At the end of my last column I mentioned a big factor in the growth of health insurance in the United States was a result of wage and price controls set by the federal government during the Great Depression. While other factors existed, something I didn’t note previously was the fact health insurance in one form or another (before the employer-provided option) was available before the wage and price issue created the employer-based model.
At the turn of the century under common law, employers were responsible for injuries to employees sustained in the workplace. Employers defended themselves citing employee negligence, co-worker error and assumed risk that came with the job. (Let’s face it, work was much riskier then). This led to our courts being swamped with cases trying to prove guilt and obtain awards for those injured. Out of this came the first employer provided health insurance — more commonly known as worker’s compensation — which was passed by many state governments. But as with all laws, worker’s compensation laws were written to benefit one constituency over another. Employers that could afford to purchase insurance were guaranteed the right to use the aforementioned defenses when a claim was filed. Employers that could not were denied the same defenses.
Along with the companies that wanted these laws to protect their interests, “organized medicine” at the time (read American Medical Association in today’s world) also supported these laws. But only when it thought the laws would benefit its members. The opposite actually occurred as employers hired their own doctors for their employees’ injuries and many private doctors actually saw a reduction in patients with workplace injuries. Once again, an overreaching law had unintended consequences in the marketplace, even though the ones it affected wanted the government to enact the law to benefit them personally.
This history is important to note because also during that time was the rise of labor unions. But you’d be surprised to note many labor unions, along with businesses and the American Medical Association (which was now in existence), opposed the government’s first attempts at mandated health insurance via compulsory contributions from the employee, employer and government. While this was a state-by-state issue that was never put into effect, it laid the groundwork for the mess we have today. You might find it odd that businesses said no to these plans because they really didn’t lower costs (not nearly as much as their much-favored, government-sponsored worker’s compensation) and many unions opposed it because they still thought the role of the union was to get higher wages for all employees so their members had more wages to spend and members knew best how to spend them. Finally, the previously mentioned AMA opposed this kind of law because it interfered with the patient-doctor relationship. Compare that today in how these same folks still use the government to try to fix a private sector, marketplace problem.
It also should be noted there were other types of private insurance in many areas dubbed “sickness funds.” These funds were established by groups of workers, employers and fraternal organizations and ran very simply. Members contributed a small percentage of pay (back then about 1 percent) to a fund that paid members’ lost wages who were too sick or injured to work. These funds — which would be similar to an AFLAC policy today — were popular with members. Satisfaction with how well these plans worked can also be attributed as to why government-mandated health insurance failed in its first foray into the marketplace.
Then came the stepping stones to the large insurance carriers we have today — along with massive government regulation. During the Great Depression, the need for goods and services decreased exponentially and hospitals were affected because hospitals supplied both and folks simply couldn’t afford them. Entrepreneurial hospitals began creating ways to gain back business. One way was to create what we would now call preferred provider organizations in which members paid a monthly fee in exchange for hospital services, some as individual hospitals, some as associations of hospitals. The individual plans spurred competition between local hospitals while the associations provided choice. Although doctors were left out due to the AMA opposition to insurance plans, the plans grew in popularity. As they grew, hospitals needed a way to manage them. Hello Blue Cross.
The Blue Cross Commission set the rules for these associations where they had to be non-profit, covered hospital charges only, along with a few other platitude-based ideals and allowed for a free choice of physician — all in all not bad things. One bad thing, however, was that Blue Cross established exclusive marketing areas for each of these groups, which set the stage for regulatory based competition. But the initial death knell of private-run health insurance came when the New York state insurance commissioner determined these plans must be viewed as insurance, which greatly increased government oversight and meddling.
And of big insurance and government writing insurance legislation together.