of total health care expenditures. As a result, by the late 1980's, the United States found itself in the midst of a full-fledged health care financing crisis in which those who did purchase medical insurance (both employers and individuals) had no choice but to pay exorbitant prices, and over 40 million people (mostly of the middle class) chose or were forced to do without medical insurance at all because it was so expensive.

The ensuing nationwide debate touched every corner of the country and explored the many factors responsible for runaway health care costs including: an aging population; the spectacular growth of medical technology and new pharmaceuticals; the HIV/AIDS epidemic; growing public demand for exceptional medical outcomes; an increase in malpractice litigation; an overabundance of hospital beds and medical specialists; cumbersome government regulations; and the employer-financed indemnity insurance system.

  Perhaps because there was not much that politicians could do about most of these factors, they seized upon reform of the insurance system as the solution --- and split along two lines: One camp proposed a state-run national health service similar to those of most European countries and Canada; the other favored expansion of the recently "resurrected" HMO  (health maintenance organization) type of plan.

With the defeat of the Clinton nationalized health care system, virtually everyone, including the Clinton administration, endorsed  the managed-care concept as a way to solve the health-care cost crisis.

The first managed care organizations had been HMOs  (which were not-for-profit) created by business owners on the west coast in the early 1900s as prepaid group practices to provide medical care for lumbermen and railroad workers and their families, and a few years later for coal miners in Appalachia. The best known survivor of these early HMOs is Kaiser-Permanente, which became a model for many that followed over the years.

However, HMOs remained unpopular throughout most of the century, insuring only 3 million people in 1971. And, even though President Nixon and Congress passed the Health Maintenance Organization Acts of 1973 and 1976, which specifically endorsed and encouraged HMO development by offering them special legal and financial incentives  (including mandating that all larger companies must allow their employees the option of choosing an HMO as their form of insurance and insulating them from certain kinds of lawsuits), the total HMO enrollment in the U.S. in 1979 was still only 8 million and that was concentrated mostly in a few areas of the country.

This reluctance was finally overcome by the health care crisis. The lure of the cheaper medical care that HMOs promised did what legislation could not, and HMO enrollment skyrocketed to 25 million by 1986 and over 50 million by 1990 (over 85 million now).

In addition to increasing in number and size, HMOs began to alter their structures as well. The HMOs of the 1970s (eg,  Kaiser-Permanente of California and HIP of New York) were generally not-for-profit partnerships of physicians in large group practices who would contract with large employers to provide all health care services to their employees for a fixed, per capita, pre-paid fee.  Enrollees in these not-for-profit plans received all of their health care from physicians and facilities that were part of their particular system, trading the freedom to choose their doctors and hospitals that was the hallmark of indemnity insurance for the cheaper alternative of being completely restricted to the doctors, hospitals and treatment options offered by their HMO.

However, as more and more of the employer market began to look to managed care, many insurance companies came to realize that there was a potentially huge profit to be made from brokering HMO-type contracts between employers and doctor/hospital organizations. Furthermore, government embraced "for-profit managed care," based on the hope that this new type of plan would impose some of the cost disciplines found in a free market economy, and thus rein in the high costs of care.

• First and foremost, they had to drive medical expenditures low enough to offer employers benefit packages at lower prices, yet still have profit left over. This required not only aggressive bargaining with hospitals and doctors about fees, but also exerting significant control over how their contracted health care providers practiced, as well as over how many and which medical services these providers would be allowed to provide.


• They had to insulate themselves from the huge liability they might  incur if their controls on health care providers resulted in patients being harmed or denied necessary care.


• They had to make reduced options for patients somehow seem attractive.

For the most part, managed care companies achieved cost control in two ways. They negotiated lower fees or package deals with doctors and hospitals in return for the promise of increased patient loads, and they wrote restrictive contracts that penalized their providers in various ways (see below, How Does Managed Care Work?) if they did not adhere to insurance company guidelines for all aspects of medical care (including use of diagnostic testing, frequency of visits, range of treatment options, use of cheaper versus more expensive medications).

Insurers attempted to insulate themselves from liability primarily by insisting in their contracts with doctors that they (the insurance companies) made no medical decisions (those were solely the province of the doctors), but only decisions about what was to be covered (paid for). Remarkably, the doctors who signed these contracts agreed to this absurd transfer of liability even though they knew full well that, as James Monroe said, " [he] who controls the purse strings, controls the sword."

Finally, they attempted to make the unpalatable desirable by advertising essentially unlimited coverage at minimal cost (the falsity of which has subsequently led many angry patients to file lawsuits for breach of contract, fraud and racketeering) and by creating a host of hybrid managed care plans that seemed to offer otherwise reluctant patients the best of both the HMO and traditional medical care worlds --- patients enrolled in the plans would have the option to alternate as they wished between network providers (at little or no per service cost) and "out-of-network" doctors who would be covered by what seemed to be traditional indemnity insurance (at a higher cost).

The Devil Is In The Details

In fact, it is in these details that the devil lies when it comes to choosing health care insurance. In an attempt to offer some insight, the next section describes the various ways in which managed care insurers control their providers, and how this can affect the way they practice medicine. Once you understand the kinds of restrictions that may be placed upon you and the managed care doctors who take care of you, you will be in a better position to assess the pluses and minuses of the various types of managed care and non-managed care plans described in the final segment.

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