THE HMO ACT of 1973

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					                                               The HMO Act of 1973   1

Running Head: THE HMO ACT of 1973

                         The HMO Act of 1973

                            Tracey White
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Passage of the 1973 Health Maintenance Organization Act represents a significant effort by the

Federal government to experiment with organizational change in the structure of the health care

delivery system. The history of the bill is briefly reviewed. The most important sections of the

bill are analyzed from the perspective of an existing prepaid group practice plan. The author

concludes that the bill contains sufficiently stringent requirements that it will not result in a

major increase in the number of Health Maintenance Organizations unless similar requirements

are imposed on other private insurance carriers.
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The HMO Act of 1973

     Today there are over 46.3 million Americans living without health insurance. Included in

that figure are 9 million children also living without insurance also, these number will continue

to rise over the next century. Policies have been implemented to protect American citizens.

History dates back to 1930 when the first Health Maintance Organizations plans existed. In the

year of 1973 President Richard Nixon was the first political leader to take control of managed

care. (Starr 1975). The HMO Act of 1973 was created to reduce the cost of healthcare, make

healthcare available to employees and improve the quality of care.

       The main purpose of the HMO Act of 1973 was designed to provide quality health care to

its members, while trying to control cost. Henry Kaiser began the first significant effort to

provide managed care for his employees. (Kaiser 2007). This organization became the HMO

Kaiser Permante. Due to the much success of the Kaiser Permante led to the passage of The

HMO Act of 1973. To understand the purpose and function of managed care system it needs to

be defined fully. The term managed care can be defined in many ways. Managed Care is used to

describe a variety of techniques intended to reduce the cost of providing health benefits and

improve the quality of care for organizations, that use those techniques or provide them as a

service to other organizations, or to describe systems of financing and delivering health care to

enrollees organized around health care techniques and concepts. Some programs that were

already in place to control healthcare was Medicare and Medicaid.

     The HMO Act of 1973 was part of the Public Health Service Act. It defined HMO’s as

legal entities providing a prescribed range of health services, known as basic health services, to

an enrolled population in return for a pre-paid payment. It must also provide its enrollees an
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oppurnity to obtain, or contract for other optional health services on a prepaid basis, so called

supplemental health service when possible. The original act spelled out the definition of and

requirements for an HMO. It specified basic and supplemental health services to be provided to

the HMO members, the basis for fixing the rate of employment prepayment, the requirement of

the HMO to also have open reenrollment (Starr 1975). The original act also authorized a 5 year

plan demonstration program designed to promote the development of new HMO’s and the

expansion of existing HMO’s by providing financial assistance through grants, contracts and

loans, provide a market by requiring certain employers to offer employees the option of joining a

qualified HMO, removing state laws and practices which could have could serve to hinder the

development and operation of a qualified HMO (Starr 1975). Under the HMO policy it increased

flexibility of HMO’s qualified under the act with regard to basic and supplemental health

services, options for staffing and organization and waivers and delays of imposing open

enrollment and community rating requirements. This amendment also increased the funding

limits for the grant program and extends the period for use of loan funds to cover the operating

cost deficits from 36 months to 60 months.

      To help fund the new HMO policy and programs, The Department of Health, Education

and Welfare had awarded 151.5 million in grant and loan assistance under the act to 215

organizations, 71.3 million in grants and 80 million in loans. Federal healthcare spending

increased from $39 million in 1965 to $75 million by the year of 1971. This increase in federal

spending was attributed by some policymakers to the “unregulated” use of these two new

programs. In March 1970, the Department of Health, Education, and Welfare proposed the

possible rise of federally supported health maintance organizations also referred to as HMO’s, an

alternative for Medicare. In February 1971, President Nixon challenged congress to develop a
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strategy to use the government to move health care coverage from traditional indemnity

insurance to prepaid healthcare. By the year of 1972 there were 110 HMO planning and

development grants funded, and President Nixon continued to advocate for HMO as a means of

expanding patient choice. The HMO Act of 1973 help stimulate private sector growth of HMO’s

by providing $375 million for development and subsidization of HMO programs and requiring

private employees with 25 employees or more to offer HMO’s (Roy 1972). The short term effect

was that legislation provided the start up of funding for HMO’s to get in to the business, and

served to legitimize the concept of HMO to employers (Roy 1972). The long term effect of The

HMO act also it helped set the stage for development of preferred providers’ organizations

(PPO), point of service (POS) and other forms of managed care. With the passage of the HMO

act of 1973 it helped to create different programs. The effect of the actual legislation was limited

by the passage of other managed care act it also helped to create the evolution of the private

healthcare marketplace (Roy 1972). Since the passage of the HMO Act of 1973 it has created

new legislation that was a major milestone for history. From this policy a new policy was created

called the Balanced Budget Act of 1997. It is noted as one of the most significant change in

private plan contracting in history. It introduced major revisions in the types of private plans that

could have Medicare contracts, the contracts standards to be applied, beneficiary enrollment

rules and payment rules.
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      Due to increasing dissafication with the passage of The HMO Act of 1973 it led to

increasing regulation of the HMO. Government officials expressed concern for patient protection

and access to healthcare. Public officials profit politically by promising, “free” healthcare. It

allows many political leaders to promise healthcare without actually guaranteeing access to it.

Proponents argue that it has increased efficiency improved overall standards and led to a better

understandings of the relationship between quality and cost. On the political effect of the HMO

Act of 1973, many democrats seek more government control, while republicans desire less

government control. Many argue there is no consistent, direct correlation between the cost of

care and its quality.

      Critics also argue that “for-profit” managed care has been unsuccessful health policy, as it

has continued to higher health care cost, increased the number of uninsured citizens, driven away

health-care providers, and applied downward pressure on quality. In defense to the managed care

system, related to the HMO plans have grown steadily over the last couple of years. Enrollment

began to peak in 1999 with more HMO plans being offered. By 2003, 63% of health plans

enrollees were in a managed care plan (Hoven 2004). By the year of 2004 184.7 million people

enrolled in a managed care plan. The following states in 2003 had an increasing number of

enrollees that over 30% of growth come from California had 48.5%; Massachusetts had 38.7%,

Connecticut with 37.8%; New York with 32.4% and Pennsylvania had 31.7 %.( Hoven 2004).

      With the growing number of HMO plans offered new plans to be offered. The POS plan

which is known as Point of Service. It utilizes some the features of other plans, where members

enrolled in a POS plan do not make a choice about which system to use until the point at which

service is being used. POS plans are becoming more popular because they offer more flexibility
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and freedom of choice than standard HMO plans. In a study on Comphrensive Study of US

Markets found that 88% of the 26 state level market studied there is a least one insurer in each

market that has a combined HMO/PPO market share in excess of 30% (Hoven 2004). In 42% of

the 26 level market studied that there is a least one insurer in each market that has a combined

HMO/PPO market share in excess of 50% (Hoven 2004). With the passage of the HMO Act,

more Americans have been able to gain healthcare coverage. There is still many Americans

struggling to afford insurance and get adequate medical coverage the HMO Act paved the way

to correct policies leaving so many behind. PPO plans increased while the HMO plans were a

low level. Below is a chart on how HMO plans changed over the years.

     Over the years new legislation was created to better improve the policy on HMO plans. In

1976 the HMO Act was amended to relax requirements for “qualified HMOS. In 1978,

amendment extended the HMO assistance program for 3 years. In 1981, legislation eliminated

almost all requirements of the HMO Act. In the following year 1982 a provision in the Tax
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Equity and Fiscal Responsibility Act of 1982 mandated further reductions in many federal health

programs, required employers with 20 or more employees to offer active employers and their

spouses aged 65-69 the same level of healthcare benefits offered to younger employees (Ellwood

2004).. By the year 1988 the HMO was rewritten to allow experience rating by HMO and to

allow employers to contribute less to HMO plans than to indemnity options (Ellwood 1996). . In

1997 the Balanced Budget Act of 1997 added new Part C to Medicare expanding options for

enrollment in managed care plans. In the year of 2003, the Medicare Prescription Drug

Improvement and Modernization Act of 2003 replaced the Medicare +Choice Program with a

new program called Medicare Advantage which operates under Part C of Medicare. Overtime

and throughout history new changes have been adapted to control the problem of managed care.

All though all problems have not been fixed, new changes are effecting history today with the

New Health Care Reform Bill.

       The main goal of the HMO Act of 1973 was to change the health care delivery system by

providing an alternative to the traditional solo-practice fee for service system. It also aimed to

anticipate the passage of the National Health Insurance with an alternative that has a promise for

controlling cost and assuring health care access irrespective of health care status, income or place

of residence. Goals not addressed or problems not focused on under the HMO Act was which

medical provider to see for medical coverage, referral issues, and certain services not offered or

covered under the HMO plans. While these issues created other problems in the managed care

policy, the major goal is providing health care coverage to all Americans.

       The various models of the managed care primarily effect differences on how physicians

are contracted with and paid, including how much financial risk physicians assume for providing

expensive or extensive care to patients covered under HMO plans. It can easily affect the quality
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of care and treatment the patient receives. Still many question the requirements under the policy,

which include do some managed care programs operate better than other plans. The earliest

HMO’s were established to serve employee groups, however there are still many unemployed

Americans that are not covered under a managed care plan. With so many changes and conflict

resulting from HMO plans effectiveness, The Commonwealth Fund Healthcare Reform was

created to focus on the need of the HMO organizations. It was a survey of patients experience

with managed care. (McNeil 1973). The survey findings included new information on who joins

managed care plans, perceptions of the quality of care, the current instability of health coverage,

differences ins satisfaction with services and care between fee for service and managed care

enrollees and the importance of having some choice of plans and providers(McNeil 1973).

Recognizing that the nation is moving rapidly toward a restructing of how care is provided and

paid for. The Common Wealth Fund Healthcare Reform advisory Committee and foundations

staff believes that managed care reform warrants further and immediate attention (McNeil 1973).

     It is clear that the passage of the HMO Act of 1973 helped develop numerous HMO plans,

as well as growth in the managed care industry. Today society is still implementing new changes

to policy. The New HealthCare Reform Act was passed on March 23, 2010 by President Obama.

He has added new change to existing policies and plans. This new policy is putting Americans

back in charge of their healthcare coverage. Under the new policy children under the age 26, will

be allowed to remain on their parent’s policy, provide affordable coverage to Americans without

insurance due to pre-existing conditions, review of health insurance premiums and getting the

best care from their current plans. The major benefit under this new act is to improve Americans

health, protect Americans savings, and enhance workers productivity. When the HMO Act of

1973 was passed there was a lot or argument on how the policy would work and benefit
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Americans covered under the plan. The new Healthcare Reform Act has also experienced the

same battle over coverage. Today the Department of Health and Human Services Labor and

Treasury issued regulations to implement a new Patient’s Bill of Rights under the Affordable

Care Act, which will help children and eventually all Americans with pre- existing conditions

gain coverage and keep it, protect all Americans choice of doctor and end lifetime limits on the

care consumers may receive. This new protections apply to all health insurance plans.

     Looking back over history there have been many changes and improvements in the

managed care system. All policies that have been created were not designed to protect or cover

all Americans but with the latest passage of the New HealthCare Reform Bill history is still

being created. When President Richard introduced the first passage under his administration he

took a major political defense on healthcare. The HMO Act of 1973 only helped evolve new

practices and guidelines for health insurance plans.
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Development of an Implementation of a Health Maintance Organization. (1971). Texas: Perry.

Ellwood, E., & Lundberg, D. (1996). A work in Progress. Journal of the American Medical

        Assiocation, 13, 1-151.

Hoven, A. (2004). Report of the Council on Medical Service. Report on Medical Service, 5(5),


Kaiser Public Opinion Spotlight: The Public, Managed Care, and Consumer Protections - Kaiser

        Family Foundation. (2007, October 5). The Henry J. Kaiser Family Foundation - Health

        Policy, Media Resources, Public Health Education & South Africa - Kaiser Family

        Foundation. Retrieved September 13, 2010, from

Kongstvedt, P. (2001). The Managed Care Healthcare Handbook (4th ed.). New York: Apen


McNeil, R. (1973, March 15). A Cenus of HMO's. Cenus Report, 5, 69. Retrieved September 7,

        2010, from Cenus Report

Roy, W. (1972). THe Proposed Health Maintance Organization Act of 1973. Washington DC:


Starr, P. (1975). Perpesctives on HMO's-- The New Medicine. Virginia: The New Republic.

APA formatting by
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