In an article entitled,”Health Care in the Twentieth Century: A History of Government Interference and Protection”, Terree P. Wasley provides some insightful historical perspective on the development of health insurance in the United States. Wasley notes that from 1880 to 1930, America saw the establishment of a professionalized medical industry and the use of health insurance to prepay health care costs. As a result of the Great Depression, hospitals saw incomes per patient fall from $200 to $60. Hospitals turned to insurance plans as a way to guarantee revenues.
The first insurance plan was introduced in 1929 at Baylor University Hospital, where teachers prepaid their health care expenses to the hospital. Soon after other groups of hospitals formed multiple hospital insurance plans.
Insurance plans compensated doctors on a cost-plus method, which meant that doctors would be reimbursed based on “reasonable and customary” charges. According to Walsey, the plans reimbursed hospitals on a percentage of their costs as well as working and equity capital. Doctors and hospitals could charge what they wanted knowing they would be reimbursed and consumers had no incentive to manage their health costs given that care was being paid by money from a “third party.”
As we progressed thorugh the 1940s, America saw the establishment of employer-provided health insurance. As a way to attract quality employees and avoid higher taxes, employers began offering health insurance. The Internal Revenue Service provided some tax relief by allowing employers to deduct the cost of providing insurance as a cost of doing business. In 1954, Congress went ahead and codified the tax exempt status of health insurance benefits.
Labor unions got into the act and began negotiating for employer provided health insurance in the 1940s. Receiving additional cover from the U.S. Supreme Court’s resolving the issue of whether unions could negotiate for health care in collective bargaining in Inland Steel, coverage expanded via collective bargaining agreements and employer contributions. During the 1940s and 1950s, the U.S. saw an expansion of employer-provided plans that offered first-dollar and routine care coverage as opposed to just catastrophic coverage. This expansion of employer-based insurance eventually drove up the cost of health care, especially since it is more expensive to provide for and insure first dollar care i.e. doctor visits, flu shots, etc. than low probability, low frequency, high-cost events such as catastrophic injury.
This expansion of employer-based health insurance fueled the argument that health insurance should be expanded to the poor, elderly, and unemployed, thus the implementation of Medicare for the elderly, and state administered, federally funded Medicaid for the poor. Like private insurance, Medicare reimbursed doctors and hospitals for reasonable and customary fees.
Through his historical expansion, health care insurance has, according to Reason.com’s Ronald Bailey, managed to obscure the basic notion of insurance. In his November 2004 article, “Mandatory Health Insurance Now!”, Bailey notes that insurance was designed to protect against unexpected financial losses. Insuring routine activities such as flu shots and annual physicals drive up health care costs.
The irony of it is that most Americans who are typically concerned about catastrophic care could reduce their insurance costs by purchasing less costly catastrophic health insurance. Bonnie Erbe noted in her article, “Most Could Afford Catastrophic Health Coverage”, (U.S. News and World Report, December 13, 2006) that the costs of such policies is approximately $3,000, a fraction of the cost that most Americans incur for a standard health insurance policy.
Rather than revamp an entire $2.4 trillion health care services market to cover, at most, an additional 30 million uninsured citizens, some of whom do not want to buy health care insurance in the first place, wouldn’t it be better to subsidize a portion of their out-of-pocket routine care expenses and encourage the uninsured to purchase lower cost catastrophic insurance with their savings?