The HMO Act

1973 - Institutional Event

In an effort to control rapidly rising medical costs in the early 1970s, Congress passed the Health Maintenance Organization Act of 1973. The act coined the term “HMO” and required businesses with more than 25 employees to offer an HMO option if they offered any insurance at all.

A health maintenance organization provides managed care, a form of health insurance that provides care through hospitals, doctors and other providers with whom the HMO has a contract. Since the providers usually agree to offer services at a discount, the HMO can charge members a lower monthly premium than traditional indemnity insurance.

Besides negotiating discounts on services, HMOs control costs through utilization review, managing members’ care to reduce unnecessary services. In most cases, members select a primary care physician who acts as a “gatekeeper” to other medical services, such as specialists and diagnostic tests.

As health care costs continued to soar, HMOs’ lower premiums made them an increasingly popular choice. Newly formed corporations and established insurance companies began offering HMOs. In North Carolina, enrollment peaked in the late ’90s, then steeply declined, as newer programs such as preferred provider organizations (PPOs) emerged that consumers preferred to more rigid forms of managed care.

But the new HMO system had its drawbacks. The “gatekeeper” function, for example, frustrated many consumers. (Unlike the majority of HMOs, Blue Cross and Blue Shield of North Carolina eliminated this barrier.)

Health care providers also found HMOs restrictive—financially. As managed care began to dominate health care in the ’90s, many hospitals and physician clinics lost money. To survive, some had to merge with larger HMOs or regional health care systems.

Information provided by BCBSNC.

The HMO was central to the new managed care model for delivering and financing health care.