Managed Markets Monday: The Evolution of Managed Care

By Carly Israel, Account Executive, Managed Markets at Palio

Managed care has become an increasingly important concept as the cost of healthcare remains at the forefront of national dialogue. But when did managed care start and how has it evolved since? Let’s take a look at the origins of managed care and the key time periods that have allowed it to evolve.

The Early Years

In 1910, the Western Clinic in Tacoma, Washington began offering a variety of medical services to lumber mill owners and their employees in exchange for a premium payment of $0.50 per member per month. Often cited as the first health maintenance organization (HMO), the Western Clinic provided a range of services exclusively through its own providers. Over the years, this program expanded to 20 sites throughout Oregon and Washington and set the stage for similar prepaid medical care programs to develop.

During the period surrounding World War II, there seemed to be a shift in the way society thought about medical care. Employers began seeking health benefits for their employees, consumers began wanting improved and affordable care, and providers began pursuing enhanced patient revenues. As a result, several examples of early HMOs began popping up ‒ some of which are still in existence today. The Kaiser Foundation, which is still a prominent organization today, began in 1937 to provide medical care for workers who were building an aqueduct in southern California. Though these early organizations offered slightly different services, their goal was the same: provide affordable and improved healthcare and ensure a flow of patients and revenues.

The Adolescent Years

Though HMOs represented a significant shift in the way people sought out healthcare, it was not until the enactment of the federal Health Maintenance Organization Act in 1973 that HMOs began to play a more prominent role in the way healthcare was financed and delivered. The HMO Act, which was enacted during the Nixon administration, authorized start-up funding and ensured access to the employer-based health insurance market. There are several key features of this act that have helped shape the way HMOs operate:

  • Grants and loans became available for the planning and start-up of new HMOs
  • Specific state laws that restricted the development of HMOs were overruled
  • Employers with 25 or more employees were required to offer up to 2 optional HMO plans as part of their employee benefits package            

The HMO Act also established the process in which an HMO could become federally qualified, which had a major impact on the establishment and growth of HMOs. Federal qualification meant that HMOs would have access to the employer market and could receive federal grants and loans. Issuance of these regulations resulted in rapid growth of HMOs.

In the early 1980s, there were several developments that helped further shape the evolution of managed care. Preferred provider organizations (PPOs) were created to have plans contract with a limited number of providers to obtain services for their members at a discount. In addition, utilization review became an important aspect of healthcare management. Plans began to perform analyses of hospital claims to identify utilization, and many corporations initiated programs for preauthorization and review for inpatient care.

The Recent Years

The period between 1985 and present day can be characterized by 3 stages: innovation, maturation, and restructuring. Let’s take a brief look at each stage:

Innovation: Physicians and hospitals began collaborating to form integrated delivery systems (IDSs). IDSs had 2 forms: a single legal entity made up of hospitals and hospital-employed physicians and a physician-hospital organization (PHO) to contract with managed care organizations. PHOs did not become important to the managed care environment because their reimbursement systems did not support the primary goals of managed care, which are cost containment and efficient care.

Another major development during this time was computer technology advancement. Managed care plans began using improved computer systems to generate statistical profiles of the services provided by physicians. This technology served as a means to assess the efficiency and quality of care that patients received, and it provided a basis for the adjustment of payment levels to providers. In addition, advances in computer technology have led to a much more efficient way to process medical and drug claims, which has lowered administration costs and allowed for superior information to be available. The collaboration of physicians and new and improved technology led to rapid growth and success of HMOs.

Maturation: During the early 1990s, the growth of PPOs surpassed the growth of HMOs. Conventional health insurance continually declined, and Medicare HMO enrollment grew from 1.3 to 6.3 million by 1999. In addition, external quality oversight activities became an important aspect of the managed care industry. Entities such as NCQA began accrediting HMOs and many employers started requiring NCQA accreditation of HMOs they contracted with.

This phase also saw the change of cost management efforts, which were almost exclusively inpatient hospital utilization. A significant amount of attention started to be paid to ambulatory services, such as prescription drugs and disease management, in addition to inpatient utilization.

Restructuring: In the late 1980s, the relationship between managed care, the healthcare delivery system, and the overall marketplace began to change. Payers began creating hybrid products, which led to a restructuring of services by the players in this space. As group-model HMOs declined, HMOs began expanding their offerings to include PPOs, while some contracted with employers on a self-funded basis so the risk for medical costs remained with the employer. Major commercial health insurance companies significantly increased their involvement in managed care. As you can see, the managed care environment became more and more complicated.

As anti-managed care rhetoric became popular in political debates during the early 2000s, employers began competing for employees by offering fewer managed health plans. HMOs saw periods of decline and periods of growth, mainly as a result of increasing Medicare enrollment. Insurance carriers found it necessary to sell hybrid products that combined elements of HMOs and PPOs, in combination with an increase in cost-sharing with consumers.

Perhaps most importantly, this time period saw a significant amount of consolidation. Many small health plans were acquired by larger ones, and employers began moving towards national companies at the expense of local health plans. As you can see, the managed care environment has continued to become more complex as it has evolved.

It is clear that managed care has dramatically changed over the years. From its inception in the early 1900s up until the present time, managed care continues to evolve as new advances become available and as changes in the market and economy occur. With the advent of the Affordable Care Act, managed care is sure to play an increasingly important role in the healthcare industry. It will be fascinating to see how it evolves even further in the coming years.

Source: Kongstvedt P. Managed Care: What It Is and How It Works. 3rded. Sudbury, MA: Jones and Bartlett Publishers, LLC; 2009.

Managed Markets Monday is a weekly series that provides insight into what we think it takes to meaningfully and effectively communicate in the managed markets space. Follow up with Carly at

Palio is an advertising agency revolutionizing pharmaceutical and healthcare marketing to create experiences that will Never Be Forgotten.

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