Prior to 1920 most medical care was paid directly from patient to provider. If insurance was purchased it was more likely to be “sickness insurance” which paid insureds for lost wages during illness. In addition, the quality of medical and hospital care was questionable at best. Commercial insurers generally avoided writing health care policies (other than the aforementioned sickness policies designed to replace wages lost to illness).
As a direct result of the Flexner report in 1910, changes in medical education and hospital accreditation in the late 1910s and through the 1920s began to improve the quality of medical care. The number of physicians decreased due to more stringent educational requirements. Hospital quality improved due to more careful accreditation. As these services improved more care was demanded by the public. Increased demand and fewer providers resulted in price inflation.
The Great Depression brought one of the two key events in the history of private health insurance in the US. In 1929 a group of Dallas teachers contracted with Baylor University Hospital to prepay for hospital expenses (fixed payment of $6 for 21 days of hospital care). This development (contracting with a single hospital for a fixed payment) eventually brought about the founding of Blue Cross and Blue Shield. Ultimately, BCBS prevented the single hospital contract from continuing. Blue Cross subscribers would be allowed to pick the hospital and physician unlike the original Baylor plan (this limited price competition among hospitals). Also, state enabling legislation allowed Blue Cross to operate as “non-profits” without the reserve funds required of other insurance companies. This was allowed because of the perceived purpose (see Part 1 of this series) that Blue Cross organizations were performing a public service. Physicians developed Blue Shield at about the same time. Blue Cross and Blue Shield dominated health insurance during the 1950s-1970s and merged in 1982. Commercial insurers eventually started to write health policies to compete with the Blues.
The next key event in the development of private health insurance occurred during WWII. First, wages and prices were strictly controlled during the war years. Employers found it difficult to attract workers because of wage controls; so, they opted to compete for workers by increasing benefits, especially health insurance. Then, in 1943, premiums paid for health insurance were exempted from taxation. Prior to 1940 only about 9% of Americans had some form of health insurance. By 1945 the number had increased to nearly 23% and by 1975 to 82.9% (Morrissey, Michael, 2008: “Health Insurance”, Chicago, Health Administration Press, p.10). Employer sponsored health insurance is largely an artifact of the wage and price controls established during the Second World War. It is only in the United States where employers determine benefits and employee costs..
Linking health insurance to employment occurred at a time when many employees spent their entire career with a single employer. As this practice gradually disappeared this practice has resulted in “job-lock”. Employees were reluctant to leave a job for fear of losing coverage. There are many other unintended consequences as well. For example, 84% of US households with income greater than 400% of the poverty level have employer sponsored insurance ("ESI"). For households with income less than 250% of the poverty level only 35% have ESI. Because insurance premiums paid by employers are tax exempt (see paragraph above) that means those households with more income receive a greater tax benefit. How much? The vast majority of the roughly $300 billion in foregone income taxes go to the top 20% of the US income distribution every year. So, lower income households will receive an average tax benefit of about $160 while the highest income households will receive an average benefit of $4,700. In general, health policy experts believe linking health coverage to employment is a serious mistake. Click here to read more on this topic.
Next: Some regulatory attempts...