Public Health Law Map - Beta 5 - Medical and Public Health Law Site

to set up their own practices or work their way into existing practices. In the last few
years, it has allowed some physicians to cash out by selling their practices to
corporate providers while nominally remaining independent practitioners.
The downside of prolonging these simple business structures beyond the point where
they made economic sense is that physicians were left unprepared for the onslaught
of MCOs. The medical societies focused on medical malpractice reform—a small-
practice issue—while MCOs were solidifying their legislative and political position.
Physicians never developed the major business entities that could better negotiate
with MCOs. The physicians who cashed out are now finding that their corporate
owners are starting to demand higher productivity and threatening to close practices
that fail to turn a profit.
2. The Rise of MCOs
MCOs, in the broad sense of organizations that employ or contract with physicians to
deliver care to defined groups of individuals as an alternative to private fee-for-
service medicine, are as old as modern medical practice. The earliest cases
establishing the ban on the corporate practice of the professions carved out
exceptions for benevolent organizations that hired physicians or attorneys to look
after their own members or those in need. These MCOs predated indemnity health
insurance. Some were organized to ensure access to medical care for workers in
isolated locations. Kaiser-Permanente Health Plan began as a method of providing
medical care to the workers building Grand Coulee Dam. Others were integrated,
member-owned mutual insurance plans that employed physicians to care for the
members. Organized medicine opposed these early MCOs as unethical, and were
sued by the government for antitrust for trying to restrict the competition in medical
care. [American Med. Ass’n v. United States, 317 U.S. 519 (1943).] Although the
courts supported MCOs, the concerted opposition of organized medicine kept them
from making any substantial progress in the market until the 1970s.
In 1971, President Nixon addressed the rising cost of medical care and predicted that
it would cripple U.S. productivity. This prompted Congress to pass the Health
Maintenance Organization Act of 1973 (HMO Act of 1973). [42 U.S.C. § 300e-10
(1973).] This act banned most state law impediments to the establishment of MCOs;
it did not, however, preempt state laws on regulation of medical practice or state
criminal laws dealing with bribing fiduciaries. With the legal framework in place, the
rising cost of medical care through the 1970s and 1980s fueled the growth of MCOs.
By 1997, MCOs had become the predominant form of medical practice. Most
physicians must participate in some form of MCO because it is estimated that less
than 5% of individuals not under a government program have a traditional
indemnification insurance plan.
3. The Structure of MCOs
It is difficult to generalize about MCOs because they take many different forms.
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