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The History of HMOs: What You--and Your Employer--Probably Don't Know About Your Health Plan

From Capitalism Magazine
by Scott Holleran (August 28, 2009)

The new year begins as employees begin a process called open enrollment—when many employees designate a health plan through their employer. Unfortunately, most are forced to enroll in a managed care plan, i.e., an HMO or PPO. That’s right: force actually lies at the core of today's health care system.

From their beginnings, HMOs were designed--by Democrats and Republicans--to eliminate individual health insurance. The result is a vast network of health care collectives (HMOs, PPOs, Point-of-Service plans) created by government that are destined to do harm to individuals.

The individual was first discouraged from buying insurance in 1942 when employee health premiums were made tax deductible to employers—not to individuals. Congress created Medicare in 1965, making individual insurance for those over 65 obsolete. Subsidized, unrestricted health care for seniors lead to an unprecedented frenzy of spending by patients and doctors.

Costs went up, introducing an economic obstacle to individual health insurance. As costs rose, those on the New Left, including then freshman Sen. Ted Kennedy, argued that government ought to pay for everyone’s health care and promoted the idea of a health maintenance organization, a term coined by a left-wing college professor.

President Nixon appeased the left and proposed the HMO Act, which Congress passed in 1973. The law created new, supposedly cheaper health coverage with millions of dollars to HMOs, which, until then, constituted a small portion of the market. Kaiser Permanente was the only major HMO in the country by 1969 and most of its members were compelled to join through unions.

Combined with Medicare, the HMO Act eventually eliminated the market for affordable individual health insurance.

The new managed care plans mushroomed with federal subsidies. Employers perceived managed care as less expensive than individual insurance and stopped offering a choice of plans, making insurance more expensive for the individual. The government had effectively instituted HMOs, at the insistence of the left and the capitulation of conservatives and pragmatic businessmen.

Nixon’s HMO Act was passed 25 years ago. Since then, the individual has become a prisoner of the tax code. Covered by an employer and herded into managed care, the individual patient is powerless. Under managed care, if the patient gets sick, he or she may wander the maze of managed
bureaucracy, be treated, or, languish in pain awaiting treatment. The patient may also be refused treatment and die.

Premiums under managed care do not pay for an insured contract for medical care decided between the patient and the physician—premiums pay for the management of care, i.e., health maintenance, by a third party.

Unrestricted free choice in medicine—health insurance chosen, provided and paid for by the individual—has practically vanished. A few indispensable provisions of the House GOP’s recent health care proposal, crafted by prospective House Speaker J. Dennis Hastert, (R, IL), offer renewed hope.

Hastert’s proposal offers every patient a choice to purchase health insurance as an individual—neither through an employer nor through government—by legalizing Medical Savings Accounts (MSAs) for all Americans, (MSAs are currently restricted to a small group of self employed, uninsured, small business people and 390,000 Medicare recipients.)

The GOP proposes to make every patient eligible for MSAs, lift restrictions, and grant full tax deductibility to the self-employed for health insurance premiums.

MSA opponents, including Hillary Clinton and Kennedy, believe MSAs will attract young and healthy patients and, therefore, raise premiums for the remaining population. According to the IRS and private health plans, the opposite is true: fully one third of thousands of MSA enrollees were previously lacking any health insurance and the median age for an MSA health insurance policyholder is over 40.

The distinct lack of a free market in individual health insurance, not a lack of regulations, lead to the domination of managed care. The next Congress, possibly under Hastert’s leadership, should grant 100 percent individual tax deductibility and fully expand MSAs and it should do so immediately. Alabama Sen. Richard Shelby, an MSA proponent, ought to take the lead in proclaiming the provisions as a step toward what America’s health care system needs most: health insurance which preserves the right to choose—and pay for—one’s own health care.

First published in the AZ Republic 1999. Republished here by permission of the author.

Scott Holleran is a writer and journalist. His articles have been published in the Philadelphia Inquirer, Los Angeles Times and Wall Street Journal. Visit his Web site at

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