America’s First Health Insurance Led Us the Wrong Way

This episode tells the story of how America’s first health insurance contract started us down the path of spiraling health care costs, closed networks, moral hazards, and “lose your job, lose your insurance.” Worth 4 minutes of your time and a share.

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 I’m Dr. Mike Koriwchak, Vice President of the Docs4PatientCare Foundation. As part of our continuing conversation about health care reform we need to understand the history – of health care delivery-how did we get here?  We can’t fix things unless we can answer that.

Now you would think that such a complex, mission-critical system as health care would be the product of careful consideration by really smart people. Unfortunately, it turns out that is not the case. For the past century, our healthcare system has been designed and managed by the one group of people least qualified to do it – politicians…of bot political parties.

The historical accident that is our health care system began almost a century ago. During the years leading up to The Great Depression not only were patients financially desperate for care, but hospitals were desperate for paying patients!  In 1929 Baylor Hospital in Texas, on the brink of financial ruin, tried something new.  The hospital contracted with the teachers of the Dallas Independent School District to pay a monthly premium that covered up to 21 days of hospital admission annually.  The architect of this deal was one Justin Ford Kimball, a lawyer and former Superintendent of the same Dallas School District (hence the connection with teachers).  Kimball had left the superintendent job to become the administrator of Baylor hospital sometime before. With that contract, Blue Cross Health insurance was born.

Now there is an interesting back story here.  While he was Superintendent Kimball created a “sickness fund” (as they were called) for teachers.  Financial data from that fund allowed him to measure spending for health care on the employer side.   Then when he took over Baylor Hospital he gained access to cost data on the hospital side of the equation.  With all of this information, he was able to calculate the cost of care for Dallas Independent teachers to be *15 cents* per person per month.  The price he charged the teachers was 50 cents per member per month.  That’s over a 200% markup.  Talk about surprise medical billing!!

Now think about that for a minute.  So the moment the ink was dry on this deal 4 things happened:
1.  Spending on health care more than tripled from 15 cents to 50 cents.  In all fairness, this is probably balanced by some underutilization that got corrected.
2.  The first closed provider network was created.  Baylor was the only place you could get the care and receive benefits.
3.  Health insurance was tied to your employment.  Lose your job, lose your insurance.
4.  The first moral hazard in health care was created…after taking your money the hospital was perversely incentivized to provide patients with as little care as possible.

Does any of this sound familiar???  Many of the problems in our health care system today were created right here. So on the historical timeline of America, we’re not even through the Great Depression yet and already health care costs are spiraling upward!  …why?  Because the cost of care just got hidden away!

Transparency, choice, competition, downward pressure on prices…all just went out the window. Now don’t get me wrong…we have to have health insurance of some kind.  In fact, the hospitalization coverage covered by the original Blue Cross contract is well served by a classic insurance model.  And as Americans, we have rightly committed to finding a way to pool resources to pay for care related to unexpected events, pre-existing conditions, and for folks who can’t afford to pay.

We talked about that in our last video on the right to health care.  But to solve our current health care problems we have to understand the unintended consequences of the choices we make.

From this story, we must learn that the moment you decide to pay for something with insurance, the cost goes way up. In our next video will get into what happened to health care during and after World War Two.   We’ll see that although the practice of medicine changed significantly, the way we paid for it didn’t change at all.

I’m Dr. Mike Koriwchak, Vice President of the Docs4PatientCare Foundation.  Thanks for listening.  See you again soon.

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