Health Insurance, The History

Health insurance provides people with a way to protect themselves against financial catastrophe and to assure themselves and their families of access to the health care system.

In 1850, The Accidental Death Association of London was the first company to offer coverage for medical expense for bodily injuries that did not result in death. In the United States at the end of that same year, the Franklin Health Assurance Company of Massachusetts offered of Hartford began offering medical expense coverage on a basis resembling health insurance in its present form. By 1866, health insurance policies were being written by 60 other insurance companies.

At the beginning of the twentieth century, both accident insurance companies and life insurance companies were writing health insurance policies. The early policies were essentially loss-of-income policies and provided benefits for a limited number of diseases such as typhus, typhoid, scarlet fever, smallpox, diphtheria, and diabetes.

The Beginnings of Modern Health Insurance

The birth of modern health insurance came in 1929, when a group of school teachers made a contract with Baylor Hospital in Dallas, Texas, to provide room, board, and specified ancillary services at a predetermined monthly cost. This plan generally is acknowledged as the first of what came to be called Blue Cross plans. The Blue Cross plans were attractive not only to consumers but also to hospitals because they needed to find a mechanism to assure that patients would be able to pay for services they provided. For patients who were covered by the Blue Cross plan, payment was made directly from the plan to the hospital, rather than reimbursing the patient who would then pay the hospital. Coverage under the Blue Cross policies was typically for a hospital stay of specified number of days or for particular hospital services.

These plans contrasted with the indemnity plans offered by private insurance carriers which reimbursed (that is, "indemnified") the patient for covered services up to a specified dollar limit. It was up to the hospital to collect the money form the patient. Blue Shield plans, initiated by physicians, followed and were based on similar concepts except they offered coverage for physician services. The Blue Cross and Blue Shield plans traditionally established premiums by community rating: that is, everybody in the community paid the same premium.

Starting in the 1930s and continuing into the war years, traditional insurance companies began to add health insurance coverage for hospital, surgical, and medical expenses to their accident and life insurance lines of business. During World War II group health insurance became an attractive benefit to workers at a time when wages were frozen. The trend was strengthened by the favorable tax treatment that fringe benefits received. Unlike money wages, they were not subject to income or Social Security taxes, so a dollar of health insurance was worth more than an after-tax dollar spent out of pocket for medical services.

Health insurance quickly became a benefit that was covered by the part of employee benefits was assured in the postwar era when the Supreme Court ruled that employee benefits, including health insurance, were a legitimate part of the labor-management bargaining process.

Although early policies were often sufficiently broad to cover the expenses of common accidents and illness, they were inadequate to cover extended illnesses or long hospital stays. To correct this deficiency, in the early 1950s insurers began to offer major medical expense insurance to cover catastrophic cases. Soon thereafter, Blue Cross-Blue Shield followed the lead of the private insurers and offered similar plans. Typically the policy holder under major medical expense insurance paid a specified deductible amount after which the insured and the insurer shared the covered losses according to a specified ratio (coinsurance).

During the 1950s, health insurance protection expanded rapidly and by the middle of the decade 77 million people had hospital expense insurance in either the indemnity form or under a major medical plan.

In the next few years, insurance companies began to offer a new high-benefit major medical plan, which encompassed "out-of-pocket" cut-off points beyond which the insurance company paid 100 percent of covered expenses.

The same types of health insurance plans, expanded in coverage to meet new medical technology, are in wide use today.

Medicare and Medicaid
During the next 20 years, health insurance would not only continue to cover an increasing number of people, but also greatly broaden the scope of it's coverage. The federal government's Medicare program for people over the age of 65 became effective July 1, 1966.

For the portion of the working population covered by Social Security, it provided compulsory hospitalization insurance (Part A) as well as voluntary supplementary medical insurance (Part B) to help pay for physicians' services, medical services, and supplies not covered by the hospitalization plan. To fill gaps in Medicare coverage, nearly 23 million or 70 percent of Medicare enrollees supplement their Medicare benefits with private insurance policies.

Medicaid, designed to share the cost of medical care for low-income people, also became effective in 1966 under Title 19 of the Social Security Act. It allowed states to add health coverage, with federal matching funds, to their public assistance programs for low-income groups, families with dependents children, the aged, and the disabled. Because eligibility is based upon meeting criteria other than having a low income, only 40 percent of the population living below the poverty line is covered by the Medicaid program today.

Recent Changes
Private insurance companies continued to determine premiums through actuarial assessments of the risk associated with the insured group, and premiums would differ from group to group because the risk of groups varies. In other words, groups' premiums were based on their own medical claims experience, later known as experience rating. It was only a short step from experience rating to self-insurance. Some big companies realized that their work force was large enough that aggregate medical experience and expenses of their employees would vary little from year to year (except for inflation in medical prices).

Given such predictability of medical experience and expense, it was feasible for large companies to self-insure. Rather than pay insurers a premium to bear the risk, the employer could simply assume the risk by budgeting a certain amount to pay claims. In addition, the firm could retain control over funds until the time a medical bill needed to be paid.

Two other factors related to government regulations spurred self-insurance. In virtually all states, insurance companies had to pay a premium tax of several percentage points, the cost of which was passed on to customers. Self-insured firms could avoid this cost. In addition, states began mandating that insurance policies cover certain specified services and the services of particular provider groups. But the Employee Retirement Income Security Act of 1974 (ERISA) prohibited states from applying these mandates to self-insured plans. Thus employers who did not want to pay the extra costs of these mandated benefits (now nearly 900 when aggregated across all states) could avoid doing so by self-insuring. The combination of these factors led to rapid growth of self-insurance in the mid-to-late 1970s. As employers turned to insurers to administer plans through administrative services only (ASO) contracts, self-insurance became a dominant form of group coverage. Currently the various kinds of plans in which the employer group assumes all or a substantial portion of the risk account for 55 percent of total commercial health insurance business, with ASO arrangements accounting for 31 percent and minimum premium plans and stop-loss plans accounting for another 24 percent.

Once self-insurance became an option, community rating was no longer a viable way of determining premiums for groups that were large enough to self-insure. (The exception was some very large accounts that stayed in federally qualified HMOs and continued to practice community rating.) It is always advantageous for any group of below-average risk to leave the "community" in which it is paying a premium that reflects the risk of the total community, including those of higher risk than itself; this lower-risk group will self-insure. As a consequence, in recent years, private insurance carriers and Blue Cross-Blue Shield plans have been forced to turn to experience rating as the predominant method of premium rating for the types of groups that have the option of self-insuring.

The Increasing Visibility of Managed Care
As health care costs rose drastically in the 1970s and 1980s, attention turned to new delivery systems, initially health maintenance organizations (HMOs) and later preferred provider organizations (PPOs) and other hybrid arrangements. These health care delivery systems (now called managed care) seemed to offer the potential for controlling costs by organizing providers into coherent networks and by integrating the financing and delivery of medical care. In such plans, mechanisms assure the coordination of a broad range of patient services and monitor care to determine that it is appropriate and delivered in the most efficient and inexpensive way.

At the beginning of 1991, between 50 million and 60 million persons were enrolled in HMOs, PPOs, exclusive provider organizations, and point-of-service plans. Forty-nine percent of the people covered by employer-sponsored health plans were enrolled in managed care plans in 1991. Growth of managed care can be expected to continue as new permutations on existing models develop.

Managed care companies now are developing specialty networks for mental health, vision, dental, chiropractic, podiatry, and physical therapy care. Sophisticated managed care principles also are being applied to other medically related fields, such as long-term care and auto liability and workers' compensation claims.

Major Trends in Coverage, Utilization, and Expenditure
From its beginning, the emphasis of health care reimbursement has been on hospital coverage, since the hospital has been the center of medical technology. As the scope of health insurance grew and health insurance policies found a niche in the financial plans of the majority of Americans, the dramatic progress of surgical techniques and technology, along with their increasing costs, encouraged a demand for surgical coverage. By the 1950s, nearly 60 million people had surgical expense insurance.

A growing realization that physician care is critical to good health encouraged 21 million people in the 1950s to purchase insurance coverage for physicians' medical fees as well as for surgery. By 1990, Americans spent $58 billion on physicians' services through private insurance.

During the 1950s and 1960s, most health insurance policies sold by insurance companies contained the three basic coverages for health insurance: hospital care, surgical fees, and related physicians' services.

Anticipating the requirements of the insurance-buying public, insurance companies began offering in the 1970s more comprehensive coverages and increased benefit levels that ranged from $50,000 to several million dollars under comprehensive major medical expense policies.

In 1990, public and private health insurance protected 214 million Americans, but more than 34.6 million persons, many employed by firms that do not offer coverage, and many below the poverty line, were still without health insurance coverage. Of the 34.6 million people without health insurance, 13.6 million were workers (and their dependents) who worked for firms employing 25 employees or fewer. Many of these people without coverage were poor but still did not qualify for Medicaid.

Commercial insurance companies, Blue-Cross-Blue Shield plans, self-funded employer plans, and prepayment plans (such as HMOs) cover 90 percent of the people who purchase private coverage. During 1990 these private programs paid more than $12 billion for health care expenses.

Hospital services are also an important factor in determining a large proportion of physician expenses; it has thus become imperative that insurers, both public and private, concern themselves with monitoring the use and costs of hospital services.

In 1990, Americans spent $666.2 billion ($384 billion in private funds and $283 billion in public funds) for medical and health care services, research, and construction of medical facilities. Private insurance companies spent nearly $186 billion on personal health care, a $17 billion increase over the previous year.

Rising health care costs continue to be the most pressing problem of the health care system. In 1969, per capita expenditures for health care were $268 in this country. By 1990, the figure had increased to $2,567. During the same 20-year period, health expenditures grew from 5.3 percent of the gross national product (GNP) to 12.2 percent. By the end of this decade, the Health Care Financing Administration projects the per capita at $5,712 and the National Health Expenditure at $1,616 trillion, approximately 16.4% of the GNP.

Three leading reasons continue to influence health care cost escalation: increases in coverage, perverse incentives, and new technology.

Health Promotion Programs: A New Role in Health Care
Commercial health insurance companies, realizing the personal and societal benefits of healthy life styles and early detection strategies, began to focus on health promotion programs in the early 1980s/ Rate advantages for non-smokers, and for individuals who control their weight, had already been offered for years, and many companies began to offer medical screening benefits as an integral part of their policies. Now, many companies offer various prevention services as part of their benefits packages.

Statistics provided by Health Insurance Association of America, Source Book of Health Insurance Data, 1992.