History of Managed Care

Managed care is a organized method of delivering healthcare services. Its mission is the utilize healthcare resources to provide optimum care to patients. Principles of managed care have been used in the American health care system for over a century. Managed care attempts to achieve several goals, which include:

  • Improve quality and accessibility of health care
  • Improve outcomes and overall quality of life for patients
  • Contain costs


Early Development

The system currently used and known as managed care traces its roots to a series of alternative healthcare arrangements, many times for laborers, throughout the nation as early as the 19th century. In order to help certain individuals get the medical services they needed, the enrollees paid a set fee to physicians who provided services as part of their agreement.

This new system was made available to select groups of people, including rural residents, and workers and families in the lumber, mining, and railroad industries. In more densely populated cities,  these groups were typically paid by charitable organizations to provide care to their members or charges. Such prepaid group practices served as a model for what became Health Maintenance Organizations (HMOs).

One of the influential figures in the origins of managed care is Dr. Michael Shadid, who began a rural farmers’ cooperative health plan in Oklahoma in 1929. Despite opposition from multiple doctors, he enrolled several hundred families with assistance from the Oklahoma Farmers’ Union.

The same year, the Los Angeles Department of Water and Power contracted with Drs. Donald Ross and H. Clifford Loos to offer comprehensive health care to about 2,000 workers and their families. Within five years, the group practice prepayment plan at the Ross-Loos Clinic enrolled 12,000 workers and 25,000 dependents for a monthly charge of $2.69 per person.

Additionally, Dr. Justin Ford Kimball established The Baylor Plan at the Baylor Hospital in Texas in 1929. This was a prepaid hospitalization plan, which was the first to use the Blue Cross logo.

Health Insurance Flourishes

In 1933, Dr. Sidney Garfield of Los Angeles with several associates was providing prepaid medical services to 5,000 workers on a large aqueduct construction project. The workmen’s compensation insurance companies paid Garfield a percentage of their income to cover treatment for accidental injuries, while the workers paid 5 cents for other types of health care. Five year later, Garfield offered the same plan to even more workers at the Grand Coulee Dam for Henry J. Kaiser.

Influenced by Garfield’s program, Henry Kaiser (prepaid healthcare’s most recognized name – Kaiser Family Foundation, Kaiser Permanente) organized two medical programs during World War II. These programs provided health care to workers in his steel mills and shipyards on the West Coast.

After the war, Kaiser released his plans for public use. He believed he could reshape the health care system to give millions of Americans prepaid, comprehensive medical care at affordable prices. Ten years later, the Kaiser Permanente health plan had half a million members and a growing number of hospitals and clinics.

Soon other prepaid group plans emerged in the 1930s and 1940s, essential to the formation of what we now know as the HMO. Group Health Association was formed in 1937 in the District of Columbia as a nonprofit cooperative by employees of the Federal Home Loan Bank. Group Health Association of Puget Sound in Seattle was developed at the end of World War II by members of the Grange, the Aero-Mechanics Union, and local food and supply cooperatives. In 1947, The Health Insurance Plan of Greater New York (HIP) was put in place to give city employees access to care.

Comprehensive Coverage

Each of these companies worked a little bit differently from one another, yet shared a common goal of providing comprehensive medical services. Kaiser was run by the Kaiser family and company executives, while Group Health Association was coordinated by enrolled members who elected trustees. Decision-making was accomplished at HIP by a board comprised of representatives from business, medicine, labor, and government.

Premiums for coverage with any of these companies was equally or more costly than other insurance, though their benefits and coverage exceeded others in quality. They included a focus on preventive care, outpatient services, immunizations, well-child care, and other types of care. Exclusions, limits, and copayments were relatively low in occurrence for members of these plans. Group practice plans, especially those that owned hospitals, could create an environment and incentives for physicians that nurtured the availability of affordable and high quality care.

AMA Opposition and Influence

Greatly opposed to the concept of organized medicine, the American Medical Association (AMA) considered each type of prepaid health plan an atrocity to the field of medicine. The AMA viewed the cooperative plans as an unnecessary form of non-physician control over health care professionals. They also considered these groups a “corporate practice” of medicine, and therefore rejected it. They rejected prepaid plans controlled by physicians, calling them a method of unethical contract practice.

As more prepaid plans sprouted forth in the 1930s and 1940s, AMA made active efforts to eliminate the growth prepaid plans and cooperatives. Organized physician groups expelled participating physicians from local medical societies, prevented them from obtaining consultations and referrals, and convinced hospitals to deny them admitting privileges. In effect, the AMA was taken to the Supreme Court for violating the Sherman Antitrust Act and were rejected.

Their efforts still proved successful, as several state laws were enacted, restricting the use of such plans, requiring members have the freedom to choose their doctor, and permitted state medical societies to  approve or deny new plans. Prepaid plans had become less prevalent in health care by the 1950s, and the AMA changed from being the anti-group plan, to closely monitoring yet coexisting.

Prepaid Revival: HMOs

Laying low for many years, prepaid health care made a comeback in the 1970s. In the late 1960s and early 1970s, a variety of politicians and interest groups set forth to reform the healthcare system in the US. Proposals addressed issues of cost containment, uninsured coverage, access to care for the poor and minorities, consumer rights, efficient delivery systems, and more.

In 1971, a new system to be implemented was announced by the Nixon Administration. This was our country’s introduction to Health Maintenance Organizations (HMOs). Backed by government funding, HMOs were supported by The HMO Act of 1973, which granted $375 million to assist in their development, address the state laws banning prepaid groups, and required companies with at least 25 employees to offer a federally qualified HMO to interested employees.

Dr. Paul Ellwood, a Minneapolis physician, coined the phrase “health maintenance orgnaization,” referring to prepaid plans that enrolled members and managed their care through a designated provider network. Dr. Ellwood influenced the Administration, insisting that in order for the HMO system to be effective, the structural incentives of traditional fee-for-service care had to be reversed.

Modern Expansion

Since the creation of HMOs, the  system of managed care has continually expanded throughout the past forty years. Employers began to view managed care as a less costly and high quality for of coverage to provide their employees. State governments use managed care for organization within Medicaid programs, and the federal government has implemented managed Medicare.

Preferred Provider Organizations (PPOs) were created in the early 1980s, begun by California legislation allowing selective contracting for Medicaid and private insurance. This led to other states enacting similar laws to facilitate PPOs, giving plan members the freedom to use out-of-network doctors if they chose. By 1990, PPOs were dominating HMOs in the health insurance market, making Preferred Provider Organizations increasingly widespread and available. The option of having options gave way to 108 million PPO plan members in 2006, compared to 67.6 million in HMOs. Further development in the healthcare marketplace was introduced in the 1990s by the Health Insurance Portability & Accountability Act of 1996 (HIPAA).

Managed care history continues to be made, as health insurance laws are continually changing through the Affordable Care Act. Since its inception in 2010, the Obama Administration has altered much of the health care system in the ACA’s “overhaul” of previous laws. The health care reform law mandates a variety of preventive care services be covered in full by all insurance plans, which has already taken effect.

In 2014, most of the ACA’s key points will be fulfilled, with all uninsured individuals being required to buy a health plan, no discrimination towards insurance applicants with pre-existing conditions, and several other laws which give the government more influence over the health care system and more individuals the ability to get insured. Significant changes to Medicare and Medicaid were also made, as well as an extension placed on the age for dependent children allowed on their parent’s plan.

Health insurance has since been subject to various laws and new reforms. Overall, the system of managed care has remained for employers offering insurance to their workers, individuals and families without other types of coverage, and those using government insurance plans. As the current reform takes its course, we will see where managed care ends up in years to come.