History of Health Insurance in the United States
Health insurance as we generally think of it in the United States began with the Great Depression in the 1930s. In this artilce, we review the history of health insurance and demonstrate how that history is linked to current health insurance developments. Predating private health insurance were efforts at government-sponsored coverage for workplace injury. The Great Depression led hospitals and then physicians to implement forms of insurance as means to assure payment for services. Ironically, conventional insurance and managed care were developed at this same time.
The advent of World War II, the growth of the labor movement, and the federal tax code all fostered the growth of employer-sponsored insurance coverage. Medicare was introduced in 1965 to provide coverage insurance to older age group citizens; it mimicked the private coverage common at the time. Commercial insurers aggressively competed with others by offering lower premiums to larger employers, based on their lower claims experience. Government preemption of state insurance laws led to dramatic growth in self-insured employer plans.
The 1980s saw the development of managed care, prompted by rapidly increasing healthcare costs and the emergence of self-insured employer plans. Managed care’s ability to selectively contract revolutionized healthcare markets by introducing price competition and led to a backlash against managed care. Currently, healthcare costs are again rising rapidly, and efforts are underway to encourage insured individuals insurance to pay more out-of-pocket in an effort to contain costs.
• Private health insurance in the United States began as efforts by hospital and physician providers to deal with the revenue consequences of the Great Depression.
• The forerunners of managed care plans emerged at the same time as conventional insurance but were subject to serious challenge by physicians, who were concerned about the potential loss of income from the inability to price-discriminate among patients with different demands for care.
• The growth of health insurance over the middle of the 20th century was spurred primarily by the tax-exempt status of employer-sponsored health insurance. Wage and price controls during World War II, the rise of labor unions, and the declaration of health insurance as a proper focus of collective bargaining were other key factors.
• Commercial insurers were successful in the insurance market because they introduced experience rating, which allowed them to offer lower-priced coverage to groups with lower expected claims experience. The rest of the industry followed suit.
• The enactment of Elderly Medicare Program in 1965 expanded insurance coverage to older Americans. The current Medicare and Medicaid program reflects the nature of private health insurance in the 1960s. The allowable cost reimbursement system, largely borrowed from the provider-designed Blue Cross and Blue Shield plans, entrenched cost-based reimbursement for 20 years.
• The passage of the Employee Retirement Income Security Act (ERISA) in 1974 led to the growth of self-insured employer health plans and all but assured competition in the risk-bearing segment of the conventional insurance market.
• The growth of managed care in the 1980s and 1990s was the result of the introduction of selective contracting as a response to growing health care insurance costs. Selective contracting introduced price competition into healthcare markets.
• The 1990s and 2000s saw consolidation among healthcare providers and a backlash against the utilization management of managed care plans. Both actions undercut the ability of managed care plans to selectively contract.
• Consumer-driven health plans offering a high-deductible insurance plan and a tax-sheltered health spending account were emerging in the mid- 2000s.