Early insurance was “sickness” insurance. It covered lost income when sick, not health care expenses.

"sickness" insurance...

The idea of insurance is nothing new, even in health. The ancient Greeks had a “sort of” socialized medicine. They hired city physicians paid by taxes to provide medical care to people without physicians. England started the Friendly Societies, groups of people that pooled resources to help workers and their families when injured or ill. In 1793 the British Parliament passed an Act to assist the formation of these societies. In the U.S., similar Fraternal and Mutual Benevolent groups were formed. One of the earliest was set up by freed slaves in 1787, starting the Masonic Order who hired lodge doctors to care for their sick.

Between 1793 and 1867, 38,000 mutual benevolent societies were formed in the U.S. By 1900 there were 2,500,000 members with insurance of over $4,000,000,000 and $38,000,000 in benefits. In 1853, the French mutual aid society established a prepaid hospital care plan in San Francisco.

The first prepaid health plan in the United States was 1798, when Congress established the U.S. Marine-Hospital fund for seamen. The Act created a tax of 20 cents each month to be withheld from merchant seamen’s wages. This early government funded system was used not only to treat seamen but continued to expand and eventually became our present day Public Health Service (PHS).

As we learned previously, most Americans were treated at home, not in hospitals up to the 1900s. And for good reasons, medical care was little more than quackery and there was little a physician could offer a patient. In the developing urban areas we had almshouses or poorhouses that functioned for housing and care of the poor. It wasn’t until American moved from rural to urban areas and medicine became scientific and offered actual cures that the demand, and prices, required insurance.

Early insurance was “sickness” insurance, similar to disability insurance today, which covered lost wages. The first group sickness policy was in 1847, by The Massachusetts Health Insurance Company of Boston. The first accident policy was written by the Franklin Health Assurance Co. of Massachusetts in 1850. A 15-cent premium would pay $200 in case of bodily injury from an accident by railway or steamboat. Travelers Insurance Co. entered the field in 1863 and set the standard with policies similar to todays. A typical policy provided a $1,000 death benefit and a $5 weekly disability benefit. By 1899, 47 insurers of accidents had issued 463,000 policies. In 1907, the first non-cancelable, guaranteed renewable accident and sickness insurance was provided by the National Masonic Provident Association of Mansfield, Ohio.

In the 1870s and 1880s certain companies, such as railroad, mining, and lumber, began providing the services of company doctors to workers. This was funded by deductions from workers’ wages. However, there was still little demand among the general populace for health insurance. In 1910, Montgomery Ward and Co. created a plan for its employees. . It was written by the London Guarantee and Accident Co. in New York and is considered the Nation’s first group health insurance policy. It paid one-half of the employee’s weekly salary if unable to work due to illness or injury. It did not reimburse for medical services.

In 1912 the American Association for Labor Legislation (AALL) organized the first national conference on “social insurance”. They began studying compulsory health insurance in 1912 and produced a model bill in 1915. This would have provided “sick pay” for income lost and a lump-sum payment to assist with funeral expenses. However, the lack of consumer demand, physician resistance, and lack of commercial insurance company support made passage difficult. The plan would include death or funeral benefits. This type of insurance was already sold to working class families for 50 cents a week by commercial insurance companies and by including this insurance companies opposed compulsory insurance. Finally, the entry of America into WWI in 1917 spelled the end of health care. Germany had started compulsory health insurance in 1883. Slogans such as “made in Germany” and “Prussianization of America” were touted by critics. The compulsory health insurance bill was dead by 1920.

After 1920 Health Care Costs Rise The population began to shift from rural to urban centers and families lived in smaller homes unable to care for sick family members. Rising incomes made health insurance a financial possibility. Advances in medicine as science also helped develop hospitals as treatment centers. According to Rosenberg (1987) “by the 1920s…prospective patients were influenced not only by the hope of healing, but by the image of new kind of medicine – precise, scientific and effective”.

The AMA formed the Council on Medical Education (CME) in 1904 and invited Abraham Flexner of the Carnegie Foundation to evaluate medical education. His report was published in 1910. According to Flexner the current method of teaching had “…resulted in enormous over-production at a low level, and that, whatever the justification in the past, the present situation…can be more effectively met by a reduced output of well-trained men than by further inflation with an inferior product”. After the report the number of medical schools dropped from 131 in 1910 to 95 in 1915 and 81 in 1922. The increased requirements for physicians and education restricted the physician supply and resulted in the increased cost of physician services.

In 1913 the American College of Surgeons (ACS) was founded and for a hospital to be a member (for surgery) it had to meet a set of standards in regards to staffing, record keeping, diagnostic and therapeutic facilities available. Only 13 percent of hospitals were approved in 1918. By 1932, 93% met ACS requirements.

The Committee on the costs of Medical Care (CCMC) reported that in 1929 the average American family had $108 in medical expenses. Hospital bills made up 14% of that total (compared to 7.6% in the 1910s). By 1934 hospital costs rose to nearly 40 percent of a family’s medical bill.

Next, the birth of "health" insurance.