It took 80 years to create our current healthcare system. Increasingly unaffordable health care costs that developed over that time are the driving force for rapid change today. Understanding our history, in particular, the history of our healthcare payment system, helps us identify the best pathway into the future. The foundation of our payment system is health insurance coverage. Payment for health care is largely through a collection of private and public health insurance plans for various subgroups of Americans (e.g., the elderly, the self-employed, the poor, etc.). As of 2014, private health insurance plans were largely employer-sponsored (154.3 million insured). With the creation of the new Health Insurance Marketplace, an alternative private health insurance option exists ( 17.3 million insured at the end of 2014).
BB’s Healthcare Brigade members do not need to digest the details of the business and legal actions that make up this history. We need only be interested in where this history is taking us in the future. The series of historical events, laws, and business changes that make up the history can be categorized according to HICUP (BB Brigade acronym for those who are engaged in the business of health care in the USA) member contribution. These individual contributions are outlined below. For a reference through the year 2007, I recommend the health insurance timeline found in Table 1 (Timeline of Selected Legislation and Events Relevant to Health Insurance Coverage, 1919–2007) of the document titled “Health Insurance Coverage Trends: 1959-2007: Estimates from the National Health Interview Survey”
Prior to the 1930’s, people paid for health care out-of-pocket and health insurance was largely nonexistent. The history of our modern healthcare system (starting about 80 years ago) is based on payment through “shared risk” (health insurance). Each of the groups that make up HICUP; namely, the federal government, medical providers, the insurance companies, and employers, played important roles in creating the final healthcare system we have today. A brief history is given below for background.
Our federal government, with ultimate responsibility for all healthcare policy in the United States, created and molded our present healthcare system. With the passage of any given law, the other HICUP members simply reacted to maximize profits and minimize costs. The ultimate goal of the various laws and tax regulations has been to make sure that the “business of health care” remained in the private sector. However, our government reluctantly has had to take over the health care for a number of American subgroups, who found themselves without sufficient funds to remain in the private sector. These Americans were members of our most vulnerable subgroups; namely, the elderly, the disabled, and the poor). As health care costs continue to rise at higher rates than found in the rest of the economy, this vulnerable group is expected to grow.
The high health care costs we face today have their roots in every healthcare law our government enacted over the past 80 years. Special-interests tweaked the laws to ensure the flow of money to HICUP members stayed intact. Vague language in laws created loopholes and opportunities for “interpretation” thereby allowing HICUP members to exploit for financial gain. In addition, tax breaks and direct funding (subsidies) were handed out to every healthcare business imaginable–tax exemption for employee health insurance premiums, federal subsidies to HMOs (1973), and medical provider subsidies for creating electronic health records (HiTech Act of 2009) to name a few.
The only two major healthcare reform laws passed over the past 80 years were Medicare/Medicaid (Title XVIII and Title XIX of the Social Security Act) in 1965 and Obamacare (The Patient Protection and Affordable Care Act) in 2010. The first represented a commitment by our government to our national health and the second a cry for help from high costs and a crumbling national health system. Both pieces of legislation were flawed from the moment they were signed. We have spent 50 years trying to improve the original Medicare/Medicaid legislation and are 5 years into doing the same for Obamacare. In the 45 years between these two laws, we also find a patchwork of laws and regulations that either serves to protect (the “P” in HICUP) the “business of healthcare” or belatedly reacts to flagrant abuses by members of HICUP.
With the creation of the Medicare/Medicaid programs in 1965 and it’s original “blank check” guaranteed payment scheme, our government (and the taxpayer) directly felt the impact of out-of-control healthcare price hikes almost immediately. Much of the legislation that followed was aimed at constraining the growth of these healthcare costs. Some measures helped (e.g., replacing the “blank check” healthcare payment scheme of “usual, customary, and reasonable rate” charges with set fee schedules based on diagnosis codes in 1983), but most were only temporary as they didn’t address the core reasons for high healthcare prices.
Our laws and tax regulations have encouraged and nurtured the spread of employer-sponsored health benefits to where they are now the backbone of our healthcare payment system. As unaffordable healthcare costs have tested this healthcare system, our government has reacted with laws that attempt to keep it functioning. These legislated “bandages” from the past (e.g., Employee Retirement Income Security Act (ERISA) in 1974, Pregnancy Discrimination Act in 1978, Consolidated Omnibus Budget Reconciliation Act (COBRA) in 1985, Health Insurance Portability and Accountability Act (HIPAA in 1996, Mental Health Parity Act in1996, and Newborns’, and Mothers’ Health Protection Act in 1996) only serve to delay the fact that unaffordable healthcare costs are slowly destroying our system of healthcare delivery.
Actions by medical providers in our nation’s healthcare system were and still are largely designed to safeguard and maximize physician and hospital income. During the Great Depression (1930s), when many people couldn’t afford to seek medical care or pay their hospital bills, medical providers successfully lobbied to keep a national health program for all Americans out of the Social Security Act of 1935. Instead individual hospitals started offering “prepaid hospitalization plans” that provided hospital services as the need arose in the future. To eliminate price competition, these early “insurance” groups banded together to form the Blue Cross association. Not to be left behind, groups of doctors created their own individual associations. By 1946, the individual groups of pre-paid plans for physician services came together to form the Blue Shield associations. As time went on and our nation became more prosperous, the medical providers and the health insurance products they helped create became separate businesses (Blue Cross severed its ties with the American Hospital Association in 1972).
As essential contributors to the public health, medical providers parlayed this power for financial gain on more than one occasion. For example, upon threat of boycotting the new Medicare patients, medical providers were able to get legislators to agree to reimbursements according to whatever price the doctor’s set (called the “usual, customary, and reasonable rate”). In addition, doctors were allowed to bill patients directly, so that patients had to pay the difference between what the Medicare paid and what the doctor charged. Physician income soared under this system and the “rich” doctor was born. These billing practices were not halted until decades later (in the 1980s) and their effects on healthcare inflation never reversed. Normal salary contractions in the general economy during recessions did not impact these medical provider incomes since the government payments were guaranteed whether the doctor provided excellent or poor care. The delivery (or even measurement) of healthcare quality was never required for payment.
Health Insurance Companies
The health insurance business (both non-profit and for-profit) replaced the “prepaid plan” model for healthcare payment and by 1960, the total number of people enrolled in health insurance plans was 142,334,000.
Given a healthcare system where government does not take a leadership role and medical providers are left unaccountable, it is not surprising that, over time, health insurance companies have risen to fill the gap for managing all aspects of healthcare payment. As healthcare costs continued to rise over the years, insurance companies grew their businesses to provide “managed” health care services to employers and our governments (state and federal). In “managed” care, the need for health care services is evaluated by the cost containment entity (usually the insurance company) before the service is performed. “Managed” care was aimed at managing employee and medical provider behavior for maximum cost containment. The money saved from “managed” care arrangements are largely shared by the the insurance company and its partner (employer or government).
It is also important to note that a single law, the McCarran-Ferguson Act of 1945, laid the foundation for all health insurance business practices. With this law, insurance companies are allowed to operate without fear of violating federal anti-trust laws that govern all other business in the United States as long as they were regulated by individual states. Unsurprisingly, a business environment with years of unfettered monopolistic practices, rubber-stamped premium rate hikes, and a general lack of transparency has been a very profitable one indeed.
Prior to 2010, private insurance companies could “cherry pick” the healthiest beneficiaries and reject those with pre-existing conditions or the very sick. The rejects—America’s most vulnerable citizens (the elderly, the poor, the disabled, and the uninsured) had no choice but to turn to government for healthcare coverage.
Although employer-sponsored health insurance creates many conflicts of interest between the employer and his employees, this network of health insurance delivery is the backbone of the United States healthcare system. The growth of employer-sponsored health benefits occurred during World War II, when employers needed a way to entice scarce workers and higher wages were not an option (there was a freeze on wages). Business was booming and health insurance costs were very affordable. By the late 1950s, health insurance benefits had become a standard part of compensation packages (wages, pension, and insurance benefits) among most major employers. As healthcare costs have grown substantially faster than other parts of the economy, these early “carrots” of employment have become albatrosses around employers’ necks. In 1965, national health spending was 5.4% of GDP and today it is 17.2%.
Over the years, employers have viewed the employee health benefit as a cost of doing business and as such required constant cost containment. As costs rose at rates higher than economic output, many small companies dropped coverage for employees, and many large ones shifted premium cost increases onto employees. “Managed” health care left employees with higher cost share, greater paperwork, greater frequency of coverage denial, reduced medical treatment choice, and reduced choice of healthcare providers.
The Bottom Line
Eighty years of government laws and regulations that created and nurtured a healthcare payment system based on private sector health insurance coverage is the reason we are faced with unaffordable health spending today. Beneficial treatment of insurance company practices and the lack of medical provider pricing controls led to decades of unfettered healthcare price increases. Government (taxpayers) had to take over health care for those Americans dropped from private sector health insurance coverage; namely, the vulnerable Americans who ran out of money first (the elderly, the poor, disabled, and the uninsured). Will Obamacare correct these excesses from the past? Can we use information from the past to point toward a better healthcare future pathway?