How the 'Father of the HMO' helped make Minnesota a model for health care reform

One evening in the early 1960s, Dr. Paul Ellwood was walking the halls of a Minneapolis hospital when he heard children crying. They were about the age of his young son, who was happy at home.

Were all these kids really better off hospitalized?

"I just thought: 'This is all wrong. The incentives in this business are to fill beds and to see more patients and to spend more money,'" Ellwood said in a 2019 interview with the Star Tribune. "And so that began a career of trying to reshape the incentives of the American health care system."

Ellwood went on to develop a new form of health insurance in the 1960s and 1970s that he called the health maintenance organization, or HMO. It was an idea that rose to national prominence from a Twin Cities think tank he established called InterStudy, ultimately located on Christmas Lake in Excelsior.

The push for HMOs helped make the business of health care today a key pillar of the Twin Cities regional economy. Minnetonka-based UnitedHealth Group — the state's largest company by revenue — and other industry players can trace their origins to Ellwood's big idea. He died June 20 at an assisted-living facility in Washington at the age of 95.

"Many of the folks who started and ran some of the first HMOs in Minnesota came out of InterStudy," said Jan Malcolm, the state health commissioner, who worked with Ellwood in the 1970s and 80s.

"Minnesota from early on was sort of a hot bed of innovation in health care delivery and in reform ideas," Malcolm said. "I do think it's fair to attribute a lot of that to Paul and InterStudy."

The idea was to stop paying a fee for every discrete medical service provided by doctors and hospitals. Instead of this "fee-for-service" system, health care providers would receive a per-patient sum paid in advance, an arrangement that Ellwood believed would prompt doctors to efficiently manage care for groups of patients. One goal was to provide financial rewards for caregivers who helped patients stay healthy.

Ellwood arrived in the Twin Cities in the early 1950s for a pediatric neurology internship at the University of Minnesota. He soon found himself in the unexpected position of running the Sister Elizabeth Kenny Institute, a Minneapolis facility that was busy at the time treating hundreds of polio patients.

Soon, the public health triumph of the polio vaccination created a leadership dilemma for the young physician — there were so few patients to treat, the hospital was practically empty.

Ellwood and colleagues shifted the institute's focus to comprehensive rehabilitation needs, but the facility struggled again financially as clinicians became more skillful and patients didn't need to stay as long for care.

After admitting a number of children with learning disorders who likely didn't need to be in the hospital, Ellwood heard their cries and had his epiphany: The incentives in health care needed to change.

Ellwood often was called the "father of the HMO," even though some groups that took the name health maintenance organization — like Kaiser Permanente in his home state of California — had been around for decades.

HMOs were embraced by President Richard Nixon's administration as a response to growing health care costs in the wake of Medicare's launch in the mid-1960s. The federal Health Maintenance Organization Act of 1973 helped drive adoption of the new health plans and it was "no accident," Malcolm said, that employers and medical groups in the Twin Cities led the way.

Doctors at St. Louis Park Clinic created an HMO called MedCenter. In time, it merged with Group Health — a prepaid health plan launched in Minnesota in 1957 — to create what's now Bloomington-based HealthPartners.

At the Hennepin County Medical Society, physicians approached Ellwood for help developing their own HMO. He connected them with a researcher at InterStudy named Richard Burke, who helped launch the non-profit Physicians Health Plan. Burke's company Charter Med, which provided management services to the HMO, eventually became UnitedHealth Group.

In time, Physicians Health Plan merged with another local HMO to create Medica, the health insurer based in Minnetonka.

"It was kind of a golden age for care improvement and enhancement — and that would not have happened without Ellwood. He triggered it," said George Halvorson, who was a top executive at Blue Cross and Blue Shield of Minnesota at the time before becoming CEO at HealthPartners and then Kaiser Permanente.

In the 1980s, Ellwood was a trusted advisor to former U.S. Sen. David Durenberger, R-Minn., who led bipartisan health reform efforts during his Senate tenure.

"We were convinced by Ellwood, and then by a few others, that the health maintenance organization was the way to go," Durenberger said. "The emphasis should be on health maintenance and the rewards in the system ought to be for keeping people healthy as much as curing their ills."

By the 1990s, Ellwood had moved to Wyoming, where he created what came to be known as the Jackson Hole Group, a regular meeting of policy experts — including some from Minnesota — whose ideas informed the health reform push by President Bill Clinton. They promoted "managed competition," where partnerships of insurers and health care providers would compete to sell services to health insurance purchasing cooperatives.

But as the Clinton health reform idea moved forward, Ellwood distanced himself from the proposal because he felt his ideas "were just getting warped," said Barbara Ellwood, his wife. The Clinton plan was never adopted.

In 1997, Ellwood told the Star Tribune that despite Minnesota's reputation as a testing ground for managed care, the state was "a long way from" being a model for the country because health plans were failing to compete on quality rather than price.

By the late 1990s, there was a strong national backlash against HMOs amid criticism that health plans were profiting by blocking patients from needed care.

Like so many visions, Ellwood believed the reality fell short of its noble intent. For HMOs, specifically, the measurement of patient outcomes got short shrift.

In the end, Ellwood lamented that the HMO movement simply "created more and more of a focus on money and how to game the system," Barbara Ellwood said.

At the conclusion of a 2010 interview that reviewed his career, Ellwood asked: "Would you like to be labeled 'The Father of the HMO'?"

To Kip Sullivan, a long-time Twin Cities activist for a single-payer health care system, the HMO push was flawed from the start because Ellwood wrongly attributed health care inflation to excessive use of services rather than runaway prices. The emergence of large, powerful health plans prompted hospitals to consolidate, Sullivan said, resulting in bloated administrative costs.

Lynn Blewett, a health policy researcher at the University of Minnesota, said Ellwood advocated for the state's model of well-coordinated and integrated health care and believed in principles at the heart of today's push for "value-based care." But, she added in an e-mail: "I don't think he could have predicted how these core principles would be co-opted by for-profit health care."

Today, millions of people are still covered through HMOs, but features that made the coverage distinct in the 1970s and 1980s have been incorporated into standard health insurance. Other HMO goals — like the emphasis on preventing illness and measuring health outcomes to promote quality — just haven't been baked into the business model with coverage, Malcolm said.

"It was a movement back then," Malcolm said. "HMOs were the reformers. They grew up to be the system, but back then they were the rebels pushing for change."