David Larson: The health care system we almost had (and still can)

Most of our current financial worries — whether federal, state or even at the personal and family level — are driven by the fact that our health care system is a wasteful, complicated mess. But it didn't need to be this way. In fact, a promising model was emerging before WWII but was snuffed out when the federal government threw a giant wrench into the system. What if we can return to these market-based systems (some of which are re-emerging on their own) and save the nation from an unnecessary debt crisis?

First, the problem: We spend 18 percent of our GDP on health care, which is on another plane from any other industrialized nation. Progressives notice that "single-payer" systems, where the government simply pays for universal coverage, only tend to cost 10-12 percent of GDP, and they assume shifting over to that model is the simple answer. But one can have affordable, and even universal, care without handing everything over to the state. Germany, the Netherlands and Switzerland do this with mandatory health insurance and have better results than single-payer countries at about the same cost.

Singapore, in my opinion, is the best system, operating an almost-entirely cash-based system of patients shopping services based on price and quality scores, which are made transparent on a government-regulated website. These market forces have given them the best quality care at the lowest costs, only 4 percent of GDP. Our system is too complex to mimic their success entirely, but there is a similarly market-based system that the U.S. had been developing before the federal government crushed it.

A little background

Health care is actually fairly new as a major industry. There were town doctors, but until the 20th century, they did not have the benefit of our modern diagnostic instruments, our medicines, our surgical precision or many other advanced options. People paid out of pocket for doctors when something came up the same way they would for a plumber. And while doctors could set a broken leg or sew up a wound, for serious illnesses, they mostly aimed to strengthen the patient's immune system so that they could defeat it naturally.

Care was typically given at home, if you could afford it, because hospitals were places for caring for the poor or those in quarantine. Spending much time in a hospital could mean getting, not curing, a disease. Often, the working class started the hospitals themselves by pooling their money. The "Friendly Society" hospitals in Great Britain were an early model of membership hospital, where working class Brits in the 1800s gave a monthly fee to guard against potential physical and financial ruin from an unexpected illness.

The American equivalents were mutual aid societies through social lodges — a lifeline for the working class. Senior Heritage Foundation fellow David Beito says that by 1910, about one-third of all men belonged to these lodges, which provided an equivalent "for virtually every major service of the modern welfare state including orphanages, hospitals, job exchanges, homes for the elderly, and scholarship programs." Others pooled their money in less-social versions of this arrangement, called "sickness funds."

Blue Cross and Blue Shield

And as health care began to develop into more of a science than an art (and one that was becoming increasingly expensive to perform), this membership model was among the first successful payment structures. In 1929, Baylor University Hospital realized that a lot of their unpaid bills were from young teachers, so they offered a 50-cent-per-month membership to Dallas-area teachers.

This quickly took off throughout the 1930s, and hospitals across the country began to use this model. So that members would be covered even outside their member hospital, the American Hospital Association knit these memberships together into a wider "Blue Cross" plan.

For less-catastrophic medical care, similar "Blue Shield" plans also emerged that covered medical care from family physicians and specialists. So for two monthly fees — one for more routine and specialist care, and the other for more catastrophic care that required hospitalization — Americans could have their medical needs covered. The costs were predictable for the patient, and providers could set membership rates to a level that kept them competitive yet financially solvent.

World War II and employer benefits

Unfortunately, this system was snuffed out in its infancy as the unintended consequences of policy (a tale as old as time). During World War II, the nation's largely male workforce was tied up in battles around the globe, many never to return. This created a massive demand for labor, which, naturally, led to a spike in wages. The government, in all its wisdom, did not want these wage increases to lead to run-away inflation, so it simply declared that wages must stop rising. The wage caps did not stop employers from increasing other benefits though. And with looming labor strikes over stalled wages, those in power decided to ease some of the frustration by making these benefits, including health insurance, exempt from taxation.

And, really, the rest is history. Employers immediately offered deluxe health insurance plans to all of their employees in lieu of wage increases. And all of these employees then dropped their hospital (Blue Cross) and physician (Blue Shield) memberships. In their place, a supremely complicated fee-for-service system evolved in the decades since (ironically, with Blue Cross and Blue Shield merging and becoming one of the major providers of these complicated insurance products).

Time to shift back?

But this fee-for-service comprehensive health care paradigm has not worked particularly well. It only emerged from an accident of history, not because it was the most logical or efficient model. And with everyone scrambling to find ways to simplify it or to just prevent it from bankrupting the country, it might be worth going back to the fork in the road where things went wrong and asking: What was the model we had before the federal government's bad labor policy created this monster?

Whether consciously or not, many are doing just that. Direct Primary Care — where you pay a monthly membership fee for total access to a primary care doctor, with no billing battles with insurance — looks quite a lot like the old Blue Shield family physician membership plans.

With insurance becoming wildly expensive and difficult to manage, some have even gone back to something akin to the "Friendly Societies" or "sickness funds." "Health sharing plans," where everyone pools money and pays for any bills that come up, are an increasingly popular option. These have some difficulties, seeing as they have to operate in the complicated fee-for-service world of surprises and shifting prices (and they likely don't deal with catastrophic events as well), but the instinct is a familiar one.

Some hospitals administrators too are likely nostalgic for an end to the eternal battles with insurance companies and a return to the predictability of the old Blue Cross membership plans. One can imagine a world where these three monthly fees are combined into a comprehensive system, which could continue to largely be paid for by employers:

These three elements appeared to be the core pieces of our health care system before we went down our current path. Why not consider simply reviving them? The fee-for-service model is like a gym where you pay for every exercise you do and have to haggle over the prices. What existed before (and what the DPC model looks like now) is like a sane gym membership where all the basics are included. And like with a gym, even if you aren't nickle-and-diming the minutia, overall competition still keeps providers accountable and incentivizes them to improve quality and lower price over time.

President Trump announced he wants to redirect from Obamacare to a Health Savings Account-based system, which is a good instinct, since it injects market mechanisms into the mix. The "HSA + catastrophic care" model certainly works in Singapore. But our system could be too complicated to wipe it clean and move smoothly into that. Instead, it may be preferable to go back to the monthly membership models that have worked in American health care in the past.

US Rep. Dan Crenshaw, Republican of Texas, has been working on making DPC more available, including in Medicaid. Expect to see pilot programs and experimentation along these lines as health care costs spike and our current system is increasingly found unworkable. North Carolina has already been a pioneer in DPC. Hopefully it can continue to be.

David Larson is managing editor of Carolina Journal where this column first appeared.