How Did We Get Here?
“The discussions are confusing. Help me understand how we got here.” This simple question by a young physician executive has a complex answer. When my great-grandfather Wright graduated from medical school in 1892, he applied for a position as a police surgeon to secure a steady income stream while he built his practice. Patients paid, or did not, pay his bill out of pocket, so he could charge whatever he wanted, but realistically could hope for payment only from a fraction. Hospitals were funded by government or charitable organizations, usually churches. My grandfather graduated in 1911 and went into practice, but was drafted into the Army following the US entry into WWI. He found that he liked being able to care for patients without worrying about money, and passed a competitive examination to remain on active duty as a chest (TB) physician following the war. My uncle followed him into the Army Medical Department upon graduation in 1946, but decided to go into private practice about 1956 with an older man who was looking for help. Doctors were still paid as his grandfather had been and the only common option to private practice was still government employment.
After WWII, employer-based hospital insurance became more available and the government passed the Hill-Burton Act to fund building of hospitals leading to rapid expansion of hospital services. As reviewed by Enthoven and Fuchs, about 45% of the population had hospital insurance in the mid-1950’s, which rose to 77% by 1963. By that time, more than half the population had coverage for regular medical expenses and about a quarter had major medical insurance, which covered prolonged hospitalization and big expenses. This trend crested in the 1980’s and has been in steady retreat as international competition has increased pressure on US employers to constrain costs.
Medicare and Medicaid began in 1965, with hospitals being covered under a mandatory program and reimbursed on a cost-plus basis, and physicians on an optional program (part B) where physicians were reimbursed at 80% of the “usual and customary rate” (UCR) for their locale. Older physicians told of patients brought to the office or ER by family with their bags packed for a hospital “checkup” following passage of Medicare. This growth in funding, combined with the simultaneous biomedical revolution, fueled massive increases in utilization of hospitalization. In 1984/5 the government changed hospitals to “prospective payment,” meaning they fixed a price they would pay based on admitting diagnosis (DRG payment is sometimes used as a short-hand for this.) This led hospitals to shorten hospital stays and stopped admission for diagnostic workup—you had to have a working diagnosis to get the patient admitted. For physicians, abuses of the UCR system, combined with billing patients for the part Medicare didn’t cover led to a rule that mandated physicians to “accept assignment,” meaning agree to Medicare’s fee schedule. Balance billing was limited to the 20% not covered by CMS. While fees paid by the government were fixed, payment was still episode-based—more contact meant more reimbursement to the provider.
Suspecting continued abuse, CMS has instituted an increasingly prescriptive series of regulations and requirements about what would and would not be reimbursed, and developed more and more oversight requirements, now routinely withholding payments and “clawing back” payments deemed to be in error or unjustified. So, over time government payments have increased as a percentage of hospital billings, but declined as a source of net revenue. This was initially countered by cost-shifting to private employers, but they have also evolved their approach.
The one major exception to this history is the pre-paid, integrated delivery system model pioneered in California, now known as the Kaiser-Permanente system. During the Depression, Dr. Sidney R. Garfield opened a hospital in the middle of the Mojave Desert to serve the men building the Colorado River Aqueduct and developed a pre-paid plan to keep it afloat for the life of the project. In 1941, Henry J. Kaiser asked Dr. Garfield to build on the model to support shipyard and steel workers he was recruiting to build ships for the war effort. Following the war, the health plan was opened to the public and the prepayment model had morphed into an “integrated delivery system” (IDS) where the health plan, hospitals and medical groups were all under the same umbrella, but managed separately.
“More important but somewhat less familiar than the growth and subsequent decline of employment-based insurance is its transformation from quasi-social insurance to insurance based on actuarial principles. The latter assumes that insurance is to protect against unpredictable risks for individuals or subgroups; if risks are predictable, premiums are adjusted for the differential. Under social insurance, individuals or subgroups who are expected to use more care do not pay a differential premium; the excess costs are shared collectively. In market terms, those with lower risks cross-subsidize those with higher risks.”
As explained by Enthoven and Fuchs, hospitalization insurance, through Blue Cross plans, was “community rated” and was quasi-social, but over time hundreds of commercial insurance plans entered the market, leading to a change to an actuarial or experience basis. Insurance companies seek to pay only the minimum charge. What that means in practice is that health insurance companies don’t insure against risk—they pass the risk on to the payers in the form of higher premiums or to providers in the form of lower payments, or some combination of both, depending upon market forces.
Today, the government is trying to build a “virtual” IDS under the rubric of paying for value, not volume, while trying to expand insurance to replace those lacking employer-based insurance through the Affordable Care Act, (Obamacare.) Predictably, the forces of the status quo are resisting, but the real debate is still how to “right-size” the healthcare system. Demand for healthcare services seems to be unlimited. Should we use price and actuarial methods to constrain demand or should be use explicit allocation decisions by government, called rationing by opponents, to achieve the same goal?
Much of the conflict in healthcare today derives from these competing views of insurance. And like many such issues, both perspectives have valid arguments and both create different issues of who bears the burden and who pays the cost. Deciding is a political issue. The pandemic has exposed the hidden costs of the actuarial approach, but without producing agreement as to how to resolve the tension. Fear of losing out as the debate continues drives a lot of current behavior in the healthcare arena.
16 May 2021
 Enthoven AC, Fuchs VR. Employment-Based Health Insurance: Past, Present, and Future. Health Affairs 2006;25(6):1538-1547. doi 10.1377/hlthaff.25.6.1538.
 https://about.kaiserpermanente.org/our-story/our-history/how-it-all-started. Accessed 4 May 2021.
Capitalism in Medicine
Is capitalism, with its emphasis on markets, really the appropriate model for health care?
Conflicting Economic Models
Providers are being forced to take on financial risk for the cost of care as shown by recent news articles.
More on Money in Healthcare
Hospitals account for the largest fraction of the healthcare dollar, but are usually hegemonic if not monopolies in their communities. Can Trustees call them back to their mission of patient care?
New Payment Methods
The Public Looks at Healthcare Reform