Health Maintenance Organizations (HMOs)

Health Maintenance Organizations (HMOs) are the primary vehicle for managed health care in the United States. An HMO is an organizational structure that insures participating members for health-care-related expenses through its coordination of the financing elements of medical care with the care provision aspects. In their role as insurer, provider, and administrator for health care coverage, HMOs attempt to fulfill three often conflicting agendas: the provision of high quality health services; the reduction of inefficiencies, both operational and economic, in such services; and the generation of financial profits for the owners of care provider systems.

The underlying philosophy behind the development and implementation of health maintenance organizations is the concept of managed care. Managed care is an approach to the provision of health care services that attempts to balance concerns for the application of effective medical treatment with administrative concerns for economic efficiency, as represented by cost control measures. A critical element in this balance between treatment and cost containment is an emphasis on preventive care—the effort to prevent serious disease through periodic preventive treatments such as annual physical examinations. Preventive care attempts to identify potential health problems before they grow both in severity and in treatment cost.

HMOs form a unique element of the U.S. health care system by offering a means to “manage” health care costs through the provision of prepaid health coverage for future services; in this fashion HMOs serve as both health insurers and health care providers. They operate largely as private, for-profit organizations within the U.S. health care system, which itself is a predominantly private (nongovernmental) medical services delivery system. Prior to the emergence of HMOs, most medical services in the United States were performed on a fee-for-services basis, with traditional health insurance offering posttreatment payments. Under this structure, the risk of excessive health care costs that would not be covered in full by these existing insurance plans tended to discourage some individuals from obtaining necessary medical treatment. Moreover, the cost of traditional insurance would often fall beyond the means of up to a quarter of the working population.

Because the United States does not provide comprehensive, universal, publicly funded health care for its citizens, the HMO was developed as a mechanism to lower health care costs and thus make health care more affordable for less affluent portions of the population. However, as HMOs are largely privately owned businesses facing pressures from stockholders (the owners of these companies) for profits, the structure and performance of health maintenance organizations in the United States embody the central dilemma that bedevils health care in the United States—the struggle between economic demands for profitability and medical demands for effective care. Complicating this situation are issues of equity in the availability and implementation of care, ethics concerning the nature of the decisionmaking processes in HMOs, and efficiency in a system that attempts to balance important issues of medical treatment with overriding pressures for cost containment.

The historical origins of HMOs date from the early part of the 20th century. In several areas of the United States, innovative physicians established prepaid medical service arrangements within their communities. The most significant large-scale developments among these early efforts were the formations of the Kaiser Permanente group and the Health Insurance Plan (HIP). The system that became Kaiser Permanente started in the 1930s as a supplier of medical services to industrialist Henry J. Kaiser's employees throughout the Western United States; after World War II, it expanded into a publicly available, comprehensive prepaid health plan that was open to all interested groups. In the eastern United States, HIP emerged in New York City during the 1940s as a medical provider for the municipal employees of that city. Two important elements of these and other early efforts toward prepaid group health coverage were the nonprofit status of many of these emerging providers and the emphasis these providers placed on preventive care as a means to reduce overall health care costs.

...