History of Health Insurance

By Chris Yang | Last Updated: March 28, 2021

Image by: Brett Dashevsky

What is Health Insurance?

Health insurance in the U.S. finances the unpredictable costs of health care. Health insurance allows health care access. Note: other countries use health insurance, too — it just looks a little different here.

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Key Takeaways

  • Health insurance originated to pay for expensive health care costs.

  • In the U.S., health insurance is associated with decreased risk of mortality across all socio-demographic groups.

  • Racial, economic, gender and other demographic disparities in care can exacerbate poor health outcomes even with health insurance.

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A Brief History

Pre-1920

Before employment-based and government-subsidized health insurance, people paid for healthcare through basic barter or out-of-pocket transactions. Hospitals were considered sickhouses. Patients generally went to hospitals when no other options were available. In fact, in 1900, the average American spent $5 ($100 in today’s dollars) per year on health care. All in all, health care didn’t take up much of America’s budget.

1920s-1950s

As sanitation standards, clinical care and medical education advanced, health care became more effective but more expensive. High costs discouraged health care use. So, in 1929, Baylor University created the nation’s first health insurance plan. The idea was simple: Dallas schoolteachers would pay 50 cents per month in exchange for Baylor picking up the tab on hospital visits. These hospital insurance plans ultimately spread to California and grew into what we know as Blue Cross today.

The rollout of organized insurance plans coincided with the Great Depression and World War II, when F.D.R. signed an executive order that imposed wage freezes on businesses. Employers reacted by offering fringe benefit packages (which included health insurance) to attract potential employees and stay competitive. In 1943, the IRS classified employer-sponsored health insurance contributions as tax-exempt, effectively subsidizing employer-sponsored health insurance plans and making them more affordable than individual plans.

1950s-now

The establishment of health insurance as an employment benefit led to access inequality based on employment status. People who were unemployed, retired, worked part-time jobs or ran small businesses couldn’t access affordable employment-sponsored health insurance. To address this, the federal government introduced government-sponsored plans for the retired and the poor (aka Medicare and Medicaid) in 1965. In 2019, nearly 35% of the U.S. population was covered by government-funded health insurance.

Since then, U.S. healthcare has grown in many ways. The insurance market exploded in the past two decades and our attitudes toward care have changed too. The Health Maintenance Organization Act of 1973 led to a paradigm shift towards managed care, which emphasizes preventative care and cost containment. The Affordable Care Act of 2010 increased coverage, expanded Medicaid eligibility and subsidized cost-sharing. More recently, the Trump administration attempted but failed to repeal the ACA with the American Health Care Act of 2017.

In summary...

The massive U.S. health insurance industry arose as a result of decades of effort and chance. Today, health insurance is associated with decreased risk of mortality in all sociodemographic groups. Yet, socioeconomic disparities contribute to poor health even after controlling for health insurance and income. Health may be influenced more by broader socioeconomic factors than by medical care. Poor health can stem from psychosocial stresses, not just from material access or deprivation. Good insurance and healthcare access do not necessarily equate to good health. 

The future is uncertain, but access to health insurance is, for the time being, a force of good.

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Outside the Huddle

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Reviewed by Geetika Rao, MPH | Edited by Nidhi Mahagaokar, MPH and Paris Ghazi | Fact checked by Julia Radossich, PA-C