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As Long as We Remember...

March 31, 2010

The History of Health Insurance Part 2

Farrell Keough

Yesterday we reviewed both the government and private market responses to the nation’s insurance needs. Now we shall see if the actions of the past are a precursor to the present and future happenings with our new healthcare law.


If you will remember, the basic outlines of our current insurance programs were established in the 1920s and 1930s. Four major components allowed for their establishment:


1) Hospitals were able to cover their costs via pre-paid plans.

2) Doctors retained control of their decisions for treatment and care of their patients.

3) Various sliding scales were established for payments of treatments.

4) These programs garnered a non-profit status keeping them tax exempt.


With the advent of the Great Depression, government determined the need to insert itself into many aspects of the economy.


“The Great Depression also resulted in the unprecedented involvement of the federal government in labor-management relations… In addition to providing compensation for lost income, the passage of the Social Security Act and the Wagner Act in 1935 signaled the beginning of the concept of compensation as more than just traditional straight-time pay for time worked. Unions began to deviate significantly beyond the traditional scope of collective bargaining – wages, hours, and working conditions – and began to negotiate compensation packages that would give workers more and better welfare plans than were provided by legally required plans.” *


Once we entered the Second World War, various other government regulations were put in place in attempts to ensure both national security and inhibit economic downfall within our nation. “Under the 1942 Stabilization Act, Congress limited the wage increases that could be offered by firms, but permitted the adoption of employee insurance plans. In this way, health benefit packages offered one means of securing workers.” **


Unions glommed onto this pay mechanism and included it in their negotiations for workers. In short, private insurance had become a mainstay of the American system. So much so, that it affected the most heavy-handed aspect of our government, the tax system.


“Perhaps the most influential aspect of government intervention that shaped the employer-based system of health insurance was the tax treatment of employer-provided contributions to employee health insurance plans. First, employers did not have to pay payroll tax on their contributions to employee health plans. Further, under certain circumstances, employees did not have to pay income tax on their employer's contributions to their health insurance plans. The first such exclusion occurred under an administrative ruling handed down in 1943, which stated that payments made by the employer directly to commercial insurance companies for group medical and hospitalization premiums of employees were not taxable as employee income (Yale Law Journal, 1954, pp. 222-247). While this particular ruling was highly restrictive and limited in its applicability, it was codified and extended in 1954. Under the 1954 Internal Revenue Code (IRC), employer contributions to employee health plans were exempt from employee taxable income. As a result of this tax-advantaged form of compensation, the demand for health insurance further increased throughout the 1950s (Thomasson 2003).” **


Even with these various private market solutions, the difficulties of insuring the aged continued to plague our society. This is when government stepped in once more and developed both Medicaid and Medicare in 1965. Medicare is a means-tested program funded by both state and federal revenues. Medicaid is a two-part system: Part A is a compulsory hospital insurance program and Part B is a supplemental insurance program for doctor care. While Part B was created to pay ‘usual, customary, and reasonable’ rates, the program is under the government auspices; hence these costs can be altered.


It becomes quickly evident that these two approaches have yielded a dramatically different outcome – the private market approach offers a variety of solutions and costs dependent upon the level of care, while the government solution is a one-size-fits-all proposition that can be changed with the swipe of a pen.


We have seen Medicare/Medicaid create huge amounts of our government debt. We have also seen various state insurance coverage requirements increase premium costs – for instance, requiring sex change operations be covered under all insurance plans. The common denominator in these various scenarios is the attempt by government to solve the problem!


If the focus would change from one of government dictating the solution to one of government recognizing the private sector will offer better and more diverse solutions, we might actually be on the road to solving the difficulties of health insurance. The best thing our government can do to promote health insurance solutions would be to offer tax cuts and incentives. We have seen from history the free market will provide workable solutions, just as government will provide programs that are unaffordable.



* 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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