from "sickness" to "health" insurance...
Now was the time for the transition from “sickness” to “health” insurance. All the right pieces were in play. A move from rural to urban. Physicians were actually offering a cure. Technology was developing and hospitals were able to offer treatments not available in a person’s home. The cost of healthcare was rising.
One of the early examples of federal government supplied health care was after the Civil war. The government established 40 hospitals in the south, employed over 120 physicians, and treated over one million sick and dying former slaves. These hospitals lasted from 1865 to 1870. Of note, Freedmen’s Hospital in Washington, DC remained in operation before becoming a part of Howard University in the late 19th century.
Theodore Roosevelt championed universal coverage in his failed 1912 election bid. Although this was “sickness” insurance, consistent with the times, it was the first proposed compulsory universal coverage plan.
The real thrust at this early stage was that America, unlike Europe, was avoiding compulsory insurance and moved towards employer insurance. Metropolitan insurance was authorized to write accident and health insurance in 1913 and wrote its first group policy on its own employees in 1914. In 1928, General Motors and Metropolitan insurance wrote the largest group policy to cover 180,000 employees for $400 million. Just a year later in 1929 the first HMO was born when Drs. Donald Ross and H. Clifford Loos provide prepaid health care services for the Los Angeles’ Department of Water and Power employees.
1930 saw the beginning of the Great Depression. President Franklin D. Roosevelt believed Americans needed protection against the growing costs of illness and economic security and wanted to reform health care. However, the Great Depression elevated unemployment insurance to the top concern. He did not have the AMA, insurance, or employer support on health reform and needed their help for his other plans, and in 1934 removed national health insurance from his legislation. He settled for the creation of Social Security, unemployment insurance and workmen’s compensation. This was the second failed attempt at national health insurance.
At the state level in 1915 – 1916, several model bills for universal health insurance were offered. All of them were defeated by insurance companies wanting to preserve their burial and accident insurances. The AMA feared limits on their fees. Pharmacists feared the drugs provided by the legislation would undercut their services. And finally, by Samuel Gompers, the head of the American Federation of Labor, believed government insurance would weaken the unions’ appeal.
The largest HMO formed, 1933 – 1938, was Kaiser Permanente. The Kaiser Co was building a dam in a remote area of California, and injured workers were being sent to medical facilities 200 miles away by the construction worker’s insurance company. Sidney Garfield, a physician at the construction site, convinced the insurance company to pay him directly in advance and he provided all needed care. He also arranged for voluntary deductions to be withheld from a worker’s salary to provide off-the-job care. Henry Kaiser, who was building the dam, and owned the insurance company, had Garfield establish similar programs in Washington and San Francisco. These facilities opened to the community as Kaiser Foundation Health plan.
The Age of Employer insurance.
Blue Cross for hospital coverage.
The first group “hospital” health plan started at Baylor University Hospital in Dallas, Tx, in 1929. They offered to 1500 school teachers to cover up to 21 days of hospital care per year for 50 cents a month. The Great Depression was causing financial hardship to private hospitals and as a result many other hospitals began to offer similar plans. As these single-hospital plans generated competition, community hospitals began to organize with each other to offer hospital coverage and reduce inter-hospital competition.
The American Hospital Association (AHA) formed in 1929. In 1932, the AMA oversaw the combining of the individual hospital plans into Blue Cross (BC), the first private hospital coverage plan. BC plans benefited from state-level enabling legislation allowing BC to act as a nonprofit corporation, tax-exempt and free from insurance regulations.
Blue Shield for physician coverage.
Physicians were slower to adopt third party payors; however, in the 1930s, two situations occurred to spur doctors into accepting insurance plans. First, BC was gaining popularity and physicians feared that BC would start offering physician insurance, limiting physician autonomy. Second, advocates of compulsory health insurance looked to the emerging social security legislation as a logical means of providing national health care. Compulsory health insurance was considered worse than voluntary health insurance.
In order to protect themselves from BC and provide an alternative to compulsory insurance the American Medical Association (AMA) adopted a set of ten principles in 1934 to guide the development of physician insurance.
In 1939, the California governor, Culbert Olson, proposed compulsory health insurance for those earning less than $3000 a year, which was 90% of the population. In response to the Governorm, the California Physicians’ Service (CPS) began operations as the first prepayment plan to cover physicians’ services. These were physician-sponsored plans. Employees earning less than $3,000 annually could take advantage of CPS through their employer at the fee of $1.70 per month.
The AMA further encouraged state and local medical societies to form their own prepayment plans. These physician-sponsored plans ultimately affiliated and became known as Blue Shield in 1946. Enabling legislation was established similar to that which allowed BC to operate as non-profits.
Growth of Commercial Insurance Before the “Blues,” commercial health insurance was essentially non-existent. They feared that they would not be able to overcome problems relating to adverse selection (only subscribing sick and costly people). The Blues showed how to overcome adverse selection: provide health insurance only to groups of employed workers. They were insuring young, healthy people that were not individually seeking health insurance. Now commercial health insurance companies rapidly moved into health insurance and the market grew from 20,662,000 in 1940 to 142,334,000 in 1950.
The Blues were limited due to their non-profit status. They could only base premiums by “community” rating, meaning that they had to charge the same for healthy or sick persons. Commercial insurance companies could engage in experience rating, whereby sicker people paid higher premiums and healthier people lower premiums. As a result, commercial companies could offer lower premiums to healthy groups than the Blues and gain their business. By 1951 there were more individuals enrolled in commercial plans than the Blues.
Government policies encouraged health insurance. During WWII wage and price controls prevented employers from using wages to compete for scarce labor. But, the 1942 Stabilization Act permitted firms to offer employee insurance plans. Two rulings reinforced the employer-provided health insurance system. In 1945, the War Labor Board ruled that employers could not modify or cancel group insurance plans during the contract period. In 1949, the National Labor Relations Board ruled in a dispute between the Inland Steel Co. and United Steelworkers Union that the term “wages” included pension and insurance benefits. This allowed unions to negotiate benefit packages on behalf of workers.
Major government decisions that further reinforced the employment-based system was that employers did not have to pay payroll taxes on contributions. Next, in 1943 it was decided that premiums paid by employers directly to commercial insurance companies were not taxable as employee income. This decision was codified and extended in 1954 in the Internal Revenue Code (IRC). Employer contributions to the employee health plans were exempt from employee taxable income.
Of note, during this time two more attempts were made for national health care. The first in 1915, the second in 1935, and now in 1944 President Roosevelt calls for a second bill of rights that includes, “The right to adequate medical care and the opportunity to achieve and enjoy good health.” [Third attempt] In 1945 President Truman became the first president to publicly support national health insurance through support of the Murray-Wagner-Dingell bill for compulsory health insurance funded by payroll deductions. [Fourth attempt]
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