The History of Health Care Insurance

Embedded within the review of Elizabeth Rosenthal’s book on the business of American health care and reforming it at the New York Review of Books there’s a handy summary of the history of health care insurance in the United States:

The American system was not always like this. Rosenthal gives a lucid and revealing history of American health care beginning with religious institutions ministering to the sick and dying in the nineteenth century. Absent effective treatments like antibiotics and anesthetics, therapy was not very costly, and recovery largely depended upon the body’s natural systems of resistance and repair. In the early 1900s, as clinical knowledge and treatment advanced, medications and surgeries were developed, and costs increased.

The question for hospitals at the time was how to cover expenses, not how to make money. The archetype for today’s insurance plans, developed at the Baylor University Medical Center in Dallas in the 1920s, was never intended to generate profit. It began when the hospital accumulated large numbers of unpaid bills for its services and decided to offer the local teachers’ union a deal: for six dollars a year, members “who subscribed were entitled to a twenty-one-day stay in the hospital, all costs included.” But there was a deductible: the insurance took effect only after a week of hospital costs pegged at $5 daily.

Baylor’s plan spread across the country and was given the name “Blue Cross.” The aim of this insurance was to protect patients from bankruptcy and to sustain hospitals and the charitable religious groups that supported them. Employer-based health insurance arose as a “quirk of history.” The federal government ruled in 1943 that no taxes would be levied on the money paid for employee health benefits. “When the National War Labor Board froze salaries during and after World War II,” Rosenthal writes, “companies facing severe labor shortages discovered that they could attract workers by offering health insurance.” After the war, in many other countries, a national health care system came to be regarded as a public good. But in the US, many viewed government-based health insurance as a form of socialism, and despite several attempts, proposals for such a system never could pass Congress.

As more Americans gained coverage, for-profit insurance companies sprang up to compete with the nonprofits Blue Cross and Blue Shield. The “Blues”—which coordinated their efforts starting in the 1940s and formally merged in 1982—accepted everyone, and all members paid the same rate no matter how old or how sick they were. (By the 1960s, more than fifty million Americans had hospital coverage from Blue Cross.) “Unencumbered by the Blues’ charitable mission,” Rosenthal writes, the private insurers “accepted only younger, healthier patients on whom they could make a profit.”

In the 1970s and 1980s, the rise of for-profit insurance companies like Aetna and Cigna made it difficult for the Blues to compete. In 1994, “hemorrhaging money,” Blue Cross and Blue Shield became for-profit as well. “This was the final nail in the coffin of old-fashioned noble-minded health insurance,” Rosenthal writes. The for-profit California Blues “gobbl[ed] up” their fellows in a dozen other states and, renamed WellPoint, emerged as the second-largest insurer in the country. Premiums rose rapidly. “WellPoint’s first priority appeared no longer to be its patient/members or even the companies and unions that used it as an insurer, but instead its shareholders and investors,” Rosenthal writes. This truth is often obscured; insurance companies market themselves in the media as caregivers, confusing the public, but they are not. The companies are fundamentally investment vehicles, maximizing profits to boost shareholder value.

Before the Blues turned into for-profit companies, they spent 95 percent of premiums on medical care. To increase profits, the Blues, along with other insurers, now spend as much as 20 percent of their premiums on marketing, lobbying, and administration.

There are several things worth pointing out in that history. At its inception health care insurance had all the features of an insurance program. Risks were defined on both sides of the transaction. There was a risk pool.

Note, too, that the transition from not-for-profit to for-profit took place as the menu of successful treatments rose. From 1920 to 1960 there were no open heart surgeries or transplants and joint replacement surgeries were rare. The start of the boom in for-profit health care insurance was coincident with the establishment of Medicare.

There are lot of other noteworthy tidbits in the piece but this one stood out for me:

Rosenthal points out that “total cash compensation for hospital CEOs grew an average of 24 percent from 2011 to 2012 alone.”

If anyone can outline a health care system in which hospital CEO pay can increase by 24% per annum year over year indefinitely, I’d be very interested in hearing about it. And with a suspicious mind like mine it’s hard to avoid noting that the health care exchanges under the Affordable Care Act opened for business the year after that enormous jump.