How the HMO Led to the Current State of Health Insurance

HMO spelled out with letterpress blocks.

Health insurance remains a touchy subject among America’s insured. Workers from all walks of life are unhappy about the rate increases they see every year. They are more than willing to complain about health insurance policies that cost a lot but do not offer a lot when they are most needed. Ironically, much of what we know about the current state of health insurance is directly related to the introduction of the HMO.

Health Maintenance Organizations (HMOs) did not exist in this country until passage of the Health Maintenance Organization Act in 1973. The law forced employers offering traditional healthcare benefits to also offer employers a federally certified HMO plan.

Giving HMOs Control

Traditional health insurance prior to the HMO was more or less major medical. Your typical major medical policy was an indemnity policy. It insured customers against catastrophic financial loss in the event of a major medical event. Policies did not provide coverage for routine care and medical tests. They also did not interfere with the ability of doctors and their patients to make decisions.

The HMO Act changed everything. It essentially turned healthcare delivery over to HMOs, giving them control by allowing them to establish the standards by which GPs and family doctors would operate. In exchange for following insurance company standards, doctors were guaranteed a steady stream of patients capable of providing a steady income.

We all know the result. Since the establishment of the HMO, insurance companies have largely called the shots. Through everything from coverage limits to provider networks, they largely determine how healthcare services are delivered in this country. And as a result, they also have a large influence over healthcare costs.

Consumers Want More Value

Fifty years of the HMO model has created a vacuum in terms of value. That vacuum sucks up premium dollars without giving consumers an appropriate level of value in return. According to a recent BenefitMall blog post, consumers are starting to wake up. The Dallas-based general agency recognizes that consumers are getting tired of the fee-for-service model. They want more value.

BenefitMall cited a survey revealing that 71% of consumers with group health insurance plans would willingly shop around to find the best value for their healthcare dollars. Approximately 36% of respondents admitted to having already done so at some point. The fact that consumers are more willing to shop around proves the point: they do not feel as though they are getting enough value unless they actively look for it.

From the general agency’s perspective, this is a red flag. It is also an opportunity to approach carriers with proposals for increasing healthcare value. Common sense seems to suggest that carriers hoping to compete for the largest possible market share would give consumers what they want. And if what they want is value, you give it to them.

Taking Value Out of the Equation

Unfortunately, the HMO model takes value out of the equation by limiting just how much consumers can shop around. A good example is found in shopping around for less expensive tests, only to discover they are not covered by one’s insurance policy because they are out of network. Faced with the choice between an affordable co-pay and a much higher out-of-pocket cost, most consumers will choose the former.

HMOs were promoted as being the key to preventative healthcare when they were first proposed more than 50 years ago. Whether or not they have succeeded in that regard, they have led to the current state of health insurance in this country. You can decide if that is good or bad.