BRIEF HISTORY OF SYSTEMS-BASED PRACTICE

Summary:

Some form of “Managed Care” has been around since around 1910. The development of Blue Cross was based on a capitated system in 1929. Through the years, especially in the late 1980s and through the 1990s the size of the medical group practice grew larger to help physicians have more negotiating power in dealing with managed care organizations and in the 2000s it appeared that the small group practice and solo practitioner model was returning. By 2013 with the passage of the Patient Protection and Affordable Care Act, otherwise known as “PPACA” or “Affordable Care Act” or “ACA”, or “Health Care Reform”, or “ObamaCare” the movement towards system-based practice grew.

BEGINNINGS OF SYSTEMS-BASED PRACTICE

Prepaid group practices, precursors to HMO’s, developed in the turn of the century in the American Northwest due to the opening up of the west by railroads. Probably the first example of such prepaid group practice was the Western Clinic in Tacoma, Washington. Tacoma was the lumber capital of the world. Mill owners and their employees wanted to lock in medical care through contracts with doctors. Under these agreements, doctors would render all necessary health care services for a prepaid set fee every month. The Western Clinic began in 1906 as a fee-for-service partnership between two doctors. Around 1910, they entered into their first prepaid medical contract with the lumber industry at a cost of 50¢ per member per month.

Around the same time, Dr. Albert Bridge began a clinic in Tacoma. He organized a chain of about 20 group industrial clinics throughout Washington and Oregon using prepaid contracts. These clinics known collectively as the Bridge Company are an early example of the “industrialization of medicine”.

By 1917, the Pierce County Medical Service Bureau had been organized in the Tacoma area by physicians in private practice. The bureau’s purpose was supposedly to screen all medical contracts to preserve some professional control and offer more consumer choice. It has been claimed that the bureau actually served to control and limit competition from the prepaid groups and employer-sponsored programs. This and other medical service bureaus became the predecessors of the local county medical societies. These are the same societies that would later oppose HMO’s at basically every stage of their development.

CONFLICTS BETWEEN PRE-PAID PLANS AND MEDICAL ESTABLISHMENT

During the “Great Depression”, the financial uncertainty of the times forced hospitals to turn from philanthropic donations for funding to patients fees for support. Hospitals were threatened by declining income and increasing number of unused beds. Patients faced both loss of income from illness and increasing debt for medical expenses. Patients sought solutions through group actions such as the prepaid premium experiment with the teachers at Baylor Hospital.

In 1927, before the origins of traditional health insurance, came the “medical shot heard around the nation”. Dr. Michael Shadid sold shares in the construction of Community Hospital for $50 each in the small farming community of Elk City, Oklahoma. Each share entitled the holder to medical care provided by the hospital. Consumers in Elk City responded enthusiastically, but the county medical society responded in anger and fear. Shadid lost his membership in the county, state and national medical societies and was threatened with suspension of his license to practice medicine. From then on, any physicians applying to the state of Oklahoma for licensure to work at Community Hospital had an unusually difficult time passing the examination.

In 1934, Farmers Union assumed sponsorship of the program and Community Hospital became the Farmer’s Union Cooperative Association. Twenty years after Shadid’s initial proposal, there was an antitrust suit against the county and state medical societies settled out of court awarding Shadid and his associates $300,000 in damages.

A much more well-known clinic, started originally as a fee-for-service partnership in 1929 by Drs. Donald Ross and H. Clifford Loos, serving the employees of the Los Angeles water and power department began a prepaid program to provide medical services. This program grew and enrolled other groups of municipal employees. Both Ross and Loos were expelled from the Los Angeles County Medical Society for operating their prepaid clinic, but were later reinstated after an appeal to the American Medical Association.

Both situations show medical establishment retaliation against consumer control, prepaid fee and regular salary paid to physicians. There were many other court cases around the country dealing with this issue and courts regularly ruled in favor of the group physicians and protected them from further harassment.

This conflict grew from a grass-roots level to a national forum when a group of public leaders from medicine, dentistry, public health, education drug industry, and public at large formed a committee to study the economics of health care and prevention of disease. They published their five year study known as the 1932 Committee on the Costs of Medical Care Report which recommended that employer groups and other groups make regular payments into a common fund and that these groups then arrange with physicians in private practice to furnish complete medical services in return for regular payments. In 1932 the American Medical Association issued a statement strongly opposing prepaid medical care which ultimately led to the development of Blue Cross because of public pressure, self-interest, and the perception that health insurance was the lesser of two evils.

In 1937 the Home Owner’s Loan Corporation found that large medical expenses were a major cause for mortgage defaults. Group Health Association of Washington, D.C. was created as a nonprofit corporation with start-up funds from the Home Owner’s loan. The District of Columbia insurance commissioner claimed authority over Group Health and forbid its operation. Group Health went to court and won and this trial resulted in an important legal precedent that Group Health and other prepaid group practice programs did not constitute medical insurance.

The District of Columbia Medical Society opposed Group Health and impeded recruitment of physicians for Group Health staff, limited access to hospitals for Group Health physicians, and threatened expulsion from the medical society for those who already belonged to hospital staffs. Group Health took District of Columbia Medical Society to court in one of the “bitterest battles in the history of modern American medicine” and the U.S. Supreme Court ruled in favor of Group Health. The District of Columbia Medical Society was indicted by a grand jury for restraint of trade by blocking the development of Group Health, and organized medicine was again facing charges of antitrust violations.

BLUE CROSS/BLUE SHIELD

The development of Blue Cross started as essentially a capitated plan for school teachers in Dallas Texas in 1929

In the depression era, many patients were not able to pay for hospital care. In 1929, Baylor University Hospital agreed to provide 21 days of hospital care to 1500 Dallas, Texas schoolteachers, if they paid the hospital $6 per person per year. Until then, only disability insurance was available to the school teachers. As the depression deepened and private hospital occupancy in 1931 decreased to 62%, similar hospital centered private insurance plans spread. The American Hospital Association built on this prepayment movement and established a statewide Blue Cross hospital insurance plans allowing free choice of hospital. In 1939 the California Medical Association established the first Blue Shield plan to cover physician services. These plans, controlled by state medical societies, followed Blue Cross in spreading across the nation. This was the beginning of traditional health insurance and the foundation for the development of Blue Cross/Blue Shield. By 1940, 39 Blue Cross plans, controlled by the private-hospital industry had a total enrollment of more than 6 million people.

KAISER-PERMANENTE MEDICAL CARE PROGRAM

During the Depression era in 1933, Dr. Sidney Garfield finished his surgical training and wanted to set up a medical practice. At the time, Henry Kaiser was involved in major construction projects in California and owned an insurance company. Garfield decided to work at a construction site in Southern California where an aqueduct was being built to supply Los Angeles with water from the Colorado River. Kaiser was involved with this construction project. Garfield developed a 10-bed hospital built on skids which were dragged along as construction progressed. All patients with serious injuries were sent to Los Angeles at the request of the company insuring the construction workers. Garfield capitalized on this by convincing the insurance company to pay him directly and in advance for each employee in exchange for provision of all necessary on-the-job medical care. He also arranged for voluntary deduction from worker’s salary for off-the-job care for workers and their family.

In 1937, Kaiser had Garfield create a similar program for workers and their families at the construction site of the Grand Coulee Dam in Washington State. The program was successful.

In 1942, Kaiser again had Garfield develop a health care program in the San Francisco Bay area at his shipbuilding plants with 90,000 employees. Most of these employees were there because they were medically disabled, otherwise they would have been in the U.S. armed forces. A number of health care facilities were constructed and paid for and the program was successful. When the war ended and the patient population essentially vanished, Kaiser-Permanente Health Care Program was offered to the public. Highly regarded and successful from its inception, today Kaiser-Permanente Health Care Program is the largest HMO in the United States.

GROWTH OF PRE-PAID PLANS

During World War II, wage and price controls prevented companies from granting wage increases but allowed the growth of fringe benefits. With a labor shortage, companies competing for workers began to offer health insurance to employees as a fringe benefit. Enrollment in group health insurance plans increased to 101 million in 1955.

Other prepaid health care plans developed around the country such as the Health Insurance Plan of Greater New York involving Mayor Fiorello La Guardia. This plan began in 1944 and had group clinics throughout the New York metropolitan area and it did well almost immediately. The Group Health Cooperative of Puget Sound was started by consumers without any sponsoring company or other organization.

Group Health Cooperative in Seattle, inspired by the appearance of Shadid, organized 400 families paying $100 each to establish a clinic for themselves. In 1947 they purchased the assets of the Seattle Medical Securities Clinic and contracted with its physicians for care. The local medical society opposed the formation of this Group Health Cooperative and this case went to Court and in 1957 the medical society lost. The results of this case outlines the rights of both consumers and organizations in developing prepaid medical practices.

The ultimate role reversal took place in 1956 when Group Health Mutual Insurance Company, a traditional insurance company servicing rural Minnesota and Wisconsin, offered “direct service program” and built a clinical facility along with its headquarters. This began Group Health Plan, the largest HMO in the Minneapolis-St. Paul metropolitan area at one time.

A movement began by some physicians to loosely associate various fee-for-service physicians in an arrangement under which they would accept fixed fee schedules, peer review and the risk of financial loss. One of the first of these plans was the San Joaquin Foundation for Medical Care in California in 1954. This is the Independent Practice Association type of HMO, a common model in use now.

ORIGINS OF HEALTH MAINTENANCE ACT OF 1973

Dr. Paul Ellwood, considered by many as the “modern-day father of the HMO concept” coined the term “health maintenance organization.” He was the executive director of the American Rehabilitation Institute and had concluded that the existing fee-for-service system created “perverse incentives,” which:

“Rewarded physicians and institutions for treating illness and then withdrew those rewards when health was restored. Such a system discouraged preventive health care as well as rehabilitative care. Ellwood believed that the health care system could be more functional if it were restructured and incorporated genuine incentives to promote health.”

Ellwood found that Kaiser-Permanente and similar groups were providing good care to large populations at reasonable cost. In 1969, Ellwood began promoting the prepaid care concept to the federal government when President Richard Nixon took office. Nixon was elected president without any health care platform, though there was great public concern about rising health care costs and Medicare/Medicaid expenditures. At that time, Democrats favored a national health insurance policy while Republicans proposed a policy of prepaid health care that the Democrats came to support. Ellwood was able to convince key Nixon aides to formulate a health care policy that a “nationwide system of prepaid group practices and foundations for health care would link a system capable of being most cost efficient and thus provide an answer to the country’s health care problems.”

Paul Ellwood is credited with coining the term “Health Maintenance Organization – on the concept of preventive care of helping patients maintain their health

Over the next two years, support for the HMO concept grew favorably despite opposition that weakened the Nixon administration’s overall commitment. Ultimately, the HMO legislation that passed, called the Health Maintenance Act of 1973, had many stipulations and limitations. HMO advocates eventually altered the restrictive nature of government policy through amendments of 1976 and 1978.

RAPID GROWTH OF MANAGED CARE IN 1980’s AND 1990’s

Ellwood’s policy of improved quality through competition and expanded options is a growing concept. The proportion of HMO members enrolled in for-profit plans has increased from 12 percent in 1981 to about 62 percent in 1998.

In 1985, there were about 320 HMOs in the United States serving 15 million members. In 1994, membership was estimated to be 50 million. According to The Interstudy Competitive Edge HMO Industry Report, HMO enrollment has reached over 70 million for the first time in 1997. InterStudy collects enrollment information from all state-licensed, full-service HMOs. It excludes specialty HMOs, such as dental and vision plans.

The dependence of physicians’ offices on managed care contracts grew form 61 percent to 88 percent between 1990 and 1996. Managed care revenues earned by physicians during this time grew from 28 percent to 44 percent of total revenues. Physicians also increased their direct contracting with employers as they tried to regain independence in their practice of medicine and eliminate costs associated with an insurer intermediary. In 1996, 31 percent of physicians in practices with twenty-five or more physicians were engaged in direct-contracting activities with employers.

MEDICAL PRACTICE IN THE 2000s

By the year 2002, the size of medical group practices appear to be getting smaller as compared to the size of medical practices in the 1990s. In the year 2002, studies indicate a movement from large group practices to solo practitioners and to medical group practices of five or less physicians.

By 2002, generally, Medical Group Practice Size was Getting Smaller

In 1996, the average size of physician practices was 14.5 as compared to an average of 10.6 physicians in 1990 and during that time the proportion of physicians who were employees grew from approximately 32 percent in 1990 to 42 percent in 1996. These changes in the 1990’s reflects the view among physicians during that time that the size of their practices affect their success in contractual negotiations with managed care organizations and employers as well as their ability to assume risk. By the year 2002, providers may be participating in Independent Provider Associations (IPAs) to help with the ability to negotiate better contractual terms and also use alternative health care providers including nurse practitioners in their office to be able to provide more services in a cost effective manner.

PATIENT PROTECTION AND AFFORDABLE CARE ACT – HEALTH CARE REFORM

By 2013 with the passage of the Patient Protection and Affordable Care Act, otherwise known as “PPACA” or “Affordable Care Act” or “ACA”, or “Health Care Reform”, or “ObamaCare” the movement towards system-based practice grew.  The Affordable Care Act refers to the federal Act signed into law in March 2010 cited as the ” Patient Protection and Affordable Care Act”, Public Law 111-148, March 23, 2010, and includes the “Health Care and Education Reconciliation Act of 2010″, Public Law 111-152, March 30, 2010.  The ” Patient Protection and Affordable Care Act” (PPACA), commonly called “ObamaCare” or the “Affordable Care Act” (ACA) or “Health Care Reform”.  Enrollment began October 1, 2013 for coverage beginning January 1, 2014.

By 2019, the Affordable Care Act was still in effect.