It was in 1938 that the problems with the U.S. health care system started. Though people had been seeking help from healers since time immemorial, a lot had changed around start of the 20th century. As germ theory became accepted, vaccines became widely used and hospitals became safer, demand for trained and licensed doctors exploded, and so did the influence of groups like the American Medical Association
As people wanted to go to more expensive doctors, they began to get creative. In the years before health insurance was the norm, Americans came up with multiple ways to pay for care. Free care at places like charity clinics and dispensaries was sometimes available, and the barter system was not uncommon. Doctors often practiced a kind of sliding-scale fee system, in which they took care of the poor for very little but expected their wealthier patients to pay more, subsidizing for the community.
But it wasn't difficult for patients to see that there would be a benefit to pay smaller amounts more regularly rather than waiting for an emergency and paying all at once, the same logic that insurance operates today. Mutual-aid societies and union welfare funds often stepped in to provide that, and some doctors arranged their own multispecialty group practices, some of which allowed patients to pay a set premium. The option that was not available was to pay for service through a large insurance company. Insurance companies did exist, especially after the tax structure changed in 1913, (allowing the income tax we know a loath today) but the insurers mostly provided group life insurance and pension plans to big businesses.
Meanwhile, groups like the AMA viewed these changes with trepidation. In their view, all of these options (union, physician groups, insurance) were a bad idea. They didn't want any outside entity involved in the physician-patient relationship because they were worried that financier would become more and more powerful and end up reducing the physician's sovereignty. In order to enforce that, the AMA threatened doctors with the loss of professional support if they took part. By 1938, however, they could see that it was a losing proposition. With the nation in the depths of the Great Depression and President Franklin Roosevelt helping to change American expectations about citizens' relationship with government, providing for the people's health seemed to be a natural step for government to take. As TIME reported in 1938, "Hard times for doctors and patients [and] changing social attitudes have caused doctors to consider new ways of distributing medical care." Fearful that the profession would be "federalized," the doctors' group finally agreed that some form of insurance was necessary.
They only agreed to that change on their own terms. And, running on the notion that insurance companies were less likely to interfere with doctor sovereignty, it was in 1938 that they chose the insurance model as the only one they would allow, setting conditions with which the doctors and the insurers would have to comply, like the requirement of a fee-for-service model. Though the insurers had long balked at the idea and predicted that the result would be chaos, they had no choice when faced with the entire medical establishment compared to the idea that the other option was socialism. The insurance-company model started to seem like the obvious choice for Americans, even though the nation had once been full of many alternative models.
World War II changed that for a unanticipated reason: employers started buying health insurance for their employees. There were two reasons employer sponsored health insurance became popular during World War II. First, there was a wage freeze during the war so employers couldn't compete for good employees by offering higher pay. In place of higher wages, employers started offering free health insurance. Then, in 1943, the Internal Revenue Service cemented the concept of employer sponsored health insurance in the U.S. by ruling that it should be tax free. With that ruling health insurance benefits became an expectation because it was less expensive for employers to purchase health insurance for employees than for the employees to buy it themselves. Business for the health insurance companies exploded after that. By the end of World War II, health insurance companies had grown large enough to have powerful lobbies (to bribe congress).
Health care costs were only five percent the GDP at the time and only about half of the U.S. population had private health insurance but, even then, the insurance companies were big enough to take on the government and win.
By the 1960's, 70 percent of working Americans had private health insurance that was mostly provided by their employers. In 1962, John F. Kennedy tried to broaden health insurance coverage to cover those who couldn't get private coverage. Kennedy decided to only address the people private insurance companies didn't want to cover: the elderly, the disabled and the poor. Johnson had the largest supermajority of Democrats any President has had since 1937. In 1965 Johnson had 68 Democrats in the Senate and 295 Democrats in the House. Johnson was also famous in his ability to "convince" unwilling Democrats to go along with his plans, so he managed to get Medicare through Congress.
Since then, private insurance companies in the U.S. have coexisted alongside of Medicare in a hostile truce. Private insurance companies have never stopped wanting to either eliminate or control Medicare. Jimmy Carter attempted to expand Medicare in 1980 and failed and, more recently, a Medicare expansion was attempted in 2009 that also failed.
Ballooning health care costs became a serious issue in the 1970s, and it was in this that the concept of HMOs grew in popularity. An HMO differed from the other insurance models in that it was a prepaid, managed plan that granted a patient access to a specifically contracted network of physicians and specialists, generally combined with financing. The concept had existed in various forms prior to the 1970s, but during the Nixon administration the HMO model was viewed as the main solution to the massive increases in spending taken on by the federal government through the Medicare/Medicaid programs. Both liberals and conservatives supported the concept (at the time).
Differences between liberal Democrats and conservative Republicans shaped the trajectory of the legislation that would become the Health Maintenance Organization Act of 1973, which was signed into law with bipartisan support. The act initially provided $45 million grants and loans and $300 million in loan guarantees to spur the development of HMOs. Over time, the restrictions on which HMOs could receive federal endorsements were eased in a series of amendments to the act, which led to a massive increase in for-profit HMOs. In this light, it is fair to say that Richard Nixon's support for HMOs presaged a dramatic transition in the American healthcare system that increased for-profit health insurance enterprises. Flash forward, and the health insurance tax break is the biggest in the federal budget; the government loses out on $260 billion annually by not taxing health benefits.
But here's one fact about insurers that often gets lost in the debate over health care: Their profit margins tend to be relatively small. Yahoo Business estimates that the health-care sector as a whole runs a 15.4 percent profit margin. Health plans, meanwhile, have an average profit margin of 3.2 percent.
As to who makes the money, it is drug companies and device manufacturers who are the people who make the things that insurance companies buy. They run profit margins around 20 percent.
One reason the cost of American health care is so high is that insurers are so weak. Having hundreds of different insurance companies means no one insurer has much negotiating power, hence the high prices drug and device makers can charge.
Now that we covered a little history, let's take a look at why cost is the way it is"
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