American Association for Physician Leadership

Strategy and Innovation

A Brief History of Healthcare and Insurance in America

Ron Howrigan

December 8, 2018


From the early days of house calls and self-pay in cash or trade to the recent passing of massive legislation to reform managed care, this article reviews how the US healthcare system became complex and problematic.

For over 100 years after the birth of this nation, healthcare in America was a completely self-pay system. We all have visions of the local country doctor and his black bag making house calls—which were paid for either in cash or by trade. The system worked reasonably well for a century. However, as medicine advanced and the cost of care began to increase, the possibility of a two-tiered system started to become more likely. The wealthy would get care because they could afford the advances—the working class would not. In 1910, one of the earliest examples of health insurance was created. The Western Clinic in Tacoma, Washington, provided a wide variety of healthcare services to the employees of local lumber mills. The cost was 50 cents per month. In 1929, Dr. Michael Shadid created something like the model in Tacoma. Dr. Shadid created a healthcare cooperative in rural Oklahoma where farmers could pay a predetermined monthly fee for which he would provide all their care. These two early examples were driven by healthcare providers without the middle man—known later as the insurance company.

In 1929, the Ross-Loos Medical Group was established in Los Angeles. The medical group offered its services to county and city employees for a premium of $1.50 per month. Baylor Hospital in Texas started its own plan in 1929 for about 1500 teachers. This plan eventually became what we know now as BlueCross and Blue Shield (BCBS). The seeds of the insurance industry were planted and quickly took root.

In 1933, Dr. Sidney Garfield and several of his associates started another pre-paid care delivery model in southern California. The model contracted with the LA Workers Compensation Insurance companies to care for job site injuries while the workers themselves contributed out of their pocket for routine medical issues. A few years later, Dr. Garfield connected with Henry Kaiser and formed both the Kaiser Foundation Health Plans and the Permanente Medical Group, which many people have come to know as Kaiser Permanente—the first HMO. This development led to an explosion of similar local or regional delivery systems and plans. Group Health Association, Health Insurance Plan, and Group Health of Puget Sound were all formed during this time frame. In 1933, the first BCBS-covered baby was delivered in Durham, North Carolina. The mother stayed in the hospital for 10 days, and the entire hospital bill was $60.

In the 1940s, the country faced a labor shortage brought on by increased factory production and a reduced labor force as many of America’s young men went off to fight World War II. The government put into place several wage controls. As a result, companies began offering healthcare insurance as a fringe benefit to attract employees. The government wanted to encourage this practice, so it offered business income tax exemptions for healthcare-related expenses. These factors gave birth to the development and growth of our current employer-based health insurance model.

In 1965, the federal government enacted legislation that created Medicare and Medicaid to provide coverage for the country’s poor and elderly. These programs were thought to provide a solution for the two main groups of people who were not covered by employer-based insurance, namely the unemployed and the elderly who were no longer part of the work force.

In the 1970s, a big push began in this country to address some of the perceived failings of the then-current system. Issues around escalating costs, patients’ rights, coverage of the uninsured that didn’t qualify for Medicare or Medicaid, and cries for reform brought about the HMO Act of 1973. This act created loans and grants for starting new HMOs or expanding existing ones. The Act also served to override state restrictions on HMOs if the HMO was federally qualified. Finally, the Act required employers with more than 25 employees to offer a federally qualified HMO in addition to the traditional indemnity coverage offered to their employees.

This is important because, while nowhere near as sweeping as the most recent reform legislation, the HMO Act of 1973 did two things that were revolutionary at the time in healthcare, and possibly influenced the shape of our most recent round of reforms. First, the Act allowed the federal government to override state legislation when it came to HMOs. This is particularly interesting when you consider the Supreme Court ruling in 2012 that stated the federal government could not force states to expand Medicaid. The waters navigated by the state and federal governments certainly get murky where they mix. The HMO Act was never even challenged in court, though many attorneys considered it a violation of the Commerce Clause—not to mention a gross overstepping of federal authority. It simply passed. The Medicaid expansion, granting similar rights to the federal government over the states, was challenged and struck down by the Supreme Court. There’s no clear sailing here.

The other revolutionary aspect of the HMO Act of 1973 was the requirement that employers offer a federally qualified HMO alongside their indemnity coverage. When this was passed in 1973, there was a chorus of employer organizations that argued against the ability and wisdom of the federal government dictating insurance coverage to the business community. There are similar arguments going on today from businesses that claim the government’s intrusion into employer-based healthcare is damaging to the economy and their businesses.

Beginning in the 1970s, and continuing through the turn of the century, we witnessed an explosion of HMOs and the expansion of a host of insurance products that we now collectively call managed care. This time period also saw healthcare costs continue to inflate faster than general economic growth and faster than government tax revenue growth. Many thought managed care, with its admittedly limited tool bag, would be the answer to controlling medical costs. That HMOs and other network-based insurance products were expanding while we were also producing significant increases in the cost of healthcare put the lie to that assumption early on.

In 1992, then-Governor Bill Clinton campaigned heavily on a proposed universal healthcare platform as he pursued and won the presidential election that year. Clinton spoke on many occasions about how millions of Americans were without healthcare and millions more were “just one pink slip away from losing their healthcare” in this country. Once elected, President Clinton set up a task force headed by First Lady Hillary Clinton to develop legislation to produce universal healthcare coverage in the United States. The plan that came out of that task force required employers to provide insurance for their employees and required all Americans to purchase a qualified health plan. It also provided government subsidies so that Americans below a certain income level received their coverage at no cost. At this point, you’re probably thinking this sounds suspiciously like what eventually was passed with the Affordable Care Act.

The push for “Hillary Care,” as its detractors dubbed the plan, faced opposition not only from the right, but also some on the left who favored a single-payer system rather than a market-based solution with employer and public mandates. A set of TV ads showing a couple sitting at a kitchen table talking about losing their doctor and their choices helped turn the tide against the plan; and finally, in 1994, Senate Majority Leader George Mitchell declared the bill dead. The first real attempt at modern healthcare reform was defeated.

What’s interesting to note is the impact that the threat of reform had on healthcare inflation. If you look at the period from 1980 to 1990, healthcare costs as a percentage of GDP increased by 3.2%. That means that healthcare inflated at a rate that is 3.2% faster than the growth of the economy during that decade. During the decade from 1990 to 2000, which had the threat of Hillary Care, healthcare inflated only 1.2% faster than general economic growth. For the period from 2000 to 2008, after the threat of reform was dismissed, the inflation went back to 2.6% faster than general economic growth. This would suggest the threat of government intervention that scared both the provider and payer segments of healthcare had the effect of diminishing cost increases. As soon as the threat passed, the market went back to its old ways of inflating faster than economic growth could keep up.

In 2008, Illinois Senator Barack Obama ran as the Democratic Party nomination for the presidency of the United States. Like President Clinton, one of his key platform positions was healthcare reform. Since the last attempt in 1992, healthcare inflation had taken its toll on the U.S. economy. The number of people in this country who were uninsured exceeded 40 million by some accounts. Shortly after assuming office, President Obama, with a majority in the House and Senate, set about developing and passing a sweeping healthcare reform bill. Having learned lessons from the last attempt, the president knew that he had to strike quickly, and that if he lost either the House or the Senate in the mid-term elections, his hope for healthcare reform would be gone.

On December 24, 2009, the Senate passed the Patient Protection and Affordable Care Act (ACA) and sent it to the president’s desk where it was signed into law in March 2010. This law is the biggest piece of healthcare legislation since the creation of Medicare and Medicaid in 1965. The law set in motion tectonic shifts in the healthcare landscape that we are only now beginning to understand some five years later.

The logical question, considering our history, is how did we get here? What drove this country and its elected officials to pass massive legislation impacting the largest single segment of the U.S. economy? How does a president and Congress pass a piece of legislation that could not be fully understood by anyone at the time—one that, if it fails, could cause the collapse of an economic market that accounts for over 17% of the U.S. economy? To answer those questions, you need to understand the failures that preceded the passing of the ACA and how those failures, along with several other key factors, turned out to be a perfect storm in political timing.

From the 1980s through the end of the century, the expansion of managed care did many things. It increased the types of products and options that were offered to employers. It increased choice and competition in a marketplace that just a few decades before had little to none. Managed care introduced a variety of cost controls, some that worked and some that didn’t. It also created a financial entity that got in the middle of the doctor and patient relationship in some cases. Contract disputes, coverage decisions, utilization management programs, and formularies were all things that caused conflict between insurance companies, doctors and patients.

This laid a foundation for the thinking that insurance companies were only interested in profit and willing to put patient care on the chopping block in the name of earnings. In some cases, though certainly not all, these indictments were true. No company is perfect, and the insurance companies are no exception. I worked for the insurance industry from 1987 through 2004 and know of many examples where insurance companies put profits ahead of what most people would consider good patient care. I can also tell you an almost equal number of stories where the insurance company was vilified just because it was an easy target and it really didn’t do anything wrong.

The same holds true for the other actors in this play. I have seen good, honest doctors just as I have seen physicians who do things for monetary gain and not because it’s clinically correct. Hospitals and employers all have the same positive and negative issues. The point is, in any system as big as healthcare, it’s not so simple to figure out who is the hero and who is the villain. If there truly was a single “bad guy” to focus on, the problems would be much easier to solve.

That said, though, the expansion of the employer-based managed care system did produce some problematic side effects. The first was uncontrollable and unsustainable cost increases, the second was an increasing population of uninsured. Both these factors were major players in the passing of the ACA. Put simply, if not for the hyperinflation of healthcare costs, and the 40 million-plus people in this country without insurance, there wouldn’t even have been a debate on healthcare reform—let alone a bill and a vote in Congress. Because of this, it’s important to address the issues of healthcare “hyperinflation” and the uninsured population separately, before we examine the current state of affairs in healthcare, and finally, what the future looks like.

Excerpt from: Flatlining: How Healthcare Could Kill the US Economy, by Ron Howrigon, American Association for Physician Leadership® 2017,

Ron Howrigan

President and CEO, Fulcrum Strategies, 1101 Haynes Street, Suite 103, Raleigh, NC 27604, and author of Flatlining: How Healthcare Could Kill the U.S. Economy (American Association for Physician Leadership®, 2017); phone: 919 436-3377; e-mail:

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