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The history of health insurance – how we got to where we are today

Before WWII, healthcare was paid for like any other service. If you went to the doctor’s office, he did what he needed to do and you paid him a chicken and a jar of peach preserves. A house call might cost two chickens, and delivering a baby (at home), maybe a ham and a bushel of corn.   When people got sick, they generally were treated at home. If they were really sick and went to the hospital, they paid in cash or went to a charity hospital paid for by the state or religious organizations. Health insurance was available, but fairly rare.   When purchased it worked very much the same as other ‘catastrophic’ insurance policies like homeowners or auto insurance; people paid for their own minor and preventative care, but if they experienced a medical emergency, the insurance company paid beyond the deductible.

During WWII, American industry converted to a wartime economy (producing tanks and guns instead of plowshares), and the government was the primary consumer of most manufactured goods. They paid for many of these on a cost-plus basis, and to control costs, wage and price freezes were enacted. Towards the end of the war, as a concession to industry, the War Time Labor Relations Board allowed employers to provide employer sponsored health insurance to both employees and their entire family as a tax-free fringe benefit to attract and maintain employees. That act alone ‘tipped’ the population from health insurance being rare to being the norm.

From WWII until about the 1980’s, employer sponsored health insurance continued to be the norm for virtually every employee. Employers loved it because it helped them maintain loyal employees and was a tax-deductible expense. Employees loved it because they paid little or nothing for healthcare for themselves or their families – it was a tax-free benefit. Gradually, more and more services were covered but as a % of fully burdened employee expenses, it was still relatively low so everyone was happy.

Starting in the 1980’s, however, the employer sponsored healthcare insurance model began to erode due to several factors;

  • The employee base was aging, resulting in higher consumption of healthcare services
  • Employees became much more portable. They no longer stayed with their first or second employer until retirement.
  • Costs skyrocketed. Access to new technology resulted in astronomically increases consumption and costs. Interestingly, this was contrary to the impact of new technology in virtually every other sector of the economy, where advances in technology resulted in costs decreasing while quality increased.

As a result of these factors, the cost of providing health insurance to employees first became a concern, then a source of panic. Employers reacted by enacting one, more, or all of the following steps over time;

  • By ceasing to pay premiums for families, and shifting that cost to the employee.
  • By paying less than 100% of the employee premiums, and shifting the rest of the cost to the employee.
  • By increasing deductibles, co-pays, and annual limits.
  • By decreasing benefits.
  • By opting for smaller, more exclusive provider networks.
  • By not providing health insurance at all.

The net result of any or all of these changes was significant increases in out of pocket expenses and financial risk for the employee and their family.

In the 1960’s, President Truman signed legislation bringing Medicare into being. Medicaid, at the state level, followed shortly after.

 

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