All Things Considered

Accidents Of History Created U.S. Health System

Published October 22, 2009 3:28 PM

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If you want to understand how to fix today's health insurance system, you'd be smart to look first at how it was born. How did Americans end up with a system in which employers pay for our health insurance? After all, they don't pay for our groceries or our gas.

It turns out there never was any central logic at work. The evolution of the American health care system began in the 1920s, when choices boiled down to which crazy cure you preferred.

Dr. John Brinkley, for instance, was a huge hit in American radio with his health advice shows. For whatever problem folks had, Brinkley had one fabulous solution: transplant a goat gland into your body. He pitched it as being perfect for everything from dementia to impotence to flatulence. But if, somehow, a goat gland didn't cure your ills, you could always use Bonnore's Electro Magnetic Bathing Fluid or Clark Stanley's Snake Oil Liniment.

In that era, most medical care in the U.S. was basically medieval — a bunch of potions that did nothing. Luckily, though, they were cheap potions. Health care was a trivial part of the average person's annual budget. In 1900, the average American spent $5 a year on health care ($100 in today's money). No one had health insurance, because you don't need insurance for something that costs $5 a year.

The First Health Insurance

Before the birth of modern medicine, hospitals were poorhouses where the indigent went to die. Then came the advent of effective medicines, especially antibiotics, along with a revolution in medical schools.

Suddenly, says economic historian Melissa Thomasson, "hospitals are marketing themselves as places to have babies." The professor at the Miami University in Ohio says that in the early part of the 20th century, hospitals were able to focus on happy outcomes.

Health care became much more effective, and much more expensive. Clean hospitals, educated doctors and real pharmacological research cost money. People proved willing to pay for care when they were really sick, but it wasn't yet common to go for checkups or survivable illnesses.

By the late 1920s, hospitals noticed most of their beds were going empty every night. They wanted to get people who weren't deathly ill to start coming in.

An official at Baylor University Hospital in Dallas noticed that Americans, on average, were spending more on cosmetics than on medical care. "We spend a dollar or so at a time for cosmetics and do not notice the high cost," he said. "The ribbon-counter clerk can pay 50 cents, 75 cents or $1 a month, yet it would take about 20 years to set aside [money for] a large hospital bill."

The Baylor hospital started looking for a way to get regular folks in Dallas to pay for health care the same way they paid for lipstick — a tiny bit each month. Hospital officials started small, offering a deal to a group of public school teachers in Dallas. They offered a plan for the teachers to pay 50 cents each month in exchange for Baylor picking up the tab on hospital visits.

When the Great Depression hit, almost every hospital in the country saw its patient load disappear. The Baylor idea became hugely popular. It eventually got a name: Blue Cross.

"When I actually started studying this stuff, I got interested because I wondered why we have an employer-based system," Thomasson says. "It comes right out of Blue Cross." The genius of that approach, she says, was marketing it to groups of workers.

The Modern System Is Born

Soon, Blue Cross coverage was available in almost every state, though not many people bought in. The modern system of getting benefits through a job required another catalyst: World War II. Thomasson says that if the Great Depression inadvertently inspired the spread of employer-based health insurance, World War II accidentally spread the idea everywhere.

"The war economy is an entirely different ballgame," Thomasson says. The government rationed goods even as factories ramped up production and needed to attract workers. Factory owners needed a way to lure employees. She explains that the owners turned to fringe benefits, offering more and more generous health plans.

The next big step in the evolution of health care was also an accident. In 1943, the Internal Revenue Service ruled that employer-based health care should be tax free. A second law, in 1954, made the tax advantages even more attractive.

Thomasson cites the huge impact of those measures on plan participation. "You start from 9 percent of the population in 1940 to 63 percent in 1953," she says. "Everybody starts getting in on it. It just grows by gangbusters. By the 1960s, 70 percent [of the population] is covered by some kind of private, voluntary health insurance plan."

Thus employer-based insurance, which started with Blue Cross selling coverage to Texas teachers and spread because of government price controls and tax breaks, became our system. By the mid-1960s, Thomasson says, Americans started to see that system — in which people with good jobs get health care through work and almost everyone else looks to government — as if it were the natural order of things.

But to Thomasson and other economic historians, there's nothing natural or inevitable about it. Instead, they see it as the profound result of historical accidents.

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MELISSA BLOCK, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block in California.

MICHELE NORRIS, host:

And I'm Michele Norris in Washington.

First up this hour, we have a story that begins with some old-time potions, promised cures for just about any ailment. And it ends with our modern-day health care system. It is a story of how we wound up with a system where employers pay for health insurance.

BLOCK: So, how did we get here? After all, employers don't pay for our groceries or our gas. NPR's Planet Money has been exploring this question and as Adam Davidson and Alex Blumberg discovered, there was never any central logic at work, just a bunch of accidents that brought us to where we are today.

ADAM DAVIDSON: To learn about how we got our modern health care system, you do have to study history, but you don't have to study too much of it; you can ignore most of what was going on before, say, the 1920s.

ALEX BLUMBERG: That's right, Adam. We dug up some archival health care radio stories. Here's a bit...

(Soundbite of radio program)

Dr. JOHN BRINKLEY: And you know that unless some relief comes to you you're going to be in the undertaker's parlor on the old cold slab, being embalmed for a funeral. Well, why do you hold back? Why do you...

BLUMBERG: The audio quality isn't great. So, let me explain. This is Dr. John Brinkley. And he was huge in the U.S. in the 1920s, dispensing on-air health advice through his radio shows. Whatever problem folks had, he had one fabulous solution: transplant a goat gland into your body. It was perfect for everything from dementia to impotence to flatulence.

DAVIDSON: And if, somehow, a goat gland didn't cure your ills, you could always use Bonnore's Electro Magnetic Bathing Fluid, Clark Stanley's Snake Oil Liniment.

BLUMBERG: Oh, and my personal favorite: Mugwump, for the cure and prevention of all venereal disease.

DAVIDSON: We're having fun here, of course, but the point is that up until say 1910, 1920, most medical care in the U.S. was basically medieval -a bunch of potions that did nothing.

BLUMBERG: Luckily, they were cheap potions. Health care was a trivial part of the average person's annual budget. In 1900, the average American spent $5 a year on health care - that was cheap even then, 100 bucks in today's dollars.

DAVIDSON: So, it was a tradeoff. On the one hand, health care was cheap. That's a big plus over the system we have today. On the other hand, it didn't actually make you any better.

BLUMBERG: Right. And, of course, nobody had health insurance. Why would you get health insurance for something that doesn't work and only costs $5 a year?

DAVIDSON: So, the first step in getting us to our current health care system: medicine got better. Doctors started curing the sick.

BLUMBERG: There were new, and for the first time, effective medicines starting in the 1910s and '20s, especially antibiotics. There was also a medical school revolution.

DAVIDSON: All this transformed health care, which was especially clear in hospitals. Before, say, 1911, hospitals were not anything like what we think of today. They were really poorhouses where the indigent went to die.

BLUMBERG: Melissa Thomasson is an economic historian at Miami University in Ohio.

Professor MELISSA THOMASSON (Economics, Miami University): Hospitals have a radical transformation in the early part of the 20th century. Hospitals are actually marketing themselves as places to have babies, do appendectomies, take your tonsils out. They're focusing on generally things with happy outcomes.

BLUMBERG: Turns out effective health care is a lot more expensive than quack elixirs. All these clean hospitals, educated doctors, real pharmacological research, it costs money.

DAVIDSON: People were willing to pay when they were really sick, but it wasn't yet common to just go to the doctor for checkups or for a survivable illness.

BLUMBERG: By the late 1920s, hospitals noticed most of their beds that were going empty every night. They wanted to get people who weren't deathly ill to start coming in.

DAVIDSON: An official at Baylor University Hospital in Dallas, Texas, noticed that Americans, on average, were spending more on cosmetics than on medical care. He said, we spend a dollar or so at a time for cosmetics and do not notice the high cost. The ribbon-counter clerk can pay 50 cents, 75 cents or $1 a month, yet it would take about 20 years to set aside a large hospital bill.

BLUMBERG: So, Baylor hospital wanted to figure out how to get ribbon-counter clerks and any one else they could find in Dallas to pay for health care like they pay for lipstick. A tiny bit every month.

DAVIDSON: Baylor started small. They offered a deal to a group of public school teachers in Dallas. They told them, you pay us 50 cents a month and we'll cover your hospital visits.

BLUMBERG: And then the Depression hit. Almost every hospital in the country saw their patient load disappear. So, the Baylor idea became hugely popular. And eventually it got a name: Blue Cross. Again, Melissa Thomasson.

Prof. THOMASSON: You know, when I actually started studying this stuff, I got interested in it because I wondered why we have an employment-based health insurance plan. It doesn't seem very logical, but it comes right out of Blue Cross selling insurance to groups of people who probably wouldn't need it, that is, people who were healthy enough to work. The genius in marketing this by Blue Cross is marketing it to groups of workers.

BLUMBERG: Blue Cross eventually shows up in almost every state, but it's still pretty small. Not that many people have it. To get to our modern insurance system, you need another step. Go to war.

(Soundbite of music)

Unidentified Man #1: War has always had two fronts: The fighting fronts with its fury of battle and behind the lines, the civilian front with its job of living and producing.

Prof. THOMASSON: The war economy is an entirely different ballgame.

DAVIDSON: Economic historian Melissa Thomasson says that if the Great Depression inadvertently inspired employer-based health insurance, World War II accidentally spread the idea everywhere.

Prof. THOMASSON: Essentially we go from being a mixed economy, with mostly market and some government intervention, to being a planned economy. I mean, think of government rationing on all levels.

Unidentified Man #2: Good afternoon. Here's a reminder from the office of price administration. All old type B&C gas coupons expire midnight Aug 31st, that's Tuesday night. After that...

Prof. THOMASSON: But they tell people as you can't - you legally, you cannot raise prices if you can't raise wages and so you can't find workers who can work for you. You can't lure them by increasing wages. Now so, what's a poor employer to do? They turn to fringe benefits. And they just started offering more and more generous health insurance plans.

BLUMBERG: Then another big change. The one that they really cemented the system and got us where we are today. It came entirely by accident in 1943.

DAVIDSON: The Internal Revenue Service ruled that employer-based health care should be tax free. Then, in 1954, a new law made the tax advantage of employer-based health care even more attractive.

BLUMBERG: And if you don't think a tax law change can have a huge impact on health care, Melissa Thomasson has some data for you, pal. Just look at how the number of people with employer-based health insurance changed over time.

Prof. THOMASSON: You start from nine percent of the population in 1940 to 63 percent of the population in 1953. Everybody starts getting in on it. And it just grows like gangbusters and by the 1960s, you know, roughly 70 percent of the population is covered by some kind of private, what the AMA would say, voluntary health insurance plan.

DAVIDSON: By the mid-1960s, Thomasson says, American started to see our system, where people with good jobs get health care through work and people without good jobs have to look to the government, as if it were the natural order of things.

BLUMBERG: To Thomasson and other economic historians though, there's nothing natural or inevitable about it. It's simply the result of a series of historical accidents.

I'm Alex Blumberg.

DAVIDSON: And I'm Adam Davidson, NPR News. Transcript provided by NPR, Copyright National Public Radio.

Source: NPR

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