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As Long as We Remember...

March 30, 2010

The History of Health Insurance Part 1

Farrell Keough

Many articles and commentaries are floating around about the newly passed healthcare law. It is worth our time to review how we got to this point and what the pitfalls were in the creation of insurance programs in the United States.


The idea of “universal health care” is neither new nor endemic to this nation – its roots go back to the 1900s. The primary cost during those days was not one of payment for medical care, but rather the loss of pay from being out of work. Hospitals were not common and most care was provided in the home. “As a result, most people felt they didn't need health insurance. Instead, households purchased ‘sickness’ insurance – similar to today's ‘disability’ insurance – to provide income replacement in the event of illness.” **


After World War I, this nation entered a time of economic growth. It was also a time of radical change in the power of the federal government and the rise of unions to remedy workplace inequities.


“The watch words of the day were eliminating corporate abuse, trust-busting, reducing tariffs, reforming banking, protecting natural resources, creating new sources of government revenues, and improving workers’ living and working conditions. Several new laws were enacted…the Clayton Antitrust Act of 1914 limited the use of injunctions in labor disputes and provided that picketing and certain other union activities were not to be considered unlawful.” *


As you will note, many of these ‘watch words’ are still part of the lexicon of today. But, the concept of health insurance was still a far cry from being available to the average citizen. The general public saw little value in the expense and commercial insurance companies were unwilling to risk the costs for private insurance. “According to The Insurance Monitor, ‘the opportunities for fraud [in health insurance] upset all statistical calculations.... Health and sickness are vague terms open to endless construction. Death is clearly defined, but to say what shall constitute such loss of health as will justify insurance compensation is no easy task’ (July 1919, vol. 67 (7), p. 38). **


This situation did not go unnoticed by the various governmental entities. The Bureau of Labor Statistics (BLS) devoted an entire study to “Workmen's Insurance and Benefit Funds in the United States” in 1908. “The investigation discloses that nearly all of these [insurance] funds attempt to accomplish no more than to relieve immediate necessities. The two principal classes of benefits are for death and for temporary disability.” *


Many in government determined the United States should follow the lead of many European countries and develop some form of ‘universal health insurance.’


“Compulsory health insurance failed in this period for several reasons. First, popular support for the legislation was low because of the low demand for health insurance in general. Second, physicians, pharmacists and commercial insurance companies were strong opponents of the legislation. Physicians opposed the legislation because they feared that government intervention would limit their fees.” **


As time marched on, so did advances in medical treatments, oversight organizations, and governmental tentacles into various business activities. The American Medical Association (AMA) was formed in the 1910s. Under its auspices, various sister organizations were formed which standardized and improved both the training of doctors and the accreditation of hospitals. While this improved medical treatment tremendously, it did not come without substantial increases in costs.


Along with these medical advances and changes, the work of the Bureau of Labor Statistics also increased. “In what today might be called a vision statement, the work of the bureau was outlined in 1927:


Primarily the Bureau of Labor Statistics is a fact-finding agency. Its duty as set forth in the act creating it is to ‘collect information upon the subject of labor ...and the means of promoting the material, social, intellectual, and moral prosperity’ of the wage earners of this country. The function of the bureau is thus somewhat broader than what is commonly understood by the word statistics. Its field of work not only covers purely statistical data, but also includes other subjects of vital human welfare, such as accident prevention, housing, labor legislation, and social insurance in all its phases.” *


Enter the private market to fill the void. Two basic plans were initiated to deal with the serious money issues arising from increased costs for medical treatment: the Blue Cross and the Blue Shield models.


The Blue Cross model was promoted by the American Hospital Association (AHA) “ostensibly as a means of relieving ‘... from financial embarrassment and even from disaster in the emergency of sickness those who are in receipt of limited incomes’. However, the prepayment plans also clearly benefited hospitals by giving them a constant stream of income… Blue Cross plans also benefited from special state-level enabling legislation allowing them to act as non-profit corporations, to enjoy tax-exempt status, and to be free from the usual insurance regulations.” **


The Blue Shield model was slower in coming. Doctors realized they could be so severely restricted in the practice of medicine, that such a pre-payment plan would neither help them nor their patients. Coupling this with the previously stated reluctance of commercial insurance companies to take on private insurance and you have a barrier that is virtually impassable.


The impasse was breached when doctors used their ability to lobby as a group and established various principles they could accept.


“Within these rules were provisions that ensured that voluntary health insurance would remain under physician supervision and not be subject to the control of non-physicians. In addition, physicians wanted to retain their ability to price discriminate (to charge different rates to different customers, based on their ability to pay).”




The success of Blue Cross and Blue Shield showed just how easily adverse selection problems could be overcome: by focusing on providing health insurance only to groups of employed workers. This would allow commercial insurance companies to avoid adverse selection because they would insure relatively young, healthy people who did not individually seek health insurance. After viewing the success of Blue Cross and Blue Shield, commercial health insurance companies began to move rapidly into the health insurance market.” **


Tomorrow we will explore the negative effects that government established once these market solutions to insurance were established.



* Bureau of Labor Statistics – Compensation and Working Conditions

Compensation from before World War I through the Great Depression” Robert VanGiezen and Albert E. Schwenk, Fall 2001


** Economic History Association – “Health Insurance in the United StatesMelissa Thomasson, Miami University

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