In America today, there’s a drastic discrepancy between people’s perception of health insurance and its definition; and understandably so, as it has fundamentally changed since its inception just decades ago. It could be argued that many of the frustrations relating to this topic stem from a near-universal knowledge gap, specifically regarding what health insurance is - and also, what it isn’t.
By definition, health insurance is the term used to describe any insurance that provides people with protection against the costs of medical services. Albeit vague, this definition for modern day Americans tends to reflect the belief that health insurance policies should cover pretty much everything - which, in most minds, is everything outside of a copay. Think for a moment though, about car insurance. It’s illegal to drive without it, it costs all drivers a monthly fee, and people understand its in-case-of-emergency role. For instance, you expect your insurance to cover an accident - but would never expect it to cover a tire rotation. Why don’t people think of health insurance the same way?
By looking to the past, we hope to shed some light on the short and surprising history of American health insurance and how the system came to be what it is today.
While the earliest forms of health insurance came to be in 1850 and were similar to today’s workers’ comp, the first modern policies were not formed until 1930, less than 100 years ago. Before WWII, health insurance was not a fundamental right and the exchange of medical goods and services were handled much differently than they are now.
Vintage illustration of the all powerful Family Doctor by Norman Rockwell from Upjohn Advertisement 1943
In the 1940s, doctors and their God-like reputations were on the rise. The popularity of alternative medicine had slowed and American doctors were wildly influential, making more than 2.5 times the salary of an average worker. Most providers conducted business in solo practices, where patients paid out of pocket for the services they received - in other words, they paid cash for their healthcare. In hospitals, a two-tiered system emerged. Wealthier patients paid for certain luxuries, like private rooms, while other ‘charity’ patients were treated in large, open spaces.
Black and white photo of an open hospital treatment space, designed for ‘charity’ patients.
As a result of the high labor demands brought on by the war (which spanned from 1939-1945), along with the strict wage control enacted by the government, employers had to come up with other methods of compensation with which to attract workers. By this time, the War Board had declared benefits like paid time off and health insurance to be considered ‘fringe benefits.’ thereby acting as the perfect loophole to incentivize and attract talent. This marked the first time health insurance, for families and for individuals, was tied to employers. The modern definition of health insurance was born.
President Truman proposed an optional public health insurance system in 1945.
In 1945, President Truman proposed an optional public health insurance system where participants would pay monthly for coverage of all time-of-need medical expenses. The government would then cover the cost of services incurred by any physician who chose to join the system. The plan would also replace member wages lost during the time of illness or injury. While the policy was popular with Americans, it was considered socialism by a number of prominent institutions, including the AMA.
Aside: The ideal of an ‘optional’ health insurance system is an interesting one and demonstrates a lack of understanding of how insurance companies work. If the government decided to make healthcare ‘optional’, only the sick would enroll and would subsequently, over-utilize. If that were to happen, premiums in the years to come would increase to compensate. Healthy people, thinking it unfair that they are paying for services they’re not using, would un-enroll, leaving an ever sicker population to over utilize even more. This is called a rate spiral. The way health insurance companies work now is purely based on averages. They bank on people consistently paying into a large pool that is not used by everyone all at once. The word ‘optional’ is one of the differences between Truman’s plan - and Obama’s.
By 1960, health insurance enrollment had skyrocketed to more than 140 million.
By the late 1950s, labor unions were aware of the future never-ending political battle centered around healthcare and opted to pursue a less desirable but more realistic goal: employer sponsored coverage. The private sector successfully attracted the best, white-collar employees by incorporating such ‘fringe benefits,’ and the public soon followed. By 1958, the number of employees enrolled in employer-run insurance plans had skyrocketed from 20.6 million in 1940, to more than 142 million, or ~75% of American lives.
Over the next few years, issues relating to age, cost and availability of healthcare coverage surfaced. Medicare and Medicaid were signed into law in 1965 by President Lyndon B. Johnson, thereby creating publicly run insurance for the elderly and the poor.
President Lyndon B. Johnson signed Medicare and Medicaid into law in 1965.
Since 1965, there’s been a relatively large lull in healthcare historical events. Patients experienced higher costs in the ‘80s as a result of more expensive technology and the first signs of system wide cracks; which were quickly and reactively patched. Managed care plans and Health Maintenance Organizations (HMOs) were created in direct response to the high cost of healthcare, but they only served as a temporary solution to the problem.
A universal healthcare system was proposed once again in 1993 by President Bill Clinton - but it was quickly squashed by Congress. By 2010, with the recession in full swing and the unemployment rate close to 10%, nearly 50 million Americans were uninsured for at least a portion of the year. As a result, prices continued to rise. That brings history close to the present with the Affordable Care Act of 2010. This plan was enacted to increase both the affordability and quality of health insurance, decrease the number of uninsured Americans by expanding insurance coverage, and reduce healthcare costs for people and the government.
In sum, the history of employee sponsored health insurance in America stems from a temporary solution to a war-time problem. This recruitment loophole led to generations of employer-reliant healthcare when really, direct employer involvement in employee health makes little sense. Employees shouldn’t feel shackled to jobs purely because of health insurance access, just like employers shouldn’t be completely responsible for solving employee health problems. What might happen to the structure of both business and healthcare if these two entities were separated? For now, we can only speculate but time will tell as will the future success - or failure of Obamacare.
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Tags: Consumer, Enterprise