The History of HMO Plans


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

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


Healthcare organizations were meant to steer healthcare in a new direction. They were designed by the government to do away with individual health insurance and make affordable health insurance available to everyone. At the time, employers bought individual health insurance plans for their employees — an expensive expense that many were beginning to forego.

The Health Maintenance Organization (HMO) Act was passed by President Nixon in 1973. The managed health care plans were subsidized by the government and the new HMO-like systems began to proliferate, usually organized by corporations and community groups eager to make health care available to their workers and members at a cost they could better afford. This subsidy created deals from the insurance companies to entice these companies to buy these new low-cost discounted health plans for their employees instead of the expensive individual health plans.

Feeling the power of government behind them and the frantic desire of employers to enroll their employees in these new HMO plans, insurance companies began pressuring physicians to join an HMO. Doctors were told that if they didn’t participate, the insurance company would find doctors who did and would effectively take away all of their patients. That’s how doctors ended up with an HMO so they wouldn’t lose their patients and then their entire practice.

As time passed, the insurance companies added 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 terms. New terms included receiving more patients, tighter confidentiality agreements, and more services requiring pre-approval.

Until the 1980s, most members agreed that HMOs were a great health plan. Towards the end of that decade, however, members began to sour on the HMO plans, as they faced an increasing number of rejected claims.

What led to the increase in rejected claims? It was not the result of the claims themselves; it was a result of bad investments by the insurance companies.

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During the real estate boom, the insurance companies thought it would be a good idea to invest in real estate deals. Unfortunately, insurance companies started losing money as the savings and loan industry collapsed along with property values. These losses left them short of covering the claims of their HMO members.

Thus began the practice of denying the claims of the HMO Plan members. The insurance companies rejected claims because they were too expensive or medically unnecessary. At the time, members and their physicians did not challenge these denials, and because the insurance company got away with the denied claims process so well, they have continued to do so as part of their practice.

However, a new concept has emerged in the past year ~ HMO Law.

There are now lawyers and law firms dedicated to bringing cases against HMOs. These claims include wrongful death, bad faith and medical malpractice. This means that an HMO can be sued when a person dies as a result of the HMO’s denial of coverage for necessary medical treatment; for the rejection of valid claims; and for medical malpractice by one of his physicians.

In addition, individual states are tightening their laws HMO plans.

In future articles, we’ll discuss how HMOs work, the types of HMO plans, the cost of the plans, and the future of the plans.