The Sister Kenny Institute, which Ellwood directed, then filled its vacant beds with children suffering from learning disabilities.
According to Ellwood, one evening while doing rounds amid crying children, it struck him that they were making decisions for economic reasons (the need to fill hospital beds) that were not in the best interests of patients.
His growing conviction that this calculus – putting the interests of health care providers over patient well-being – characterized the American medical system in general, led him to conceive of and advocate for alternative approaches.
He coined the term Health Maintenance Organization, or HMO, to describe groups of physicians who were pre-paid on a per-patient basis (capitation) instead of a fee-for-service arrangement.
While the term "HMO" was Ellwood's, this institutional model already existed in the form of the non-profit Kaiser health plan in California.
Doctors would promote preventive medicine and would be less inclined to order costly procedures that had not been proven to improve health outcomes.
[10] A key member of the group was Alain Enthoven, a Stanford economist who was instrumental in shaping the concept of "managed competition" in health care.
"[15] The plan was called managed competition, and two of its most prominent advocates from the Jackson Hole Group were Ellwood and Alain Enthoven.
By then, the Jackson Hole Group had distanced itself due to disagreement about the degree of regulation the plan sought to impose, and Ellwood had become a pioneer in outcomes management.
From the beginning, critics argued that pre-paid competitive plans like HMOs provided incentives for doctors and hospitals to "skimp" on care.
On the left, advocates of a Canadian style government health plan have argued that the Managed Competition approach enriches the insurance industry at patient and taxpayer expense and relies naively on free market forces.
In 1988, he was invited by the Massachusetts Medical Society, which publishes The New England Journal of Medicine, to deliver their annual Shattuck Lecture.