Lately we always seem to find ourselves in the middle of various levels of brouhahas about medical insurance, Obamacare, the still-remaining potential for the reversal of Obamacare, the premiums, the pre-existing conditions, the power of the insurance lobby in Washington, to name only a few of the slices of the current controversies. I wanted to take a look at how it all started. We know there was no medical insurance during the Dark Ages, the Renaissance, the Revolutionary War, or the Civil War, so how and when did it all begin?
The first form of medical insurance showed its face in this country in1850 when coverage for injuries related to railroad and steamboat travel was offered by the Franklin Health Assurance Company of Massachusetts. By 1866 the number of organizations offering accident insurance grew to sixty, but that number was reduced through consolidation soon thereafter.
The origins of sickness coverage in the United States effectively date from 1890. The first employer-sponsored group disability policy was issued in 1911, but that plan's primary purpose was replacing wages lost due to an inability to work, not medical expenses. The first modern health insurance plans were not formed until 1930.
The late 1800s and early 1900s were bursting with medical advances which transformed the perception of medicine, and people began to place more trust in medical institutions. In 1904 the American Medical Association created the Council on Medical Education, which developed standards for medical licensure. In 1913 the American College of Surgeons was founded to oversee the accreditation of medical schools. These new standards ensured the quality of health care and resulted in a smaller but more talented supply of licensed physicians. With this rise in regulations and quality of care, demand for medical services increased. This growth in demand, coupled with the limited supply of physicians, brought with it escalated medical costs.
Initially, there was a low demand for health insurance, which was matched by the unwillingness of commercial insurance companies to offer private health insurance policies. Commercial insurance companies did not believe that health was an insurable commodity because they lacked the information to accurately calculate risks and write premiums accordingly.
The fact that people generally felt actual health insurance (as opposed to sickness insurance) was unnecessary prior to 1920 also helped to defeat proposals for compulsory, nationalized health insurance during that time. Although many European nations had adopted some form of nationalized health insurance by 1920, proposals to enact compulsory health insurance in several states were never enacted. They failed for several reasons: popular support was low because of the low demand for health insurance in general; physicians opposed the legislation because they feared that government intervention would limit their fees; pharmacists opposed the legislation because they feared it would undermine their business.
In 1929 Dr. Justin Ford Kimball, at Baylor University Hospital in Dallas, Texas, realized that many schoolteachers were not paying their medical bills. In response to this problem, he developed the Baylor Plan in which teachers were to pay fifty cents per month in exchange for the guarantee that they could receive medical services for up to twenty-one days of any one year.
With the onset of the Great Depression, many other hospitals followed the model of the Baylor Plan, and medical insurance became more widespread. Prepaid health plans enabled consumers to be insured and also benefitted hospitals by giving them steady income, despite the economic turmoil. These single-hospital plans also generated price competition, and to avoid this, community hospitals worked together to create health coverage plans. In 1939 the American Hospital Association first used the name Blue Cross to designate health care plans that met their standards. These plans merged to form Blue Cross under the AHA in 1960. Considered nonprofit organizations, the Blue Cross plans were exempted from paying taxes, enabling them to maintain low premiums. Prepaid plans covering physician and surgeon services also emerged around this time. These physician-sponsored plans combined into Blue Shield in 1946, and Blue Cross and Blue Shield merged into one company in 1971.
Meanwhile, private commercial health insurance companies began to develop. Coverage for serious medical emergencies was originally designed as a supplement to basic health insurance, but has since become an integrated aspect of most plans. Commercial insurance companies also began to charge premiums according to calculations of relative risk, charging more money for older people and for people with a history of a medical condition. Blue Cross and Blue Shield Plans, which were in the nonprofit sector, were forced to compete with commercial health insurance companies, and they eventually began to charge premiums in the same way, despite having previously maintained equal premiums for all consumers.
The 1940s and 1950s also saw the proliferation of employee benefit plans, and the included health insurance packages became more and more comprehensive. During World War II, because of both wartime wage controls and the limited labor force, companies began to compete for employees with health insurance packages. When the War Labor Board declared that fringe benefits, such as sick leave and health insurance, did not count as wages for the purpose of wage controls, employers responded with significantly increased offers of fringe benefits, especially health care coverage, to attract workers.
The existence of successful health insurance plans precluded government intervention until the mid-1950s. In 1954 Social Security coverage for the first time included disability benefits, and in 1965 Medicare and Medicaid programs were introduced. In the 1970s and 1980s, more expensive medical technology and flaws in the health care system led to higher costs for health insurance companies. Responding to those higher costs, employee benefit plans changed into managed care plans, and Health Maintenance Organizations (HMOs) emerged. Managed care plans involve a particular network of health care providers that have been verified for quality and have agreements with the insurer about price and related issues. HMOs were originally primarily nonprofit, but they were quickly replaced by commercial interests. Managed care only succeeded in temporarily slowing the growth of healthcare costs.
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So this is how it all started, and now we are where we are. Nothing gets easier. It only gets more complicated. Nothing gets cheaper. It only gets more expensive. Of course, it is not only the business of medical insurance itself that has grown complicated. Let us not forget to factor in the major role that tort law plays in our current muddle. We do not want nationalized insurance because we do not want too much government in our lives. We also do not want to continue to pay the escalating premiums which can now be so high as to make medical insurance a luxury. While many put faith in Obamacare, and thus are under the impression that there will be some sort of cap on insurance premiums, the very real economics of the total health care industry does not make this feasible. To keep those total attendant costs down would require radical changes “in the system.” Radical changes that, I sadly think it is safe to say, will never happen.
Until the next time, LL&P!
References:
Fundamentals of Health Insurance: Part A, Health Insurance Association of America, 1997, ISBN 1-879143-36-4
