We know D.C. Get our free newsletter to stay in the know.

Three years ago, Hillary Rodham Clinton was touring the country selling the administration’s reform proposal, which would have brought down health care spending while extending health insurance coverage to nearly all the country’s 36 million uninsured citizens. Opponents fired back with “Harry and Louise,” who warned TV audiences that the Clinton health care plan would prevent people from choosing their own doctors.

Three years later, millions of Americans can’t pick their own doctors, medical care is rationed, and the health care system is often hazardous to Americans’ health. Today, though, that dynamic isn’t being driven by any government-mandated policy but by Wall Street, which has profited handsomely from the managed-care revolution. Managed-care companies and HMOs have driven down the national rate of health care spending, but the savings have gone into the pockets of a handful of highly paid CEOs and shareholders. Meanwhile, another million Americans have joined the ranks of the uninsured.

The human costs of the health care revolution are just starting to become apparent in the horror stories touted in weekly news magazines and in malpractice suits around the country. The HMO industry has been quick to dismiss those incidents as statistical anomalies, but Wall Street Journal reporter George Anders’ Health Against Wealth confirms everything you might have suspected about your HMO—that the rushed exams, skimping on tests, denied specialist referrals, all come in the interest of the bottom line.

As Anders discovered, managed care is a great deal for healthy people. HMOs give out $5 birth-control pills, and they’re all too happy to pay for smoking-cessation classes or other kinds of touchy-feely—not to mention cheap—preventive care. But god forbid you should need an expensive new AIDS drug or bone-marrow transplant, because the HMO considers every dollar spent on health care lost profit.

Anders has done a meticulous job of quantifying managed care’s horrifying failures. In a chapter on cardiac care, Anders looks at the success rates of heart surgery, something Medicare officials have used as a benchmark for evaluating hospital quality. The treatment of heart disease is one of the most costly segments of the health care industry, and in the days of traditional fee-for-service insurance, hospitals realized they could make big bucks off saving the lives of fat, rich, white guys. Hospitals built specialized surgical centers, and pharmaceutical companies developed newer, more effective drugs, all of which made health care spending grow by 15 percent a year.

In an effort to contain the escalating costs of cardiac care, Anders writes, HMOs took a three-pronged approach. They encouraged lifestyle changes (i.e., diet and exercise), cut down on excessive tests and expensive procedures, and used their bargaining power to negotiate deals with the cheapest hospitals and surgeons. The result has been a dramatic reduction in health care spending, but one that has compromised the quality of medical care. Anders reports the findings of one 1992 study in which researchers looked at the outcomes of 7,000 pediatric heart surgeries. They found that children were much more likely to die from heart surgery if they were in an HMO than if they were covered by traditional health insurance. In one state, even kids covered by Medicaid had better luck in the operating room than kids in HMOs.

Health Against Wealth presents the statistics HMOs won’t be providing in their marketing literature. In fact, Anders shows that part of the success of managed-care plans has come from HMOs’ ability to use data to market their strengths—easily measurable things such as child immunization rates and mammograms for women over 50. But managed care’s failures come in the margins, with the unexpected surgeries, hidden diagnoses, and the stuff that can’t be addressed by a nurse at the end of an 800 number.

Once you understand the basic equation, though, there’s really no need to wade through more horror stories; fortunately, Anders doesn’t pile them on. Instead, scattered among the cautionary tales are the faces of the managed-care revolution.

Anders traces the origins of the managed-care boom to one Edward Hennessy, the longtime chairman of the blue-chip Allied Signal Corp. In 1987, Allied was looking at 39-percent annual increases in the costs of its employees’ health insurance. At the time, soaring health care costs were attributed to greedy doctors who never saw an expensive test they didn’t love—especially if they owned a piece of the lab that did the tests. So, in a radical departure from its old ways, Allied invited major insurance companies to bid on the chance to put the company’s 76,000 workers and their families into some kind of managed-care plan. The idea was to use cheaper doctors and hospitals and shift some of the costs to the workers if they chose to remain in the more costly system.

Allied’s move set off a revolt in corporate America. Business leaders followed Allied’s lead and essentially made what Anders calls a power grab, seeking to reign in the medical establishment with the justification that the change was necessary to allow U.S. companies to maintain their competitive edge. This mentality also permitted corporate America to embrace a concept it had once decried as socialized medicine—the health maintenance organization.

Anders also includes profiles of the new lords of the health care industry who have made millions off the HMO business—people like Leonard Abrahamson, the founder of U.S. Healthcare, who has raked in an annual salary of $3.5 million and another $11 million in dividend income. Anders dubs them the “barons of austerity,” and he shows how people who specialize in cutting waste from the health care industry have spent the savings on office suites, sports teams, and castles in Aspen. More significantly, managed-care companies have also used their tremendous profits to head off consumer protection legislation aimed at regulating the industry.

In 1994, 10 of the largest managed-care firms were sitting on more than $10 billion in liquid assets—way, way more than they needed to pay the bills of their enrollees. Yet the percentage of premiums the companies actually pay for patient care is dwindling. Anders writes that in the late 1970s, HMOs spent about 94 percent of premium revenue on medical treatment. The industry calls these percentages the “medical-loss” ratio. By the early 1990s, the few remaining nonprofit HMOs were still spending at least 90 percent of the premiums they collected on medical care. However, the ratios of the largest publicly traded for-profits fell to an average of 76.6 percent in 1994. That year, the mammoth U.S. Healthcare’s medical-loss ratio got as low as 68 percent.

Anders offers some suggestions for reforming the system, but his solutions tend to be the weakest part of the book. After describing how the market has disrupted—often fatally—the doctor-patient relationship and the quality of medical care, Anders looks to the market to correct itself. He argues that managed care can be fixed with the help of consumers, doctors, and regulators to achieve a balance between saving money and taking good care of patients. In one suggestion Anders quotes a physician who suggests that patients should give gifts to their doctors to engage their support in battles with insurers. This hardly seems like the way to systemic reform.

What Anders doesn’t quite acknowledge is that health care does not respond to market forces in a way that benefits consumers, especially now that health care policy is being driven by a handful of billion-dollar firms led by people whose interests lie with feeding their stockholders. Part of the reason the system is broken is that sick people are generally too busy trying to get well to become health care advocates.

Still, Health Against Wealth is a fine primer on the state of health care today, and the history lessons it offers are instructive. The book balances an account of the flaws in the old fee-for-service system by showing many of the good things managed care has been able to do; beyond that Anders is content to let the HMO honchos hang themselves.CP