Health care in the twentieth century:
a history of government interference and protection
Business Economics, April, 1993
by Terree P. Wasley
HEALTH CARE COSTS and coverage have become a dominant force in almost everyone's life over the course of the past fifty years. Before many workers change employment, they must weigh the costs of changes in health coverage. Many people are left out of the insurance market, either because they can't get it or can't afford it. Patients complain that doctors don't listen anymore and are anxious to slap their physician with a lawsuit for the slightest imperfection in care. Physicians are tired of struggling under mountains of paperwork from the government and insurance companies when all they want to do is treat patients.
More Articles of Interest
• Health Care In The 20th Century - Statistical Data Included
• How not to fix the health care crisis
• Health care policy reform - in the public interest or for the special interests?
• Employer-provided health care: where's the justice?
• Occupational changes during the 20th century: professional, managerial,...
And the costs keep going up. With health care expenditures expected to reach $830 billion in 1992 and $1.5 trillion by the year 2000, the American public wonders where it is all going.(1) No one can figure out the answer, and all everyone knows is that costs are too high and too many people are falling through the cracks of the health care system.
How have we in the United States come to find ourselves in this kind of a mess? An investigation into the evolution of the medical industry in America will expose not the competitive market that most Americans assume has been operating, but stifling regulation and government control as well as regulations originating from interest groups such as medical organizations and insurance companies. This system is chaotic for both doctors and patients and is one that appears to be a free-market operation but is really an industry legislated and regulated from behind the scenes.
A HISTORY OF THE AMERICAN HEALTH CARE SYSTEM IN THIS CENTURY(2)
The early years of formalized health care in America (1880-1930) saw the establishment of the medical profession, both through the expanded duties and formal education of the physician and the growth of the hospital system. The start of the twentieth century also witnessed the beginnings of health insurance as a method of prepaying health care costs, and the American Medical Association's (AMA) growing control over the medical marketplace.
By 1930, the United States had as many or more medical, nursing, and dental schools and hospital beds per unit of population as it has today. The Great Depression, however, slowed the expansion of health care facilities and personnel. Many Americans had trouble paying for the medical care they needed. Doctors tried to make allowances for patients in financial straits, but hospitals, with higher fixed costs, had much less flexibility. Between 1929 and 1930, average hospital receipts plummeted from more than $200 per patient to less than $60. Hospitals then began to turn to insurance plans as a way to guarantee a steady cash flow by spreading the financial risk.
The first plan was introduced in 1929 at Baylor University Hospital in Dallas, Texas. By paying a monthly fee in advance, a group of 1,500 school-teachers contracted with the hospital to provide care should they need it. The fee was paid whether or not the individual teacher ever used the services.
Soon, groups of nonprofit hospitals in several cities organized multiple hospital insurance plans. These plans gave subscribers a choice of medical care providers and therefore attracted more patients, strengthening the income to the participating hospitals. This multiple hospital plan served as a model for Blue Cross, established in 1932 in Sacramento, California. These hospital plans changed the concept of insurance and forever changed the American health care system. Unlike other forms of insurance, the primary purpose of these plans was not to protect consumers from large, unforeseen expenses, but rather to keep hospitals in business by guaranteeing them a regular income. While these plans benefited consumers by giving them a predictable method of paying for their medical care, they contained serious flaws that would become increasingly apparent as our health care system developed.
Blue Cross and Commercial Insurance
The institutionalization of Blue Cross/Blue Shield as the dominant provider of health care insurance was due in some part to interference in the market by the government on behalf of the Blues. The AMA and the American Hospital Association (AHA) lobbied for legislation to exempt Blue Cross plans from normal insurance regulations and receive federal tax exemption as nonprofit organizations. These benefits gave the Blues an enormous advantage over other insurers, and until the 1980s the Blues never held less than 40 percent of the entire health insurance market.(3)
The most interesting and devastating contribution made by the Blues was the reimbursement procedure they adopted. This procedure, known as cost-plus, was adopted by other insurance companies in order to compete and was also used by the Medicare program when it came into effect in 1965. Cost-plus allowed physicians to be reimbursed according to "reasonable and customary" charges, and hospitals were reimbursed on a percentage of their costs plus a percentage of their working and equity capital. This system permitted doctors to charge whatever they wanted, knowing they would be reimbursed, and created a perverse incentive for hospitals to increase costs because that meant increased income. Patients have no reason to show restraint either, because the money spent belongs not to them but to a third party. The cost-plus system inevitably led to higher health care costs.
More Articles of Interest
• Health Care In The 20th Century - Statistical Data Included
• How not to fix the health care crisis
• Health care policy reform - in the public interest or for the special interests?
• Employer-provided health care: where's the justice?
• Occupational changes during the 20th century: professional, managerial,...
And the costs keep going up. With health care expenditures expected to reach $830 billion in 1992 and $1.5 trillion by the year 2000, the American public wonders where it is all going.(1) No one can figure out the answer, and all everyone knows is that costs are too high and too many people are falling through the cracks of the health care system.
How have we in the United States come to find ourselves in this kind of a mess? An investigation into the evolution of the medical industry in America will expose not the competitive market that most Americans assume has been operating, but stifling regulation and government control as well as regulations originating from interest groups such as medical organizations and insurance companies. This system is chaotic for both doctors and patients and is one that appears to be a free-market operation but is really an industry legislated and regulated from behind the scenes.
A HISTORY OF THE AMERICAN HEALTH CARE SYSTEM IN THIS CENTURY(2)
The early years of formalized health care in America (1880-1930) saw the establishment of the medical profession, both through the expanded duties and formal education of the physician and the growth of the hospital system. The start of the twentieth century also witnessed the beginnings of health insurance as a method of prepaying health care costs, and the American Medical Association's (AMA) growing control over the medical marketplace.
By 1930, the United States had as many or more medical, nursing, and dental schools and hospital beds per unit of population as it has today. The Great Depression, however, slowed the expansion of health care facilities and personnel. Many Americans had trouble paying for the medical care they needed. Doctors tried to make allowances for patients in financial straits, but hospitals, with higher fixed costs, had much less flexibility. Between 1929 and 1930, average hospital receipts plummeted from more than $200 per patient to less than $60. Hospitals then began to turn to insurance plans as a way to guarantee a steady cash flow by spreading the financial risk.
The first plan was introduced in 1929 at Baylor University Hospital in Dallas, Texas. By paying a monthly fee in advance, a group of 1,500 school-teachers contracted with the hospital to provide care should they need it. The fee was paid whether or not the individual teacher ever used the services.
Soon, groups of nonprofit hospitals in several cities organized multiple hospital insurance plans. These plans gave subscribers a choice of medical care providers and therefore attracted more patients, strengthening the income to the participating hospitals. This multiple hospital plan served as a model for Blue Cross, established in 1932 in Sacramento, California. These hospital plans changed the concept of insurance and forever changed the American health care system. Unlike other forms of insurance, the primary purpose of these plans was not to protect consumers from large, unforeseen expenses, but rather to keep hospitals in business by guaranteeing them a regular income. While these plans benefited consumers by giving them a predictable method of paying for their medical care, they contained serious flaws that would become increasingly apparent as our health care system developed.
Blue Cross and Commercial Insurance
The institutionalization of Blue Cross/Blue Shield as the dominant provider of health care insurance was due in some part to interference in the market by the government on behalf of the Blues. The AMA and the American Hospital Association (AHA) lobbied for legislation to exempt Blue Cross plans from normal insurance regulations and receive federal tax exemption as nonprofit organizations. These benefits gave the Blues an enormous advantage over other insurers, and until the 1980s the Blues never held less than 40 percent of the entire health insurance market.(3)
The most interesting and devastating contribution made by the Blues was the reimbursement procedure they adopted. This procedure, known as cost-plus, was adopted by other insurance companies in order to compete and was also used by the Medicare program when it came into effect in 1965. Cost-plus allowed physicians to be reimbursed according to "reasonable and customary" charges, and hospitals were reimbursed on a percentage of their costs plus a percentage of their working and equity capital. This system permitted doctors to charge whatever they wanted, knowing they would be reimbursed, and created a perverse incentive for hospitals to increase costs because that meant increased income. Patients have no reason to show restraint either, because the money spent belongs not to them but to a third party. The cost-plus system inevitably led to higher health care costs.
