The History of HMO Plans

The History of HMO Plans


Health Maintenance Organization Plans – HMO Plans for short – are a kind of managed care program. The idea behind managed care programs is that maintaining good health will be achieved by preventing disease and providing quality care. By maintaining good health, it is believed that escalating health care costs can be controlled.

When HMO Plans were first introduced, members paid a fixed, prepaid monthly premium in exchange for health care from a contracted network of providers. The contracted network of providers includes hospitals, clinics and health care providers that have signed a contract with the HMO. In this sense, HMOs are the most restrictive form of managed care plans because they restrict the procedures, providers and benefits by requiring that the members use these providers and no others.


HMOs were intended to take health care in a new direction. They were designed by the government to do away with individual health insurance plans and to make affordable health insurance obtainable to everyone. At that time employers were purchasing individual health insurance plans for their employees ~ a costly expense that many were starting to forego.

The Health Maintenance Organization (HMO) Act was approved by President Nixon in 1973. The managed health care plans were subsidized by the government and the new HMO-kind systems began to grow, typically organized by businesses and community groups eager to make health care obtainable to their workers and members at costs they could better provide. This subsidy produced deals from the insurance companies to lure these businesses to buy these new discounted low cost health plans for their employees instead of the costly individual health plans.

Feeling the strength of the government behind them and the frantic desire of employers to enroll their employees in these new HMO Plans, insurance companies began to apply pressure to doctors to join an HMO. Doctors were told that if they didn’t join, the insurance company would find doctors who would join and they would effectively take all their patients away.  consequently, doctors ended up joining an HMO so they would not lose their patients and afterward their complete practice. 

As time went on, the Insurance companies additional more and more rules each time the doctor’s contract was renewed. The popularity of the HMO Plans meant that the majority of their patients had HMO plans so they accepted the new conditions.  New terms included seeing more patients, more stringent confidentiality agreements, and more sets requiring pre-approvals.

Up until the 1980’s most members agreed that HMO’s were a great health plan. However, by the end of that decade, faced with mounting numbers of denied claims, members began to sour on the HMO Plans.

What led to the increase of denied claims? It wasn’t a consequence of the claims themselves; it was a consequence of bad investments by the insurance companies.

During the real estate expansion, the insurance companies thought it would be a good idea to invest in real estate deals.  Unfortunately, when the savings and loan industry crashed along with real estate values, insurance companies began to lose money. These losses resulted in their coming up short to cover the claims of their HMO members. 

consequently began the practice to deny the claims of the HMO Plan members. The insurance companies denied claims on the basis that they were too expensive or medically un-necessary. At that time, members and their doctors did not fight these denials and because the insurance company got away with the denied claim course of action so well, they have continued to do this as part of their operating procedure.

However, a new concept has sprung up in recent year ~ HMO Law.

There are now lawyers and law firms dedicated to bringing situations against HMO’s. These claims include wrongful death, bad faith and medical malpractice. This method that an HMO can be sued when a person dies as a consequence of the HMO denying coverage for necessary medical treatment; for the denial of valid claims; and for medical malpractice on the part of one of its physicians.

Additionally, individual states are tightening up their laws governing HMO Plans.

In future articles we will discuss how HMO’s work, the types of HMO Plans, the cost of the plans and the future of the plans.

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