How Did the American Health Insurance System Begin?

The American health insurance industry began as a result of better educated medical specialists and more demand for hospital care. Physicians' fees, more sophisticated and costly drugs, and advanced diagnostic tests became unaffordable as an out-of-pocket expense. People needed a more affordable way to pay for quality medical care, both in and out of the hospital setting.

Progress in Medicine

• Scientific and medical advances meant that doctors and nurses were being better educated, standards were rising, and better medical care became available in more places.

Increased Cost

• Medical advances, better education, and licensing led to increasing costs of providing medical care. The cost of a hospital stay came to represent the biggest part of a family's medical bill.

Greater Demand

• Better quality care also led to greater acceptance of---and greater demand for---medical care by the public.

The Baylor Plan

• In 1929, Baylor University Hospital came up with a way to make sure people paid their hospital bills. The hospital contracted with a group of Dallas teachers to provide 21 days of hospitalization for a fixed sum of $6 per year.

Mutual Benefit

• Prepaid hospital plans grew because not only did the patients benefit, the hospitals now had a steady stream of income. Hospitals began to form groups offering coverage that reduced inter-hospital competition. This was the beginning of Blue Cross.

Commercial Health Insurance

• Blue Cross grew rapidly, but operated as a non-profit entity, which meant they had to charge the same premium to buyers whether they were sick or healthy. Commercial companies started charging higher premiums to the sick. This attracted many healthier clients, who paid less. This, in turn, resulted in higher profits and the rapid growth of commercial health insurance in this country.