By: Steven Berman
Perhaps no other facet of our society touches our lives as acutely as Healthcare. Given the industry’s impact on everything from our personal lives to our national economy, one might expect that the average American would be indelibly linked to its financial underpinnings. Yet nothing could be further from the truth. Most Americans have no clue what their Healthcare actually costs, given that someone else –Insurance – is paying the tab.
So how did we end up here? How did America find its way into a system where consumers are so far removed from the costs of their care that most don’t even know the actual price of the last prescription drug they took? In an effort to shed light on the subject, we thought we’d pluck a page out of The History Channel’s playbook and briefly examine the history of health insurance in the United States. Hopefully doing so will help illuminate exactly why we are where we are today (while also providing some nifty historical tidbits).
So without further ado…
The forerunner to what would eventually become modern-day group health insurance didn’t come to fruition in the United States until the turn of the 20th century. Given the state of the industry prior to then, Healthcare’s delayed entrance on the national stage should really come as no surprise. Throughout the 19th century, Healthcare as an industry rarely provided effective outcomes to patients seeking respite from illness and disease. Medical care was substandard at best, and hospitals were mostly sick houses for the poor and those afflicted with contagious disease. Indeed, the goal of medical care at the time was – to quote an infamous saying – “to cure seldom, to help sometimes, and to comfort always.”
By the turn of the century, however, advances in medical care began to considerably improve patient outcomes. Innovations in the fields of bacteriology and anesthesiology made surgery less painful and much safer, and modern medicine helped transform hospitals into effective treatment centers. At the time, consumers were well aware of the costs of care, as those costs were so low that they were not considered onerous (oh how times have changed!). Of greater concern was the loss of income sustained during time away from work due to illness or injury. To address this growing anxiety, the first employer-sponsored group policies were initiated. These pre-paid group plans were not aimed at covering medical expenses, since those were not of primary concern to patients; rather their purpose was to replace lost wages incurred due to an inability to work. Patients covered their own medical expenses in a standard fee-for-service model.
An interesting footnote here: Physician associations actually discouraged companies from offering group care policies, which were viewed by physicians as infringing on their control of care (and doing so at a lower cost). During the early part of the century, opposition to employee-sponsored coverage dissuaded numerous companies from escalating their participation in medical care. One prominent example involves the famous retailer Sears, Roebuck. The company doctor was forced to resign after the county medical society refused him membership due to his supervision of a group policy. Not coincidentally, his successor persuaded the company to limit their pre-paid care packages. And word of this type of public pressure got around. A 1916 Public Health Service study found that only only one of 425 companies surveyed fully funded pre-paid group plans.
By the 1920s, however, things were starting to change. Public demand for group health insurance was on the upswing, thanks to the notion that healthcare could actually… ahem… care for one’s health. Hospitals even began offering medical services to individuals on a pre-paid basis, and more and more consumers emerged into the Healthcare marketplace. Yet despite the industry’s rapid growth, there was still plenty of progress to be made. A report issued by the Committee on the Costs of Medical Care at the end of the ‘Roaring 20s’ provides an illustrative snapshot on the state of Healthcare at the time. A few highlights:
- • Per capita spending on healthcare averaged $25-$30 per year (about 4% of national income). However, 3.5% of families bore roughly 1/3 of that total.
- • 1/3 of those receiving hospital care needed government largesse or philanthropy to pay their medical bills.
- • Around 150 multispecialty medical groups were in existence, and many were offering innovative delivery mechanisms that coordinated patient care across certain metrics.
- • Several employment-based medical expense protection arrangements were being developed and launched; some that offered benefits for as little as $6-$12 per year.
One of those employment-based arrangements that came to fruition during the decade led to the formation of the largest health insurance provider in the nation. In 1929, then vice president of Dallas, Texas-based Baylor University’s health system, Justin Ford Kimball, began noticing a hefty amount of unpaid medical bills, mostly belonging to Dallas educators. Kimball developed a plan in which an enrollee would pre-pay just $0.50 a month to cover the cost of a 3-week stay at a hospital. The coverage would be initiated after a 1-week hospital stay, and the fees incurred during that first week would cost $5.00 per day above the pre-paid coverage amount. Interest in Kimball’s innovative plan quickly skyrocketed, and the plan became known as a Blue Cross plan. The next year, Blue Shield plans were introduced to provide reimbursement for physician services. In 10 years time, enrollment in both plans grew from 1,300 covered souls to 3 million.
The growth of the medical industry and the sprouting of innovative insurance plans cheerfully coincided, giving rise to a budding new sector of the economy – that of health insurance. Health insurance addressed a key pain point in the market: the mass-consumerization of the industry, and the resulting interaction between consumers and the costs of care, which was beginning to take place on a large scale for the very first time. But the health insurance industry in its current form didn’t sprout up overnight. It would take an accident of history to help pave the way for the complex and overarching system that we know today…
In the wake of the devastating hyperinflation that gripped post-WWI Germany, the FDR administration issued wage and price controls in order to stem a similar tide that some feared might occur as the administration attempted to lift the country out of The Great Depression. What the FDR government didn’t foresee was the vitriolic reaction from unions and labor groups, who threatened to strike en masse. To avert a cataclysmic strike, FDR struck a deal with labor, exempting employer-paid health benefits from wage controls and income tax. The exemption afforded a 100% tax deduction to employers, while employee benefits were exempt from federal, state, and city taxation. In a war economy with labor shortages, the tax exemption became a means of circumventing the wage controls that were instilled to counteract hyperinflation. FDR’s decision generated enormous demand for employer-provided health insurance, and ultimately led to the decline of individual fee-for-service plans. This was the turning point which saw consumers first become detached from the cost of their Healthcare.
The 1943 exemption helped balloon coverage from less than 10% of the population in 1940 to nearly 70% by 1955. By 1958, an estimated 3/4 of the 123 million Americans with private health coverage were participants in employment-based programs. By 1960, 79 Blue Cross and 65 Blue Shield plans had been established, 250 to 300 independent and pre-paid group plans existed, and over 700 commercial insurance companies were selling individual or group coverage.
Thanks to an accident of history, our modern health insurance system was born. As a result, employers and insurance companies bore most of the costs of insurance throughout the second half of the 20th Century, hence the general public was almost entirely removed from the cost-element of Healthcare. But with the advent of pioneering pharmaceuticals and groundbreaking procedures, costs rose sharply, and premiums climbed higher as a result. The 1990s saw double-digit growth in premiums, which led many small businesses to either redesign their plans with higher cost-sharing by employees or cease offering health benefits altogether. The combination of rising costs and benefit reductions led to what is known as ‘the small employer-based health insurance death spiral.’ Essentially, the individual market expanded as small businesses could no longer afford to adopt robust group plans. And as demand increased, flaws in the individual market were soon exposed. Medical underwriting procedures began to be questioned, application denials – some leading to fatalities – made headlines, and a general lack of discontent with our Healthcare system inhabited our public zeitgeist. In short, costs were ballooning, and the level of care wasn’t meeting consumer expectations. Something had to change.
That is where the country stood prior to the Affordable Care Act, which was passed in part to standardize insurance plans and provide consumer protections, as well as to offer universal, affordable care. It’s interesting to note that the consumer frustration around Healthcare centered on the fact that consumers typically hadn’t been exposed to the cost-element of our Healthcare system – at least not until the small employer-based health insurance death spiral forced them into the individual market. Once consumers hit the private market, they were aghast at what they found: pills and procedures that broke the bank.
Regardless on where you stand politically on the ACA, most healthcare professionals acknowledge we are continuing to move more towards a value-based system, which will only further the “consumerization” of healthcare. Whichever way we’re headed, it’s vital that we instill some level of transparency in order to enable us as a society to make more informed healthcare decisions. I want to be clear I’m not proselytizing here, I am simply advocating for a more healthcare literate citizenry in regards to costs. It is my belief that because we as consumers had such little skin in the game, we’ve allowed our system to become bloated and overly complex, and as we head down the path to get it under control, education is a strong first step.