A century ago, all health care was paid for out of pocket. Today, most Americans have health insurance. How did this important system emerge and develop?
Mar 2, 2024 • By Owen Rust , MA Economics in progress w/ MPA
One of the largest financial institutions in the United States is the health insurance industry. Most full-time employees can access health insurance through their employer, while those who are retired, unemployed, disabled military veterans, or low-income workers may receive either health insurance or direct health care through government assistance. Controversially, the US remains one of the few developed nations where most citizens in the labor force are expected to purchase their own health insurance plans, either on the health insurance marketplace or through their employers. Many find health insurance to be complicated and seek reforms to the system. When did health insurance begin, how has it evolved, and what do reformers want to see it evolve into?
Health insurance is a relatively new concept in history. Prior to the early 1900s, almost all health care was paid for at the point of sale, and there was virtually no government regulation. Not until around 1910 did formal medical care have a measurably greater health outcome than not seeking formal care, and the education of doctors was often relaxed and unregulated. That year, the Flexner Report revolutionized medical school training by increasing academic standards and encouraging partnerships with hospitals for real-life training. The railroad industry led the country in developing employee health programs for maintaining worker productivity.
Although Progressive Era reformers were already calling for government health insurance, influenced by Europe, health insurance reforms were difficult because the federal government had little authority over health care. Health care is not mentioned in the US Constitution, meaning it is the province of the individual states (as stated in the Tenth Amendment of the Bill of Rights). This has made health insurance reform more difficult to enforce on a national level, even leading some to propose another constitutional amendment to include health care. Federal regulation of health insurance is indirect, with states having regulatory control.
Because Americans’ use of formal medical care was rather minimal and sporadic up through the 1920s, modern, prepaid health insurance – where participants paid monthly premiums ahead of any medical treatment – first emerged in 1929. School teachers in Dallas, Texas paid $6 per year to receive hospitalization insurance. Hospitals liked this plan because people rarely needed hospital care, so the fixed premium payment was a reliable source of income. In 1934, commercial insurance companies began selling this hospitalization service in other markets. Hospitals accepted this arrangement because, due to the ongoing Great Depression, hospital occupancy rates were down from the late 1920s.
Initially, hospitalization insurance was not considered true insurance but rather a prepaid package of service. The state of New York, however, declared it to be insurance in 1933, and twenty-five states had followed suit by 1939. This placed hospitalization insurance under state insurance regulation authority. Around that time, hospitalization insurance began to expand to cover non-emergency surgeries, as these were distinct individual events. Also during this era, hospitalization insurance was divided into localized monopolies by the American Hospital Association (AHA), which decreed that insurance plans could not compete against each other; this was struck down as unconstitutional in 1943.
During World War II, the federal government took unprecedented control over the economy to ensure sufficient resources for the war effort. In October 1942, US President Franklin D. Roosevelt (FDR) froze wages to minimize inflation and ensure production. However, employers were still allowed to offer different fringe benefits, including employer-provided health insurance. This quickly led to a massive expansion of employer-sponsored health insurance…assisted by the Internal Revenue Service (IRS) deciding that employer-sponsored insurance should be considered nontaxable in 1943.
Employer competition for workers and the nontaxable status of health insurance made it far easier and cheaper for people to get employer-sponsored health insurance than to buy private insurance plans. This began the tradition of most working-age adults in the US opting for employer-sponsored health care. Some workers received this coverage cost-free, with the employer paying for all of an employee’s premium costs, while others have to share the cost. Across all industries, employers average about 80 percent of the cost of an employee’s health insurance premium, meaning the remaining 20 percent is deducted from a worker’s paycheck.
In autumn 1945, a few months after the end of World War II, new US President Harry S. Truman proposed a single-payer healthcare plan. The five-point plan, which would also increase funding for medical training and medical research, was rolled into a bill that was part of a Social Security expansion. However, after many years of elevated government spending (the New Deal followed immediately by World War II), there was staunch opposition to any additional increase in taxes. In 1946, Republicans took back control of Congress and later helped quash Truman’s proposal, which had built on earlier work by FDR and the Wagner-Murray-Dingell Bill.
Truman’s support for public health care stemmed back to his service in World War I, where he was struck by how many men were considered medically unfit for service. He fought hard for his health care plan as president but was opposed by the American Medical Association (AMA) and anti-communists. The AMA argued that doctors would lose their autonomy under the plan, and anti-communists railed against the proposal as “socialized medicine.” Although Democrats retook Congress in 1948, conservative Democrats from the South (“southern Democrats”) were no longer willing to support New Deal-style legislation. Truman’s goal of single-payer health care through government-run health insurance, likely linked to Social Security, had failed.
Twenty years after President Truman proposed universal, government-run health insurance, his Democratic successor Lyndon B. Johnson achieved a partial victory with the Medicare and Medicaid Act of 1965. The need for government support for health care costs for the elderly had become significant due to the rapid growth in the number of elderly Americans over the past few decades. While many Americans over 60 were retired, medical care costs were rising roughly seven percent annually. Private insurance companies did not want to provide comprehensive health insurance to these septuagenarians (and older) because of their elevated health care needs compared to working-age citizens. Beginning around 1960, health care for the elderly was a top domestic issue for Congress.
Medicare was a grand government-run health insurance program that covered all basic health care for those age 65 and older, regardless of income. In 1972, it was expanded to cover some people who were disabled but under the age of 65. Medicaid was included as a program linked to poverty relief for those receiving cash assistance, though it was later expanded to include some groups (slightly) above the poverty level, such as single mothers with dependents, pregnant women, and people with disabilities. In 1997, the Children’s Health Insurance Program (CHIP) was created as part of Medicaid to provide more coverage for uninsured children in the US, insuring about 1 in 7 youth.
A third group needing government assistance in health care was military veterans, many of whom had become disabled during their military service and required extensive care. The modern Veterans Administration began after World War I, and the government vowed to take better care of veterans after the infamous Bonus March of 1932 during the Great Depression. The VHA, Veterans Health Administration, operated a network of hospitals that specialized in the unique medical care needs of veterans, including poison gas exposure from World War I. Veterans’ needs expanded during the Vietnam War in the 1960s due to the increased survivability of war wounds; many soldiers who would have perished during previous wars were able to be evacuated from the field.
VA medical care is considered separate from health insurance, as it is provided by VA hospitals. This makes the VA more similar to England’s National Health Service, which is single-provider care, than Medicare, which is single-payer care. Veterans receiving full VA benefits receive medical care at VA facilities, though many veterans also have private health insurance and can see private sector doctors. As of 2017, approximately 26 percent of working-age military veterans used VA care as their sole source of medical care. With roughly 7 percent of the US population consisting of military veterans in 2018, this meant that about one percent of the nation used VA care as their sole source of medical care.
The high rate of inflation caused by government spending during the 1960s, including on the Vietnam War, also high health care costs. In addition to soaring health care costs, millions of Americans still lacked health insurance in 1971. Millions more had health insurance that was not comprehensive; few policies at the time covered preventive care, such as checkups and vaccines. Influenced by family healthcare woes when he was growing up, US President Richard Nixon had a goal of achieving universal healthcare. However, unlike Truman’s single-payer proposal in 1945, Nixon’s proposed National Health Insurance Partnership Act in 1971 required employers to provide health insurance to all employees and their dependents.
Nixon’s proposal still involved some cost to the employee, with employees expected to cover about 25 percent of the cost of the premiums. In exchange, however, insurance plans would be required to be comprehensive. Unfortunately for Nixon, his Watergate scandal sapped his influence in Congress. Although Nixon’s broad plan was not adopted, he was able to pass a Medicare expansion to include those with kidney failure and other long-term disabilities in 1972. He encouraged competition between private insurance plans to try and maintain costs and also managed to expand Medicaid coverage, but did not achieve the universal health insurance coverage he sought.
Nixon achieved a few victories in increasing health insurance coverage, but the true conservative resurgence under US President Ronald Reagan meant there was no goal of increased government spending on health care in the early 1980s. Although Reagan supported the concept of universal coverage, he had opposed Medicare upon its inception in the 1960s because participation was mandatory. Reagan supported the concept of devolution during his tenure, which meant the return of power to the states. In the 1980s, states gained increased control over programs, including Medicaid.
Laws in 1981 and 1982 granted states more freedom to operate Medicaid, including increasing cost-sharing with Medicaid beneficiaries. However, legislation after 1982 required states to give Medicaid eligibility to additional groups, such as immigrants needing emergency medical treatment and pregnant women. In 1996, a Republican-controlled Congress pushed through a major devolution of welfare with the Personal Responsibility and Work Opportunity Reconciliation Act. The law repealed the direct link between welfare and Medicaid and allowed states to set stricter income requirements to be eligible for Medicaid, as well as tougher restrictions on immigrants receiving Medicaid.
In 1992, Democratic candidate Bill Clinton won the presidential election, sparking renewed interest in liberal reforms in the new post-Cold War era. Immediately upon taking office in January 1993, Bill Clinton convened the Task Force on National Health Care Reform. First Lady Hillary Clinton was named chair of the task force. After eight months, the task force presented its proposal, which would provide universal health care coverage using a plan similar to that proposed by Richard Nixon twenty years earlier. The Clinton plan was more generous for workers, who would only have to contribute 20 percent of the premium cost versus 25 percent under Nixon’s plan.
In addition, the government would directly subsidize health insurance coverage costs for small businesses and self-employed citizens. Conservatives opposed this health care expansion, and even moderates and some liberals were not fans of the lengthy bill – it was over 1,300 pages long! The Health Security Act fizzled out in Congress in September 1994 as Republicans were poised to gain control of the legislature. Faced with a Republican-controlled Congress in the mid-1990s, President Clinton did not re-attempt the legislation.
The biggest change to health insurance since 1965 came shortly after the election of Democratic candidate Barack Obama to the White House. Obama was able to push through comprehensive health insurance legislation where Clinton had been blocked some 15 years earlier. The Affordable Care Act (ACA), passed in 2010, increased health insurance coverage and forced insurance companies to provide comprehensive coverage. It increased requirements for employer-provided coverage, expanded Medicaid coverage, and required all health insurance plans purchased individually on the private market to provide comprehensive coverage.
In exchange for having to provide more comprehensive coverage, insurance companies benefited from having millions of additional enrollees because of the individual mandate. Controversially, the ACA required all Americans between ages 26 and 65 to maintain health insurance coverage or face a tax penalty (with one ACA reform being that young dependents are able to remain on their parent’s health insurance through age 25). The tax penalty for not having health insurance coverage reached a maximum of $2,085 for a family between 2016 and 2018. The penalty was rationalized as being necessary to convince enough uninsured Americans (with incomes greater than 150 percent of the poverty line) to purchase health insurance coverage that it lowered prices for all consumers.
Although the ACA, colloquially known as Obamacare, was a major liberal reform to health insurance, many liberals and progressives believed it did not go far enough to achieve universal coverage. They also complained that it was complex and difficult to understand, similar to criticisms of the Clinton universal coverage plan in the early 1990s. Many liberals wanted a push for true single-payer health care, similar to the existing Medicare program that covered all citizens age 65 and older. In 2015, Democratic presidential candidate Bernie Sanders, a US Senator from Vermont, reintroduced a single-player healthcare proposal for the first time since Truman’s 1945 plan.
As Sanders turned out to be a serious contender for the Democratic presidential nomination, the media began to explore and publicize his single-payer proposal. Although Sanders eventually lost the presidential nomination to Hillary Clinton, his strong performance and the popularity of his healthcare proposal put the concept of Medicare for All on the map. Bills to expand Medicare to cover all US residents have become increasingly supported by congressional Democrats. While current polls reveal a majority public support for single-payer health care, it is not a current policy proposal for the Biden presidential administration, which may remain in power through 2028.
Despite majority public support for single-payer health care and the proposal of Medicare For All, Republicans won control of both Congress and the White House in the 2016 elections. Republican President Donald Trump vowed to repeal or eliminate Obamacare as part of his platform, but a congressional vote to do so failed in the Senate when three Republicans chose not to vote to repeal it. However, Trump was able to eliminate the individual mandate because it was attached to his successful tax cut proposal, the Tax Cuts & Jobs Act of 2017. Therefore, although the Affordable Care Act (Obamacare) remained in effect, there was no longer a penalty for not having health insurance beginning in 2019.
The Trump administration also allowed states to tighten restrictions on Medicaid eligibility and reduced funding to help enroll people online in Affordable Care Act health insurance plans. However, as states both operated Medicaid and the ACA plan marketplaces, the Trump administration reforms did not have uniform effects nationwide. In 2021, after Democratic nominee Joe Biden became president, he restored funding for Affordable Care Act programs using executive orders. Under both Trump and Biden, health insurance plans were required to offer free Covid-19 testing during the pandemic through the CARES (Coronavirus Aid, Relief, and Economic Support) Act. The CARES Act expired in 2022, and on May 11, 2023 the Covid pandemic was declared over.
Cite this Article
The Gilded Age in America: Booming Business & Incessant Inequalities
By Owen Rust MA Economics in progress w/ MPA Owen is a high school teacher and college adjunct in West Texas. He has an MPA degree from the University of Wyoming and is close to completing a Master’s in Finance and Economics from West Texas A&M. He has taught World History, U.S. History, and freshman and sophomore English at the high school level, and Economics, Government, and Sociology at the college level as a dual-credit instructor and adjunct. His interests include Government and Politics, Economics, and Sociology.
