Was It Illegal to Profit from Healthcare Prior to the HMO Act of 1973?

While there are myriad arguments to be made that the legislation contributed to expansion of for-profit insurance companies, the HMO Act of 1973 is misrepresented in memes.

Claim

Before the 1973 HMO act was signed into law by Richard Nixon, it was illegal to profit from healthcare.

Rating

Origin

A long-lived but inaccurate meme on social media ties an act signed into law in 1973 by President Richard Nixon to the development of for-profit HMO and health insurance agencies:

Did you know that before 1973 it was illegal in the US to profit off health care? The Health Maintenance Organization Act of 1973 passed by Nixon changed everything. In 1973, Nixon did a personal favor for his friend and campaign financier, Edgar Kaiser, then president and chairman of Kaiser-Permanente. Nixon signed into law, the Health Maintenance Organization Act of 1973, in which medical insurance agencies, hospitals, clinics and even doctors, could begin functioning as for-profit business entities instead of the service organizations they were intended to be. And which insurance company got the first taste of federal subsidies to implement HMOA73 *gasp* … why, it was Kaiser-Permanente!

This text conflates two separate issues: the development of Health Maintenance Organizations (HMOs) in conjunction with alleged cozy ties between Kaiser-Permanente and the Nixon Administration, and the legal permissibility of for-profit healthcare. However, as for-profit health care existed prior to 1973, the Health Maintenance Organization Act clearly did not create or enable that phenomenon.

For-Profit Health Care Existed Decades Before the HMO Act of 1973

The growth of employer-sponsored health insurance was instrumental to the development of the current for-profit healthcare insurance system in America, which arose largely as a result of federally mandated wage freezes that occurred during and after World War II. This progression was described in a history of American Healthcare by Elisabeth Rosenthal, abridged in a Spring 2017 issue of Stanford Medicine:

When the National War Labor Board froze salaries during and after World War II, companies facing severe labor shortages discovered that they could attract workers by offering health insurance instead. To encourage the trend, the federal government ruled that money paid for employees’ health benefits would not be taxed. This strategy was a win-win in the short term, but in the long term has had some very losing implications …

Within a decade, the model spread across the country. Three million people had signed up by 1939 and the concept had been given a name: Blue Cross Plans. The goal was not to make money, but to protect patient savings and keep hospitals — and the charitable religious groups that funded them — afloat. Blue Cross Plans were then not-for-profit.

As time wore on and medical science became both more advanced and more expensive, other organizations realized the existence of a market for plans tailored to younger and healthier people, and by 1951 both Aetna and Cigna were major players in offering major medical coverage in a for-profit model:

For-profit insurance companies moved in, unencumbered by the Blues’ charitable mission. They accepted only younger, healthier patients on whom they could make a profit. They charged different rates, depending on factors like age, as they had long done with life insurance. And they produced different types of policies, for different amounts of money, which provided different levels of protection.

Aetna and Cigna were both offering major medical coverage by 1951. With aggressive marketing and closer ties to business than to health care, these for-profit plans slowly gained market share through the 1970s and 1980s. It was difficult for the Blues to compete. From a market perspective, the poor Blues still had to worry about their mission of “providing high-quality, affordable health care for all.”

In 1994, after state directors rebelled, the Blues’ board relented and allowed member plans to become for-profit insurers. Their primary motivation was not to charge patients more, but to gain access to the stock market to raise some quick cash to erase deficits. This was the final nail in the coffin of old-fashioned noble-minded health insurance.

It is inaccurate to say that “before 1973 it was illegal in the US to profit off of health care,” as Aetna and Cigna had been profiting from health care for over 20 years before that.

The HMO Act of 1973

Ballooning health care costs became a serious political issue in the 1970s, and it was in this environment that the concept of HMOs grew in popularity. An HMO differed from the other insurance models in that it was a prepaid, managed plan that granted a patient access to a specifically contracted network of physicians and specialists, generally combined with some form of financing:

In traditional managed care plans (e.g., Health Maintenance Organizations) the money follows the “member,” whether ill or not. Although there are many definitions of managed care, generally the term describes a continuum of arrangements that integrate the financing and delivery of health care. Purchasers contract with (or “own”) selected providers to deliver a defined set of services at an agreed per-capita or per-service price.

The concept had existed in various forms prior to the 1970s, but during the Nixon administration the HMO model was viewed as the solution to massive increases in government spending taken on by the federal government through the Medicare and Medicaid programs. Both liberals and conservatives supported the concept at the time, as described by Stuart Altman and David Shactman in their book Power, Politics, and Universal Health Care:

Richard Nixon was concerned about health care costs. Federal spending for the Medicare and Medicaid programs had surpassed everyone’s expectations. Their cost grew from 4.1 percent of the federal budget in 1961 to 11.3 percent by 1973. HMOs seemed to have everything Nixon needed … They appealed to Nixon and Republican conservatives became they were a free market approach, and they preserved the private insurance market. Moreover, they did not require large government spending as in the case of liberal, Democratic reform proposals.

Differences between liberal Democrats and conservative Republicans shaped the trajectory of legislation that would become the Health Maintenance Organization Act of 1973, which was signed into law with bipartisan support. The act initially provided $45 million in grants and loans and $300 million in loan guarantees to spur the development of HMOs:

With support from a broad coalition in Congress, President Nixon secured the passage of the HMO Act of 1973. The Act enabled individual HMOs to receive endorsement (referred to as qualification) from the federal government, and it required employers to offer coverage from at least one federally qualified HMO to all employees (dual choice). However, the dual choice requirement was never enforced, and many large HMOs, including Kaiser, never sought federal qualification. The Act did facilitate growth in HMO enrollment by helping to create several successful HMOs around the country, and it legitimized the HMO concept.

Over time, the restrictions on which HMOs could receive federal endorsements were eased in a series of amendments to the act, leading to a massive increase in for-profit HMOs that medical historian Paul Starr described as the “conservative appropriation of liberal reform”:

Paradoxically, the efforts to control expenditures for health services also stimulated corporate development. The conservative appropriation of liberal reform in the early seventies opened up HMOs as a field for business investment. And in ways entirely unexpected, the regulation of hospitals and other efforts to contain costs set off a wave of acquisitions, mergers, and diversification in the nonprofit as well as profit-making sectors of the medical care industry. Pressure for efficient, business-like management of health care has also contributed to the collapse of the barriers that traditionally prevented corporate control of health services.

In this light, it is fair to say that Richard Nixon’s support for HMOs presaged a dramatic transition in the American healthcare system that increased for-profit health insurance enterprises, but it is not fair to say that the act itself first made for-profit health insurance legal.

“A Personal Favor for Nixon’s Friend and Campaign Financier Edgar Kaiser”

The primary emotional hook in the meme is the assertion that the HMO Act was a handout to Edgar Kaiser, a friend of Nixon’s who donated heavily to his campaign for president. It is true that Kaiser advocated on behalf of the HMO Act to Nixon’s aide John Ehrlichman, and that the concept proposed in the bill was modeled on HMO plans already offered by Kaiser. The claim that the act was a quid pro quo, however, is belied by the fact that the original 1973 act, in its final form, did not allow Kaiser’s plan to be recognized:

While Kaiser Permanente was in operation for many years before, it did serve as a model for the HMO Act of 1973. Paul Ellwood Jr., MD, a community physician working with the U.S. Department of Health, Education and Welfare, in 1971 found a model for his “health maintenance organization” vision in Kaiser Permanente …

Ironically, when Nixon signed the HMO Act in 1973 it had been so diluted by the political process from Ellwood’s ideas that Kaiser Permanente, a central model at the outset, did not qualify as an HMO until the act was amended four years later.

Such a truth also makes the meme’s claim that Kaiser was the insurance company to get the “first taste of federal subsidies” incorrect. Additional controversy stems from a conversation between Ehrlichman and Nixon captured in the Nixon White House tapes that makes it sound as though Nixon believed the motivation behind the act was that “the less care [insurance companies] give [patients], the more money they make”:

Ehrlichman: “Edgar Kaiser is running his Permanente deal for profit. And the reason that he can … the reason he can do it … I had Edgar Kaiser come in … talk to me about this and I went into it in some depth. All the incentives are toward less medical care, because …”

President Nixon: [Unclear.]

Ehrlichman: “… the less care they give them, the more money they make.”

President Nixon: “Fine.” [Unclear.]

Ehrlichman: [Unclear] “… and the incentives run the right way.”

President Nixon: “Not bad.”

Kaiser Permanente contended that this was a crude and inarticulate paraphrase of what Edgar Kaiser was trying to explain to Ehrlichman, and that Nixon’s later statements to Congress about the act made it clear what the two men were attempting to explain. The issue was that doctors needed to be incentivized to provide preventative medicine to reduce overall healthcare costs, but the rate-based, for-profit insurance model currently in play did not provide incentives for this less profitable area of healthcare, unlike HMOs:

Despite Ehrlichman’s miscommunication, Nixon eventually grasped the Kaiser Permanente model of integrated, preventive health care. In a communication to Congress about his Health Strategy Initiative on Feb. 18, 1971, Nixon called “health maintenance” an important part of “a new national health strategy.” He continued:

“If more of our resources were invested in preventing sickness and accidents,” Nixon said, “fewer would have to be spent on costly cures. If we gave more attention to treating illness in its early stages, then we would be less troubled by acute disease. In short, we should build a true ‘health’ system—and not a ‘sickness’ system alone.

“… Under traditional systems, doctors and hospitals are paid, in effect, on a piecework basis. The more illnesses they treat, and the more service they render, the more their income rises. This does not mean, of course, that they do any less than their very best to make people well. But it does mean that there is no economic incentive for them to concentrate on keeping people healthy.”

All told, little factual basis supports the meme’s assertion that Nixon altered the legality of for-profit insurance by signing the HMO Act of 1973, or its claims that the act was a secret method for Nixon and his cronies to enrich themselves. The only sliver of truth here is the fact that the increase in popularity of HMOs that occurred after passage of the act (and its amendments) greatly expanded for-profit health care in America.

Sources
  • Rosenthal, Elisabeth.   “Insurance Policy: How an Industry Shifted from Protecting Patients to Seeking Profit.”
        Stanford Medicine.   Spring 2017.

  • Sekhri, Neelam K.   “Managed Care: The U.S. Experience.”
        WHO Bulletin.   2000.

  • Altman, Stuart and David Shactman.   Power, Politics, and Universal Health Care: The Inside Story of a Century-Long Battle.
        Prometheus Books, 2011.   ISBN 1616144564.

  • Markovich, Martin.   “The Rise of HMOs.”
        RAND Graduate School Dissertation.   7 August 2003.

  • Starr, Paul.   The Social Transformation of American Medicine.
        Basic Books, 2017   (2nd edition).   ISBN 0465093027.

  • Kaiser Permanente.   “Kaiser Permanente’s Prominent Role in American Health Care Reform.”
        22 June 2007.

  • Wikisource.   “Transcript of Taped Conversation Between President Richard Nixon and John D. Ehrlichman (1971) That Led to the HMO Act of 1973.”
        17 February 1971.

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