Hello Everyone,

On the heels of the Supreme Court ruling largely upholding the “Patient Protection and Affordable Care Act,” it’s time to follow up on Obamagram #45, “Health INSURANCE Reform,” written in September 2009, prior to the passage of the Act. http://www.obamagrams.com/group-5/health-insurance-reform/

In that piece, I made several observations, which I still believe to be valid:

1) The Act is largely about health insurance reform, not about all-encompassing health care reform.

2) Major changes are extremely difficult to achieve, as Machiavelli wrote in 1513, “…there is nothing more difficult to execute…than to introduce a new order of things…”

3) We humans are wired to instinctively react to what we perceive as “emotional emergencies,” at which time fear overrides reason, what Daniel Goleman calls an “amygdala high jacking.” The prime example of this was lies spread by Sarah Palin and others about the Act’s non-existent “death panels.”

4) Voters are reluctant to “look it up” – that is to do the fundamental work to make fully-informed judgments rather than being swayed by opposing politicians and scary T.V. commercials.

Opposition to the law that was passed has largely, but not exclusively, rested on two arguments – it’s unconstitutional and it’s unpopular. The first one has now been summarily dispatched.

And, I would submit that the second is largely a circular argument. The opposition would have us believe that the law should be repealed because it is unpopular when its unpopularity in the polls is in the main a result of the opposition’s mammoth effort to make it so, primarily through fear and deception. Death panels. Government takeover. Interfering with the doctor-patient relationship. Socialized medicine.

So, in a series of Obamagrams, I will seek to shed a little light on this continuing debate, recognizing that it cannot possibly be comprehensive. Or, entirely persuasive.

First, let me make some comments about the history of health insurance. Then, in subsequent editions I will describe what might be called “Romneycare” – the precise precursor to “Obamacare” – and then examine some of the actual provisions of the federal law.

In order to understand the Patient Protection [note how those words are overlooked] and Affordable Care Act, it is important to have some understanding of how health insurance has evolved in the United States. That evolution was, in part, particular to our free enterprise, capitalist system. By understanding it, we can begin to rationally discuss the contortions (I will write more on “contortions” in other Obamagrams) we are now going through to extend coverage to all citizens.

History of Health Insurance in the United States

According to Prof. Melissa Thomasson, an economic historian at Miami University, here is a thumbnail history of the development of health insurance in the U.S. in the twentieth century. I am hereafter redacting her article from EH.net with emphasis added: http://eh.net/encyclopedia/article/thomasson.insurance.health.us

Prior to 1920 [in my 96-year-old father’s lifetime!], the [poorly-developed] state of medical technology generally meant that very little could be done for many patients…that most patients were treated in their homes…[and] most people had very low medical expenditures…As a result, most people felt they didn’t need health insurance. Instead, households purchased “sickness” insurance — similar to today’s “disability” insurance — to provide income replacement in the event of illness.

The low demand for health insurance at the time was matched by the unwillingness of commercial insurance companies to offer private health insurance policies. Commercial insurance companies did not believe that health was an insurable commodity because of the high potential for adverse selection [only the sick buy coverage] and moral hazard. They felt that they [couldn’t] calculate risks and write premiums accordingly. For example, people in poor health may claim…to be healthy [when they] sign up [individually] for health insurance.

The fact that people generally felt actual health insurance (as opposed to sickness insurance) was unnecessary prior to 1920 also helped to defeat proposals for compulsory, nationalized health insurance in the same period…although many European nations had adopted some form of compulsory, nationalized health insurance by 1920.

As the twentieth century progressed, several changes occurred that tended to increase the role that medicine played in people’s lives and to shift the focus of treatment of acute illness from homes to hospitals…the growing acceptance of medicine as a science led to the development of hospitals as treatment centers and helped to encourage sick people to visit physicians and hospitals.

1920-1940: Blue Cross and Blue Shield
As the demand for hospital care increased in the 1920s, a new payment innovation developed at the end of the decade that would revolutionize the market for health insurance. The precursor to Blue Cross [hospital insurance] was founded in 1929 by a group of Dallas teachers who contracted with Baylor University Hospital to provide 21 days of hospitalization for a fixed [periodic premium]. The Baylor plan developed as a way to ensure that people paid their bills…Blue Cross [was later] designed by the American Hospital Association to [in part] reduce price competition among hospitals.

Blue Cross plans also benefited from special state-level enabling legislation allowing them to act as non-profit corporations, to enjoy tax-exempt status, and to be free from the usual insurance regulations. Despite the success of Blue Cross and pre-paid hospitalization policies [like Baylor’s], physicians were much slower in providing pre-paid care. Blue Cross [hospital insurance] and Blue Shield [insurance for physician services] developed separately, with little coordination between them. Physicians worried that a third-party system of payment would lower their incomes by interfering with the physician-patient relationship and restricting the ability of physicians to price discriminate. However, in the 1930s, physicians [were pushed] to develop their own pre-paid plans…[as] advocates of compulsory health insurance looked to the emerging social security legislation as a logical means of providing national health care. Compulsory [national] health insurance was even more anathema to physicians than voluntary [commercial] health insurance. It became clear to physicians that in order to protect their interests, they would be better off pre-empting both hospitals and compulsory insurance proponents by sculpting their own plan…These [state and local] physician-sponsored plans ultimately affiliated and became known as Blue Shield in 1946.

1940-1960: Growth in the Commercial Health Insurance Market
After the success of Blue Cross and Blue Shield in the 1930s…commercial insurance companies decided to enter the market for health coverage. Demand for health insurance increased as medical technology further advanced, and as government policies encouraged the popularity of health insurance as a form of employee compensation.

Employer-Provided Group Insurance
Blue Cross and Blue Shield were first to enter the health insurance market because commercial insurance companies were reluctant to even offer health insurance early in the century. As previously mentioned, they feared that they would not be able to overcome problems relating to adverse selection, so that offering health insurance would not be profitable. The success of Blue Cross and Blue Shield showed just how easily adverse selection problems could be overcome: by focusing on providing health insurance only to groups of employed workers [this is a key point that I’ll return to in subsequent commentaries]. This would allow commercial insurance companies to avoid adverse selection because they would insure relatively young [i.e., not retired], healthy people who did not individually seek health insurance…the market for health insurance exploded in size in the 1940s.

Discriminatory Pricing
The success of commercial companies was aided by two factors. First, the competitiveness of Blue Cross and Blue Shield was limited by the fact that their non-profit status required that they community rate their policies. Under a system of community rating, insurance companies charge the same premium to sicker people as they do to healthy people. Since they were not considered to be nonprofit organizations, commercial insurance companies were not required to community rate their policies. Instead, commercial insurance companies could engage in experience rating, whereby they charged sicker people higher premiums and healthier people lower premiums.

Wage Control Loopholes During World War II
Offering insurance policies to employee groups not only benefited insurers, but also benefited employers. During World War II, wage and price controls prevented employers from using wages to compete for scarce labor. Under the 1942 Stabilization Act, Congress limited the wage increases that could be offered by firms, but permitted the adoption of employee insurance plans. In this way, health benefit packages offered one means of [paying] workers [more]…in 1949, the government ruled…that the term “wages” included pension and insurance benefits. Therefore, when negotiating for wages…union[s were] allowed to negotiate benefit packages on behalf of workers as well. This ruling, affirmed later by the U.S. Supreme Court, further reinforced the employment-based system [that is at the heart of our system today].

Perhaps the most influential aspect of government intervention that shaped the employer-based system of health insurance was the tax treatment of employer-provided contributions to employee health insurance plans [and] employers did not have to pay payroll tax on their contributions to employee health plans [and] in 1954…employer contributions to employee health plans were [declared] exempt from employee taxable income.

The 1960s: Medicare and Medicaid
By the 1960s, the system of private health insurance in the United States was well established. In 1958, nearly 75 percent of Americans had some form of private health insurance coverage. By helping to implement a successful system of voluntary [commercial] health insurance plans, the medical profession had staved off the government intervention and nationalized insurance that it had feared since the 1910s [and still fear today]. The AMA also was a vocal opponent of any nationalized health insurance programs [as it is today]. The AMA had played a significant role in defeating proposals for nationalized health insurance in 1935 (under the Social Security Act) and later in defeating the proposed Murray-Wagner-Dingell…bill in 1949. [That] bill would have provided comprehensive nationalized health insurance to all Americans.

While serious proposals were not put forth during the Eisenhower Administrations of 1952-1960 …proponents…realized that the only way to enact government-sponsored health insurance would be to do so incrementally — and they began by focusing on the elderly.

Medicare passed in 1965 [consisting] of two parts. Part A represented the compulsory hospital insurance program the aged were automatically enrolled in upon reaching age 65. Part B provided supplemental medical insurance, or subsidized insurance for physicians’ services.

In contrast to Medicare, Medicaid [also passed in 1965 as part of amendments to the Social Security Act] was enacted as a means-tested, federal-state program to provide medical resources for the indigent. The federal portion of a state’s Medicaid payments is based on each state’s per capita income relative to national per capita income. Unlike Medicare, which has uniform national benefits and eligibility standards, the federal government only specifies minimum standards for Medicaid; each of the states is responsible for determining eligibility and benefits within these broad guidelines. Thus, benefits and eligibility vary widely across states. [End of Prof. Thomasson’s history.]

Hopefully, this will provide a foundation for my discussion of the Patient Protection and Affordable Care Act in subsequent Obamagrams. We can see how medical advances, adverse selection, discriminatory pricing, employer-based groups, for-profit insurance companies, and government-based insurance – among many other factors – have affected the evolution of health insurance in the U. S.

Next time, I will write about Romneycare.

Please, as always, pass it on. And, remember that previous Obamagrams are stored on www.obamagrams.com



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