America's health plans are floundering. If their job has been to provide the nation's mainstream families with access to affordable care (let's leave quality out of it for the moment), they have failed miserably, though they were very profitable along the way, at least until Q1 2008. In 2008, the Milliman Medical Index – an estimate of the total cost for health coverage premium and out-of-pocket costs for a family of four – was $15,609. Now it is almost certainly above $17,000, more than the total income of more than one-third of American households.

To many health plan execs, these are simply market dynamics that must be accommodated through new product and service designs. I just attended a health plan conference where the overarching themes were the transition away from group to individual coverage, and the use of incentives and touch points like texting, email, and ergonomic Web interfaces to cultivate member competency, loyalty and retention.

There are important steps forward but, to me, the discussion tiptoed around the more glaring problem – costs this high have exhausted many purchasers’ ability to pay, and are rapidly shrinking health plans’ commercial market and profitability.

Several health plan execs at the conference pointed to the care delivery and supply sectors as the drivers of cost, but that is, at least in part, also an evasion. As payers, health plans can design incentives for more efficient care delivery. They can exert significant pressure on cost growth through many simple but demonstrably effective mechanisms: empowering primary care, leveraging market forces by making cost and performance transparent throughout the health care continuum, paying for results rather than for procedures.

But the harsh truth is that for about 10 years health plans, like all major health care sectors, have focused on anything but cost management for a simple reason: it has been in their short-term financial interests for health care to cost more. (Fully insured plans earn a percentage of total revenues. The large carriers who administer self-funded or ASO (Administrative Services Only) plans have raised administrative fees as claims costs have risen.) The problem is that the long-term consequences of that strategy have arrived.

It has been nearly a decade since, in November 1999, UnitedHealth Group announced that they were curtailing most utilization management activities. Their announcements said that the complexities of pre-certification had actually increased overall costs. And, of course, the process was typically cumbersome and often idiotic, infuriating doctors and hospitals. In a sense, this moment signaled the transition out of the first major phase of managed care, at least as hopefuls like me thought of it, and into a period of relative dormancy.

Like other health plans, United did a poor job conveying to employers and patients health care’s enormous waste and financial conflict, or the seriousness of the approaches necessary to turn those problems around. The physicians’ rebuttal – that accountants and clerks, rather than doctors, were making health care decisions – was well received in the marketplace. Ultimately, nearly all health plans followed suit. The sun set on that era of aggressive medical management.

What remained unsaid, though, was that fewer controls over care, combined with a reimbursement system that rewarded more procedures, would accelerate overall cost growth, and that the health plans, whose profits rose in absolute terms as total revenues rose, could ride that wave. And that’s how it played out. Between 1998 and 2005, health care premium grew 60 percent, or 2.4 times as fast as in the previous seven years. As last week’s Robert Wood Johnson report notes, premium growth between 1996-2006 rose nearly eight times as fast as the growth in personal income.

One of managed care’s more hare-brained ideas was slotting primary care physicians (PCPs) as “gatekeepers.” This meant that, faced with a patient whose condition warranted referral to a specialist, the PCP would likely lose touch with that patient’s care. Inside primary care, declining reimbursements translated to more patients, with less time available for any one patient. Meanwhile, specialists enjoyed increasing pay and were rewarded for doing more, though not necessarily the right, procedures. The continuity of care between primary and specialty physicians gradually eroded until it was all but forgotten. One of health care’s major check-and-balance mechanisms was lost, and costs skyrocketed.

The evidence that primary care should have primacy in any health care system is simple but compelling. Consider that about 30 percent of American physicians – family physicians, internal medicine physicians, pediatricians, and gynecologists – provide primary care, and that about 70 percent are specialists. In virtually every other developed nation’s health system, the ratio is approximately reversed. Their costs are about half ours, and their quality is typically as good or better.

Primary care’s effectiveness in creating better health at lower cost throughout a population is well documented in other health systems and in our own. Studies focused on the US also show that more access to primary care lowers mortality rates, but the same is not true for specialty care.

Sure there are other factors that make our costs higher – access to technologies, lifestyle issues, demographics, and a dozen more – but nothing has as strong or pervasive an influence as the straightforward relationship between the generalist and the specialist. If it is there, then controls for reasonable care are in place. Without it, as the Dartmouth Atlas has shown repeatedly, specialist and inpatient settings are rife with “unwarranted variation” - waste.

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