HMO Act Enables For-Profit Healthcare Expansion

President Richard Nixon signed the Health Maintenance Organization Act of 1973 into law on December 29, 1973, following Senate sponsorship by Edward Kennedy. The Act provided grants and loans to start or expand Health Maintenance Organizations (HMOs), removed certain state restrictions for federally qualified HMOs, and required employers with 25 or more employees to offer federally certified HMO options alongside traditional health insurance. While the legislation was ostensibly designed to control healthcare costs and improve patient care, the Nixon administration viewed it as an opportunity to develop a profit-driven alternative to Senator Kennedy’s national health insurance proposal.

The Act’s true purpose was revealed in a 1971 Oval Office recording where domestic policy advisor John Ehrlichman briefed Nixon on Edgar Kaiser’s Permanente HMO model. Ehrlichman explained: “All the incentives are toward less medical care, because the less care they give them, the more money they make.” Nixon responded enthusiastically to this profit-maximizing structure, recognizing it as a private sector alternative that could block comprehensive healthcare reform. The legislation took its main inspiration from Kaiser Permanente, though ironically, due to legislative amendments during the political process, Kaiser Permanente itself did not qualify as an HMO under the Act until it was amended four years later.

The HMO Act of 1973 accelerated the transformation of American healthcare from a service model to a profit-extraction system. While for-profit healthcare existed before 1973, the Act provided federal backing and incentive structures that dramatically expanded the corporatization of medicine. The legislation established the principle that healthcare organizations could maximize profits by minimizing care—a fundamental conflict of interest that would drive decades of healthcare dysfunction, rising costs, and deteriorating patient outcomes. This framework laid the groundwork for the managed care revolution of the 1980s and 1990s, the insurance industry’s capture of healthcare policy, and the current system where administrative costs and corporate profits consume an ever-larger share of healthcare spending while millions remain uninsured or underinsured.