The HMO Act of 1973

The early HMOs were idealistic non-profit organizations endeavoring to enhance the delivery of health care to patients while controlling costs. The HMO Act of 1973 changed that premise. It authorized for-profit IPA-HMOs in which HMOs may contract with independent practice associations (IPAs) that, in turn, contract with individual physicians for services and compensation. By the late 1990s, 80 percent of MCOs were for-profit organizations, and only 68 percent or less of insurance premiums went toward medical care. The remainder was paid for MCO executives’ and salespersons’ salaries.

As a counterbalance against growing concerns that MCOs had transformed from patient-friendly plans to profit-making machines, state legislators around the country began to enact laws limiting certain restrictions imposed by MCOs on their members. Most of these laws are referred to as “HMO laws” but generally govern all MCOs within the state (HMOs being the most common).

State laws vary on such issues as whether HMOs may deny patient access to medical specialists without first going through the designated primary care provider (PCP); “best practice” minimum hospital stays; and whether HMOs may provide financial incentives to health care providers who curb medical costs by limiting medical care. Almost all states now prohibit “gag rules,” which are contractual agree-ments with physicians not to inform their patients of treatment options not covered by the HMO/MCO plan (a common practice in earlier days).


Inside The HMO Act of 1973