The Healthcare Breakdown No. 024 - Breaking down the origins of health insurance and how it makes your life suck today
Brought to you by Wolverine, the first origin story
What we’re breaking down: Health insurance origins and evolution
Why it matters: Lessons from the past help predict the future or help us create a better one
Read time: How long it takes you to do a medium-hard Sudoku (people still play that right?) (8 minutes for real though)
All right beautiful people. You still have one more day ahead of you for this long weekend, so grab that hair of the dog, put on your reading slippers and settle in.
This episode is in honor of Labor Day. Where we celebrate laboring and how awesome we are for working hard and growing the economy. Yay, us.
Now, I am no historian. So if you’re gearing up for 79 pages of Walter Isaacson style detail or Doris Kearns Goodwin fact spewing, you’re in the wrong place.
If you’re looking for an entertaining, probably mostly true stroll down history lane, you’re for sure in the right place.
Today we are talking about health insurance. Where it came from, how it evolved into the monster it is today, and why it matters. And since I basically write stream of consciousness style, I may even give some suggestion as to a better path forward at the end. Maybe.
Why is this in honor of Labor Day you ask? Well there basically is no insurance without employment these days. So, it just felt right.
Off we go…
Let’s go back to a sleepier time in history, a more depressing time, to a small town called Dallas, Texas in 1929.
One plucky and astute vice president of something important at Baylor Hospital noticed something troubling on the books as the realities of the depression started kicking in. He noticed that revenue and admissions were down. He also noticed the amount of unpaid bills were up.
When you are the VP of important things, this is not a good thing to notice. More importantly, you are the person who needs to do something about it.
Who was this observant white guy? Well, Justin Ford Kimball of course.
This is him:
In effort to get more heads in beds, his revenues and collections back up, he came up with a masterful plan. One that at the time, seemed reasonable and wholly innocuous. One might even call it down right innovative and wise.
He devised the Baylor Health Plan. I think they called it that, I don’t know. The plan was simple. $0.50 per month that would cover a 21-day stay at the hospital. Anything beyond the 21-days, $5.00 per day.
Basically, the same amount it costs today.
Fun fact: with inflation that $0.50 a month would amount to $8.94 today.
Right, totally the same.
The plan wouldn’t stay the Baylor Plan for long and eventually became known as, Blue Cross.
Anyways, his foray into the world of plan design worked. Originally targeting teachers in the Dallas area, the plan grew and thousands of teachers enrolled. The teacher angle made sense, since Baylor was a university hospital and teachers get all those pesky kid germs.
The success of the program spread and other hospitals began adopting the model. Generally offering a set hospital stay for a prepaid monthly amount.
Here’s a fun tidbit from the annals of history that gets lost today. The Baylor plan did advertise and one of it’s pitches was this: "Baylor uses no sales agency or middlemen, but prefers to deal directly with each group so that all group hospitalization fees paid may be used only for hospital care of members and not for any personal profit.”
We’ll come back to this.
As the model grew, the AHA (American Hospital Association) took interest. How could they make this a thing for hospitals all over the country? They began endorsing the idea and drafting legislation (of course) around networks versus individual hospitals providing coverage. The reasoning of course would be that individuals have more choice as to where they receive care.
The reality of all of this though, is that hospital revenue was dragging and this was a good way to get consistent cash in the door up front. Float baby. Float.
Get the money in first, provide the service later. Magic.
The original architects of health insurance plans were the hospitals themselves, strongly backed by the AHA. The whole point was to ensure revenue and receive cash up front.
Now, you may be wondering, was this just for hospitals? What about everything else?
Well, there wasn’t much “else” during this time. There were however, and gloriously still, independent physicians. In fact, that’s all physicians were at this time. They, did not take kindly to the growing power of hospitals and did not like the idea of prepaid anything.
However, times began to change in the sleepy logging towns of the Northwest in the late 30’s.
As you can imagine, being a logger in the pacific northwest, where it rains more than 365 days a year, in the, well, less than sanitary conditions of the 1930’s, it was easy to get sick.
Logging companies noticed. They also noticed that their workers couldn’t afford medical care. So what did they do? Well, they started contracting with physician groups to prepay for medical care for their workers.
And so, physician only health insurance was born. To ensure that workers could, well, work. No one likes a logger who can’t log the hours.
Get it? “Log” the hours. I’m a dad, it’s cool.
Blue Shield, they called it.
As it happens, it was also popular and quickly grew.
From humble beginnings, the framework for our wonderful health insurance system was set.
Blue Cross for hospital coverage. Blue Shield for medical coverage.
But it was still the 30’s and 40’s. People weren’t into hospitals and medical care. In fact, you mostly went to those places as a last ditch effort not to die. Medicine wasn’t the sophisticated practice it is today. Though it was better than like 1853 I guess.
Nonetheless, in early 1940 only about 9% of the US population had health insurance.
Then something happened.
World War II to be exact.
As the United States turned it’s war machine back on, saving itself from the Great Depression and the world from evil, genocidal, dictatorship, something potentially catastrophic was happening economically at home.
Inflation was beginning to rage and many companies were going out of business. Part of the reason is because hundreds of thousands of workers were not in the US to work. They were overseas fighting. Rosie the riveter was picking up the slack.
There was a significant labor shortage. Larger companies could take advantage of this by paying higher wages and stealing workers. Despite that being good business, it was undermining the economic recovery efforts and to an extent, the war efforts.
This led to the 1942 Stabilization Act. Great name. This act used emergency powers to freeze wages.
But the big dogs aren’t dumb. They had heard of this insurance stuff and thought, maybe we can entice people with benefits outside of money.
Well, it worked.
By 1950, 50% of Americans had employer sponsored health insurance. It was 66% a decade later.
What started as a move to entice employees, has become our shackles.
Not to be hyperbolic or anything. The reality though is relatively grim. People are stuck in jobs, with little to no wage growth because of health insurance.
To wrap this jaunt down memory lane up, three Major step changes led us to where we are today:
Hospitals needed to secure revenue and improve collections
Physicians didn’t want hospital power to reign unchecked and employers needed workers to work
Wages froze, so large companies used health insurance to lure talent
In reality, health insurance has always been about one thing: Money.
Today, it’s clearer than ever that’s what it’s all about.
And since you come here for numbers in addition to my whacky writing style, here are a few to see where these humble beginnings have landed us:
All the billions.
How do we get ourselves out of this mess?
Perhaps we should look at history to give us some example.
"Baylor uses no sales agency or middlemen, but prefers to deal directly with each group so that all group hospitalization fees paid may be used only for hospital care of members and not for any personal profit.”
Now, profit is not inherently bad. But adding no value by leveraging legal and statutory mechanisms to your advantage to generate obscene personal and organization profit is bad. Very, very bad.
It’s subverting the economy if you prefer that. It’s also very literally kills people.
So the path…
No middlemen. Direct.
Employers buy $1.2T worth of healthcare each year. Imagine if every employer waived goodbye to their middlemen?
The government buys $1.6T worth of healthcare each year.
Leave out United. Leave out Cigna. Leave out Anthem. Leave out Elevance or Anthem, or whatever they’re called now. Is Humana still a thing? Well the heck with ‘em. Leave ‘em out.
What service do they even provide?
Denials. Delays. Limiting. Gate Keeping.
Health insurance needs healthcare to be expensive.
If we knew, people and large employer groups, that healthcare was actually affordable, then health insurers no longer have a leg to stand on.
Oh right! Labor Day! If we really want to continue to have a strong economy and support workers and the labor that made the US a great world leader (grain of salt), then we need to decouple health coverage from employment.
It shackles us unfairly to jobs that can treat us poorly because we need coverage. Coverage because healthcare has become artificially expensive.
Just ask the nurses at Robert Wood Johnson who are on strike but about to lose their benefits. When that deadline looms, many will have to capitulate, returning to unsafe working conditions because of a few historical twists and turns.
Time for change.
See you out there.