Kids and Health Care: Managing Costs

Health insurance companies had to pay for much of the rocketing costs; they had to contend with increasing fees for doctors, lab tests, prescription drugs and hospitals. These growing costs meant insurers either needed to keep increasing their premiums, or they needed to find another way. To some degree, they did both.

The important thing to remember about these companies is that their market has almost never been individual people or families -- their market has been employers offering fringe benefits as a cheap alternative to higher salaries. Many people, faced with long lines in the ER and daunting paperwork when they take their kids for checkups, forget this.

Through the 1960s, 1970s and 1980s, health insurance companies managed the rising costs of medical care (which they were also enabling) by passing along the increases in the form of higher premiums to their customers. Most of the time, the companies simply absorbed these higher costs.

But no economic system can simply absorb higher costs forever. In the 1980s, the companies that were the main market for health insurance companies started to react to the increasing premiums. Some cut back on the benefits they offered employees. Some left their well-known insurance companies for lesser-known, cheaper start-ups. Some laid off employees to keep salaries and benefits higher for those who remained.

None of these options was good. American insurance companies realized they couldn't pass along rocketing costs any longer. They had to do something else to remain competitive; they had to cut the costs themselves.

What did insurance companies do to cut costs? They moved toward managed care. This meant they set up agreements with doctors and hospitals that enabled them to standardize fees for various services. They limited their coverage to doctors and hospitals that would accept the standard fees. They started paying for services of low-cost alternative therapies like acupuncture and chiropractic treatment -- which they used to dismiss as quackery. They stopped paying for prescription drugs.

By the late 1990s, the delivery of medical services had changed dramatically for most Americans. A growing number no longer had traditional indemnity health insurance; they had managed care plans -- things like health maintenance organizations (HMOs) and preferred-provider organizations (PPOs). Even those who had traditional health insurance felt the influence of HMOs and PPOs. Seeing any doctor or any specialist was no longer easy. All programs were full of limits -- lists of doctors you can't see and treatments you're not allowed unless two or three doctors and a review board agree they're necessary.