HISTORY OF MEDICAL INSURANCE

Development in Other Countries 

The concept of spreading the personal economic risks of injuries and illnesses is not new. Examples include the artisans of imperial Rome, the craft guilds in medieval England, and subsequently the mutual aid systems which developed in Great Britain in the 19th century which came to be known as Friendly Societies or Saturday funds. As industrialization spread throughout Europe, so did the mutual aid or insurance concept. Participation was purely voluntary which resulted in low participation which, when coupled with poor administration and low contribution levels, produced ineffective organizations unable to pay adequate benefits.

In 1883 the first national compulsory health insurance law was passed in Germany. The compulsory health insurance idea spread slowly from Germany, accelerating after the turn of the 20th century. Today, over 60 nations have some form of compulsory governmental program. The programs vary widely, and some allow private insurance to supplement the governmental program.

 Development in the United States

Voluntary mutual protection associations developed in the United States in the second half of the 1800’s. One of the earliest of these, La Société Française de Bienfaisance Mutuelle, was organized in San Francisco in 1851. This society was noteworthy for having established a hospital in 1852 to provide care for its members. Fraternal organizations and other ritualistic social organizations also were important early providers of health insurance.

The Montgomery Ward Contract

Starting in 1875, a number of mutual benefit associations called "establishment funds" were formed by and for the employees of a single employer, sometimes with some help from the employer. The development of group health insurance by private insurance companies is related closely to an establishment fund created for the employees of Montgomery Ward & Co., Inc. Montgomery Ward decided to investigate the possibility of replacing the voluntary and poorly supported plan with an insurance product and after protracted and complex negotiations with a number of insurers, the disability income coverage was placed with the London Guarantee and Accident Company of New York in 1911. This contract provided, after a three-day waiting period, loss of time benefits for employees under age 70 equal to one-half of an employee’s weekly wage, subject to a minimum benefit of $5 per week and a maximum benefit of $28.85 per week. There was no maximum time limit for payments.

This plan is generally regarded as the first group health insurance plan.

Group accidental death and dismemberment insurance, which was first written about 1917, was the next group form to appear in the marketplace. In the 1940’s, insurance companies began experimenting with long term disability.

Development of Basic Medical Care Expense Benefits

In 1911, when Great Britain passed a National Health Insurance Act, the concept of providing medical care expense benefits generated significant interest in the United States. Various plans were investigated, but even Samuel Gompers, then President of the American Federation of Labor, rejected compulsory health insurance as being to paternalistic. In the early 1920’s, individual hospitals in Rockford, Illinois; Grinnell, Iowa; New Bedford, Massachusetts; and Brattleboro, Vermont offered hospital expense benefits on an individual prepaid basis.

The principle of group prepayment for hospital coverage originated at Baylor University Hospital in Dallas, Texas, in 1929, when some 1500 school teachers were covered for 21 days of semi-private room and board and hospital extras in any one year. During the depression, more and more hospitals followed the Baylor plan.

Blue Cross developed during the thirties. In 1934, the General Tire & Rubber Company asked the Equitable Life Assurance Society of the United States to add group hospital expense coverage to its existing group insurance program. About the same time, Occidental Life of California added hospital expense benefits to an existing short-term disability income policy for a large chain of grocery stores.

The development of the group hospital expense benefit was a significant step forward in helping employees meet the cost of medical care. The next step was coverage for surgeons’ fees and physicians’ charges for in-hospital, home, and office benefits. In 1938, private insurers introduced group surgical expense benefits, followed by group medical expense benefits in 1943. In 1939 the first state-wide Blue Shield Plan was developed, California Physician Service. Private insurers continued to add other basic medical care expense benefits, for example, vision benefits in 1957, extended care facility benefits in 1959, and prescription drug benefits in 1964.

Development of Major Medical Expense Benefits

The basic hospital, surgical, and medical expense coverage developed during the 1930’s and 1940’s, although very beneficial for the great majority of situations, was found to offer inadequate protection against serious accidents or illnesses that involved prolonged confinements and expensive procedures. To provide insurance against such catastrophic medical events, major medical expense benefits were introduced by the Liberty Mutual Insurance Company in 1949 to supplement basic medical benefits. Originally insurers wrote major medical expense benefits as a supplement to their own basic medical care coverages or those provided by the Blues. Today, major medical expense insurance encompasses virtually all types of medical care expenses - both in and out of a hospital - and either supplements a basic medical care plan or integrates basic and supplemental medical care benefits in a single plan of insurance called comprehensive major medical.

Factors Influence the Growth of Group Health Insurance

Factors outside the Insurance Field. Many of the factors responsible for the rapid and extensive growth of group health insurance are outside the industry itself:
  1. Population Growth - Growth in the number of people in the U.S. plus changes in the distribution of population and standard of living with a growing emphasis on institutionalized care.
  2. Changes in the National Economy - The expanding economy with increasing gross national product, a more equitable distribution of wealth, a substantial increase in average family income, etc. all following the serious depression of the 1930’s heightened interest in health insurance among workers and it became an employment issue.
  3. The Rising Demand For and the Cost of Medical Care - The increasing effectiveness of medical treatment with the availability of more effective drugs and diagnostic services increased public usage of medical services combined with more technically-oriented and specialized medical practice which pushed prices up.
  4. The Influence of Collective Bargaining - The first labor agreement to provide medical care was in 1926 but the real push came in 1949 when the Supreme Court upheld the unions’ right to bargain for benefits.
  5. The Effect of Federal Taxation - The premiums are considered a tax-deductible business expense for employers and not part of taxable income to employees and the benefits are generally not taxable either.
  6. The Effect of Statutory Disability Benefit Programs - Some states have mandated short term disability programs that insurers can compete for. The Federal Government introduced the Social Security long term disability benefit program which employers cannot compete for.
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