A new packaged deal: Kaiser Permanente first applied the HMO concept on a wide-scale basis.

While some historians believe HMO-style plans date hack to ancient China, the modernization of the prepaid health plan occurred nearly 60 years ago.

Kaiser Permanente is credited as being an innovator in the modern health maintenance organization plan--a prepaid health plan in which members pay a monthly premium, and in exchange the HMO provides maintenance care for them and their families. Kaiser Permanente's role began when industrialist and Kaiser founder Henry J. Kaiser learned about Los Angeles surgeon Dr. Sidney Garfield's new approach in health care.

Garfield had established a prepaid health clinic for construction workers in Southern California in 1933. The boon took off when he soon found himself faced with the difficult task of finding financing and getting insurers to pay bills in a timely fashion. In addition, many of the men he treated lacked health insurance. With the help of former engineer Harold Hatch, Garfield came up with a prepayment concept in which insurers world pay a fixed amount per day, per covered worker, up front.

Kaiser was intrigued by Garfield's development and he commissioned Garfield to provide similar service, first for his workers who were constructing Grand Coulee Dam in Washington State starting in 1938 and then for Kaiser's nearly 90,000 employees in his Richmond, Calif.-based shipyards during World War II.

Kaiser had a vested interest in providing health-care coverage to those in need. When his mother died in his arms when he was only 16 years old, he believed his family's lack of money kept her from the medical care she needed and he pledged to make health-care coverage a part of his vision. Kaiser and Garfield opened the prepaid plan to the public in 1945. In 10 years, enrollment surpassed 300,000 members in Northern California. Today, Kaiser Permanente says it is the largest nonprofit HMO in the United States.

The HMO has evolved since the mid-20th century, but not without some bumps along the way.

The 1965 enactment of Medicare for the elderly and Medicaid for the poor spawned an upsurge in managed care organizations, including HMOs. In the early 1970s, the federal government, insurers and employers were searching for an answer to escalating health-care costs. On Dec. 29, 1973, President Richard Nixon signed the HMO Act of 1973 into law. The act provided $375 million for HMO development and subsidization of HMO premiums and required private employers with 25 employees or more to offer HMOs.

Kaiser had a hand in the development of the act by providing insight on HMOs and serving as a model for the creation of the act. Patti Elwood Jr., chief architect of the act and coiner of the term "health maintenance organization," recalled in a historical perspective of Kaiser Permanente's beginnings how he immediately hoarded a plane to Kaiser's Oakland headquarters when the U.S. Department of Health, Education and Welfare leaders agreed to his idea for the act.

The following decades also provided stepping stones into the modern HMO. In the 1980s, HMOs gained attention when Congress attached an HMO provision under the Employee Retirement Income Security Act. ERISA required all employers with more than 50 employees to offer an HMO choice in health plans. It wasn't until the 1990s, however, that HMOs garnered the most fame. The percentage of working Americans with private insurance enrolled in managed care rose from 29% in 1988 to more than 50% in 1997, according to the Health Resources and Services Administration.

But the by type around HMOs in the '90s soon gave way to a downward trend that many believe still continues. "The concept was a good idea, but the reason that HMOs are now on the decline is that they didn't include the patient in the decision-making process.

Instead, the HMO set copays and because there wasn't involvement by individuals, it developed an idea of entitlement and no awareness of the actual cost," said Marc Bilodeau, senior vice president with insurance broker Willis Group Holdings Ltd.

The HMO Legacy

But despite its ups and downs, many industry experts believe the innovation of the HMO has provided much value to the health-care system. "Perhaps one of the most notable contributions of the HMO is its focus on and advocacy of the concept of prevention," said Susan Pisano, vice president of communications for America's Health Insurance Plans. Fee-for-service plans pre-managed care usually didn't have coverage for prevention, she said, and HMOs looked at the concept broadly to include primary prevention (such as flu shots), secondary prevention (such as screening for cancer), and tertiary prevention (treating people with chronic disease comprehensively).

As the HMO continues to evolve, Pisano said, it will likely borrow features from some of the newer models that emerge. In turn, many of those models will also adopt some of their features from today's HMO. "I don't necessarily think we'll see a time when a particular model is the answer to all of the health-care system problems or addresses all the needs. But I think the HMO model has contributed important basic concepts to the health-care system and it will continue to evolve as a major model."

While the original concept was good and still offers much value, Bilodeau said today's HMO is taking on a different appearance. HMOs are now beginning to again move back to more restricted care, he said. "The original concept of limited networks based upon fees and reimbursement schedules was the way to contain costs, but I now think it will be limited networks based upon quality of care and quality outcomes." In addition, he believes the concept of preferred providers is increasing and traditional staff model HMOs will continue to evolve. Staff model HMOs, like that found at Kaiser, work well because "everyone is based on salaries, there's no fee for service, you negotiate relative income for providers and you own the bricks and mortar," he added.

"In addition, it looks like we're going back to centers of excellence--limiting providers based upon quality outcomes," Bilodeau said. "That's the difference of today's HMO and that's why I think it's sustainable. You can't do it just based purely on cost; that doesn't make any sense."

Kaiser Permanente also sees some changes in the HMO from its early form. "While we served as a model for the HMO act, when you look at what an HMO is today, in many respects we're not really an HMO--but something more," said Tom Debley, Kaiser's director of heritage resources. There are now many variations--some of which don't include the idea of integrated efficient delivery systems, he said. "We're still struggling with that idea in the United States nearly 70 to 80 years after it was first discussed as a public policy problem."

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Kaiser Foundation Health Plan

A.M. Best Company # 64585

Headquarters: Oakland, Calif.

Lines of Business: Health insurance. Includes the not-for-profit Kaiser Foundation Health Plan Inc., Kaiser Foundation Hospitals and their subsidiaries, and the for-profit Permanente Medical Groups.

2003 Net Income: $996 million

Distribution: National consulting houses, regional brokers and brokerage firms, membership exchange, direct

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