Group Health Cooperative, Part 4: From Medicare to HMO, 1966-1980

  • By Walt Crowley & the Staff
  • Posted 8/09/2007
  • Essay 8255

The health care visionaries who founded Group Health Cooperative in Seattle in 1945 were activists in the farmers' grange movement, the union movement, and the consumer cooperative movement. Their inspiration was Lebanese-American physician Dr. Michael Shadid (1882-1966), founder of the nation's first cooperatively owned and managed hospital (in Oklahoma). Dr. Shadid's crusade was to overthrow the traditional fee-for-service practice of medicine dominated by solo practitioners, expensive specialists, and private hospitals and clinics. Instead he advocated affordable, prepaid healthcare through the cooperative ownership of hospitals staffed by physicians -- practicing as a group -- who promoted the new idea of "preventive" medicine. Group Health Cooperative began providing health care after merging in 1946 with the Seattle-based Medical Security Clinic, a physician-owned group practice whose idealistic doctors also believed in preventive care. After years of struggle and despite virulent opposition by the medical establishment, Group Health became one of the nation's largest consumer-directed health-care organizations. This is Part 4 of a seven part history of Group Health Cooperative.

From Medicare to HMO, 1966-1980

On July 1, 1966, Medicare and Medicaid became available. Medicare offered a "three-layered cake" of health reform baked in the oven of congressional compromise. Part A covered hospitalization and some extended-care costs on a reimbursement basis through compulsory insurance paid by workers through Social Security. Part B was a partially subsidized, voluntary program to cover physician care. The legislation also established Medicaid, which expanded federal aid to finance health care for the poor through state-administered programs. 

The new law began a revolution in health care, but its internal flaws resulted in a system that institutionalized fee-for-service care and triggered relentless inflation in health care by guaranteeing to pay the "usual and customary" fees of physicians and hospitals without standards for efficiency or effectiveness. Prepaid plans and institutions with an incentive to keep down costs, such as Group Health Cooperative, were effectively penalized financially because they limited their costs and claims for reimbursement. Nevertheless, Group Health believed it could reform the system from the inside and began accepting Medicare patients. 

Early in 1966, the Board of Trustees adopted a Part B plan offering Medicare participants full Group Health coverage for $6 a month. Until this time, Group Health had extended membership only to people under 60 years of age. Now the Board amended the membership agreement to admit members over the Medicare-eligible age of 65. (Not until 1980 did Group Health admit members between 60 through 64.) Total Group Health enrollment passed 100,000 in 1967 and by the following year, nearly 14 percent of Group Health's revenue was coming from Medicare. 

Here Come the HMOs 

In 1969, President Richard Nixon announced the need for a new national health policy and popularized the term "Health Maintenance Organization" or HMO for short. He proposed that the government reimburse health-care organizations per member-patient rather than set prices for various procedures à la Medicare. 

The theory was that per-capita reimbursements would give health-care organizations an economic incentive to promote preventive care as well as to keep down costs. This, of course, was already the mission and ongoing practice of Group Health, although it was not a conventional HMO, most of which are insurers, not care providers. 

When Medicare came into being, Group Health, which pro-rated its individual dues and charges on the basis of serving its total membership, did not know the cost of specific services such as a gall bladder operation or a blood test when it came time to bill the Social Security Administration for its Medicare patients. Group Health entered into negotiations with the Social Security Administration about an HMO amendment to the Medicare Act, arguing that charging per capita (per enrolled patient) rather than for each particular service would save everyone money and put a brake on rising health-care costs. Thus Group Health Cooperative became a force in national health-care politics.

Serving the Poor 

In 1968, Group Health also joined in developing new health-care programs for low-income citizens. Following urban riots in Watts, Detroit, and elsewhere, the federal government created the Model Cities program and similar efforts offering a comprehensive array of community and social services, which were largely planned and administered by local governments and citizen groups. Group Health put together an experimental benefit package to be offered by the Seattle Model City Community Health Board along with a King County Medical Blue Shield plan for low-income residents in Seattle's Central Area. 

The following year, with President Richard Nixon in office, the growth of such programs slowed but did not end. Group Health contracted with the Washington State Department of Public Assistance to provide coverage for some 2,000 recipients of Aid to Families with Dependent Children, and contracted with the federal Office of Economic Opportunity to establish a health program for 500 low-income families in rural King County. 

By now Group Health was earning national and even international praise. The New Republic and Germany's Der Spiegel profiled it and Senator Edward Kennedy hailed it as a "model for reform" during his 1971 tour of the Co-op's new Family Health Center located on the Capitol Hill campus. Thanks to such publicity and despite the severe local recession known as the "Boeing Bust," people began joining Group Health in droves. It represented, apparently, security in the face of economic insecurity. 

This sudden influx of members overtaxed the staff and compromised service for members. Group Health had become too popular for its own good. The staff scrambled to keep up. During 1972 delays in appointments became a major and chronic headache. Late in the year evening clinics were instituted to handle some of the backlog. On one evening, 600 people showed up for care. 

Two years later the difficulty in getting an appointment at Group Health was so notorious that KING-TV News launched an investigation. Reporter Don McGaffin told viewers that it took him 75 phone calls to arrange a visit with his Group Health physician. Newspaper articles also sensationalized mishandled cases and disgruntled patients threatened lawsuits. The Board of Trustees commissioned a consultant study of the problem, while enrollment rocketed past 150,000, notwithstanding the less-than-flattering press.

Innovation and Expansion 

Group Health responded to consumer complaints and capacity deficiencies with innovative procedures and expanded facilities. In 1969, Group Health and the University of Washington School of Medicine collaborated on a program to retrain military medics returning from Vietnam as physician assistants. In March 1971, the Family Health Center, led by nurse Gertrude Dawson, opened on Capitol Hill, and sponsored the family-practice residency of the University of Washington School of Medicine.

The telephone Consulting Nurse Service, created by nurse Mary Matsuda Gruenewald in 1970, was greatly expanded and became one of Group Health's most popular -- and cost-effective -- programs. A major preventive care program, the Well Adult Program, was launched in 1976 and both it and the Well Child Program already in existence promoted preventive care by establishing a standardized schedule of exams that proved just as effective as the conventional procedure of individual doctors making individual recommendations. 

Led by Drs. Robert McAlister and Richard Tinker and by Mary Gruenewald, Group Health established one of the nation's first dedicated emergency care teams (at the time, hospitals typically rotated staff into the emergency room from other duties). The Cooperative pioneered the use of emergency-department observation wards in which specially trained physicians and nurses treat and monitor patients for up to 12 hours as an alternative to conventional hospitalization. Dr. Howard Kirz, one of the emergency team's first hires and later chief of staff, cited these as examples of Group Health's intrinsic impulse as a prepaid program "to wring maximum health out of every dollar instead of maximum dollars out of every illness."

The Women's Questions 

In the late 1960s, reproductive rights became a rallying cry for women across the nation, and abortion debates would dominate Group Health Annual Membership Meetings through the 1970s. The rise of feminism focused attention on Group Health's treatment of women, which was not exemplary despite the importance of women in its founding and leadership.

On March 21, 1973, the Group Health Women's Caucus met for the first time, with about 100 women present. Co-op administrators provided a room only after trustee Hilde Birnbaum personally interceded. Group Health's personnel director and her secretary attended in order to take down other attendees' names -- an act of intimidation loudly protested. 

The women expressed dissatisfaction with aspects of Group Health's pregnancy care, abortion, and other services. At the following Board meeting, Birnbaum convinced her fellow trustees to edit out of the bylaws male pronouns ("he" and "him") that referred to both sexes.

The first mission of the Women's Caucus was to elect a Board member, Emma Beezy. Beezy lost to Ralph Bremer, but the caucus pressed on under the leadership of Caroline MacColl, who was assistant director of the Puget Sound Health Planning Council, a nurse with a master's degree in public health education, and wife of Dr. Sandy MacColl.

Caroline MacColl lobbied successfully to win official recognition for the caucus, which established the precedent for Board-sanctioned special-interest groups within the Cooperative. Over time, the Women's Caucus gained influence, and in the summer of 1977, it endorsed the use of natural childbirth techniques and trained midwives as an alternative to traditional obstetrical practice. In response, the Board authorized a Midwifery Task Force, which began work in 1978 and became a permanent program two years later. In 1978 the Annual Membership Meeting provided on-site daycare for children for the first time. 

Affirmative Actions 

During the late 1960s, another area of unease at Group Health concerned African Americans and other minorities. In 1970 construction on an expansion to Group Health's Capitol Hill hospital was halted when an organization of black contractors picketed the site as part of citywide protests against racial discrimination in the building trades. In September 1970, the Board of Trustees established a new policy requiring the Cooperative's contractors and subcontractors "to employ members of minority races in reasonable proportion to the distribution of population in the community." 

In reviewing its own employment, Group Health found that 12.4 percent of its work force belonged to minority groups. This compared well with the population at large, but concealed the white dominance of higher-paid jobs.

In 1969, Group Health had hired its first black physician, Dr. James Garrison. Within the next 20 years Dr. Garrison, who was impressed with Group Health's commitment to affirmative action, rose to become chief of obstetrics and chief of staff of the Central Region, serving greater Seattle. 

Also in 1969, Ida Chambliss joined Group Health. This African American social worker became active on the Member Services and Hospital Affairs Committees. In 1974 the membership elected her to the Board of Trustees, and in 1978, she became the first African American to lead the organization as president of the Board.

Labor Pains 

In 1973, federal labor law was changed to permit employees of nonprofit hospitals to strike. Two years later Group Health, the only union-organized health-care organization in the region, experienced its first strike when X-ray technicians walked out in March 1975 to demand higher wages. 

Group Health was founded in part by the labor movement (particularly Boeing's aeromechanics union), and one of the founding principles in its bylaws was "To recognize other [non-physician] employees of the cooperative for purposes of collective bargaining and to provide incentive, adequate compensation and fair working conditions for them."

To find itself suddenly at odds with organized labor and the target of a work stoppage was a true shock to Group Health and marked the end of an age of labor-relations innocence. This first strike was quickly settled, but was followed a year later by a citywide (beyond just Group Health) nurses' strike that began on August 1, 1976, and lasted for 28 days. The nurses, represented by the Washington State Nurses Association, won cumulative raises of nearly 25 percent over three years as well as increased participation in planning and assignments. In 1983, Group Health's 1,200 nurses chose the more militant District 1199 Northwest as their bargaining agent. 

Growing Pains

Coincidentally, Executive Director Dr. Frank Newman retired just before the 1976 nurses' strike. On his 10-year watch, Group Health's enrollment had more than doubled, from 91,000 to 210,000. The Cooperative had carried out an ambitious program of regional expansion, building new medical centers in Lynnwood, Olympia, and Federal Way. A new east wing was added to the Capitol Hill hospital, and ground was broken for an Eastside Hospital and Specialty Center in Redmond and a central support and supply facility in Renton. 

Group Health's business manager, Don Brennan, succeeded Dr. Newman and became the first non-physician to run the Co-op since 1952. Group Health's expansion continued with acquisition of Tacoma's Sound Health Association and its 11,000 members in 1979. The following year, Group Health opened membership to people from ages of 60 through 64. It also established new Medical Center Councils to engage its far-flung membership in Co-op governance. But the rate of enrollment growth slowed with the loss of 6,000 state employees due to Group Health's rising fees -- a sign of troubles to come. 

The demands of shepherding the Co-op through this period took its toll on executive director Don Brennan, and after a short tenure he resigned in 1980. Group Health's lead attorney, Gerry Coe, took over as acting executive director and completed negotiations for the Co-op's formal affiliation with the University of Washington School of Medicine. He also presided over adoption of its first "Consumer Criteria for the Assurance of the Quality of Healthcare," a pioneering patient's bill of rights. 

The 1980s would witness a sea change for America, arguably the end of a liberal consensus dating back to Franklin Roosevelt. As the Cooperative began its 35th year, it would confront a less sympathetic political environment, tenser relations with its unions, and a more competitive health-care market.

To go to Part 5, click "Next Feature," to see Part 3, click "Previous Feature"


Walt Crowley, To Serve the Greatest Number: A History of Group Health Cooperative of Seattle (Seattle: GHC/University of Washington Press, 1995); Walt Crowley & the Staff, Group Health Timeline (Seattle: Group Health Coop/History Ink, 2007).

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