Bringing managed competition to life
The organization known today as Kaiser Permanente, and its successes with prepaid healthcare, first took root in California’s Mojave Desert. It was in the early 1930s and thousands of laborers were building the massive Colorado River Aqueduct project. A young physician named Sidney Garfield saw a golden opportunity in providing care for the men to keep them in good health and able to work. He even built a 12-bed hospital. But getting paid by insurance companies proved difficult, and many workers didn’t even have coverage.
An inventive insurance agent named Harold Hatch came up with idea of getting insurers to make an upfront payment for each worker to compensate Garfield for his services, giving birth to the concept of prepayment for industrial care.
“With prepayment, it’s described as inverting the medical model of economics,” said Lincoln Cushing, Kaiser Permanente’s historian. “You’re much more profitable if people don’t get sick, so prevention really becomes a prime directive.”
Garfield later moved his practice to Los Angeles after the aqueduct work started to wind down. It was during this time that he got a call from a man named Henry J. Kaiser, who had diverse industrial enterprises. Kaiser wanted to learn more about prepaid healthcare and how it could be applied to his nearly 7,000 workers erecting the Grand Coulee Dam in Washington. Early in World War II, Kaiser again turned to Garfield to help set up hospitals and recruit doctors to deliver care for tens of thousands of shipyard workers building America’s fleet of warships.
The integrated delivery system flourished in the proceeding years. Today, Kaiser Permanente has 39 hospitals and more than 22,000 physicians serving nearly 12 million members in nine states.
Garfield was inducted into the Hall of Fame in 1988; he passed away in 1984 at age 76. Kaiser was inducted in 2011 and died in 1967 at age 85.
Another important figure in the realm of prepaid healthcare is Dr. Paul Ellwood Jr., but more on the policy side than the delivery side. While practicing medicine for 17 years, Ellwood saw firsthand what he considered a flawed insurance system in American healthcare. And he started looking for alternatives. Ellwood is widely known as the “father of managed care” as well as a concept he helped develop dubbed managed competition.
He coined the term health maintenance organizations, for the prepaid, comprehensive plans that he saw as a promising alternative to fee-for-service medicine. He also saw HMOs as a better free-market approach than government-run programs. His work with the Nixon administration led to passage of the Health Maintenance Organization Act of 1973.
Ellwood developed the theory of managed competition along with colleague Alain Enthoven, an economist and Stanford professor. They were leading members of the Jackson Hole Group, a loosely organized circle of healthcare practitioners, economists, public officials and others who met regularly for decades in Ellwood’s house in Jackson Hole, Wyo. The theory envisioned a government-guided system of private health plans and insurers that would compete to enroll large regional pools of workers. Vigorous competition would drive down the cost of care.
A version of managed competition was a centerpiece of the Clinton administration’s ill-fated healthcare reform proposal in the early 1990s. But Ellwood would back away from supporting the plan, citing too much government regulation and not enough emphasis on competition and outcomes.
Ellwood was inducted into the Hall in 2000.