This two-part series gives a deep dive into how health insurance started in America and when (and why) companies got in the weird position of choosing their employees' healthcare.
You may have noticed that over the past 20 years in America, health insurance costs have gotten a little out of hand.
Since 2010, health insurance premium expenses have outpaced wage growth. Costs and deductibles are spiraling upwards annually, and nearly half of all Americans carry medical debt.
It's a mess.
Before we delve into the "why," let’s start with the "how." Specifically, how did a $0.50 per month program in Houston evolve into the complex system we have today?
How did health insurance begin?
What we now think of as "health insurance" in the United States originated during the Great Depression. At the time, hospitals operated on a direct billing model: patients paid out of pocket for their medical care at the time of service. That worked okay until the global economy collapsed. Many patients found themselves unable to afford care, leaving hospitals struggling to stay afloat.
Baylor University in Dallas, Texas, was particularly hard hit. Their average payment per patient dropped by 75% from $236 to $59. Something needed to be done if they were going to survive the year. The lead hospital administrator, Justin Kimball, had an idea that would change the US economy.
Justin noticed a common denominator in many of Baylor's unpaid medical bills — they belonged to local educators. To protect the hospital against further defaults, he piloted a program in 1923 where for $0.50 a month (which adjusts for inflation to be almost $7 in today's dollars), local teachers could gain access to an up to 21-day stay in Baylor's hospital, should they need one.
The program was a hit. About 1,250 teachers enrolled in the first year, and the resulting revenue helped save the hospital and its attached university from bankruptcy.
It didn't take long for other hospitals to notice and copy the program. In 1932, a collection of hospitals in Sacramento, California, took it one step further. With their program, members weren't confined to a singular hospital but could seek services at any participating hospital within the local community. By 1933, about 25 of these "Hospital Service Plans" existed throughout the United States.
As these plans expanded and their offerings diversified, it became nearly impossible to manage these syndicates without a centralized governing body. Local hospitals began looking to the National American Hospital Association (AHA) for guidance, and the AHA was happy to fill the void.
The rise of the first health insurance carrier
By 1933, the AHA was officially designing and approving all of the major hospital plans offered. Local hospitals were left with the tough choice of complying with the plan designs and pricing or being cut out of the offering entirely.
The AHA had a handful of very specific requirements for their plans:
- The plans had to be "nonprofit."
- The plans could only cover hospital expenses.
- The plans were geographically exclusive.
The commission tapped to oversee plan admission and adherence was rebranded in 1946 as "Blue Cross." Eventually, it became so influential that it parted ways with the AHA in 1972. While all this was happening, another organization began to emerge with a specific focus on helping lumber and mining camp workers in the Pacific Northwest pool their money to cover physician fees. This concept was eventually formalized, and the first Blue Shield plan was launched in 1939 in California — eventually growing to become the National Association of Blue Shield Plans in 1948.
Blue Cross and Blue Shield continued to expand in popularity independently until fate (the government) brought them together as official partners of the US government to administer its new Medicare plans. The pairing was so successful that in 1982, Blue Shield merged with the Blue Cross Association to form the Blue Cross and Blue Shield Association.
A new era of health insurance
Now, for context, insurance as an industry is old. The industry dates back to well before the Middle Ages. There are currently operating insurance companies with roots in the early 1700s, though the historical focus had always been on industrial excursions and property (marine insurance was the first documented version).
BCBS was essentially reinventing an industry that had been around for hundreds of years. It wouldn't go unnoticed for long. Incumbent insurance companies quickly rolled out similar health plan offerings, which led to the rise of the titans otherwise known as the BUCAs (Blue Cross Blue Shield, United Healthcare, Cigna, Aetna). And boy, have they ever risen:
Here's a bit of quick information on the remaining companies in that fun little acronym:
Unfortunately, it's a little less fun than the Italian restaurant "Buca Di Beppo," which dominates the Google Image search results for the word "BUCA."
- United Healthcare— Founded in 1974 as Charter Med Incorporated, United Healthcare has since become estimated to be the 5th largest revenue-generating company in the world (BCBS is technically a coalition of independent nonprofit associations, so even though it technically dwarfs United, it didn't make an appearance).
- Cigna — initially formed in 1982 through a merger of a life insurance company and a stock insurance company, Cigna didn't heavily lean into health insurance options until 2011.
- Aetna — originally a fire insurance company from the 1800s that began focusing on employer healthcare plans in the late 1990s.
Over the years, a few more have emerged, Kaiser Permanente, Oscar Health, and Centene, to name a few. And the BUCAs have gotten bigger through major acquisitions: Anthem & Blue Cross Blue Shield, Aetna & CVSHealth.
Employee health insurance today: Rising costs and smaller businesses left out
Health insurance went from a local experiment to a big deal across the nation, thanks to the rise of BUCA and other health insurance giants and the intertwining of health insurance with employers — a history we'll get to in our next article.
This shift didn't just happen; it's had a real impact on how Americans access healthcare. Today, about 54% of all Americans get their health insurance from their employer. However, this figure drops substantially when looking at the 5 million small businesses with less than 10 employees. For this segment, only 39% in 2022 and 2023 offered health benefits, a figured that dropped from 80% just ten years earlier.
The system of employer-sponsored health insurance that seemed to be working okay for a few decades is now cracking. There is hope though.
Digging into the history of employer-sponsored health insurance gives us a peek into the whole tangled story of healthcare — and why there is a need for new options. (Hint: StretchDollar plays a role here.)
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