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Ensuring American health

Ensuring America’s Health (Cambridge University Press, 2015) explains the incongruities of U.S. health care – how the system hosts some of the best medical practitioners and facilities in the world but also is extremely expensive, provides fragmented care, and distributes services poorly. 

U.S. health care is often labeled “exceptional” because it has not followed the European path of government funding and universal provision.  Fixation on this fact has led many scholars to assume that the American system functions as any private-sector-based health care economy would.   

A close examination of the system’s history proves otherwise.   Despite an abundance of options for coordinating private-sector health care, the American system developed around a particularly costly and inefficient model – the insurance company model. 

During the first several decades of the twentieth century, numerous organizations – labor unions, consumer cooperatives, businesses, mutual aid associations, and physician groups – experimented with various patterns of financing and organizing health care.  For example, doctors, often representing diverse medical specialties, formed groups that offered health services to patients in return for a set monthly fee.   “Prepaid doctor groups” not only offered patients integrated, multi-specialty care at one site, they also controlled costs.  Because group doctors financed patient care without the involvement of a third-party insuring organization, they lacked incentive to over-supply services.  Nor was care rationed.   Because group physicians wished to maintain and attract paying customers, they tended to provide patients with all necessary health services and consult with one another, including with in-house specialists, on particularly complex cases. 

So what happened to prepaid doctor groups, as well as union welfare funds, consumer health cooperatives, and the medical care delivered through African-American and Jewish mutual aid associations? 

The American Medical Association (AMA) attempted to destroy each of these market configurations.  Because they feared they would eventually develop into medical corporations, AMA leaders categorized both physician groups and health insurance as unethical.   To add force to this designation, association officials leveraged the professional regulatory authority that they derived from their control over state licensing boards and hospitals.  Doctors who defied AMA guidelines by straying from individual practice with patients paying at the time of service stood to lose their careers.  They often lost their medical license, hospital admitting privileges, or both.   

During the 1930s, repeated calls for government health care reform forced AMA officials to soften their opposition to all modern forms of medical financing and delivery.  To fight reform efforts, AMA leaders needed to demonstrate the strength and vitality of the private market.   AMA leaders continued to prohibit multi-specialty doctor groups, thus guaranteeing that subsequently, most care would be provided in fragmented form, through single-specialty practices.  Nevertheless, AMA officials finally endorsed health insurance – but only policies funded by insurance companies on a fee-for-service basis.   

Insurance executives had little desire to enter such a pact.  The AMA’s preferred arrangements simply presented too many financial risks.  Insured customers could request unnecessary care.  But most worrisome, physicians would be able to send a bill for each and every service they provided to a far away insurance company.  This payment method incentivized doctors to deliver as much care as possible.

Why did insurers get involved in financing health care?  A primary reason they entered the market was to obstruct the creation of a robust welfare state.  So insurance companies finally acquiesced to business requests to supply workers with medical coverage.  But insurers, in an attempt to protect themselves financially, severely restricted coverage to a portion of hospital costs in the case of an accident or severe illness.

Policymakers – from the ideological left, right, and center – realized that the nascent insurance company model was inherently flawed.  Indeed, most observers recognized that the insurance company model drove up health care costs and would encounter significant difficulties providing generous coverage for the majority of Americans. 

Democratic President Harry Truman unsuccessfully attempted to create a universal health care system during the latter half of the 1940s.  What many scholars have missed is that the episode was only one in a long succession of post-WWII reform efforts.  After private health interests and conservatives defeated Truman’s plan, policymakers continued offering a litany of reform initiatives, albeit more moderate, designed to create a more affordable and equitable system.  During the 1950s, congressional Republicans and Democrats proposed various legislative measures. Republican President Dwight Eisenhower sponsored reinsurance legislation so that the government could underwrite the losses of insurance firms that liberalized coverage or sold policies to substandard risks, such as the elderly or chronically ill. 

Paradoxically, attempts to reform the broken insurance company model cemented it at the center of the health care system.  The pressure for reform pushed organized physicians and insurance companies into an alliance.  In order to prove that they could expand coverage without federal interference, physicians and insurers worked together to transform health insurance from a high-end product for a select few into a mass consumer good.   Insurers also converted their policies from limited mechanisms that partially protected against hospital bills into devices for covering almost all costs associated with medical care. 

As predicted, health care costs rose precipitously.

In response, insurance companies implemented cost containment measures.   They began requiring physicians to submit patient treatment histories and charges to review committees to certify their appropriateness.  Insurance companies also decentralized operations to locate representatives closer to physicians.  Doctors set up offices and hired administrators to manage insurance company regulations and the burgeoning paperwork requirements.  These developments created a pseudo-corporate structure that placed insurers in a supervisory role over doctors. 

As insurers developed the market around their products, as well as the institutions necessary to support those products, policymakers and the public began to view them as crucial players in the health care system.  The insurance company model increasingly gained acceptance as the logical outcome of a private market.   Alternative models faded from the collective memory.

Insurers and physicians beat back federal reforms by radically expanding insurance coverage.  However, cost problems prevented them from insuring a politically acceptable percentage of elderly citizens.  Policymakers passed Medicare in 1965 to supply senior citizens with health coverage.  (Through the same legislation, the federal government began sending funds to states to create Medicaid programming for the poor.)

Medicare – the most significant American health care reform of the twentieth century – granted the insurance company model additional legitimacy.  In order to harness private sector capacity, policymakers appointed insurance companies as intermediaries between the government and health care providers.  In this role, insurance leaders replicated the organizational structures that they had already created to monitor physician work and pay.

This story illustrates why insurance companies, though initially hesitant to enter the health care sector, now dominate the American medical system.  From their central position, insurance companies not only finance but also manage both public and private health care.    

Ensuring America’s Health presents this history through an in-depth examination of three key interest groups: the AMA, which represented physicians; the Health Insurance Association of America (HIAA, known today as America’s Health Insurance Plans or AHIP), which represented commercial insurance firms; and the Blue Cross and Blue Shield Association, which represented nonprofit insurance plans.  The book reveals how national association leaders translated lessons learned from the federal political realm into marching orders for members.  It explores distinct organizational cultures as well as the personalities and leadership styles of various physician and insurance leaders.  The narrative gives readers an up-close view of how physician practices, commercial insurance companies, and nonprofit insurance plans developed.

Finally, this history illuminates why the recently passed Affordable Care Act (ACA) was structured to incorporate the insurance company model.  Thus, Ensuring America’s Health helps scholars, policymakers, and analysts better understand the quality of care and cost problems that will continue to plague the American medical system.

About Christy Ford Chapin

Christy Ford Chapin

Christy Ford Chapin is an assistant professor at the University of Maryland Baltimore County (UMBC) and a visiting scholar at the Johns Hopkins University. She studies political, economic, and business history with a focus on the history of capitalism.

Christy Ford Chapin @ University of Maryland, Baltimore County

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