Tuesday, August 18, 2009

What Do You Know About The History Of Health Care Insurance?

by Ron Powell

There have been a number of blogs about healthcare reform proposals recently, and there will no doubt be more before it comes to a vote in congress. Most bloggers, including me, are not old enough to have first hand memories of the major events and forces that shaped the system as we know it today. Health care insurance in America has an interesting history.

The first insurance plans weren't for "health" insurance at all. In the 1900s some Americans began buying "sickness insurance". Around 1900, workers wanted insurance that covered paid sick days and were not as interested in more expensive medical benefit insurance. They purchased industrial "sickness insurance" through employers. Since medical treatments were relatively ineffective then, the insurance was meant to cover wages lost while a person was too sick to work. Imitating benevolent societies, industrial sickness (sick day) insurance companies raised money from entertainments as well as membership dues and held social events for members. They sold beer.

In 1908, the average "establishment" (employer) insurance plan had 730 members in workplaces of 1,652 workers, so approximately 44 percent of potentially covered workers were actually covered. A 1909 audit of early life and "sickness" insurance plans showed that fewer than 5 percent had actuarial data. During the depression, hospitals were suffering from a lack of patients, so they began offering prepaid hospital care as a way to get a steady stream of income.

The first modern employee group benefit plan was an agreement between Dallas County public school teachers and Baylor Hospital in 1929. The Baylor Plan was organized by a hospital administrator who had previously been a school superintendent.

The American Hospital Association was afraid that hospitals would begin competing with each other for patients, thus reducing revenues for everybody. So they formed Blue Cross, with the help of legislation that enabled them to avoid the requirements of reserve requirements that true insurance companies had to have to guaranty solvency. Physicians, who were largely unaffiliated at that time, became concerned that Blue Cross would lead to hospitals insuring for, and providing, physician services in competition with them, causing their fees and income to drop. So the AMA preempted this by forming its own "insurance" plan for physician services, called Blue Shield.

The biggest boost to these private health insurance plans came from World War II. The Wage Stabilization Act of 1942 was enacted to prevent rapid wage escalation due to the shortage of available labor during wartime. But that act also allowed companies to use other incentives to attract workers, and gave favorable tax treatment to employer paid health insurance. In 1944, the Baylor Plan merged into Blue Cross Blue Shield of Texas. By that time, more than 3 million Americans were covered by Blue Cross Blue Shield policies.

As part of the deal that enabled Blue Cross and Blue Shield to avoid the restrictions insurance companies faced, they were required to charge premiums based on a "community rating" system. That is, they had to charge the same premium to healthy people as they charged sicker ones. This opened the door for other companies to enter the increasingly lucrative health insurance market. Since most large companies tended to employ workforces that were younger and more healthy than society as a whole, they could cherry pick those companies and either avoid insuring people who would likely incur profit draining claims, or charge higher premiums to those groups.

When Medicare was first adopted in 1965, legislators feared that doctors would refuse to treat patients covered by that plan. So they agreed to reimburse doctors for their services at their "usual, customary and reasonable rate", and allowed them to bill their patients directly. In this way, doctors were able to charge patients more than Medicare would pay, forcing them to pay the difference. Medicare payments began spiraling out of control, reimbursement policy underwent major change in 1983. From then on, providers were reimbursed according to a set fee schedule based on diagnosis.

Today, the labor market is very different from the days when employer provided insurance became popular. Currently, there is no legal obligation for an employer to provide it, as long as they don't discriminate by offering it to some employees and not others. Just as many employers abandoned defined benefit pension plans when they became too costly, it is likely some will want to drop health insurance benefits as costs continue to rise.

Due to a combination of factors, such as an aging population, introduction of expensive diagnostic technology, skyrocketing malpractice awards and so on, health care expenditures in the US account for one of every six dollars of our gross domestic product (GDP). We spend 50% more per capita on health care than any other major country, and that gap is increasing every year.

With that as background, many Americans are reaching the conclusion that the status quo cannot be sustained. Yet any attempt to change it is met with hysterical opposition and demagoguery. The insurance companies, doctors, hospitals and pharmaceutical companies that are benefiting from the current system are pulling out all the stops to prevent changes to it.

There are no market forces that will keep the cost of healthcare from continuing to climb. Private industry practices which have resulted in their reaping obscene profits by discriminating against the very people they purport to cover and denying coverage to people who need it most or can’t afford to pay exorbitant premiums or deductibles are at the root of a process of economic erosion that is bankrupting American families at an alarming rate. They will eventually bankrupt the entire country if something is not done to alter the course we are on with things as they are.

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