The Miller Report History of Health Insurance
By Dr.
Given current negotiations between
The story begins in 1850 when the
In the 1920s, hospitals started offering their own pre-paid policies in which participants would pay health care expenses for treatment of illnesses if provided at their hospital. In particular, coverage of the cost of surgical procedures was emphasized because these were the things that occurred most in hospitals since other healthcare services were mainly performed outside of the hospital setting. This would eventually lead to the disparity that we see today in the high reimbursement for surgical procedures and the relatively low reimbursement for primary care including healthcare maintenance, preventive care, pediatric care, and psychiatric care.
Another pivotal event in the 1920s was that insurance companies offering healthcare policies began to come together in associations. The driver for this was that if a health insurance company experienced a significant degree of payouts during a particular year, then the association would shore up the member to prevent bankruptcy. Recall that at this point, the idea behind insurance was that people would together pay into the insurance company as a collective so that if and when any one participant needed expensive care, then payment would be made out of the collective pot of money. The association acted as a sort of insurance for the insurance companies. The first such association of insurance companies was
Around this time, employers began offering coverage of healthcare expenses as a benefit of employment. Initially, the employer would shoulder the risks of such expenses, but soon companies sprang up to offer these employers insurance under which the insurance company would bear the risk and the employers would pay into the insurance company. In 1939, insurance companies that offered such coverage to employers came together and formed
At the start, insurance companies reimbursed patients for the expenses they incurred. Thus, healthcare providers, like doctors and hospitals, were paid fee-for-service. In other words, if a doctor or hospital charged a patient with insurance, then the patient paid the doctor or hospital bill. The insurance company would then reimburse the patient for having paid the medical bill. Costs of healthcare were thus moderated by market forces. Charges were controlled by “supply-and-demand” and “what the market will bear”. These are the basic underpinnings of our whole concept of a capitalist system.
However, two things began to change in the 1970s. First was technology. In the 1970s, we saw the development of the first mechanical ventilators and, as a result, the first dedicated units within hospitals to provide intensive, life-supporting care. Medical technology began to increase at an explosive rate. Advancements in computer technology, as a result of NASA’s
The second big change was the introduction of malpractice lawsuits. Prior to this time, people understood that nothing was perfect and that doctors, being human beings, could not guarantee perfect outcomes for everyone. However, fueled by the promise of these new, developing technologies and advancements in medical science, some patients and their families came to expect perfect outcomes every time. As a result of the advancement in expensive technology and the expectation that these technologies should be available to everyone everywhere, lest a costly malpractice lawsuit ensues, the cost of healthcare in
By the early 1990s, it was clear to insurance companies that they had to do something to curb their rising payouts. After all, they had responsibilities to the insured to have enough money to cover costs. They also had their investors consider who expected to receive stock dividends. It was during this time that insurance companies shifted from paying hospitals and doctors whatever they charged and started negotiating contracts with them to pay reduced rates for the services provided. Out of this concept grew such policies as Healthcare Maintenance Organizations (HMOs), managed healthcare capitation plans, and Preferred Provider Organizations (PPOs). In all of these, the insurance company acts as a middle-man, negotiating higher rates from employers on the front end, while negotiating lower payments to healthcare providers on the back end. The insurance company, in the middle, profits. 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 getting more difficult to provide. In response, hospitals have formed their own associations in the form of healthcare systems. The strategy is to reduce expenses through economy-of-scale purchasing and negotiate better payments for services from insurance companies through greater bargaining power. If this balance is done well, then the hospital may achieve 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 payor system, is the answer. We will explore this in subsequent Miller Report articles.
You can access all previous Miller Reports online at www.WMillerMD.com.
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