In recent days, the Obama health insurance mandate has received another blow from the 11th Circuit Court, leading to more speculation that the individual mandate will be ruled unconstitutional.
What is often omitted from the current discussions is how we got into this mess in the first place. The United States has a rather unique (and uniquely dysfunctional) health insurance system. It turns out that the history of health insurance is riddled with inept government interventions and free markets pushing down the quality of care — the same conditions we continue to see today.
The Era Before Health Insurance
Before 1900, medicine as a profession wasn’t much more effective than what you could do at home. Only in the late 1800s did doctors realize the importance of hygiene in preventing infections, which gave patients a significantly better chance of surviving surgeries and hospital visits. (With the spread of disease and infection, you were generally more likely to die going to the hospital before 1900 than staying at home.)
At this time, there was little need for health insurance, because health care costs were almost non-existent. The real concern was loss of income from missing work due to illness, which led to sickness insurance, the equivalent of modern disability insurance. Even if there were a market, insurance companies had decided to stay out of health insurance, since it was complex to calculate the probability of illnesses, and by selling to the individual or family (as was typically done with life insurance, fire insurance, etc.), it would be difficult to avoid a pool of high-risk people who were already sick, who would be the only ones likely to desire such insurance when average costs were so low.
By the 1920s, care started improving enough that hospital stays were becoming more routine. Better licensing of doctors and medical schools, as well as new standards, improved the profession immensely. People went to doctors more frequently and more willingly, but the advances in technology required high costs for care and hospital stays.
Blue Cross and Blue Shield
With the rising costs of hospital visits, a group of Dallas teachers formed a communal pool, where they each chipped in a few dollars with the expectation that their bills at Baylor University hospital would be covered if they needed a hospital stay. This was the first kind of hospital insurance.
During the Great Depression of the 1930s, more groups of subscribers (often groups of workers) negotiated similar terms with local hospitals. The plans were beneficial to patients as well as to hospitals, since hospitals could earn money even when their beds weren’t filled.
Eventually, hospitals began competing against each other with better prices, and the American Hospital Association (AHA) stepped in to create Blue Cross. Rather than individual plans between subscribers and a single hospital, Blue Cross subscribers would now have freedom of choice for their hospitalization.
It’s important to note that these initial plans did not come from insurance companies, but were rather a non-profit association between hospitals. This gave them a tax advantage as well as encouraging a sort of benevolent atmosphere: they could help society by making health care affordable to the lower classes.
Physicians were reluctant to join this market, but eventually they realized that Blue Cross plans might endanger their personal practices and individual services, much of which could be covered instead with group hospital care. Thus, the American Medical Association (AMA) established a similar non-profit entity known as Blue Shield. Membership ensured benefits during hospitalization and sometimes for office visits, but choice of physician was still a major point of the plan. Unlike Blue Cross, Blue Shield did not always guarantee complete payment for services, but the two services were still operated as non-profit organizations generally with a good relationship between health providers and patients in mind.
True Private Health Insurance Appears
With the success of Blue Cross and Blue Shield, the insurance companies realized there was a market for health insurance. But they had a couple advantages over Blue Cross and Blue Shield: (1) they weren’t restricted by non-profit regulations, and (2) they had professional actuaries.
With their actuarial expertise and less regulations, commercial insurance companies could offer targeted rates, higher for sick and older people, less for healthy and younger people. They could also target group rates for corporations — larger companies tended to have a greater percentage of young workers, so they could offer much lower rates. (Truly large companies often self-insured at this time as well.)
Blue Cross and Blue Shield had difficulty competing. Their commitment to provide coverage to all under standard rates was undercut by the targeted rates of insurance companies. By about 1950, commercial companies had a higher insurance enrollment than they did. Ultimately, Blue Cross and Blue Shield ended up as just another for-profit insurer.
Why Is Insurance Attached to Employment?
It may seem strange that health insurance is generally dependent on being employed. It’s true that employed people are generally healthier, which makes them a better risk for insurance companies (who can offer better rates). But the real reason why health insurance stopped being marketed to individuals is due to World War II and unintentional federal intervention.
During the war, the Congress instituted wage and price controls, but they did not include employer benefits in the definition of “wages.” Thus, employers who offered benefits had a real advantage in the market for workers over employers who didn’t. By the end of the war, most employers were offering employee insurance plans. Later, labor unions convinced the court system that benefits could be considered “wages” for the purposes of negotiation, which increased the strength of the connection between health insurance and employment. Various tax benefits passed over the years gave employer plans a further competitive advantage.
Reduction of Choice
Medicare and Medicaid were introduced in the 1960s, but private health insurance still paid for most costs for most people. Physicians had been fighting a government health plan for all people since the hospital costs first began to rise, but Congress finally overruled them and instituted insurance for a large segment of elderly and disabled Americans. Doctors still had the ability to set rates and force patients to pay the difference, leaving those who wanted to stay within the bounds of Medicare payments fewer options.
But the greater reduction of choice began when the federal government forced employers to allow HMOs to compete in the marketplace. The idea of HMOs had been around from the beginning — groups of doctors and hospitals would team up and give discounts that were usually greater than insurance companies with open choices could. As with the early group organizations, the plans usually only reimbursed a limited set of expenses. But HMOs had difficulty competing in a marketplace where employers had been used to traditional indemnity plans since WWII.
In the late 1970s, federal law began to require employers who offered health benefits to offer a choice of plans, namely, if they offered a traditional indemnity insurance program, they must also offer an HMO.
Not surprisingly, as health care costs skyrocketed in the 1980s and 1990s, HMOs became preferred by employers and many employees, since they could offer reduced costs. Of course, the lower costs came with a significant price — fewer choices of physicians and often more restrictions on benefits. Once again, a tweak by the federal government resulted in a huge impact on the insurance market that we are still living with.
The Current Debacle
President Clinton tried to institute a national health plan in the 1990s, but it was roundly rejected by conservatives and insurance companies. In the view of many, this single issue so polarized the U.S. that it led to the 1994 takeover of Congress by the Republicans, along with an increase in partisan polemics that has continued until the present day.
President Obama tried to avoid the missteps of Clinton by keeping insurance in the hands of private companies. But the only way the system would work effectively would be to require everyone to purchase insurance.
In a later post, I will review the reasons why this mandate is problematic, but this perhaps serves as a good endpoint for a history that shows how we ended up with the strange system we have.