The HMO Act of 1973: Objectives Finally Met through ACOs?

Signed into law by President Richard M. Nixon on December 29th, the HMO Act of 1973 was ambitious legislation that initiated a long, bumpy, and unsatisfying endeavor to establish a comprehensive healthcare delivery system that lowered medical costs and provided quality care to every American. Senator Edward M. Kennedy favorably described the proposed legislation as “a drastic overhaul of [the] entire way of doing business in the healthcare field” (Brase). The legislation obligated the Federal Government to support the implementation of prepaid group practices, or Health Maintenance Organizations (HMOs), as alternatives to the traditional fee-for-service (FFS) payment model. HMOs were designed to accomplish three main healthcare objectives: control costs, assure quality, and provide more access to more people. 

Although HMOs gained some early momentum through government funding and subsequent legislation, mistakes in implementation, deficiencies in modern technology, and inadequate measurements for quality assessment hindered HMOs from fully meeting their objectives, and subsequently created a “managed care backlash” in the late 1990s. Once again, the United States healthcare industry is experiencing another significant payment and delivery system overhaul, and value-based Accountable Care Organizations (ACOs) are the re-engineered managed care alternatives expected to finish what HMOs started. Designed to take advantage of the historical benefits of HMOs, while avoiding their drawbacks, ACOs are leading the transition to value-based care, and experts are optimistic that strategic implementation, advances in modern technology, and focused quality-assurance measurements will enable ACOs to finally achieve the objectives that their predecessors could not.

Control Costs

In theory, HMOs were expected to control costs in three major ways: through their emphasis on preventative care which would decrease hospital utilization; through their capitated payment structure which would incentivize cost-efficiency; and through their group practice collaborations which would encourage the streamlining of health care systems, procedures, and resources (Uyehara). Unfortunately, HMOs struggled to meet these expectations for various reasons.

First, to really impact cost control through preventative medicine, providers must communicate effectively and regularly to emphasize patient education and to manage patient compliance. Unlike the HMOs of the 70s, 80, and 90s, ACOs have the opportunity to employ modern technology to educate, communicate, and engage patients in preventative care. Today’s healthcare providers and patients have the benefit of communicating via email, text, smart phone apps, and internet sites (the internet has only been a reality since 1992). Consider a few examples of how ACOs can use technology to achieve preventative care goals that work to help control costs:

  • Patients can access 24/7 online education and training through their computers and/or smart phones.
  • Care coordinators can reach patients via email, text, or mobile phone to confirm that patients are taking their medicines, attending scheduled appointments, and following through with physical therapy.
  • Providers can have “telehealth” appointments with patients through online video calls. 
  • Health and fitness apps can be used to educate and encourage patients to live healthy lifestyles and manage chronic diseases.
  • Mobile apps can give patients easy access to their health records, allowing them to “own” their health data to review and to share with health professionals.

Unlike their managed care, HMO counterparts, ACOs are developing during a time when technology gives them an enormous opportunity to control costs through successful implementation of preventative medicine strategies.

Designed to take advantage of the historical benefits of HMOs, while avoiding their drawbacks, ACOs are leading the transition to value-based care, and experts are optimistic that strategic implementation, advances in modern technology, and focused quality-assurance measurements will enable ACOs to finally achieve the objectives that their predecessors could not.

Concerning the capitated payment structure, HMOs were expected to control costs by assuming full financial risk for basic health services, while negotiating the financial arrangement of fixed prepayments for patient populations against actual patient costs. HMOs were left to balance cost-efficiency with quality care, incentivized simply by the need to remain financially solvent. This often led to what some labelled as a “rationing of care”—HMOs saying “no” to certain tests, drugs, or procedures deemed unnecessary—which led to public criticism and backlash. Today, the Centers for Medicare and Medicaid Services (CMS) has designed a variety of payment structures, including hybrids of the traditional fee-for-service model, that allow ACOs to gain the experience necessary to gradually integrate into higher risk-based contracts. In fact, most models are structured to share financial risk between providers and insurers, incentivizing ACOs with shared savings and bonuses that are predicated on customer satisfaction, quality performance, and cost-efficiency.

Lastly, HMOs were expected to cut costs by consolidating physicians into group practices that would share resources while streamlining functionality. Although beneficial to controlling costs, the scope of cost savings was limited to the group practice. Today, modern technology supports ACOs in generating tremendous savings by helping physicians and specialists across provider networks to collaborate to offer more coordinated, appropriate, effective, and cost-efficient care. For example, many ACOs are equipped with third-party information technology platforms that allow for the interoperability of hospital information systems and Electronic Health Records (EHRs) across the continuum of care. This “connectivity” allows physicians to take a “holistic” approach to patient care, giving them access and awareness to a patient’s entire healthcare situation—from the immediate care needs to medical care services, lab results, pharmacy claims, hospital readmissions, and care transitions. Aggregated data allows physicians to eliminate unnecessary spending, not by “rationing care,” but by intentionally considering the quality of care provided, and the overall outcomes of that care, in relation to cost-efficiency.

Assure Quality

HMOs were expected to assure better quality health care because they organized physicians into collaborative physician groups where shared ideas, resources, and medical records would enable greater continuity of care for patients. This objective may have succeeded had HMOs had some specific, measurable goals for quality assurance; ironically, the HMO Act of 1973 outlined minimum requirements to hold HMOs accountable for quality care. The Notes and Brief Reports of March 1974 read this way: “An HMO must have an ongoing quality assurance program for its health care services. The program must emphasize health outcomes and provide for physician review and for review by other health professionals” (Mueller). Although legislation called for research, evaluations, independent studies, and annual reports concerning the effectiveness of managed care, HMOs were not incentivized in any way to provide high-quality care, other than to remain financially solvent, and there was no legislation prescribed to effectively hold HMOs accountable for assuring quality care.

Today, however, the Centers for Medicare and Medicaid Services (CMS) has initiated a sophisticated reporting and reimbursement payment system, the Quality Payment Program (QPP), to incentivize quality care through +/- payment adjustments, shared savings, and financial bonuses. The QPP “grades” individual physicians and ACOs on performance associated with specific quality measures, and CMS connects these scores to payment reimbursements and financial incentives. This performance accountability assures that there is a maintained focus by physicians and ACOs to operate with a cost-efficient, high-quality care mentality.

In addition to the accountability incentivized by the Quality Payment Program (QPP), the ACO collaborative structure assures quality care by creating a network of physician groups, specialists, surgeons, pharmacists, care plan managers, doctors and hospitals who “self-regulate” quality performance. Because ACO providers share in the financial incentives offered through the QPP, providers inherently hold each other accountable for improving quality care, while eliminating unnecessary spending. This alignment allows ACOs to deliver a connected-care experience where patients receive more coordinated, appropriate, effective, and cost-efficient care.

Provide More Access

Finally, HMOs were expected to improve healthcare access across the country, specifically in underserved and low-income areas. The assumption was that as group practices formed, they would attract physicians to more remote areas, or to areas with lower income populations. This expectation did not materialize however with experts recognizing that “rural poverty, financing difficulties, and population dispersion create[d] obstacles to group practice prepayment plans” (Uyehara).

Physicians serving in Health Professional Shortage Areas (HPSAs) and Medically Underserved Areas (MUAs) are a vital part of the healthcare system, providing critical services and access to quality care. In the past, government incentives such as loan forgiveness and J-1 visa waivers have encouraged physicians to participate in these areas. Today, the Centers for Medicare and Medicaid Services (CMS) has also implemented the Small, Underserved, and Rural Support initiative to provide free program and practice-level support to help clinicians participate and succeed.

Understanding the implications that the Quality Payment Program (QPP) has on clinicians, CMS has offered generous flexibilities to support HPSA and MUA clinicians. For example, providers who now serve in rural and low-income areas can partner as ACO virtual groups to capitalize on the benefits of being in larger organizations. Solo practitioners and small group practices can serve as virtual ACO groups in value-based contracts to improve healthcare access and to improve financial sustainability for providers in rural and low-income areas. CMS has designed virtual groups to be flexible in composition, location, and specialty, and these hybrid groups “provide a comprehensive measurement of performance, shared responsibility, and an opportunity to effectively and efficiently coordinate resources…” to give solo and small group practitioners the opportunity to fulfill their Quality Payment Program requirements and benefit from its financial rewards (CMS).

Almost fifty years after the HMO Act of 1973, today’s healthcare objectives remain the same: control costs, assure quality, and provide healthcare access to more people. Accountable Care Organizations (ACOs) are leading the way in value-based care reform, and experts are optimistic that strategic implementation, advances in modern technology, and focused quality-assurance measurements will help ACOs succeed where HMOs could not.


North Texas Clinically Integrated Network, Inc. (dba TXCIN) is a non-profit organization ACO that began in late 2014. A small group of independent physicians aligned to initiate clinical integration and value-based contracting. Partnering with RevelationMD and its state-of-the art information platform, TXCIN has become one of the largest, independent networks of physicians in North Texas.


Brase, Twila. “Blame Congress for HMOs.” Citizens’ Council for Health Freedom. February, 2001.


Fox, PhD, Peter D. and Peter R. Kongstvedt, MD, FACP. “A History of Managed Health Care and Health Insurance in the United States.” The Essentials of Managed Health Care. 6th ed. Burlington, MA. Jones & Bartlett Learning. 2013.

Uyehara, Esther and Margaret Thomas. Health Maintenance Organization and the HMO Act of 1973. The Rand Corporation. Santa Monica, CA. December, 1975.

Mueller, Marjorie Smith. “Health Maintenance Organization Act of 1973.” Notes and Brief Reports. Bulletin, March 1974.


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