Constraints and Failures of the HMO Industry It
also became clear that the HMOs were failing to reg-
ister the poor, the elderly, and the inner-city popula-
tions, shattering the federal and state governments’
hopes that the private sector would relieve them of
the burden of providing care to at-risk and under-
served Americans. Moreover, employers were at times
exerting pressure on their employees to enroll in an
HMO, rather than a more flexible, but more expen-
sive, traditional health insurance plan. All these
shortcomings shattered the prediction that, by the
end of the 1980’s, 90 percent of Americans would be
covered by the emerging for-profit HMO plans.
In small towns, where doctors worked alone, both
patients and physicians resisted enrolling in the new
plans at first, until the HMOs allowed people to
choose their physicians from a small pool, making it
possible for doctors to dedicate a portion of their
practice in what was called the individual practice as-
sociations (IPAs). Because of this arrangement with
physicians, IPAs increased their number by 87 per-
cent, from 97 to 181, between 1980 and 1985. Dur-
ing the same period, the number of prevailing HMOs
increased by only 17 percent, from 132 to 162. Other
plans, called preferred provider organizations
(PPOs), brought groups of doctors and hospitals to-
gether to serve certain public and private beneficia-
ries at competitively low prices. This variation on
HMOs allowed patients to choose to patronize other
doctors if they were willing to pay higher fees to do
so. In addition, diagnosis-related groups (DRGs) en-
tailed “prospective” (advance) payments rather than
“retrospective charges for each unit of services” be-
ing made to hospitals by each patient covered under
Medicare. In some states, DRGs encompassed all in-
surance payers.
The impending failure of the HMOs was reflected
in the continuing rise of health care costs and its im-
pact. For example, in constant 1982 dollars, U.S.
spending on health care rose from $333.47 billion in
1980 to $385.74 billion in 1987, and it climbed an-
other 16 percent in 1988. The increase in spending
was spurred by administrative overheads, which rose
by 186 percent, from $9.2 billion to $24 billion, dur-
ing the 1980-1986 period. The consequent losses af-
fected the running of the HMOs. Indeed, in 1987
alone, the overall HMO industry lost $692 million.
Some 179 of the 243 HMOs (almost 75 percent) reg-
istered a loss that year, according to the National Un-
derwriter.
Unhealthy competition among the HMOs re-
sulted in some falling by the wayside, while others
were being swallowed by the largest. As the quality of
services became imperiled and as the public claimed
that accessibility to treatment and medication for
enrollees had rapidly eroded, the situation was exac-
erbated by the fact that several HMOs were going
bankrupt or were on the brink of bankruptcy, in-
cluding the largest HMO, Maxicare. Maxicare col-
lapsed and declared bankruptcy in 1989. It had
lost $225 million out of its $1.8 billion in assets.
Thus, hospitals began to resist their associations with
HMOs, fearing that they would be left with the costly
burden of uncollected fees for services rendered.
Loss in trust of physicians, medical schools, and
medical education ensued, and the frequency of
malpractice suits shook the very foundations of the
entire U.S. health care system as the end of the
1980’s approached. HMOs were also being criticized
for lack of transparency in providing the purchasers,
especially those linked with big institutions, with
data on “cost, use, and quality” ratings of their health
care plans. The problem became so great that in
1988, Congress amended the 1973 act to ban em-
ployers from forcing their employees to enroll in a
specific HMO. The end result of the decade’s strug-
gle between HMOs and the public was the organiza-
tions’ unpopularity and near demise, which resulted
in states entrusting their health care plans to such in-
surance companies as Blue Cross/Blue Shield.Impact The wholesale introduction of HMOs dur-
ing the 1970’s and 1980’s failed, because it focused
primarily on cost cutting and profiteering rather
than on making quality health care affordable and
accessible, thereby neglecting those Americans who
could not afford it. The new system continued to fa-
vor the wealthy, who demanded high-cost services,
such as complex tests, diagnoses, and tertiary treat-
ments that required expensive equipment such as
MRIs. As most experts note, the rising cost of health
care was fueled in the 1980’s by administrative and
bureaucratic practices that unnecessarily siphoned
billions of dollars away from medical workers and
services—as well as by an excessive number of physi-
cians aggressively competing against one another,
since the market was glutted by an excess of twenty-
five thousand physicians, or 25 percent more than
was needed. Rising costs were also attributable to
new, expensive testing devices and treatments, such452 Health maintenance organizations (HMOs) The Eighties in America