That's What I Thought...
columnist: Gene DeNardo

Topic: Health Care
American Health Care and the Intrusion of Insurance.

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The history of American health care is the study of an attempt to bring health care to all and to satisfy the demands of special interests at the same time.

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by Gene DeNardo
(libertarian)
Thursday, August 6, 2009

There are two prevailing viewpoints when it comes to assessing our health care situation. The current push in Congress represents the government solution. It is viewed as a "socialistic" solution and this in itself is far from the truth. As it stands so far, it has certain socialistic tendencies, as our health care system has had since its inception in the early twentieth century, but it is far from true socialism and is very closely related to what we already have in place. In reality it is a government subsidized corporate model.

The other pole carries the common "free market" anthem. If we could only get back to the "free market" in health care, we would be fine. Free market principles should solve many of our health care problems, but we can't return to something we have never had. And, we have never had a truly free market during the era of  "modern" health care.  A brief overview of our health care history should help clarify this.

Health care itself is a fairly recent phenomenon. The demand for doctors and hospitals was very slight before 1920. The obvious reason was that western medicine was in a fairly primitive state and most people just put up with their maladies in the comfort of their own homes. There was little reason to "pay" someone for a service that one of your family members could perform just as well or better than a "professional". Often, treatment actually made a patient worse off than before.

By the twenties, things began to change. There was a great influx of population to the urban centers. The average size of housing decreased because of this and there was often little room in the home to care for sick relatives. At the same time, the medical industry was progressing rapidly and the hope of a cure, rather than just trying to comfort the patient, became a reality. Demand for health care began to increase.

The American Medical Association also began a concerted effort to limit the licensing of doctors. Stringent guidelines were imposed and the number of medical schools dropped from 131 in 1910 to 81 in 1922. Correspondingly the number of doctors decreased creating increased demand for their services and higher fees.

The American College of Surgeons was formed in 1913. Again, strict standards were imposed on surgeons and hospitals and the level of care rose appreciably, along with the price of care.

Higher quality has a higher value and often a higher price. While the original guidelines of both of these organizations did much to further the development and quality of health care, the enactment of unnecessary regulatory measures with the coordination of governmental agencies continues to this day to ensure that the "demand" for doctors always remains high. Today it is done primarily to preserve a monopoly of service rather than to raise the level of health care.

At this point, with little government intervention and no insurance system in place, wouldn't the existence of the free market in health care be obvious?

Yes and no. Both doctors and the hospitals at the time accepted fee payment based on ability to pay. Doctors especially varied their fees from zero to full fee depending on the means of their patients. While it certainly is a right of the provider of a service to charge at will, it accomplished much the same effect that a social insurance care system would accomplish. Those who had the ability to pay subsidized those who did not. The doctors acted as "managers" of the system and decided who should pay and who received free care. They have repeatedly fought any attempt to remove this power to charge fees as they see fit.

It appears all those involved at the time, whether doctor, hospital or patient realized the importance of providing care to as many patients as possible. Without any third party payer, most needy people could receive some treatment. Perhaps, a principle reason for this "cost sharing" system was the lack of economic separation among the masses. A large percentage of our population felt that we were "all in the same boat". This cannot be said today when a corporate executive might receive a bonus that exceeds the lifetime average income of most citizens. The income and wealth gap has created many other gaps in our culture.

The first organized payment system became established during the Great Depression. Hospitals began to offer monthly plans at a set fee. Patients were assured of care at a low monthly rate and hospitals received a steady income stream, which was sorely lacking at the time. Both parties benefited from the arrangement.

Although these plans brought a needed flow of income to hospitals, they also introduced fierce competition among the hospitals. To reduce competition, hospitals began to group together and offer plans covering many hospitals. Under the auspices of the American Hospital Association, this network eventually became Blue Cross.

Government stepped in and allowed a "non-profit", tax free status for the Blue Cross system. Legislation also removed any "reserve" requirement, allowing Blue Cross to compete and in a sense insure, with little or no back up funds. In exchange for these concessions, Blue Cross offered its plans to individuals, regardless of their income level and health status. Hospitals who received the Blue Cross certification promised to continue providing services even when funding was low.

Doctors not wanting to miss out on the fun, made their move to get in on the action. Fear of the possibility that hospitals would "insure" physician's services and the possibility of health care legislation growing out of the Social Security program propelled them to institute their own plans. Government granted these plans the same tax exempt and freedom from reserves that it had granted Blue Cross. Physicians reserved their right to charge fees above and beyond the guidelines of the plans. This system became known as Blue Shield.

This increased demand for health insurance encouraged commercial companies to step in. The 1942 Stabilization Act created wage and price controls but encouraged employer provided insurance programs by exempting them from both wage controls and taxes. The shift to employer provided commercial health insurance began with a vengeance and is still the norm today. Employers used insurance to attract workers in place of wage increases and the tax exempt status help foster the conversion.

The downside of this conversion from hospital and doctor sponsored plans is the action of the free market itself. Insurance companies carry only the healthiest clients or charge riskier or unhealthy people a high rate. This is exactly what a for-profit company should do in the marketplace. Customers applying for flood insurance who choose to live in a flood plain should pay a high premium. Moving to a safer area with a lower premium is a totally feasible option. Moving to a body without a life threatening disease is not.

Compulsory insurance came to us in 1965. Medicare was a two part federal program. Upon reaching 65 all citizens were automatically enrolled in Part A, which was a hospital insurance program. Part B was supplemental medical insurance that included physician's services. Patients were responsible for the difference between the fees and Medicare payments.

Medicaid followed close behind with a federally coordinated state program that provided medically assistance for the indigent. If you needed treatment and couldn't afford it, Medicaid was for you. The federal guidelines established a "minimum" level and the states individually determined the amount of care beyond that.

The Federal government was now into health care in a big way. The elderly were not only the most medically needy but also the group least able to afford care. And of course, the poor were also in great need. This forty year transition took us from "voluntary" care organized by the medical professions, to a commercially based system of selective insurance and finally to a government subsidized institution of care for those with limited ability to pay.

Although this is but a brief history of this transition, there are some important points that the events bear out.

There has never been a true "free market" when it comes to modern health care in our country. The closest approximation came prior to the government subsidized physician and hospital payment plans. During this period, we have noted that both doctors and hospitals charged fees based on "ability to pay", rather than a strict fee schedule. Both parties were interested in providing care for all in need. To accomplish this, some clients invariably paid more than their share, spreading the cost of health care across the user population.

Government intervention began with the tax and reserve incentives given to both the Blue Cross and Blue Shield plans. This was done to encourage care based on need rather than ability to pay. While this seemed to work, the entrance of commercial providers tilted the scales. With the ability to selectively choose patients and the tax breaks given to them by government legislation, commercial providers were able to undercut the "Blue" insurance groups and gain a dominant share of the "healthy" clients. This left a greater share of "unhealthy" and expensive client-patients in the hands of Blue Cross and Blue Shield, eventually coaxing their conversion to commercial, for profit organizations.

The Federal Government then firmly implanted itself in health care with the "Medi" programs. While this seemed to once again solve the problem of those who needed care but couldn't afford it, it created its own problems.

While government plans can be inefficient, it is also extremely inefficient in terms of service to insure large numbers of people who are not under any great risk, as the commercial companies were doing. With a large percentage of the population insured either through commercial or government insurance, the supply of funds flowing toward the medical industry is somewhat unending. This can only be inflationary and there is no doubt it has been.

We could argue endlessly whether access to health care is a right, a benefit or a good. It is a meaningless argument. What quickly becomes clear is that whatever health care is, the lack of it can lead to loss of life. And what is also clear is that those unfortunate enough to contract a life threatening illness or accident cannot use their free choice to escape the situation.

Other than to subsidize the absurdly inflated costs of daily health maintenance, there seems to be no logical or free market reason why "healthy" people are insured. There also is no "moral" reason why those who truly need life sustaining care shouldn't receive it. An analogy would be providing fire insurance for houses that don't burn down and allowing a portion of those that burn to go uninsured. Except, we are dealing with the human body, not houses. Early twentieth century doctors and hospitals understood this concept and dealt with it in an admirable manner.

It would seem what is needed is insurance that would cover catastrophic occurrences, the common use of risk insurance. People need to be able to have access to life saving treatment and they shouldn't be financially devastated by the realization of risk. This is why we have insurance. In order to insure that all receive catastrophic care, it may be necessary to subsidize care of those who are incapable of payment. There is nothing new about this in the "economics" of health care. To bring health care to those with the most needs has always been a "social" action.

The insurance of all in order to get the annual check up or to treat non life threatening illness seems to be greatly misguided. Somehow, it seems that those services should be affordable without insurance, since they are needed by all. Depending on how it is calculated, it has been claimed that Americans spend close to 20% of the GDP on health care. This is about twice any other developed country and really just totally ridiculous. We really shouldn't spend twenty percent of the GDP on any one thing!

What seems like a fact of life, the need to carry insurance for the payment of routine health maintenance services, is instead a product of the economic history of our health industry. The desire of society and government to offer health care to all in need presented an opportunity to private sector corporations to insure what normally would be paid for on a demand for service basis, without a third party. Because commercial insurers were able to skim the cream off the milk and select only those clients who were least likely to experience costly medical problems, since those who were at risk and needed care the most were covered by social or quasi social programs, they were able to profit on the "idea" of medical insurance, yet not have to actually perform the job. The low rates made possible by the low risk factor and the tax shelters enticed the healthy worker and employer to buy what they didn't really need. This proliferation of unneeded insurance and third party payment helped create and reinforce the massive inefficiencies that are now commonplace in the industry.

Obviously, this isn't the only problem that plagues our health system, but it is perhaps the most entrenched. The major obstacle to health care reform is that those who have been given the power to enact change receive compensation or what is known as contributions from those with the most to lose if real change occurs. In most cases, this compensation is greater than the salaries they receive as public servants. We can always hope, but what will most likely result may be spun as great reform but will probably be more of the same.

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©2009 Gene DeNardo, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Thursday, August 6, 2009
Last modified: Friday, August 7, 2009

The views expressed in this article are those of Gene DeNardo only and do not represent the views of Nolan Chart, LLC or its affiliates. Gene DeNardo is solely responsible for the contents of this article and is not an employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.

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