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The evolution of health insurance

In 1927, on the eve of the Great Depression, Baylor Hospital in Dallas entered into an agreement with the local teachers’ union. The agreement involved an employee deduction per paycheck paid in advance to the hospital. In turn, the hospital offered hospital-based care for these teachers and their families. This deduction was determined using a community-based rating model. Eventually, an organization known as Blue Cross emerged and started to provide the same type of program. Note, however, that a model known as prepaid practice groups (PGPs) already existed. Prior to this time period, private insurance did not exist for healthcare services. Health insurance offerings were avoided because appropriate premium rates were too difficult to predict, unlike rates for insurance upon the death of an individual. Private insurance plans started to appear in the late 1930s. These plans, however, were driven by risk-based models. They focused on the experience of the group. Blue Cross now had competition and was losing its customer base because of the new private-payer offerings. Blue Cross shifted toward a modified adjusted community rate plan, eventually abandoning it completely and joining the private-payer risk model plans. Eventually Blue Shield emerged to serve coverage for professional services.

This introduction illustrates one of the very first critical “cost shifting” market movements. What does cost shifting mean? It is when the cost of certain activities is shifted to another party. The question is, to whom? Private payers profited by removing high-risk individuals from their plans – they were growing at a rapid rate because during WWII a wage hold was put into place. Employers started to realize that benefit plans could be seen as a non-wage form of compensation. The tax code encouraged employers to view benefit plans as a cost of doing business, and employees never had to claim their benefits as income.

The benefit plan offering generated a significant amount of cash in the healthcare system. During the 1940s and going forward, teaching hospitals were also recipients of large amounts of cash infusion by the government’s investment in research and technology. The flow of cash from both areas generated a significant offering of healthcare diagnostics and treatment options. By 1946, the healthcare market had increased cash flow for hospital coverage. This resulted in increased utilization of hospital services. The amounts of insurance payments and premium programs went up. Hospitals expanded because of the available cash. The market had a significant buildup of resources. The amount of technology was growing at an accelerated rate. This fueled additional use and sale of insurance. The gap between the haves and have-nots exploded. From 1930 to 1965, there was the first big cost shift of high-risk individuals to uninsured status. Who were these people? They were the elderly, the unemployed, the self-employed, the retired and the disabled. With the aggressive advancements in healthcare, the disproportionate offerings between the haves and the have-nots became obvious.

The political arena debated the concept of compulsory insurance or a nationalized health plan. Instead, in 1965 Medicare was born to serve the have-nots. Medicare takes a social insurance approach, and its members are referred to as beneficiaries. Medicaid was also established; it is managed at the state level. Medicaid, however, uses a welfare approach, and its members are referred to as recipients. The market at the time believed that employer-linked insurance would eventually serve as a form of nationalized health insurance. Medicare Part A was created to pay hospital services, and Medicare Part B was created to serve the professional component. To devise a nationalized healthcare program was not necessary. The market, it was thought, would take care of itself.

Excerpt from Healthcare Fraud Auditing & Detection Guide by Rebecca Busch

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