Over the past 20 years, managed care has gone from industry hero to industry villain and then to healthcare has-been. In the mid- to late '80s, employers turned to managed care in droves, desperate to stave off fast-rising medical costs. The number of HMOs more than doubled over the next decade and HMO enrollment ballooned to 78.8 million in 1998 from 18.9 million in 1985.
For a while, managed care's cost controls worked. As employees switched to more tightly run plans, costs stabilized and premium increases slowed to less than 1% in 1996â€”the smallest annual rise in a decadeâ€”from a peak of 18% in 1989, and remained in the low single digits through 1999.
But by the mid- to late '90s, the managed-care industry found itself in the midst of a full-fledged backlash. Consumers railed against HMOs' "gatekeeping" tactics, the most vexing of which included restricting visits to specialists and requiring pre-authorization for many high-cost services.
To improve their image, HMOs were forced to broaden their provider networks and scrap many of their most onerous coverage restrictions, often by offering PPO options. But these changes came with a steep price: health plans quickly turned to premiums hikes to prop up their sagging bottom lines. As such, 2001 marked the first of four straight years of double-digit rate increases, which peaked at 14% in 2003. Because of this trend, HMOs soon lost their cost advantage in the market.