Health Care in America – an overview of its history to its current state and new Government reforms

Health Care

There is a lot of “noise” surrounding the proposed health care reforms by the Obama government, and as it tends to happen in an important and potentially historical moment of government reform, facts and opinions get mixed up to blur the truth.  Frankly, it is a complex topic that is neither easy to explain through a couple of bullet points nor easy to convey satisfying the attention span of the 140 character-limit ubiquitous twitter tweets, which automatically makes it one of those topics afflicted with ignorant rhetoric whipping up even more ignorant outrage and indignant reactions.

So, all politics aside, let us look at the current health care system in America and what we know Obama is proposing so far.  In order to understand health care in the US, we have to start from its origins and follow its history to how we got here.

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Please Note:  Everything you read below (except for the OPINION section at the very end) is compiled from the following sources.  I encourage you to visit them if you are looking for additional details beyond what you can find below.

[Economic History Association:  Health Insurance in the United States]

[PBS: Health Care Crisis Timeline]

[History of Blue Cross Blue Shield]

[History of American Health Insurance: University of Pittsburgh Supercourse]

[National Coalition on Health Care: Health Insurance Costs]

[RAND COMPARE: US Health Care Today]

[Harry S. Truman Library & Museum: President Truman’s Proposed Health Program]

[The White House: Issues.Healthcare – The Obama Plan]

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HISTORY

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1900 – 1920:

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Lewis Hine, Girl Working in a Carolina Cotton Mill (1908)

Prior to 1920, most patients got their treatment in their homes including any required surgeries and while hospitals existed, they didn’t operate in their current modern form up until antiseptic methods were well established.  Organized medicine in America emerged with American Medical Association (AMA) becoming a powerful force with increased membership from physicians across the country with the formation of state and local associations.  With medical technology still in its early stages, people had very low medical expenditures.  The true cost of illness was not that of medical care but the fact that sick people who couldn’t work were not paid and a study conducted by the State of Illinois in 1919 reported that lost wages due to illness were 4 times larger than the medical cost of their treatment.  Due to this reason, many didn’t believe in health insurance, but purchased “sickness” insurance similar to todays “disability” insurance for getting income coverage during their illness.

The low demand for health insurance at the time was matched by the unwillingness of commercial insurance companies to offer private health insurance policies. Commercial insurance companies did not believe that health was an insurable commodity because of the high potential for adverse selection and moral hazard. They felt that they lacked the information to accurately calculate risks and write premiums accordingly. For example, people in poor health may claim they to be healthy and then sign up for health insurance and a problem with moral hazard may arise if people change their behavior — perhaps engaging in more risky activities — after they purchase health insurance.

Modern health insurance and its implementation started in Germany, under Chancellor Bismarck in 1883 with 2 insurance laws put into effect.  By 1912 most European nations including England had passed similar legislations, but the demand for health insurance in the US was still low.   There were proposals sponsored by the American Association for Labor Legislation (AALL) to enact compulsory health insurance in several states, but they failed because popular support for the legislation was low due to low demand for health insurance in general and physicians, pharmacists and commercial insurance companies were strong opponents of the legislation.  Physicians opposed the legislation because they feared that government intervention would limit their fees.  Pharmacists opposed the legislation because it provided prescription drugs they feared would undermine their business. While commercial insurance firms did not offer health insurance during this period, a large part of their business was offering burial insurance to pay funeral costs.  Under the proposed legislation, commercial firms would be excluded from offering burial insurance.  As a result, they opposed the legislation, which they feared would also open the door towards greater government intervention in the insurance business.  Finally, the US entering the war in 1917 pretty much put an end to AALL’s efforts due to a tide of an anti-German sentiment throughout the country, with the opponents of federally funded medical care seizing the moment to claim that this was a German concept that should be banned from the US.  State medical societies who had previously favored some form of government funded health insurance turned violently against it.

1920 – 1940:

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A Tuberculosis clinic in 1930

With continued urbanization, wide-scale usage of telephone, the assembly line production of cars, and the emergence of antiseptics and new medications, American hospitals became more scientific institutions and medical care shifted from individual homes to hospitals.  By the 1920s, prospective patients were influenced not only by the hope of healing, but by the image of a new kind of medicine – precise, scientific and effective and this scientific aura began to develop in part as licensure and standards of care among practitioners increased, which led to an increase in the cost of providing medical care and resulted in increased hospital care costs for the individuals.

Back in 1904, AMA formed a Council on Medical Education (CME) to standardize the requirement for medical licensure.  CME invited Abraham Flexner of the Carnegie Foundation to evaluate the status of medical education.  According to Flexner’s report, published in 1910, the prevailing methods of medical education had resulted in enormous over-production at a low-level and that the situation can be more effectively met by a reduced output of well trained physicians than further inflation of an inferior product.  In other words, he was advocating stricter requirements, better facilities, higher fees and tougher standards.  Following that, number of medical schools in the US dropped from 131 in 1910 to 81 in 1922.  So, the increased health care demand coupled with a decreased physical supply increased the cost of physician service significantly in the 1920s.

After Flexner’s report was published, with a further focus on stricter accreditation, the American College of Surgeons (ACS) was founded which imposed strict standards of membership.  Of 692 large hospitals examined in 1918, only 13% were approved by ACS, but by 1932, 93% of 1600 large hospitals examined met ACS requirements, again an improvement that came with an overall increase in medical cost.  A typical physician in 1913 averaged only $500 to $700/year, only a little more than the income made by the American manual laboring classes.  Not only did their earnings begin to rise ever since, but also they rose in social stature with these changes in supply and demand.

What was once viewed as a problem of lost wages due to sickness was now being viewed as one of dramatic increase in the cost of medical care for the American middleclass, and due to this in 1927, the Committee on the Costs of Medical Care (CCMC) was formed to investigate the medical expenses of American families. Comprised of physicians, economists, and public health specialists, the CCMC published 27 research reports, offering reliable estimates of national health care expenditures. According to one CCMC study, the average American family in 1929 had hospital expenditures comprising 14% percent of the total bill.  By 1934, Michael M. Davis, a leading advocate of reform, noted that hospital costs had risen to nearly 40% of a family’s medical bills, illustrating the dramatic rise in the American hospital care costs.

Justin Ford Kimball

As this demand for hospital care increased in the 1920s, in 1929, against the backdrop of the great depression, a group of Dallas teachers contracted with Baylor University Hospital to provide 21 days of hospitalization for a fixed $6.00 payment, essentially $0.50 per month.  Dr. Justin Ford Kimball, himself a former school superintendent, an administrator at Baylor Hospital, initiated this non-for-profit Baylor plan to ensure the low-paid teachers could afford to pay their bills, thus forming the first prepaid hospital plan which was the genesis for the many Blue Cross plans later on.

By the end of the 1920s, deep into the depression, only 200 corporations controlled over half of all American industry with the richest 1% owning 40% of the nation’s wealth while the bottom 93% were experiencing a 4% drop in real disposable per-capita income.  During the 1930s, when consumers and hospitals were still suffering from falling incomes, these plans were advantageous to both the families and the hospitals and American Hospital Association (AHA) encouraged hospitals to participate in them citing mutual benefit with the plans providing hospitals a source of income during falling revenues and providing consumers affordable payment options for hospital care.  With the early success of these plans, deepening financial woes of the hospitals lead a number of hospitals in Sacramento, California to create the first multi-hospital prepaid insurance plan.  It quickly spread all over the country and were eventually combined under the auspices of AHA under the name of Blue Cross.

Walker Evans, Sharecropper's Family, Hale County AL (1936)

Because single hospital plans resulted in greater competition among the hospitals, the AHA designed the Blue Cross guidelines to reduce price competition among hospitals.  Any prepayment plans seeking Blue Cross designation required to provide subscribers with free choice of physician and hospital, thus eliminating single-hospital plans from consideration.  These Blue Cross plans were considered to be in the best interest of society since they often provided benefits to low-income individuals, hence they were exempted from the usual insurance regulations by special state level enabling legislation allowing them to act as non-profit organizations and enjoyed a tax-exempt status.

Blue Cross and pre-paid hospitalization policies were successful for the hospitals and the consumers, but the physicians were worried that a third-party system of payment would lower their incomes by interfering with the physician-patient relationship and restricting the ability of physicians to price discriminate.  So, they were slow to adopt a pre-paid plan, but due to the popularity of the Blue Cross plans, some physicians feared that hospitals would move into the realm of providing insurance for physician services, thus limiting physician autonomy. In addition, advocates of compulsory health insurance looked to the emerging social security legislation as a logical means of providing national health care. Compulsory health insurance was even more anathema to physicians than voluntary health insurance. It became clear to them that in order to protect their interests, they would be better off pre-empting both hospitals and compulsory insurance proponents by sculpting their own plan. They began to organize a framework for pre-paid plans that covered physician services.  AMA adopted a set of ten principles in 1934 that focused on ensuring voluntary health insurance would remain under physician supervision and not be subject to the control of non-physicians as well as provide them the ability to charge different prices to different customers based on their ability to pay.

Blue Cross Blue Shield

Just like the tax-exempt benefits enjoyed by the plans under Blue Cross due to state legislation, these prepayment plans were also tax exempt and free from the provisions of insurance statutes.  In 1939, the California Physicians Service (CPS) began to operate as the first prepayment plan designated to cover Physicians’ services.  To further these efforts, the AMA encouraged state and local medical societies to form their own prepayment plans. These physician-sponsored plans ultimately affiliated and became known as Blue Shield in 1946.  Blue Shield plans offered medical and surgical benefits for hospitalized members, although certain plans also covered visits to doctors’ offices. While some plans were like the Blue Cross plans in that they offered service benefits to low-income subscribers (meaning that the plans directly reimbursed physicians for services), most Blue Shield plans operated on a mixed service-indemnity basis. Doctors charged patients who were subscribers to Blue Shield the difference between their actual charges and the amount for which they were reimbursed by Blue Shield. In this manner, doctors could retain their power to price discriminate by charging different prices to different patients.

1940 – 1960:

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Harry Truman

In an attempt to provide national health care, in 1945, only 7 months into his presidency, Harry S. Truman sent a Presidential message to the United States Congress proposing a new national health care program. In his message, Truman argued that the federal government should play a role in health care, saying “The health of American children, like their education, should be recognized as a definite public responsibility.” One of the chief aims of President Truman’s plan was to insure that all communities, regardless of their size or income level, had access to doctors and hospitals. President Truman emphasized the urgent need for such measures, asserting that “About 1,200 counties, 40 percent of the total in the country, with some 15,000,000 people, have either no local hospital, or none that meets even the minimum standards of national professional associations.”

President Truman called for the creation of a national health insurance fund to be run by the federal government. This fund would be open to all Americans, but would remain optional. Participants would pay monthly fees into the plan, which would cover the cost of any and all medical expenses that arose in a time of need. The government would pay for the cost of services rendered by any doctor who chose to join the program. In addition, the insurance plan would give a cash balance to the policy holder to replace wages lost due to illness or injury.  AMA launched a spirited attack against the bill, capitalizing on fears of Communism in the public mind. The AMA characterized the bill as “socialized medicine”, and in a forerunner to the rhetoric of the McCarthy era, called Truman White House staffers “followers of the Moscow party line”.  Organized labor, the main public advocate of the bill, had lost much of its goodwill from the American people in a series of unpopular strikes. Following the outbreak of the Korean War, President Truman was finally forced to abandon the proposal, and although he was not able to create the health program he desired, he was successful in publicizing the issue of health care in America.

As mentioned earlier, Blue Cross and Blue Shield were first to enter the health insurance market because commercial insurance companies were reluctant to even offer health insurance early in the century as they feared they would not be able to overcome problems relating to adverse selection, so that offering health insurance would not be profitable. The success of Blue Cross and Blue Shield showed just how easily adverse selection problems could be overcome: by focusing on providing health insurance only to groups of employed workers. This would allow commercial insurance companies to avoid adverse selection because they would insure relatively young, healthy people who did not individually seek health insurance. After viewing the success of Blue Cross and Blue Shield, commercial health insurance companies began to move rapidly into the health insurance market. As a result, the market for health insurance exploded in size in the 1940s, growing from a total enrollment of around 20 million in 1940 to nearly 140 million in 1950.

They key advantage the commercial companies had over Blue Cross and Blue Shield was that the competitiveness of Blue Cross and Blue Shield was limited by the fact that their non-profit status required them to community rate their policies.  Under a system of community rating, insurance companies charge the same premium to sicker people as they do to healthy people. Since they were not considered to be nonprofit organizations, commercial insurance companies were not required to community rate their policies. Instead, commercial insurance companies could engage in experience rating, whereby they charged sicker people higher premiums and healthier people lower premiums. As a result, commercial companies could often offer relatively healthy groups lower premiums than the Blue Cross and Blue Shield plans, and gain their business.  This resulted in a commercial health insurance business boom to the extent that by early 1950s, commercial plans had more subscribers than Blue Cross and Blue Shields.  In 1951, 41.5 million were enrolled with commercial insurance companies and 40.5 million with Blue Cross and Blue Shields.

United Steelworkers Union

During World War II, wage and price controls prevented employers from using wages to compete for scarce labor. Under the 1942 Stabilization Act, Congress limited the wage increases that could be offered by firms, but permitted the adoption of employee insurance plans. In this way, health benefit packages offered one means of securing workers. In the 1940s, two major rulings also reinforced the foundation of the employer-provided health insurance system. First, in 1945 the War Labor Board ruled that employers could not modify or cancel group insurance plans during the contract period. Then, in 1949, the National Labor Relations Board ruled in a dispute between the Inland Steel Co. and the United Steelworkers Union that the term “wages” included pension and insurance benefits. Therefore, when negotiating for wages, the union was allowed to negotiate benefit packages on behalf of workers as well. This ruling, affirmed later by the U.S. Supreme Court, further reinforced the employment-based system.

Internal Revenue Code (IRC)

This was further validated by the tax treatment of employer-provided contributions to employee health insurance plans. First, employers did not have to pay payroll tax on their contributions to employee health plans. Further, under certain circumstances, employees did not have to pay income tax on their employer’s contributions to their health insurance plans. The first such exclusion occurred under an administrative ruling handed down in 1943 which stated that payments made by the employer directly to commercial insurance companies for group medical and hospitalization premiums of employees were not taxable as employee income. While this particular ruling was highly restrictive and limited in its applicability, it was codified and extended in 1954. Under the 1954 Internal Revenue Code (IRC), employer contributions to employee health plans were exempt from employee taxable income. As a result of this tax-advantaged form of compensation, the demand for health insurance further increased throughout the 1950s.

1960 – current:

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By the 1960s, the system of private health insurance in the United States was well established. In 1958, nearly 75 percent of Americans had some form of private health insurance coverage. By helping to implement a successful system of voluntary health insurance plans, the medical profession had staved off the government intervention and nationalized insurance that it had feared since the 1910s. In addition to ensuring that private citizens had access to voluntary coverage, the AMA also was a vocal opponent of any nationalized health insurance programs, suggesting that such proposals were socialistic and would interfere with physician income and the doctor-patient relationship.

Offering insurance to aged persons age 65 and over provided a means to successfully counter several criticisms that opponents to government-sponsored health insurance had aimed at previous bills. Focusing on the elderly allowed proponents to counter charges that nationalized health insurance would provide health care to individuals who were generally able to pay for it themselves. It was difficult for opponents to argue that the elderly were not among the most medically needy in society, given their fixed incomes and the fact that they were generally in poorer health and in greater need of medical care. Supporters also tried to limit the opposition of the AMA by putting forth proposals that only covered hospital services, which also stemmed criticism that said nationalized health insurance would encourage extensive — and unnecessary — utilization of medical services.

President Lyndon B. Johnson signs the Medicare bill into law in 1965.

The political atmosphere become much more favorable towards nationalized health insurance proposals after John F. Kennedy was elected to office in 1960, and especially when the Democrats won a majority in Congress in 1964. Passed in 1965, Medicare was a federal program with uniform standards that consisted of two parts. Part A represented the compulsory hospital insurance program the aged were automatically enrolled in upon reaching age 65. Part B provided supplemental medical insurance, or subsidized insurance for physicians’ services. Ironically, physicians stood to benefit tremendously from Medicare. Fearing that physicians would refuse to treat Medicare patients, legislators agreed to reimburse physicians according to their “usual, customary, and reasonable rate.” In addition, doctors could bill patients directly, so that patients had to be reimbursed by Medicare. Thus, doctors were still permitted to price discriminate by charging patients more than what the program would pay, and forcing patients to pay the difference. Funding for Medicare comes from payroll taxes, income taxes, trust fund interest, and enrollee premiums for Part B.  Medicare has grown from serving 19.1 million recipients in 1966 to 39.5 million in 1999.

Medicaid card

In contrast to Medicare, Medicaid was enacted as a means-tested, federal-state program to provide medical resources for the poor and destitute. The federal portion of a state’s Medicaid payments is based on each state’s per capita income relative to national per capita income. Unlike Medicare, which has uniform national benefits and eligibility standards, the federal government only specifies minimum standards for Medicaid; each of the states is responsible for determining eligibility and benefits within these broad guidelines. Thus, benefits and eligibility vary widely across states. While the original legislation provided coverage for recipients of public assistance, legislative changes have expanded the scope of benefits and beneficiaries. In 1966, Medicaid provided benefits for 10 million recipients. By 1999, 37.5 million people received care under Medicaid.

Expenditures in both programs rose dramatically in the late 1960s as the programs began to gear up. Then, Medicare expenditures in particular rose sharply during the 1970. This growth in Medicare expenditures resulted in a major change in Medicare reimbursement policies in 1983. Instead of reimbursing according to the “usual and customary” rates, the government enacted a prospective payment system where providers were reimbursed according to set fee schedules based on diagnosis. Medicaid expenditures were fairly constant over the 1970s and 1980s, and did not begin to rise until more generous eligibility requirements were implemented in the 1990s. By 2001, Medicare and Medicaid together accounted for 32 percent of all health care expenditures in the U.S.

CURRENT STATE

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National Health Care Spending:

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National Health Expenditures—Actual and Projected, 1965—2017 (click for source)

National health spending is expected to reach $2.5 trillion in 2009, accounting for 17.6 percent of the gross domestic product (GDP). By 2018, national health care expenditures are expected to reach $4.4 trillion—more than double 2007 spending.

National health expenditures are expected to increase faster than the growth in GDP: between 2008 and 2018, the average increase in national health expenditures is expected to be 6.2 percent per year, while the GDP is expected to increase only 4.1 percent per year.

In just three years, the Medicare and Medicaid programs will account for 50 percent of all national health spending.

National Health Expenditures (NHEs) as a Share of GDP and Average Annual Growth in NHE Versus Growth in GDP, 2005–2017 (click for source)

Medicare’s Hospital Insurance (HI) Trust Fund is expected to pay out more in hospital benefits and other expenditures this year than it receives in taxes and other dedicated revenues.  In addition, the Medicare Supplementary Medical Insurance (SMI) Trust Fund that pays for physician services and the prescription drug benefit will continue to require general revenue financing and charges on beneficiaries that will grow substantially faster than the economy and beneficiary incomes over time.

According to one study, of the $2.1 trillion the U.S. spent on health care in 2006, nearly $650 billion was above what we would expect to spend based on the level of U.S. wealth versus other nations.  These additional costs are attributable to $436 billion outpatient care and another $186 billion of spending related to high administrative costs.

Employer and Employee Health Care Insurance Costs:

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Over the last decade, employer-sponsored health insurance premiums have increased 119 percent.

Employees have seen their share of job-based coverage increase at nearly the same rate during this period jumping from $1,543 to $3,354.

The cumulative increase in employer-sponsored health insurance premiums have raised at four times the rate of inflation and wage increases during last decade.  This increase has made it much more difficult for businesses to continue to provide coverage to their employees and for those workers to afford coverage themselves.

The average employer-sponsored premium for a family of four costs close to $13,000 a year, and the employee foots about 30 percent of this cost.4  Health insurance costs are the fastest growing expense for employers.  Employer health insurance costs overtook profits in 2008, and the gap grows steadily.

Total health insurance costs for employers could reach nearly $850 billion by 2019.  Individual and family spending will jump considerably from $326 billion in 2009 to $550 billion in 2019.

The Congressional Budget Office has estimated that job-based health insurance could increase 100 percent over the next decade.  Employer-based family insurance costs for a family of four will reach nearly $25,000 per year by 2018 absent health care reform.

The Impact of Rising Health Care Costs:

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Health Care Spending as a Percentage of Income, by Age, 2007 (click for source)

Economists have found that rising health care costs correlate with significant drops in health insurance coverage, and national surveys also show that the primary reason people are uninsured is due to the high and escalating cost of health insurance coverage.

A recent study found that 62 percent of all bankruptcies filed in 2007 were linked to medical expenses.  Of those who filed for bankruptcy, nearly 80 percent had health insurance.

According to another published article, about 1.5 million families lose their homes to foreclosure every year due to unaffordable medical costs.

Without health care reform, small businesses will pay nearly $2.4 trillion dollars over the next ten years in

Health Care Spending as a Percentage of Income, by Income Level, 2007 (click for source)

health care costs for their workers, 178,000 small business jobs will be lost by 2018 as a result of health care costs, $834 billion in small business wages will be lost due to high health care costs over the next ten years, small businesses will lose $52.1 billion in profits to high health care costs and 1.6 million small business workers will suffer “job lock“— roughly one in 16 people currently insured by their employers.

The fact is, health care in America needs reforming, and Obama contested with an agenda to attempt to do so, and here are the details from his proposal.

OBAMA REFORM PROPOSAL

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If you have health insurance:

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Ends discrimination against people with pre-existing conditions.

Prevents insurance companies from dropping coverage when people are sick and need it most.

Caps out-of pocket expenses so people don’t go broke when they get sick.

Eliminates extra charges for preventive care like mammograms, flu shots and diabetes tests to improve health and save money.

Protects Medicare for seniors and eliminates the “donut-hole” gap in coverage for prescription drugs.

If you don’t have insurance:

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Creates a new insurance marketplace – the Exchange – that allows people without insurance and small businesses to compare plans and buy insurance at competitive prices.

Provides new tax credits to help people buy insurance and to help small businesses cover their employees.

Offers a public health insurance option to provide the uninsured who can’t find affordable coverage with a real choice.

Offers new, low-cost coverage through a national “high risk” pool to protect people with preexisting conditions from financial ruin until the new Exchange is created.

For All Americans:

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Won’t add a dime to the deficit and is paid for upfront.

Creates an independent commission of doctors and medical experts to identify waste, fraud and abuse in the health care system.

Orders immediate medical malpractice reform projects that could help doctors focus on putting their patients first, not on practicing defensive medicine.

Requires large employers to cover their employees and individuals who can afford it to buy insurance so everyone shares in the responsibility of reform.

OPINION

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If you’ve read everything to this point, as far as I can tell, these are irrefutable facts about the American health care system, its evolution to current state and the proposed reforms from the Obama government.  Now, there is much hyperbole and paranoia surrounding the proposed reforms, as evident from the reactions at the town-halls conducted by the Obama administration to get feedback from the people.  There are also some valid concerns from more rational conservatives such as the issue of potential bureaucracy that might seep into the system, or how you address the issue of illegal aliens in relation to healthcare, questions around cost and waste in the current system, whether the cost is a mere byproduct of the aging populace and scientific developments, justifiable skepticism around the government run system being more efficient than a fully private setup,  questions around the cost and efficiency of the eventual solution (Obama projected $900 billion in cost in his recent speech), the difficult topic of end of life health care costs and how that might be affected in any proposed changes to make Medicare more efficient and the  hot button topic of abortion and whether their tax dollars will directly result in a decision against their principles in a national healthcare setup.

The interest is clearly justified due to the importance of the issue and its impact on everyone, but the paranoia seems to be perpetuating out of partisanship, driven by hidden agendas and propagation of misinformation.  The generated hysteria engendered by a refusal to study the facts, some due to the inability of the President to present a clear picture of “how” and not just focus on “what” he is planning to change, and a good portion out of the backlash of the lost minority who get a disproportionate attention in the media, and continue to be threatened by a President elected from the minority demographics, and choose to view anything he attempts to do as a blasphemy and an outrage against their good-ole-boy ways.

If you read the facts above, you will see that this is truly a flashback to the Truman days when he proposed his bill to pass national health care, only to see AMA whip up a McCarthian frenzy against a supposed “communist” policy and lobbied successfully until he backed down, probably no different than the rhetoric you hear now.  If Obama is serious about this, and really believes in what he is doing, he should stick with it in spite of the fallout from the negative propaganda and even a potential threat to his reelection down the road.  He may be politically savvy and excellent at giving speeches, but it remains to be seen how sincere he is to his ideals when they potentially stack up against his ambitions.  If this isn’t a significant enough issue to stand up for what you believe in, what is?