Kip Sullivan on the Creeping Privatization of Medicare

December 13, 2021

In the early 1970s, Senator Ted Kennedy and Congresswoman Martha Griffiths introduced Medicare for All legislation in the Congress.

It could have passed but for the efforts of a doctor from Minnesota by the name of Paul Elwood.

Elwood believed that unless the Republicans did something to control health care costs, Medicare for All single payer would soon become the law of the land.

So in February 1970, Elwood traveled to Washington, D.C. and met with officials in Richard Nixon’s administration to present his proposal for what he called health maintenance organizations (HMOs).

The seeds for a managed care theology that would upend the American health care over the next fifty years were planted.

Kip Sullivan is a single payer activist in Minnesota who has produced a three part history lesson of this move to defeat single payer and privatize Medicare.

“Health care inflation was almost non-existent until the late 1960s,” Sullivan told Corporate Crime Reporter in an interview last month. “There was a brief bout of inflation that occurred in the late 1960s following the enactment of Medicare and Medicaid in 1965. That should not be surprising. All of those poor people and those elderly people that the insurance industry didn’t want were now given the means to go out and buy health care if they needed it.” 

“And the sudden increase in demand for health care services allowed doctors and hospitals to jack up prices. There were no price controls. For about a five or six year period following the enactment of Medicare and Medicaid, there was a burst of inflation. And this greatly concerned employers and legislators. By 1969 and 1970, the phrase health care crisis was being talked about, not so much by the general public but by employers, legislators in Congress and at the state level.”

“Senator Ted Kennedy and Congresswoman Martha Griffiths introduced what we would call a single payer bill. That term single payer didn’t emerge until 1989. One year after Kennedy and Griffiths introduced that bill, a Minnesota physician named Paul Elwood arranged a meeting with three members of the Nixon administration.” 

“That meeting was held at the DuPont Plaza Hotel on February 5, 1970. And Elwood’s message to the Nixon folks was – if the Republicans don’t come up with a private solution to rising health care costs, we are going to get Medicare for All from the Democrats and we don’t want that. Elwood told them that doctors are ordering services patients don’t need and it was because of the fee for service system”. 

“And the Nixon folks said – that makes a lot of sense. What’s the solution? Elwood said – we have to turn the fee for service system upside down. We have to give doctors an incentive to do just the reverse so they cut back on the services they order. He said the way to do that is to capitate doctors. Capitate means paying doctors a fee per patient per year. And you could see how that incentive would cause doctors to deny services to their patients because then they get to keep the amount of money that is given to them in advance to cover a given patient for an entire year.”

“If you do endorse capitation, then the patient pays the doctor $10,000 to cover the patient for a year. If the patient gets sick, it’s not rational or fair to let the patient go to any doctor he wants. If you endorse capitation, you have to endorse a limited choice of doctor and hospital. The other feature of the HMO that Elwood was proposing was micromanagement of the doctor by the insurance company. And on the basis of the specious argument that this form of insurance would somehow cause doctors to order more preventive services, Elwood coined the term health maintenance organization for this new fangled form of insurance.” 

“The Nixon folks bought it and eventually Ted Kennedy and the Democrats bought it too.”

Why would a single payer advocate like Kennedy buy into it?

“Each side was being persuaded by different arguments.”

“Henry Kaiser, the owner of the HMO out in the Bay Area, went to Nixon and said – the secret to these HMOs is profit. You are going to pay doctors in a way that they make more money if they deny services. And you can hear it on the Watergate tapes, Nixon responds – Oh yeah, I like that.”

“The Democrats were hearing from unions, the UAW, the AFL-CIO, the American Public Health Association, they were hearing from these liberal groups who had heard of these HMOs in Oklahoma and Washington and Minnesota – they were hearing about prepaid insurance companies that were started by farmers and unions. They were small and locally controlled and they deserved the praise they were getting.”

“And so you had this confluence of two different ideologies. Each wing came together to promote HMOs. And it turned out that the conservatives had a better vision of what was coming than the Democrats did.”

HMOs were the first iteration of a managed care theology that would lead to the privatization of Medicare.  And it was based on a misdiagnosis.”

“The most essential point we are making in these webinars is that when the Nixon administration and the Democrats in the early 1970s endorsed managed care and HMOs as a solution to rising costs, they based that endorsement on the wrong diagnosis,” Sullivan said. “They got it into their heads that excessive quantity, over consumption of medical services, was the reason costs were rising, when in fact the problem was that prices were rising.”

“It sometimes helps to remind people of something we learned when we were about eight years old. If you are concerned about total spending in any sector of the economy, be it pineapples or health care, you have to be concerned about two numbers – the number of pineapples sold in a year and the price of the pineapples. Price times the quantity of pineapples gives you total spending.”

“The health policy elites in the Nixon administration, Senator Ted Kennedy and the liberals who bought the HMO argument in the early 1970s – they bought the wrong diagnosis. They were persuaded that excessive quantity was the problem when in fact price was the problem.”

“To be a little more specific, Congress and Nixon were persuaded to think that Americans get unnecessary services because doctors are paid a fee for every service they render, the doctors are greedy and ignorant and they routinely cave into the incentives in the fee for service method to order services patients don’t need. That diagnosis was persuasive even though there was no evidence for it. And there is no evidence today.”

On the basis of that wrong diagnosis, Congress and the Nixon administration enacted the HMO Act of 1973. And they inserted HMOs into the Medicare program. That was the beginning of the dominance of the managed care solution that lasted for fifty years. To this day, it still dominates the discussion of how to contain health care costs.

Now there are a slew of these insurance companies like managed care organizations – accountable care organizations (ACO), medical homes, hospital readmission reduction programs, merit based incentive payment systems. And they are eating Medicare from the inside out.

Most troubling now is the direct contracting entity (DCE) which was conceived in the Trump administration but is being pushed by President Biden and Elizabeth Fowler who heads the Center for Medicare and Medicaid Innovation.

“The proposal calls for a pilot test in ten cities where traditional Medicare beneficiaries will be assigned to a DCE and they will have no choice to get out,” Sullivan said. “In this case, the DCE may not be able to tell patients where they can go. But now they are being paid like HMOs, they will have tremendous incentive to keep people from going outside of network. And to deny services. That’s the problem with creeping privatization in traditional Medicare.”