Blame Congress (and Nixon) for HMO

A while ago I blogged about how both parties accept the ideas of “managed care” or “managed competition.” This is where government bureaucrats or insurance company functionaries make decisions regarding what health care one uses, and even what providers you can see. The managed care model is justified by the over reliance on third party payers which removes all incentives for patients to be conscious.

The most common form of managed care is the Health Maintenance Organization (HMO). During the 1990's and early 2000's, HMOs were notorious for denying necessary care. In response, Congress passed the so-called Patient Bill of Rights Act, imposing new federal regulations on HMOs.

This legislation was another case of Congress solving a problem it created. HMOs were not a creation of the market, but the result of Nixon-era legislation. In 2001, Campaign for Liberty Chairman Ron Paul entered an article by Twilia Brase of the Citizens Council for Health Freedom into the Congressional Record, explaining how Congress created HMOs.

The article is reprinted below. This should be shared with anyone who still thinks that the government is the solution to, as opposed to the cause of, the problems in our health care system:




 of Texas

in the House of Representatives

Tuesday, February 27, 2001


 Mr. PAUL. Mr. Speaker, I highly recommend the attached article,

"Blame Congress for HMOs'' by Twila Brase, a registered nurse and

President of the Citizens' Council on Health Care, to my colleagues.

Ms. Brase demolishes the myth that Health Maintenance Organizations

(HMOs), whose power to deny Americans the health care of their choice

has been the subject of much concern, are the result of an unregulated

free-market. Instead, Ms. Brase reveals how HMOs were fostered on the

American people by the federal government for the express purpose of

rationing care.

 The story behind the creation of the HMOs is a classic illustration

of how the unintended consequences of government policies provide a

justification for further expansions of government power. During the

early seventies, Congress embraced HMOs in order to address concerns

about rapidly escalating health care costs. However, it was Congress

which had caused health care costs to spiral by removing control over

the health care dollar from consumers and thus eliminating any

incentive for consumers to pay attention to costs when selecting health

care. Because the consumer had the incentive to control health care

cost stripped away, and because politicians where unwilling to either

give up power by giving individuals control over their health care or

take responsibility for rationing care, a third way to control costs

had to be created. Thus, the Nixon Administration, working with

advocates of nationalized medicine, crafted legislation providing

federal subsidies to HMOs, preempting state laws forbidding physicians

to sign contracts to deny care to their patients, and mandating that

health plans offer an HMO option in addition to traditional fee-for-

service coverage. Federal subsidies, preemption of state law, and

mandates on private business hardly sounds like the workings of the

free market. Instead, HMOs are the result of the same Nixon-era

corporatist, Big Government mindset that produced wage-and-price


 Mr. Speaker, in reading this article, I am sure many of my colleagues

will think it ironic that many of the supporters of Nixon's plan to

foist HMOs on the American public are today promoting the so-called

"patients' rights"' legislation which attempts to deal with the

problem of the HMOs by imposing new federal mandates on the private

sector. However, this is not really surprising because both the

legislation creating HMOs and the Patients' Bill of Rights reflect the

belief that individuals are incapable of providing for their own health

care needs in the free market, and therefore government must control

health care. The only real difference between our system of medicine

and the Canadian "single payer'' system is that in America, Congress

contracted out the job of rationing health care resources to the HMOs.

 As Ms. Brase, points out, so-called "patients' rights"' legislation

will only further empower federal bureaucrats to make health care

decisions for individuals and entrench the current government-HMO

complex. Furthermore, because the Patient's Bill of Rights will

increase health care costs, thus increasing the number of Americans

without health insurance, it will result in pleas for yet another

government intervention in the health care market!

 The only true solution to the health care problems is to truly allow

the private sector to work by restoring control of the health care

dollar to the individual through Medical Savings Accounts (MSAs) and

large tax credits. In the Medicare program, seniors should not be

herded into HMOs but instead should receive increased ability to use

Medicare MSAs, which give them control over their health care dollars.

Of course, the limits on private contracting in the Medicare program

should be lifted immediately.

 In conclusion, Mr. Speaker, I hope all my colleagues will read this

article and take its lesson to heart. Government-managed care, whether

of the socialist or corporatist variety, is doomed to failure. Congress

must instead restore a true free-market in health care if we are

serious about creating conditions under which individuals can receive

quality care free of unnecessary interference from third-parties and

central planners.




                       Blame Congress for HMOs

                            (By Twila Brase)

      Only 27 years ago, congressional Republicans and Democrats
agreed that American patients should gently but firmly be
forced into managed care. That patients do not know this fact
is evidenced by public outrage directed at health maintenance
organizations (HMOs) instead of Congress.

Although members of Congress have managed to keep the
public in the dark by joining in the clamor against HMOs,
legislative history puts the responsibility and blame
squarely in their collective lap.

The proliferation of managed-care organizations (MCOs) in
general, and HMOs in particular, resulted from the 1965
enactment of Medicare for the elderly and Medicaid for the
poor. Literally overnight, on July 1, 1966, millions of
Americans lost all financial responsibility for their health-
care decisions.

Offering "free care" led to predictable results. Because
Congress placed no restrictions on benefits and removed all
sense of cost-consciousness, health-care use and medical
costs skyrocketed. Congressional testimony reveals that
between 1969 and 1971, physician fees increased 7 percent and
hospital charges jumped 13 percent, while the Consumer Price
Index rose only 5.3 percent. The nation's health-care bill,
which was only $39 billion in 1965, increased to $75 billion
in 1971. Patients had found the fount of unlimited care, and
doctors and hospitals had discovered a pot of gold.

This stampede to the doctor's office, through the U.S.
Treasury, sent Congress into a panic. It had unlocked the
health-care appetite of millions, and the results were
disastrous. While fiscal prudence demanded a hasty retreat,
Congress opted instead for deception.

Limited by a noninterference promise attached to Medicare
law--enacted in response to concerns that government health
care would permit rationing--Congress and federal officials
had to be creative. Although Medicare officials could not
deny services outright, they could shift financial risk to
doctors and hospitals, thereby influencing decision-making at
the bedside.

Beginning in 1971, Congress began to restrict
reimbursements. They authorized the economic stabilization
program to limit price increases; the Relative Value Resource
Based System (RVRBS) to cut physician payments; Diagnostic-
Related Groups (DRGs) to limit hospitals payments; and most
recently, the Prospective Payment System (PPS) to offer fixed
prepayments to hospitals, nursing homes, and home health
agencies for anticipated services regardless of costs
incurred. In effect, Congress initiated managed care.

National Health-Care Agenda Advances

Advocates of universal coverage saw this financial crisis
as an opportunity to advance

Senator Edward M. Kennedy, a longtime advocate of national
health care, proceeded to hold three months of extensive
hearings in 1971 on what was termed the "Health Care Crisis
in America." Following these hearings, he held a series of
hearing "on the whole question of HMO's."

Introducing the HMO hearings, Kennedy said, "We need
legislation which reorganizes the system to guarantee a
sufficient volume of high quality medical care, distributed
equitably across the country and available at reasonable cost
to every American. It is going to take a drastic overhaul of
our entire way of doing business in the health-care field in
order to solve the financing and organizational aspects of
our health crisis. One aspect of that solution is the
creation of comprehensive systems of health-care deliver."

In 1972, President Richard M. Nixon heralded his desire for
the HMO in a speech to Congress: "the Health Maintenance
Organization concept is such a central feature of my National
Health Strategy." The administration had already authorized,
without specific legislative authority, $26 million for 110
HMO projects. That same year, the U.S. Senate passed a $5.2
billion bill permitting the establishment of HMOs "to
improve the nation's health-care delivery system by
encouraging prepaid comprehensive health-care programs."

But what the House of Representatives refused to concur, it
was left to the 93rd Congress to pass the HMO Act in 1973.
Just before a voice vote passed the bill in the House, U.S.
Representative Harley O. Staggers, Sr., of West Virginia
said, "I rise in support of the conference report which will
stimulate development of health maintenance organizations.

. . . I think that this new system will be successful and give
us exciting and constructive alternatives to our existing
programs of delivering better health services to Americans."

In the Senate, Kennedy, author of the HMO Act, also
encouraged its passage: "I have strongly advocated passage
of legislation to assist the development of health
maintenance organizations as a viable and competitive
alternative to fee-for-service practice. . . . This bill
represents the first initiative by the Federal Government
which attempts to come to grips directly with the problems of
fragmentation and disorganization in the health care
industry. . . . I believe that the HMO is the best idea put
forth so far for containing costs and improving the
organization and the delivery of health-care services." In a
roll call vote, only Senator Herman Talmadge voted against
the bill.

On December 29, 1973, President Nixon signed the HMO Act of
1973 into law.

As patients have since discovered, the HMO--staffed by
physicians employed by and beholden to corporations--was not
much of a Christmas present or an insurance product. It
promises coverage but often denies access. The HMO, like
other prepaid MCOs, requires enrollees to pay in advance for
a long list of routine and major medical benefits, whether
the health-care services are needed, wanted, or ever used.

The HMOs are then allowed to manage care--without access to
dollars and service--through definitions of medical
necessity, restrictive drug formularies, and HMO-approved
clinical guidelines. As a result, HMOs can keep millions of
dollars from premium-paying patients.

HMO Barriers Eliminated

Congress's plan to save its members' political skins and
national agendas relied on employer-sponsored coverage and
taxpayer subsidies to HMOs. The planners' long-range goal was
to place Medicare and Medicaid recipients into managed care
where HMO managers, instead of Congress, could ration care
and the government's financial liability

To accomplish this goal, public officials had to ensure
that HMOs developed the size and stability necessary to take
on the financial risks of capitated government health-care
programs. This required that HMOs capture a significant
portion of the private insurance market. Once Medicare and
Medicaid recipients began to enroll in HMOs, the
organizations would have the flexibility to pool their
resources, redistribute private premium dollars, and ration
care across their patient populations.

Using the HMO Act of 1973, Congress eliminated three major
barriers to HMO growth, as clarified by U.S. Representative
Claude Pepper of Florida: "First, HMO's are expensive to
start; second, restrictive State laws often make the
operation of HMO's illegal; and, third, HMO's cannot compete
effectively in employer health benefit plans with existing
private insurance programs. The third factor occurs because
HMO premiums are often greater than those for an insurance

To bring the privately insured into HMOs, Congress forced
employers with 25 or more employees to offer HMOs as an
option--a law that remained in effect until 1995. Congress
then provided a total of $373 million in federal subsidies to
fund planning and startup expenses, and to lower the cost of
HMO premiums. This allowed HMOs to undercut the premium
prices of their insurance competitors and gain significant
market share.

In addition, the federal law pre-empted state laws, that
prohibited physicians from receiving payments for not
providing care. In other words, payments to physicians by
HMOs for certain behavior (fewer admissions to hospitals,
rationing care, prescribing cheaper medicines) were now

The combined strategy of subsidies, federal power, and new
legal requirements worked like a charm. Employees searching
for the lowest priced comprehensive insurance policy flowed
into HMOs, bringing their dollars with them. According to the
Health Resources Services Administration (HRSA), the
percentage of working Americans with private insurance
enrolled in managed care rose from 29 percent in 1988 to over
50 percent in 1997. In 1999, 181.4 million people were
enrolled in managed-care plans.

Once HMOs were filled with the privately insured, Congress
moved to add the publicly subsidized. Medicaid Section 1115
waivers allowed states to herd Medicaid recipients into HMOs,
and Medicare+Choice was offered to the elderly. By June 1998,
over 53 percent of Medicaid recipients were enrolled in
managed-care plans, according to HRSA. In addition, about 15
percent of the 39 million Medicare recipients were in HMOs in

HMOs Serve Public-Health Agenda

Despite the public outcry against HMOs, federal support for
managed care has not waned. In August 1998, HRSA announced
the creation of a Center for Managed Care to provide
"leadership, coordination, and advancement of managed care
systems . . . develop working relationships with the
private managed care industry to assure mutual areas of

The move to managed care has been strongly supported by
public-health officials who anticipate that public-private
partnerships will provide funding for public-health
infrastructure and initiatives, along with access to the
medical records of private patients. The fact that health
care is now organized in large groups by companies that hold
millions of patient records and control literally hundreds of
millions of health-care dollars has allowed unprecedented
relationships to form between governments and health plans.

For example, Minnesota's HMOs, MCOs, and nonprofit insurers
are required by law to fund public-health initiatives
approved by the Minnesota Department of Health, the state
regulator for managed care plans. The Blue Cross-Blue Shield
tobacco lawsuit, which brought billions of dollars into state
and health-plan coffers, is just one example of the you-
scratch-my-back-I'll-scratch-yours initiatives. Yet this
hidden tax, which further limits funds available for medical care, remains
virtually unknown to enrollees.

Federal officials, eager to keep HMOs in business, have
even been willing to violate federal law. In August 1998, a
federal court chided the U.S. Department of Health and Human
Services for renewing HMO contracts that violate their own
Medicare regulations.

The Ruse of Patient protection

Truth be told, HMOs allowed politicians to promise access
to comprehensive health-care services without actually
delivering them. Because treatment decisions could not be
linked directly to Congress, HMOs provided the perfect cover
for its plans to contain costs nationwide through health-care
rationing. Now that citizens are angry with managed
(rationed) care, the responsible parties in Congress, Senator
Kennedy in particular, return with legislation ostensibly to
protect patients from the HMOs they instituted.

At worst, such offers are an obfuscation designed to
entrench federal control over health care through the HMOs.

At best they are deceptive placation. Congress has no desire
to eliminate managed care, and federal regulation of HMOs and
other managed-care corporations will not protect patients
from rationing. Even the U.S. Supreme Court acknowledged in
its June 12, 2000, Pegram v. Herdrich decision that to
survive financially as Congress intended, HMOs must give
physicians incentives to ration treatment.

Real patient protection flows from patient control. Only
when patients hold health-care dollars in their own hands
will they experience the protection and power inherent in
purchasing their own insurance policies, making cost-
conscious health-care decisions, and inciting cost-reducing
competition for the cash.

What could be so bad about that? A lot, it seems. Public
officials worry privately that patients with power may not
choose managed-care plans, eventually destabilizing the HMOs
Congress is so dependent on for cost containment and national
health-care initiatives. Witness congressional constraints on
individually owned, tax-free medical savings accounts and the
reluctance to break up employer-sponsored coverage by
providing federal tax breaks to individuals. Unless citizens
wise up to Congress's unabashed but unadvertised support for
managed care, it appears unlikely that real patient power
will rise readily to the top of its agenda.


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