Complicated Road: A Brief History of Insurance

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By Kate Walker

Insurance dominates the marketplace in the United States. For decades, the insurance companies have set up a system that allows for their influence to be felt and seen throughout other major industries. While many sectors have been greatly impacted, the major one is the health care industry. As insurance companies have been successful in finding “windfall” profits and building their bottom line, they have grown very powerful and now control the healthcare landscape.  Health care is a substantial component of the US economy, making up 13.5% of the GDP and 12.5% of civilian employment (Helms). In fact, insurance companies have grown so powerful in the current system that they can dictate what healthcare is delivered, where it is delivered, how it is delivered, and by whom it is rendered. With these facts in mind, this article will explore the history of the US health care insurance system and its rise to the monopolization of healthcare.

The health insurance issue has been a part of the American landscape for well over a century. In 1875, the beginnings were found in ‘establishment funds’; workers of a single organization were able to have partial employer financed funds that would pay out some money for death or disabilities. While this is more akin to accident insurance, it was the beginning of the insurance era in the United States (Braverman). During the next 50 years, a number of health insurance coverage political stances came forth but eventually failed. There was even a bill drafted in 1917 that would have made health insurance compulsory (Braverman). This bill was during the Progressive Era and sought to improve the social conditions of the lower and working classes. While there were many political entities that were in favor of compulsory insurance, the main group was the American Association for Labor Legislation. Ultimately, the bill failed because of timing and other issues at the time; mainly the beginning of WWI and the “Red Scare” (Ketcham, Braverman). The rhetoric of the time labeled the bill to be radical and communist in nature. As this period was the beginning of the anticommunist movement in the United States, it caused irreparable damage to those who were trying to make health care compulsory for all US citizens (Braverman).

It was also during the 1910s and 1920s that the field of medicine began to improve and new, significant scientific advances were allowing for better quality of care to be given to patients. Advances in medicine in areas such as surgery, imaging, antibiotics, and other advanced diagnostic techniques greatly improved physician’s ability to heal patients (Helms, Weisbrod). Unfortunately, all of the new technologies and techniques also caused the price of care to increase.

With the cost of health care rising, it became more difficult for families to cover the fees. This was a problem that was then exacerbated by the Great Depression. It was during this time that the first non-compulsory health care plans were being offered by employers and by associations such as the American Hospital Association (Braverman, Wisconsin Policy…). The era of non-compulsory health insurance began in Dallas, Texas when the Teachers Union entered into a non-compulsory insurance plan with Blue Cross and Blue Shield. This initial insurance program was overwhelmingly successful for both the Teachers and Blue Cross Blue Shield. (Consumers Union). The field of healthcare insurance experienced a massive expansion with new policy holders all over the US. This period was the start of the insurance monopoly that would soon be the standard for the US health care industry.

The first time that health care insurance became a commercial commodity came about during World War II when the value of health insurance provided by an employer was excluded from the employee taxable income. After the end of the war, the federal government placed a salary freeze on GIs returning from WWII and also allowed for employer provided health insurance to be tax free. As a means of competing for the labor of these returning GIs, most employers bought non-compensatory health insurance policies for their employees (Consumers Union, Weisbrod). Employer provided healthcare insurance soon became the norm. At first, this was to be a temporary measure just for the war period but as medical advancements were made, it became essential so that cutting edge procedures could be obtained by the public. The major impact the tax-free insurance had was that employees would not buy insurance as individuals, rather opting into the employer insurance. Research done by Martin Feldstein indicates the effect of this was massive and widespread (Helms, Weisbrod). It drove up the price of insurance, increased the demand for insurance in general as well as demanding more complete insurance packages (Helms, Health Economics). In essence, because consumers found it simpler and easier to buy their insurance through their employers, there was no competitive market where buyers were trying to find the best deal. Instead, insurance companies could sell their product in batches to employers and could raise the prices at will without “checks and balances” in place to challenge them. For full time American employees, healthcare Insurance became an entitlement of working full-time and supplied by their employers.

The next change in health care insurance, that affects the story, is found in the “War on Poverty” begun by U.S.  President Lyndon B. Johnson, the passing of Medicare and Medicaid in 1965, and its eventual expansion in the mid-1980s (Swartz, Wisconsin Policy…). At this time, government began to focus on providing health care to the poor and uninsured, thereby improving the health of the nation. The “War on Poverty” resulted in Community Health Centers (CHC) to be governmentally funded and they began appearing throughout the US. Public opinion on these centers has changed dramatically through the years; positively and negatively. CHCs still play an important part of the health care system today (Swartz, Wisconsin Policy…).

Medicare and Medicaid came from the “War on Poverty” because of the overwhelming need of the elderly, impoverished, and lower class. These programs were successfully enacted in 1965 by attaching them to the Social Security Act (The Henry J. Kaiser…).  At first, the programs benefited fewer people due to the life expectancy of men (66) and women (71) which were drastically shorter than what life spans are today. As the life expectancy of the population went up, the more burden was put on Medicare and Medicaid (Wisconsin Policy…, Weisbrod). The life expectancy issue still affects the system today. However, the Medicare and Medicaid system has had a more far reaching impact on the perception of health care within the United States culture: it made health insurance an entitlement for both employed and unemployed citizens instead of something a person had to work and save for. This change in perception and resulting “entitlement health plans” caused the industry to continually become more expensive and more lucrative (Wisconsin Policy…). The increasing costs of health care resulted in the US government needing to regulate health care provided to Medicare and Medicaid patients as the system was being overtaxed by overuse (Wisconsin Policy…, Weisbrod). In response to the increasing coverage and cost of the Medicaid and Medicare system, the associated payment systems to providers went from paying for services at a nominal profit to only paying for the cost basis of these services. In other words, any profit for providing healthcare to Medicaid and Medicare enrollees was removed from the payment. This caused an issue for health care providers, both in the private and corporate sectors, as there is not much profit in treating the lower income patients. This makes health care more expensive for all as the middle and upper class must pay high enough costs to offset any monetary losses the providers sustain from the Medicaid and Medicare patients (Long).

The 1970s did not see any major changes within the health care system. There were minor modifications that occurred but none that were impactful enough to mention in this brief history. The private insurance industry continued to support the healthcare industry and Medicaid and Medicare continued to only reimburse providers for the cost of care (Long). Health insurance premiums rose sharply in the 1980s due to changes in technology, available treatments, and the increase in need due to the extending life expectancy of the population. With increasing healthcare costs, the insurance industry responded by raising insurance premiums; further exacerbating an already problematic issue. It was during this time and the following decade that the implementation of the “Preferred Provider Organizations” (PPOs) and “Point-Of-Service” products took place. This change allowed for insurance companies to have more control over where and how patients obtained their medical treatment (Lichtenstein, Morrisey). These “managed care plans” are known today as “HMOs”. The major difference between the HMO plan and the historical health care plan is that the HMO plan limits the patient to specific health care providers while the historical health care plans simply required a licensed medical professional. It was through these changes in health care insurance that the concept of “in network” was born. Insurance companies would negotiate favorable costs with certain providers and develop a network to include only them. Providers who failed to negotiate were left out of the Network.

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Figure 1 – Percentage of Insured Workers by Type of Plan Source: Morrisey, pg 19

Over the years, it had been noted that patients prefer more choices in their health care so hybrids of HMOs, PPOs, and POSs have been developed to allow for more flexibility; provided that the patient was willing to have a higher out of pocket expense (Morrisey). Figure 1 depicts the change over time of the use of conventional insurance policies as well as HMOs, PPOs, POSs, and high-deductible health plans (HDHPs). The latter came about in the mid-2000s and quickly became popular with insured workers.

Another extreme change that altered public access to health care was when the insurance industry also began to dictate what procedures and treatments it would pay for. As there was no set cost or fair market value for health care, there were no limits to what the providers could charge for diagnostic, therapeutic, and surgical procedures. As a result, insurance companies could claim that the procedure was too experimental or expensive to be realistic and, as a result, the companies began to routinely deny health care claims. In response, the field of medicine developed the field of “evidence based medicine” and allowed for all potential medical procedures, diagnostics, and therapeutics to be pre-authorized by insurance companies (Weisbrod). However, even though these payment structures are in place, there are many instances where insurance companies still refuse to pay for health care. As a result, both the health care providers and patients often find themselves taking legal action against insurance companies to force them to pay for services rendered or received.

The 1980s, 1990s, and 2000s saw many changes for health care and the insurance industry; Medicare and Medicaid in particular. Impoverished pregnant women and children were given coverage in the 1980s (SOBRA expansion). The 1990s saw limitations enacted that simultaneously made access to Medicaid independent of a person’s welfare status but tied eligibility to other aid benefits; making the system even more complicated to navigate. During this same time, the Children’s Health Insurance Program (CHIP) was an expansion of insurance eligibility for children of low to moderate income families and Medicare was also expanded to allow seniors to buy private prescription drug coverage that is subsidized by federal revenues (Morrisey). In 2003, the insurance industry instituted the “Consumer Directed Care” concept in which consumers began paying copays, deductibles, and coinsurance which significantly increased consumer spending for care. Since this time, the out of pocket expenses have continued to grow causing many opponents to complain that these out of pocket expenses primary objective is to create a disincentive for patients to seek health care.

The most significant change to the health insurance industry in the last few decades was in 2010 with the passing of the Patient Protection and Affordable Health Care Act (PPACA) or, as it is also known, “Obamacare”. Nearly 100 years after the first attempt to create a compulsory health insurance for all US citizens, President Barak Obama instituted this act amid great controversy and protest. The PPACA resulted in all US citizens being required to purchase health care and that Medicaid was expanded to cover low-income adults (Executive Office…, Morrisey, U.S. Department of Health & Human Services, Democratic Policy…). This comprehensive health reform changed how the US population accessed health care coverage. Lower income and poverty stricken persons now were able to obtain free or cost-sharing health care plans via the government (Executive Office…, The Henry J. Kaiser…). As the PPACA was passed recently, its full effects are not known. There are many available analyses on the subject to gain an idea of how much this will impact not only the insurance industry but also the everyday US citizen. One fact that is clear at this point in time is that the PPACA has allowed for millions more people to have health insurance and easier access to health care but it has also caused a dramatic 24% overall increase in the average per-person premiums (Kowalski). However, it must be noted that the data used in the trend analysis is incomplete due to the contemporary nature of the PPACA and, as such, the overall effect may be dramatically different in a few years or decades.

Recent events have shown that the price of health care will still be in a state of flux. Recently, both Aetna and United Healthcare, two of the major US insurance companies, have announced they will no longer be PPACA providers. This comes from the lack of profit in Medicaid, Medicare, and PPACA patients to the amount of over 2 billion dollars. Aetna expects a loss of around $330 million in 2016 while United Healthcare claims to be losing about $850 million (Managed Care). Even more, Blue Cross Blue Shield has also announced that there will be a 60% increase in PPACA premiums this year (2016) (Deams). Unfortunately, these recent events indicate that there is not going to be any normalization in the health care insurance industry as costs and premiums continue to rise.

In closing, it is important to realize that the health care system in the United States has evolved over the better part of a century to fit the needs of a growing country. Unfortunately, the system we have today is layered in regulation, third party payments, and an ever increasing governmental control and oversight. While there are short term benefits for some, the over-arching effect is that health care is costing more and more for the everyday American. With increasing pressures and problems, the health care system has created an atmosphere where the insurance companies have a stranglehold on the availability and distribution of medical care. Unfortunately, the historical pattern shows that there will be a continued deterioration of coverage and patient care unless there is a radical change in health care and associated insurances.

 

Bibliography

Braverman, Jordan. Health Economics “History of Health Care Financing in the USA.” Pharmaceutical Press: 2010

Consumers Union. “Blue Cross and Blue Shield: A Historical Compilation”. <https://consumersunion.org/wp-content/uploads/2013/03/yourhealthdollar.org_blue-cross-history-compilation.pdf>

Deam, Jenny. “Blue Cross Blue Shield Seeks 60% Rate Hikes in 2017”. Houston Chronicle. June 1, 2016. <http://www.houstonchronicle.com/news/houston-texas/texas/article/Blue-Cross-Blue-Shield-seeks-60-rate-hikes-in-7958152.php>

Executive Office of the President of the United States. “Trends in Health Care Cost Growth and the Role of the Affordable Care Act”. Nov, 2013.

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Long, S. K. “Physicians May Need More Than Higher Reimbursements To Expand Medicaid Participation: Findings From Washington State”. Health Affairs. September 2013 32:91560-1567.

Managed Care. “Affordable Care Act in Trouble as Big Insurance Companies Pull Out”. Aug 17, 2016. <http://www.managedcaremag.com/news/affordable-care-act-trouble-big-insurance-companies-pull-out>

Morrisey, Michael A. Health Insurance. “History of Health Insurance in the United States”. Health Administration Press. 2008.

Swartz, Katherine. “Health care for the poor: For whom, what care, and whose responsibility?” Focus. Fall 2009 26:2.

The Henry J. Kaiser Foundation. “National Health Insurance – A Brief History of Reform Efforts in the U.S.” Focus on Health Reform. March 2009.

The Henry J. Kaiser Foundation. “Summary of the Affordable Care Act” <http://kff.org/health-reform/fact-sheet/summary-of-the-affordable-care-act/>

Weisbrod, Burton A. “The Health Care Quadrilemma: An Essay on Technological Change, Insurance, Quality of Care, and Cost Containment”. Journal of Economic Literature. June 1991 29:2 523-552

Wisconsin Policy Research Institute Report. “The History of Health Care Costs and Health Insurance”. Oct, 2006. 9:10.

 

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