The Miller Report History of Health Insurance – InsuranceNewsNet

from dr William Mueller

Given the ongoing negotiations between Adventist Health and Hymn Blue Cross, I thought it might be interesting to examine how our healthcare system came to rely on health insurance as an integral part of providing healthcare to people in America. This will be a series in which subsequent articles will examine Medicare and other forms of payer health care, including the American Veteran’s Association and the Canadian Health Care System.

The story begins in 1850 when the Franklin Health Assurance Company of Massachusetts initially offered “accident insurance” to cover disabilities that might occur as a result of injury while traveling by rail or steamboat. Think of a modern “air travel insurance”. This was so popular that by 1866 there were over 60 companies in the US offering such insurance. This eventually led to the addition of insurance against disability for other reasons, including illness. By 1911, disability prevention policies were common.

In the 1920s, hospitals began offering their own prepaid policies, where participants paid for the healthcare costs of treating illnesses when they were rendered at their hospital. Particular emphasis was placed on covering the costs of surgical interventions, as these are most often incurred in hospitals, as other healthcare services are mainly provided outside the hospital environment. This would eventually lead to the discrepancy we see today in the high reimbursement for surgical procedures and the relatively low reimbursement for primary care, including maintenance health care, preventive care, pediatric care and psychiatric care.

Another key event in the 1920s was that insurance companies offering health insurance began to form associations. The reason for this was that if a health insurance company experienced a significant level of payouts in a given year, the association would prop up the member to prevent bankruptcy. Recall that at that point the idea behind insurance was that people would pay into the insurance company together as a collective, so that if and when a participant required expensive care, payment would be made from the collective pool of funds. The association acted as a kind of insurance for the insurance companies. The first such association of insurance companies was blue crossfounded in 1929.

Around this time, employers began offering health care coverage as a benefit of employment. Initially, the employer would bear the risk of such costs, but companies soon emerged offering insurance to these employers, where the insurance company bore the risk and the employers paid into the insurance company. In 1939, insurance companies offering such coverage to employers came together and formed Blue Shield. This merger of insurance companies initially focused on logging and mining operations in California.

In the beginning, the health insurance companies reimbursed the patients for the costs incurred. Therefore, health care providers such as doctors and hospitals were paid on a performance-related basis. In other words, when a doctor or hospital charges a patient for insurance, the patient pays the doctor or hospital bill. The health insurance company would then reimburse the patient for the payment of the doctor’s bill. Health care costs have thus been mitigated by market forces. Fees were driven by “supply and demand” and “what the market will bear”. These are the basic underpinnings of our entire concept of a capitalist system.

In the 1970s, however, two things began to change. First was the technology. In the 1970s we saw the development of the first mechanical ventilators and, as a result, the first dedicated units within hospitals providing intensive, life-sustaining care. Medical technology began to grow explosively. Advances in computer technology as a result of NASA Apollo project, gave us computerized tomography X-rays or CAT scans used in hospitals in 1979. MRI and PET scan technology soon followed in the 1980s. Advances in cancer treatment have opened up new chemotherapy options for us. The number of antibiotics used to treat infections increased. Implantable devices such as pacemakers and artificial joints also became mainstream in the 1980s. A major breakthrough in organ transplantation came in 1983 with the discovery of cyclosporine as an immunosuppressant to prevent organ rejection by the recipient’s immune system. Previously, organ transplant recipients were doomed to survive for just a few days. Bone Bone marrow transplants were also developed in the 1990s to treat some of the most aggressive cancers. All these new technologies came at enormous costs. Furthermore, in a capitalist system, hospitals were driven to compete with other hospitals by offering the latest and greatest technologies at ever-increasing costs. Very quickly, hospital bills had to increase to cover these expenses. In addition, completely new medical specialties have developed around the new technologies, such as B. Intensive care medicine specialists in intensive care units, cardiothoracic surgeons who perform heart valve replacement and coronary artery bypass graft surgeries, and orthopedic surgeons who specialize in total joint replacement.

The second major change was the introduction of malpractice claims. Before that time, people realized that nothing is perfect and that doctors, as human beings, cannot guarantee perfect results for everyone. Fueled by the promise of these new, evolving technologies and advances in medical science, some patients and their families expected perfect results every time. As a result of advances in expensive technology and the expectation that these technologies should be available to everyone, everywhere, lest costly malpractice lawsuits arise, healthcare costs are in the United States of America shot up.

By the early 1990s, insurance companies knew they had to do something to stem their growing payouts. After all, they had a duty to the insured to have enough money to cover the costs. They also had their investors consider who expected to receive stock dividends. During this time, insurance companies set up paying hospitals and doctors whatever they charged and began negotiating contracts with them to pay reduced rates for the services they provided. Policies such as Healthcare Maintenance Organizations (HMOs), Managed Healthcare Capitation Plans and Preferred Provider Organizations (PPOs) have emerged from this concept. In all of these cases, the insurance company acts as a middleman, negotiating higher rates from employers on the front while negotiating lower payments to healthcare providers on the back. The insurance company in the middle benefits. The unfortunate consequence, however, is that hospitals are stuck between rising costs and lower reimbursements. As a result, many hospitals across the country have closed and healthcare is becoming increasingly difficult. In response, hospitals have formed their own associations in the form of healthcare systems. The strategy is to reduce costs through purchasing at scale and negotiate better payments for insurance company services through greater bargaining power. When this balance is done well, the hospital can generate a surplus that can be reinvested in providing better care and expanded services to the community.

Some suggest that socialized medicine, or at least a single-payer system, is the answer. We will examine this in subsequent Miller Report articles.

You can access all previous Miller reports online at

dr miller is a practicing hospital physician and the chief of staff at Adventist Health Mendocino Coast Hospital in Ft. Bragg, California. The views shared in this weekly column are those of the author and not necessarily those of the editor or by Adventist Health.

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