This is the fifth post in a multi-part series, Insurance Foundations.
There’s no doubt that, in today’s United States, there is a serious crisis in health care accessibility. One need only look at the news on a given day to find a story about someone who can’t afford a necessary medical procedure; litigation involving health care providers, health coverage carriers, or both; or briefs about state and federal legislation aimed at “solving the problem.”
In my last post, I explained that what we commonly call health insurance is, at this point, better framed as health coverage. That logically leads to the next set of questions: when did the change happen? Why did it happen? And, perhaps most importantly, what might happen next?
To answer those questions, it’s best to take a step back and look at how health insurance in the United States actually developed. We’ll begin with a brief history of health coverage in the United States.
Evolution of Health Coverage Plans
The earliest health insurance plans were narrowly focused. They primarily covered hospitalization: a rare, high-cost event that was difficult for individuals to afford on their own. By contrast, care provided by physicians and physician-adjacent providers (midwives, pharmacists, and others) was generally affordable enough to be paid out of pocket.
It’s worth noting that the first plan that is identifiably health insurance, the Baylor Plan (1929), was called a “prepaid hospital plan.” In modern terms, it was conceptually similar to what would later become HMOs, though much simpler in structure. Other analyses have compared it to an early PPO model, reflecting how difficult it is to map modern categories onto these early designs.
The Baylor Plan, by the way, still exists in an evolved form. Its modern successor is the Baylor Scott & White Health Plan.
The model began to change during the Great Depression. As incomes fell, even routine medical care became difficult for many individuals to afford. In response, new forms of coverage emerged, which were known as major medical plans. These plans extended beyond hospitalization to include physician services. Some of the earliest of these arrangements were developed by employer groups in industries such as lumber and mining.
Over time, these two strands of coverage became formalized. Prepaid hospital plans evolved into what became known as Blue Cross plans, while physician service plans became Blue Shield plans. When Medicare was later established in 1965, this same structural division was carried forward: Part A reflects the hospital model, and Part B reflects the physician services model. (The U.S. government initially partnered with both Blue Cross and Blue Shield to offer these plans).
During the 1960s, the Blue Cross and Blue Shield plans began merging together in several markets. The nationwide Blue Cross Association and the National Association of Blue Shield plans came under joint management in 1978, and merged completely in 1982. Today they are known as the Blue Cross and Blue Shield Association (BCBSA), which isn’t a single carrier but is rather an association of state and local plans under the Blue Cross and Blue Shield names.
During the mergers of the prepaid hospitalization and major medical plans — not all of which were Blue Cross Blue Shield plans anymore — insurance carriers realized that there would be a considerable gain in efficiency if the two plans were consolidated under a single policy. The new products, which began appearing in the 1950s, were referred to as comprehensive major medical plans.
As coverage expanded from hospitalization, to physician services, to comprehensive major medical plans, the line between insuring against risk and paying for expected care began to blur. The exact point at which health insurance became health coverage is debatable, but most industry experts date it to either this transition or to the rise of managed care in the 1970s.
Tying Health Coverage to Employment
As I noted above, two of the earliest examples of health coverage — the Baylor Plan and the mining/lumber industry physician service plans — were developed in conjunction with employer groups. (The Baylor Plan was initially offered to teachers.) Thus, health coverage in this country has always been tied to employment to some degree. However, prior to World War II, it was equally common to obtain health coverage through non-employment-related means.
One of the earliest non-Blue carriers that offered health coverage was Liberty Mutual; and Aetna began as a life and fire insurance company. Today, Liberty Mutual is strictly a property/casualty carrier. Aetna moved into health coverage in the 1960s and later spun off its property/casualty products.
During World War II, primarily due to labor shortages driven by military enlistment, employers found themselves increasingly needing to compete for labor. In order to protect the economy from inflation (the Great Depression was a recent memory), the Stabilization Act of 1942 was passed to control prices and wages. While the aim of protecting the economy was successful, the inability to compete based on wages forced employers to find other incentives to attract labor.
Health coverage quickly became one of the most effective alternatives, and because it was not treated as taxable income (due to a 1945 administrative ruling that was officially codified in 1954), it offered advantages wages could not. By the end of the war, the majority of employers were offering health coverage as a “fringe benefit,” that is, compensation that wasn’t in the form of a direct cash payment. Worker demand for employer-based “group” health coverage continued into the 1950s and was a standard by 1960.
The 1970s began a tumultuous time in health coverage in the United States that, as of today, has yet to subside. We’ll explore the history from the 1970s forward in the next post.